News Archives: June, 2016

Two of the most popular sessions at our 2016 Money Fund Symposium in Philadelphia last week were "Major Money Fund Issues 2016" and "Senior Portfolio Manager Perspectives," which featured some of the leading authorities from some of the largest players in the money fund industry. During the first session, panelists were asked about the questions they're getting most frequently of late. Fitch Ratings' Ian Rasmussen replied, "The questions usually fall within 3 main categories: They want to know about liquidity, they want to know about asset flows, and they want to know about yield." Indeed, these three topics dominated not just the conversations in these sessions, but the entire conference. (Note: Next year's Money Fund Symposium is scheduled for June 21-23 in Atlanta. Mark your calendars and watch for details late this fall. Also, see our "Money Fund Symposium 2016 Download Center" page for recordings and Powerpoints from the show.)

In the "Major Issues" session, Crane Data's Peter Crane asked, "How much is going to flow out of Prime?" Federated Investors' Deborah Cunningham said that, to date, there hasn't been a lot of movement by investors -- but she expects that to pick up over the next few months. She explained, "As we flipped the calendar into June we started to see some customers start to take action -- not many, but a few. We saw a few customers choose to leave prime and go into Govies. Government funds are actually picking up a lot of assets that are not necessarily coming from our prime funds, or others' Prime funds. I think they are coming from other market vehicles that are no longer as attractive or no longer open to them in the form they were before.... I would expect that in July we'll see a little pick up, then a lull in August, and then September [is] where everybody is making sure they're positioned properly."

Cunningham added, "Customers want to see what other customers are doing, and there is some herd mentality, if you will, to this industry. I think that will, to some degree, at least initially, solidify in people's mind where they want to be on October 14. It doesn't necessarily solidify where they want to be on October 17. `But on October 14 when the change occurs, they often want to be with others that are similar to themselves."

Panelist John Donohue of JP Morgan Asset Management concurs with the estimates floated by others that between $400 and $500 billion will move out of Prime by reform implementation. He stated, "But as long as we get through day one, the real thing is what happens on days 2, 3, and beyond. The opportunity for us is to work with them [clients] to segment their cash ... do an asset allocation around that liquidity, and hopefully they can decide what levers they want to pull to put the cash across a full spectrum of liquidity type solutions -- everything from a Govie fund to a Short Duration bond fund."

Regarding flows into Government funds, Cunningham said, "There are 4 main categories of Government funds -- Treasury only, Treasury with Repo, Government only, and Government with Repo. The Government with repo product is the one that's gaining the most." She also said it helps to have some yield now in Government funds, after having been near zero or 1 basis point for so long. "No more zero. That happened pretty much immediately with Fed lift off."

As for the trend of sweep funds going Government, she said it's an easy choice right now because Government funds have no fees and gates and they are actually earning a little yield. "But if we start to see spreads between Prime and Govie -- now about 20 basis points -- go to 30, 40, 50 basis points, there will be some solutions to figure out how to deal with the gates and fees side of that equation for even the sweep options."

On the yield differential between Prime and Government funds, Donohue explained, "The conundrum right now is, we keep talking about that yield differential between Prime and Govie being more attractive than ever at between 20-40 basis points. But over the next couple of months, that yield is going to compress. If you look at maturity profiles right now, all of the large players have anywhere from 95-100% of their fund maturing at the end of September in anticipation of large outflows. And given that the Fed is in the market giving a natural floor on Govie funds, that spread is going to collapse right on top of each other."

He added, "Some clients are going to look at that yield differential and say, 'Let me take a wait and see approach and just go into Govie <b:>`_.' So, we're going to spend a lot of time working with clients, telling them, 'If you're comfortable in Prime, stay in it, because that yield differential is going to snap back very quickly.' But that's the risk to the overall industry and the challenge we're all going to be facing."

That led to a discussion of liquidity. Said Cunningham, "For our institutional Prime funds, weekly liquid assets at this point are about 50%, and our WAMs are 35 days or less depending on the products." Rasmussen said that is on par with the trends across the industry. (Note: Our MFI Daily currently shows Prime Inst MMFs with 49.4% in WLA, or weekly liquid assets.) Added Rasmussen, "What we're concerned about are the outliers. There are certain funds that aren't building the same type of liquidity that we have seen across the industry.... Investors want to see a higher cushion." Donohue added, "Everyone is going to err on the side of having more than enough liquidity to meet even their worst case redemption analysis."

Donohue discussed the two major elements of the October reforms: fees & gates, and the floating NAV. "The gates and fees are something clients are very concerned about. It's important for everyone to educate our clients, our collective client base, on what that actually means. I believe there's a very little probability of that, but when and if it does happen, maybe it's not the worst thing that could happen. If there were gates and fees back in 2008, maybe Reserve would have survived it, and we wouldn't all be here right now."

On FNAVs, he added, "Once clients get comfortable with the FNAV concept, I personally believe they are going to look at the Ultra-Short bond fund space." Donohue continued, "If you accept the floating NAV, you go a step out of money market funds, and maybe the NAV is a little more volatile, but still very low, and you get a very attractive return, historically, versus what you have gotten. And prime funds are going to hold a ton of liquidity, so that will cause yields to not be as high as they otherwise may be. This is why I think the Ultra-Short space is the opportunity coming out of reform."

Many of the same themes were explored in the "Senior Portfolio Manager" session, moderated by Barclays' Stewart Cutler and featuring Kevin Gaffney of Fidelity Investments; Laurie Brignac of Invesco; and Peter Yi of Northern Trust Asset Management. Cutler began the conversation with the overarching trend in the industry the past two years. "Since the beginning of 2015, Prime portfolios, which had been a little over $1.4 trillion, have slid down towards about $1.1 trillion and Government funds have increased from approximately $1 trillion to $1.4 trillion."

As the reform deadline approaches, panelists discussed how they are positioning their portfolios for the likelihood of Prime outflows. All three said they were being cautious and conservative with their Prime funds, bringing in their durations, shortening WAMs, shortening WALs, and running higher weekly liquid assets. Brignac said the WLA of her funds is in the mid-40% range, which is on par with the industry average for institutional prime funds." Later in the session, Brignac said she expects those weekly liquid asset averages to go even higher. "I would think it would be closer to 60% to 70% in September."

An audience member asked, "If WLA is at 70% in September, what does that mean for the yield differential?" Answered Yi, "That's the predicament we're in. We're going to be part of this unilateral liquidity in these next few months, and it's going to destroy where yields potentially could be. We, like many in this room, believe there will be a meaningful spread between credit strategy and Government strategy. But the next 3 months, it's going to be hard to see."

Fidelity's Gaffney was asked about communicating with clients. "They know the deadline is in October, and they know they have until then to make a decision. One of the reasons why it's difficult to pin down the number of how much is going to be moving out of institutional Prime is a lot of these institutional investors have not made that decision yet. They are still thinking about their alternatives: What other options are out there? What the funds are going to look like in October? [And, what will be] the spreads between Prime and Government funds? So there are a lot of variables to think about."

On the floating NAV, Yi said, "I don't think a variable NAV is going to move very often -- when it does, it's going to be pretty small. Interest rate movements, movements from the Fed, getting caught off-sides from the Fed. You'll see some movement in the NAV, but we don't think it's going to be meaningful. Now, if there's a credit event -- an impaired asset, a distressed asset, that’s where you're going to see movements that are meaningful -- even in a constant NAV. We need to step a step back sometimes and say, 'What are the big factors that are going to move an NAV?' ... It always ends up being a credit event."

On new product launches, Brignac said one of the outcomes of reforms is that it has "changed the cash discussion that we're having with clients. We're talking about bucketing different types of cash, what is the right vehicle -- and it's going to be different for different clients. The panel yesterday was talking about ultra-short bond funds, and this is a strategy that's gaining a lot of traction and a lot of attention. Initially, a lot of clients will hit that 'easy' button and probably just move into Government funds. But I think we'll see a lot more pickup in some of these other products going into next year."

Finally, Yi added, "Ultra-Short is the real opportunity here. We have the full product suite within the money market fund space. But outside of that, we think there will be a lot of new flavors, depending on where there is investor need. We have an ultra-short fixed income business that's really been growing exponentially in this low interest rate environment... It's a great opportunity to talk about cash segmentation strategies, and we think that's resonated very well."

UBS Asset Management liquidated its entire lineup of RMA Money Market Funds and launched a new RMA Government Money Market Fund to hold its brokerage sweep cash, and also announced details on its Select and Investor fund lineups in a publication entitled, "2016 Money Market Platform; Timeline and Review of Fund Changes." The Prospectus Supplement filing says, "The purpose of this supplement is to announce the anticipated involuntary redemption of shareholder accounts of UBS RMA Money Market Portfolio and UBS RMA U.S. Government Portfolio on or about June 24, 2016.... UBS Financial Services Inc. will no longer offer the Funds as cash sweep options as part of its sweep program. On or about June 24, 2016, through bulk exchange transactions, UBS Financial Services Inc. intends to redeem its customers from the Funds and transfer the proceeds from the redemptions to UBS RMA Government Money Market Fund." (See too the filing for UBS RMA Tax-Free, CA and NY Muni MMFs, our Jan. 29 News, "UBS Announces MMF Changes," and our March 28 News, "March MFI Profile: UBS Asset Management's Joe Abed & Rob Sabatino.") We also review a filing for Vanguard Municipal Cash Management Fund and Vanguard Market Liquidity Fund, which announces that both of these internal MMFs will adopt floating NAVs, below.

UBS's update explains, "UBS Asset Management (Americas) Inc. and its predecessors have managed money market funds for more than 35 years, offering client-focused liquidity management solutions throughout the world. To address our clients' needs in an era of evolving regulatory reform and industry changes, we are making changes to our money market fund platform, including the launch of new products. We intend to implement these changes over the course of the next several months and conclude them within the Security and Exchange Commission's (SEC) compliance period, which extends until October 14, 2016. In this update we provide a timeline and review of the changes."

It continues, "Highlights of the changes to UBS AM's money market fund platform include: 1) The UBS Select Prime Funds: With a largely institutional shareholder base, the funds will adopt floating net asset value (FNAV) pricing by an October 2016 regulatory compliance deadline; 2) The UBS Prime Funds: A recently launched family of retail prime money market funds that accept investments from retail investors and seek to maintain a constant net asset value (CNAV) per share of $1.00; 3) The UBS Select Tax-Free Funds: Intend to qualify as 'retail money market funds' later in 2016 and will also undergo a name change. The funds will continue to seek to maintain a CNAV per share of $1.00; 4) The UBS Select Treasury Funds: Will continue to invest in US Treasury securities and related repurchase agreements. The funds accept investments from all investors ('natural' and 'non-natural persons') and continue to seek to maintain a CNAV per share of $1.00."

UBS's release continues, "5) The UBS Select Government Funds: A new family of government money market funds that will be launched in 2016 to complement the existing UBS Select Treasury Funds. These new funds will accept investments from all investors and seek to maintain a CNAV per share of $1.00; 6) The UBS Investor Series: The initial minimum investment requirement has been reduced to $10,000 from $100,000 to be more accessible to investors; and 7) UBS AM's sweep money market funds: Certain funds available via UBS Financial Services' automatic cash 'sweep platform' will close with investments to migrate into two new sweep government money market funds that will seek to maintain a CNAV per share of $1.00."

It states, "The UBS Select Prime Funds below have a primarily institutional shareholder base and will adopt floating net asset value (FNAV) pricing. These funds will also be subject to the possibility of liquidity fees and/or gates on redemptions (under certain circumstances) as required by the SEC's rule amendments." The funds are: UBS Select Prime Preferred, UBS Select Prime Inst, and UBS Select Prime Investor.

The update also says, "UBS AM recently launched UBS Prime Funds, a new family of funds that are offered to natural persons. These funds intend to qualify as 'retail money market funds' under the SEC's amended rules and seek to maintain a CNAV per share of $1.00. These funds have expense structures and minimum investment requirements similar to the UBS Select Prime Funds and will be subject to the possibility of fees and/or gates effective on or before October 14, 2016." They include: UBS Prime Preferred, UBS Prime Reserves, UBS Prime Investor.

It adds, "The UBS Select Tax-Free Funds intend to qualify as 'retail money market funds' and seek to maintain a CNAV per share of $1.00. The funds are anticipated to begin limiting subscriptions to natural persons by August 31, 2016. In connection with the designation as 'retail money market funds', the funds will undergo name changes by dropping 'Select' from their names. These funds will be subject to the possibility of fees and/or gates effective on or before October 14, 2016." These funds are: UBS Select Tax-Free Preferred, UBS Select Tax Free Inst, and UBS Select Tax-Free Investor.

The statement tells us, "UBS AM previously announced changes to its UBS Select Treasury Funds in June 2015, affirming that the funds intend to qualify as 'government money market funds' under the SEC's amended rules. The funds will continue to invest in US Treasury securities and related repurchase agreements. Under the SEC's amended rules, these Treasury funds may maintain a CNAV per share of $1.00 and will not be subject to fees and/or gates unless their board determines to provide advance notice to shareholders of a change in this policy. The funds will continue to be available as investment options to both natural persons and non-natural persons." The Select Treasury funds include: UBS Select Treasury Preferred, UBS Select Treasury Inst, and UBS Select Treasury Investor.

Under "UBS Select Government Funds – New Family of Funds," it says, "UBS AM is planning to launch new UBS Select Government Funds in 2016 to expand its liquidity management platform and to complement the existing UBS Select Treasury Funds. The funds will be available to both natural persons and non-natural persons. Under the SEC's amended rules, these government money funds may maintain a CNAV per share of $1.00 and will not be subject to fees and/or gates unless their board determines to provide advance notice to shareholders of a change in this policy. The funds will seek to invest 99.5% or more of their total assets in cash, government securities (e.g. US Treasury and agency securities) and/or repurchase agreements collateralized solely by cash or government securities." The new Government funds are: UBS Select Government Preferred, UBS Select Govt Inst, and UBS Select Govt Investor.

Finally, the update discusses "UBS Cash Sweep Platform Changes." It explains, "To comply with the SEC's amended rules as well as to streamline investment options for fund shareholders, UBS AM is making several changes to the money market sweep funds offered on the UBS Financial Services (FS) automatic cash sweep platform. In response to regulatory changes, certain funds will no longer be offered as part of the UBS FS sweep program, and existing shareholders will have their investments transferred to new government money market funds. Following the changes outlined below, the sweep money market fund platform will comprise four government money market funds. These funds will seek to maintain a CNAV per share of $1.00 and will not be subject to fees and/or gates unless their boards provide advance notice to shareholders of a change in policy. The four government funds will be available as sweep fund investment options to both natural persons and non-natural persons."

It adds, "Details of the changes are as follows: The current RMA sweep funds and the UBS Retirement sweep fund will close, and client investments are to migrate into the new UBS RMA Government Money Market Fund (sweep fund) in June 2016. The new fund will replace the six sweep funds once migration is completed. UBS Select Prime Capital Fund and UBS Select Tax-Free Capital Fund will close, and client investments will migrate into the new UBS Select Government Capital Fund (sweep fund) in June 2016. The new fund will replace the two sweep funds once migration is completed. The Liquid Assets Fund will adopt a government money market fund investment policy (per SEC rule 2a-7 money market fund guidelines) and undergo a name change in April 2016." (Note: We've made these changes on today's MFI Daily. Also, the New York Fed has removed UBS RMA Money market Portfolio from its "Reverse Repo Counterparties List" and added Government Master Fund.)

In other news, Vanguard's filing says of its Vanguard Municipal Cash Management and $53.7 billion Vanguard Market Liquidity fund, "Effective on or before October 14, 2016, the Fund will be required to transition to a floating net asset value (NAV) as a result of the SEC's money market fund reforms." It explains in the prospectus that both funds are "internal" funds, "established by Vanguard as a cash management vehicle for the Vanguard funds and certain trusts and accounts managed by Vanguard or its affiliates." They add, "The Fund is not available to other investors. Vanguard reserves the right to change the availability of the Fund at any time without prior notice to shareholders. The Fund operates under an exemption issued by the SEC."

Note: Vanguard Market Liquidity Fund, like a number of "internal"-only money funds, is included in our Money Fund Portfolio Holdings data set but not in our MFI Daily or MFI XLS publications. (For more on internal MMFs, see our April 4 News, "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos," and our June 24 News, "June MFI Profile: T. Rowe Price'​s Lynagh on Lineup; First Do No Harm.")

Crane's Money Fund Symposium, which took place last week in Philadelphia, attracted 575 attendees -- shattering our record of 505 set last year in Minneapolis. One of the highlights of the 3-day conference was the keynote speech by BlackRock Vice Chair Barbara Novick, who discussed "The New Look of Money Market Funds" and focused on adapting to money market fund reforms. We excerpt from her speech below. (Stay tuned for more coverage in the coming days, and see the bottom of our "Content" page for recordings and slides.)

Novick, who delivered the keynote at our last Philadelphia Money Fund Symposium in 2011, began by discussing the history and evolution of money fund reforms. She then turned her focus to the two major aspects of the 2014 reforms -- the floating NAV, and fees and gates. On the floating NAV requirement she said, "Based on historical data, we would expect the NAV to wiggle around the dollar. We're not talking about big changes where you see it go up and down, it will wiggle -- very tight bands around that dollar."

On the fees and gates rule, Novick added, "That's probably the most controversial ... because it's unknown and untested." She explained, "We don't really know what that will look like, and history does compel us to say we want to make sure we have access to our capital at all points in time. I tend to think about these a little bit differently. First, by having these triggers, the portfolio manager is incented to manage that fund very conservatively, and I think that's good. If there's anything we've learned, people taking risks in money market fund portfolios isn't the best idea for any of us. Second, if we had some extreme environment ... wouldn't you want boards to have the best toolkit available industry-wide to deal with a stress event? I think of these as tools for terrible risk events, highly unlikely that we'll ever see them implemented in our lifetimes, but important to have that extra belt and suspenders."

Novick identified two major trends she's seen as a result of reforms. On the first, consolidation, she commented, "We're not the only one that has bought other money funds. In fact, you see a number of people getting out of the business -- either selling funds or closing funds. They're asking things like: Do I have enough scale? Do I have the technology? Do I have enough resources? Do I want to be in this business?" On the other hand, there are companies that want to be consolidators and aggregators, she said. "So, yes, you're going to have fewer providers, bigger providers. But probably, as a whole, an industry that's more conservatively managed and safe."

She continued, "A second trend, which I call restructuring and conversion, involves everything from the introduction of new fund structures, merging funds, and the conversion of funds from Prime to the Government." On the Prime to Govt conversions, Novick notes that to date, the asset shifts are almost entirely the result of fund conversions, as opposed to investors moving out of Prime.... It's actually not client driven at all, it's fund sponsor driven. We'll probably see some client-driven activity closer to the implementation date."

Novick went on, "At BlackRock, we've merged funds, we've closed funds, we've liquidated funds, we've converted Prime funds to Government funds, and we've launched Ultra Short bond funds.... I think that makes us the same as all the other providers in the room.... All of us want to have a range of choices that meet those different client needs." Many investors, including corporate treasurers, are watching and waiting before making any moves. "They want to see what the yield pickup is, they want to see where Prime funds are, where Government funds are, and they're reserving their decision, which makes sense."

Later in the presentation, she was asked about the yield premium that investors will require to stay in Prime. Novick answered, "That's the trillion dollar question. We all don't know. I think it's going to be institution-specific. At these low rates, even a small premium is a huge percentage jump. I think you have to factor in a lot of different questions ... there's no one size fits all answer to the question."

Novick continued by saying that through all the changes, "The uses and needs for cash from the client perspective really haven't changed. You need cash for operations, you need cash to make a bond payment, you need cash to pay construction costs. You need cash for lots of things, and that part hasn't changed. Client conversations are going to continue to center around what is their ultimate use of the cash."

She expects clients to segment their cash. "To anyone who thinks there was a day of one-size-fits-all and those days are gone ... I would say I'm not sure those days ever existed. Because when I talk to clients [both then and now], they're all different -- they have different needs, different strengths. The basic concept here is segmenting cash, looking at different buckets, understanding the true liquidity needs, understanding the risk tolerance, and possibly making a selection of multiple buckets."

Novick also discussed how the industry is adapting to changes, including the implementation of multiple NAV strike times per day. "A lot of our clients have told us they still want same day liquidity, they want access to the money; that's what a money fund is. So the industry seems to be coalescing around 3 strikes a day -- probably 8 am, noon and 3 pm." The keynote also mentioned several other things to watch for in the months ahead, including final rules from the IRS and CFTC, details on the New York Fed's Reverse Repo Program, corporate tax reform in the US, and EU reform negotiations coming to a close.

Another item on that list is the "big unknown," interest rates. "Don't ask me which way they are going to go. I can find as many economists who can take any possible position on that -- going up, going down, going up a lot, going down a little, tied to Brexit, not tied to Brexit ... so it is a big unknown. It's an important unknown for money market funds because with rising rates, more likely than not, you'll start seeing more of a spread between Prime funds and Government funds. It's not guaranteed, but it's likely. Likewise, you'll start seeing more of a spread with the Ultra-Short bond funds. What's going to make these products more attractive, more viable, is in part dependent on an interest rate scenario that no one can predict with any certainty. That's another good reason to have an array of products and choices, because it's going to change over time with the interest rate environment."

Novick concluded, "It's all about the client. Let's keep the clients in mind, let's think about what products we need, what products clients can use. If we do that, all of us, we'll end up in some pretty good places. And understand, it's always been changing and it always is going to be changing -- that's not new. It shouldn't be scary, it's just a given."

In the Q&A portion, she was asked about the challenges of the recent acquisition of BofA's money market funds. Among the most important things to sort out are people issues and technology issues, she said -- decisions like who's going to work with which clients, who's going to manage which portfolios, or which systems to use. "How do you get the best of both? Because a merger is really successful when you try and blend them and get the best of both." She said the merger of BofA funds into BlackRock will help when it comes to dealing with reform changes. "You have to look at each fund, you have to look at the number of classes, you have to look at the fee structure, just so many things -- then there's a mountain of paperwork as we all know. So the mergers were a good warm up act for reform. We used the opportunity to do a lot of mergers and liquidations of smaller undersized products. When we were all done I think we had a healthy robust fund lineup, a healthy robust team, and healthy robust clients."

Thank you to those who attended, spoke or sponsored Crane's Money Fund Symposium last week in Philadelphia. The record 575 participants discussed Prime fund outflows and alternatives, adapting to the new regulatory and rate regime, and a number of important topics involving money market mutual funds. Watch for excerpts and coverage later this week and in our July Money Fund Intelligence; conference attendees and Crane Data subscribers may access Powerpoints and records in our "Money Fund Symposium 2016 Download Center." (Mark your calendars for next year's Symposium, which will be June 21-23, 2017 in Atlanta. For those that can't wait until then, we hope to see you at our London European Money Fund Symposium Sept. 20-21, or at our next Money Fund University, Jan. 19-20 in Jersey City, NJ.) Below, we review comments from Federated Investors' Deborah Cunningham on "Brexit," Federated's announcement on its "60-Day Max Maturity" MMF, and the SEC's latest monthly Form N-MFP Statistics Summary.

On Friday, Federated sent out a brief entitled, "In Short: Money markets keep composure in Brexit aftermath." It says, "It is certainly not business as usual, but money markets are reacting with relative calm to the unexpected news that Britain voted to leave the European Union. While the Leave vote is rattling most of the financial sphere, cash managers are not seeing any unusual activity. Markets are trading with normal flows, with buyers and sellers active in the marketplace. Global banks continue to offer good relative value with high credit quality. Overnight rates are elevated, exacerbated by quarter-end cutbacks, but not markedly so."

The piece adds, "As for Federated's own operations, while the Leave vote was a surprise, we were prepared to react to either decision. Our portfolios have ample liquidity and are functioning normally -- there will be no changes to our operational policies. It is important to remember that the actual separation of the U.K. from the EU will be a drawn-out process over two years. It is a historic decision, but money markets are taking the news in stride." Note: Crane Data's latest Money Fund Portfolio Holdings data (as of 5/31/16) shows U.K.-affiliated money fund holdings totaling just $89.9 billion, or 3.45% of Taxable U.S. MMF securities.

Another statement, entitled, "Federated Master Trust to transition to 60-day maximum format," explains, "As part of its ongoing effort to refine its product line to meet client demand, Federated announced today that Federated Master Trust, an existing money market mutual fund, will transition to an institutional money market fund that will seek to invest entirely in a portfolio of high-quality, dollar-denominated fixed-income securities issued by banks, corporations and the U.S. government that mature in 60 days or less. The fund will be renamed Federated Institutional Prime 60 Day Fund and typically maintain a weighted average portfolio maturity of approximately 40 days or less. The fund will invest in prime securities and will seek an AAA rating. The fund is expected to offer Premier Shares (PRM), Institutional Shares (IS) and Service Shares (SS). These changes are anticipated to be effective on or about Aug. 1, 2016 subject to Securities and Exchange Commission review. Prior to Oct. 14, 2016, the fund will continue to use amortized cost to value and transact at a stable $1.00 net asset value."

It adds, "Beginning on or about Oct. 14, 2016, the fund will begin transacting at a floating NAV that uses four-decimal-place precision ($1.0000) and its share price will fluctuate, but will seek to minimize volatility of its NAV by investing in high quality securities with maturities of 60 days or less, typically maintaining a weighted average portfolio maturity of approximately 40 days or less and using amortized cost to value such securities when permissible. The fund will offer three strike times at 8 a.m., noon and 3 p.m. Eastern time with same-day settlement beginning on or about Oct. 14, 2016, the compliance effective date for the relevant 2014 amendments to Rule 2a-7 under the Investment Company Act of 1940."

In other news, the SEC's "Money Market Fund Statistics" for May 2016 shows that assets fell (with a sharp drop in Prime MMFs and jump in Govt MMFs) and yields inched lower last month. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends.

The SEC's latest statistics show total money market fund assets dropped by $18.7 billion in May to $3.013 trillion. This after assets fell $40.5 billion in April, fell $50.1 billion in March, rose $58.5 billion in February, and fell $21.4 billion in January. (This series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Year-to-date, total assets are down $72.2 billion, or 2.3%, through 5/31.

Of the $3.013 trillion in assets, $1.403 trillion was in Prime funds, which dropped by $66.9 billion in May after falling $48.0 billion in April and $68.5 billion in May. Prime funds now represent 46.6% of total assets; they've declined by $168.7 billion YTD, or 10.7%, and they've fallen by 387.6 billion, or 21.6% since 10/31/15. Government & Treasury funds total $1.391 trillion, or 46.2% of assets, up $53.7 billion in May and up $26.5 billion in April. Govt & Treas MMFs are up $142.5 billion YTD and $350.9 billion since 10/31/15, just prior to the start of the Prime to Govt conversion trend. Tax Exempt Funds were down again, dropping $5.5 billion to $217.9 billion, or 7.2% of all assets. The number of money funds was 466, down 6 for the month and down 71 from 5/31/15.

Yields were flat to lower in May, but Tax-Exempt funds' inched higher. The Weighted Average Gross 7-Day Yield for Prime Funds on May 31 was 0.55%, down 1 basis point from the previous month and more than double the 0.27% of November 2015. Gross yields were 0.39% for Government/Treasury funds, unchanged from last month but up 0.24% from 11/15. Tax Exempt Weighted Gross Yields rose 1 basis point in May to 0.42% after jumping 8 bps in April and 25 bps in March. The `Weighted Average Net Prime Yield was 0.34%, unchanged from the month before but up 0.23% since 11/15. For the year-to-date, 7-day gross yields are up 14 basis points and net yields are up 12 basis points. The Weighted Average Prime Expense Ratio was 0.22% (unchanged from April). Prime expense ratios have risen from 0.16% in November 2015.

Maturities continued to move lower and liquidity continued to inch higher in May. The average Weighted Average Life, or WAL, was 46.8 days (down 4.9 days from last month) for Prime funds, 95.0 days (down 0.1 days) for Government/Treasury funds, and 21.1 days (down 2.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 30.5 days (down 2.8 days from the previous month) for Prime funds, 39.0 days (down 1.8 days) for Govt/Treasury funds, and 18.4 days (down 2.8 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 32.5% in May (unchanged from last month). Total Weekly Liquidity was 47.9% (up 2.2%).

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, France topped the list with $164.8 billion, followed by Japan with $160.9 billion and the US with $149.0 billion. Canada was fourth with $141.8 billion, followed by Sweden ($120.9B), the UK ($63.4B), Australia/New Zealand ($62.1B), and Germany ($53.8B). The Netherlands ($44.6B) and Norway ($38.5B) round out the top 10. The biggest gainers among Prime MMF bank related securities for the month were Canada (up $2.7B), Singapore (up $2.0B), Japan (up $1.4B), China (up $1.4B), and Germany (up $493M). The biggest drops came from the US (down $22.4B), France (down $13.1B), Australia (down $9.3B), the UK (down $5.7B), and Switzerland (down $3.5B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $545.7 billion (down from $571.4B last month), while its subset, the Eurozone, had $281.6 billion (down from $297.2B). The Americas had $292.4 billion (down from $312.7B), while Asia and Pacific had $251.0 billion (down from $255.5B).

Of the $1.413 trillion in Prime MMF Portfolios as of May 31, $610.7B (43.2%) was in CDs (down from $633.9B), $283.0B (20.0%) was in Government (including direct and repo), down from $296.9B, $211.4B (15.0%) was held in Non-Financial CP and Other Short Term Securities (down from $214.1B), $219.2B (15.5%) was in Financial Company CP (down from $228.9B), and $88.4B (6.3%) was in ABCP (down from $93.9B).

The Proportion of Non-Government Securities in All Taxable Funds was 40.5% at month-end, down from 42.4% the previous month. All MMF Repo with Federal Reserve rebounded to $90.9B in May from a record low $60.0 billion the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 28.8% were in maturities of 60 days and over (down from 32.4%), while a record low 3.5% were in maturities of 180 days and over (down from 4.5%).

In the June issue of our flagship Money Fund Intelligence newsletter, we profile Joe Lynagh, Fixed Income Portfolio Manager and Head of the Cash Management team at T. Rowe Price, in charge of all the firm's money market and ultra short funds. Lynagh discusses the changes that T. Rowe Price has made to its money fund lineup as the firm prepares for reforms, based on the mandate of "do no harm to existing shareholders." T. Rowe Price plans to offer a range of options, including a Prime Institutional fund. Lynagh also talks about why retail investors will stay with Prime funds, why Ultra-Short Bond funds will grow in popularity, and why differentiation will return to the market. A reprint of the Q&A that appeared in MFI follows. (Note: Thanks to those who attended Crane's Money Fund Symposium this week in Philadelphia! Safe travels home and watch for coverage of the conference next week and in the July issue of MFI.)

MFI: How long have you been running money funds? Lynagh: T Rowe Price's history with money funds goes way back. Our first money fund -- Prime Reserve Fund -- was launched in January of 1976.... Our first tax exempt money fund was launched in 1981 and our California and New York tax exempt money funds followed in 1986. We launched our Summit series of funds in 1993, starting with Summit Cash Reserves Fund and Summit Municipal Money Fund. Three years after that we launched our Maryland tax exempt money fund. So ... it's been a steady progression building out our product line-up. As our mutual fund business grew, we launched two internal money funds -- the `Reserve Investment Fund and our Government Reserve Fund. These funds serve as cash sweeps for our other mutual funds, primarily our stock and bond funds. They are internal money funds, but they have the lion's share of the money fund assets. In all, we manage about $45 billion in money fund assets, but the majority of that, call it $25 billion, is internal money fund assets. The balance, about $20 billion is in our publicly offered funds.

I joined T. Rowe Price in 1990 and moved to the tax exempt money market trading desk in 1994. I moved up from that position, ultimately to become a portfolio manager in charge of all the tax exempt money funds. In 2009, I succeeded Jim McDonald, who retired, to become portfolio manager of our taxable funds, heading up the management of all money market funds and cash.

MFI: What is your biggest priority? Lynagh: Getting prepared for the SEC money market reforms has been an all-consuming project for T. Rowe Price. The rule release in July 2014 set in motion probably the biggest multi-departmental, multi-function project I've ever been a part of.... This rule change touches upon just about every functional area across the company, so for our weekly conference call, it seems like a cast of thousands are signing on. The breadth of impact ... of these changes is huge.

MFI: Tell us about fund lineup changes. Lynagh: We started out with the basic premise of 'let's do no harm' to existing shareholders. Said another way, let's make sure we have a home for all of our shareholders. Then we did an assessment of our shareholder base. What are they investing in today and what would be the potential implications for those shareholders of the rule changes? With our internal money funds, virtually all the shareholders would be considered "institutions." The prospect of gates and fees, in effect a liquidity lockup, is simply untenable to those investors. So our internal Reserve Investment Fund will migrate from a prime to a government strategy. Our Government Reserve fund is in fact a Treasury fund; it will be renamed Treasury Reserve fund. So all of our internal money will move to a no fees, no gates ... platform.

In terms of our client-facing money funds, T. Rowe Price has always been primarily a retail-focused shop. While we have institutional accounts in our money funds, we never created a separate institutional fund, until now. If you look at our lineup going forward, we made the decision with all of our municipal money market funds that we will only offer a retail share class. Quite honestly, the amount of institutional assets they held was so small, we didn't feel that it was productive to launch an Institutional tax-exempt product.

With our two prime strategies -- Summit Cash Reserves and Prime Reserve -- we looked at the constituents of those funds. Taking into account our original mandate to 'do no harm' and to make sure that there is a home for all shareholder assets, we realized that we need to offer a Retail Prime strategy, we need to offer a Government strategy for those shareholders that are uncomfortable with gates and fees, and we needed a prime strategy for institutional shareholders. We already had a treasury money fund, so we checked off that box. We decided to convert the Prime Reserve fund into a Government strategy, re-named the Government Reserve Fund. We decided that our Summit Cash Reserves Fund would remain Prime and become our flagship Prime retail offering.

MFI: Tell us about the new Prime Institutional fund. Lynagh: Recognizing that we need a landing place for those institutional shareholders that want a prime strategy, we will be launching a fund that we are going to call Institutional Cash Reserves. We'll be launching that sometime in September of 2016. As we go through the summer, we've already begun communications with shareholders in all of our money funds, alerting them of these changes.

MFI: What is the biggest challenge? Lynagh: Right now, the biggest challenge is trying to ascertain where the asset flows will go, what the scale of assets is that will either be forced to redeem or will opt to redeem, and how assets will move back and forth among strategies. Cash Reserves is a good example. There's been a lot of work done trying to identify who the shareholders are.... [W]e feel like we've got a good handle on those institutional assets that will need to choose a different offering than Summit Cash Reserves. But there is also the larger unknown about the flows industry-wide that will be set in motion by reform.

In the fourth quarter of 2016, shareholders are going to see where they've landed and that's going to coincide, hopefully, with a Fed rate increase. As rates begin to move higher and returns begin to differentiate among these various products, investors are going to probably take another look around at their options. So I think managers will be faced with this continuing unknown variable of assets in motion for some time to come. You see that uncertainty manifest itself in the shorter WAMs and higher liquidity position that most funds are running these days. We all face a summer where the assets flows are uncertain and that makes you very circumspect about longer-dated investments.

MFI: Are you hearing any customer concerns? Lynagh: The retail money market experience is very different from that of an institutional client. If you go back to 2008, retail funds simply didn't see the asset movement like we saw on the institutional side. It was a non-event. They've never run. Retail money funds will continue to live on because they don't have the run risk. They have such a diverse and broad base of decision makers that the prospect of a run is extremely remote. Institutional assets -- because of their scale -- will simply find another way to access capital markets. The industry is going to reshape itself where I think the prime strategies will be dominated by retail assets, which takes us full circle back to where we started back in the mid-70s.

MFI: How about fee waivers? Lynagh: Our Summit Cash Reserves fund is finally at a point where our gross yield has crossed its expense ratio threshold. Today we're grossing about 50 basis points vs. an all-in expense ratio of 45, so we crested above. Relief for the other funds will come on a market by market, mandate by mandate basis. Our Government and Treasury strategies will need at least one more Fed tightening to get those gross yields up where we are being made whole in terms of our expense ratio. It's really only in the last two months that Tax-Exempt yields have recovered, so they'll need certainly one full rate increase to get whole in terms of the expense ratio. It's important to note that we don't have any "claw-back" provisions.

MFI: Do you see demand for Ultra-Short funds growing? Lynagh: The reforms of 2014 really force investors to re-think cash investing. We launched our Ultra-Short Bond Fund in December 2012, and it was forward thinking in terms of what the landscape was going to look like in the post-reform money fund world. If you look at that landscape today, assets in government funds have now surpassed that in prime strategies.... But the demand for government assets, in my opinion, is also going to create a suppressive effect on government yields, especially in the front end of the yield curve. So money fund investors are going to realize there's a significant gap between the yields they see on their government fund compared to alternatives out there in the rest of the market. They're going to be faced with a choice -- Do I want to go into a prime money fund?

If you're an institutional investor, you're probably going to balk at that, at least with some portion of your assets, because you're concerned about gates and fees. So, you're going to be seeking out non liquidity restrained investment alternatives, and ultra short nicely fits that bill.... Money funds will always have a home, but there may be a yield give-up, which is the cost of liquidity. We believe liquidity 'tiering' is the solution; it will be productive to combine that operational cash -- your government money fund, with a more strategic investment, like ultra short bond. It's our opinion that you're going to see more and more investors begin to strategically reallocate a portion of their cash into alternatives like ultra-short bond funds and perhaps even stretch that into short term bond funds.

Standard & Poor's Global Ratings published, "How Liquidity Risk Factors Into Money Market Fund Ratings," and a "Credit FAQ: Will SEC Rule Changes Affect Our Ratings On Money Market Funds?" The first paper says, "Liquidity is an integral component of all ratings S&P Global Ratings assigns (see "Liquidity Plays A Multifaceted Role In Credit Quality," published June 1, 2016). Our detailed reviews of funds' liquidity have helped inform our ratings on funds as they navigated through periods of illiquidity that have frequently occurred in conjunction with a trough in the credit cycle, marked by rising defaults, deteriorating credit quality, and investors seeking more creditworthy assets." (Note: Thanks to those participating in Crane's Money Fund Symposium, which started yesterday in Philadelphia! We hope you enjoyed Day 1 and look forward to a full day of sessions for Day 2.)

S&P explains, "Our weekly surveillance of our principal stability fund ratings (PSFRs) on money market funds (MMFs) and frequent discussions with fund managements have enabled us to effectively monitor MMFs' liquidity during periods of significant liquidity stress, asset prices declines, and secondary-market illiquidity. If our analysis concludes that an MMF's liquidity doesn't provide sufficient resources for redemptions, our rating would be lower than indicated by our initial quantitative assessment.

They continue, "Since we began assigning PSFRs on MMFs in December 1983, one thing that has become clear is that quite often, there are no two MMFs with the same characteristics. This is particularly true for investor composition, given the various investors' unique liquidity requirements. We thus take a qualitative approach to reviewing fund management that assesses a manager's strategy for maintaining sufficient liquidity based on its shareholders' needs and expectations. During the 2008-2009 financial crisis, we observed that some structures with defined liquidity metrics failed to withstand the liquidity stress of that period. The lesson learned was that focusing on asset liquidity and fund liquidity was more important than any specific minimum liquidity metric. In our view, a tailored approach to assessing a fund's liquidity and the liquidity of its assets is effective in determining the fund's liquidity risks."

The piece tells us, "We believe the MMFs we rate investment grade have sufficient safeguards for asset liquidity risk and fund liquidity risk to enable them to hold sufficiently liquid assets and manage their liability redemptions. We do not assume in our ratings assessment that sponsors will support funds they manage by providing liquidity during times of stress. While this did occur during the financial crisis, we believe a 'AAAm' rated MMF should be able to manage credit, market, and liquidity risks by selecting adequate assets and managing its liabilities appropriately."

It states, "Asset liquidity risk is the risk that a fund will be unable to sell an asset in a timely and cost-effective manner. Fund liquidity risk is the risk that a fund will not have sufficient assets to deal with unexpected redemptions--its own version of a liability. When analyzing asset liquidity risk, our criteria (see "Principal Stability Fund Rating Methodology," Feb. 1, 2016) address the eligibility and concentration of an MMF's assets. We view investment in securities of high credit quality as necessary to qualify for our highest MMF ratings. To assess fund liquidity risk, in accordance with our criteria, we look at the average maturity of a fund, monitor a fund's maturities and weekly redemptions, evaluate the characteristics of the shareholder base, conduct our own stress testing of the portfolio, and review specified stress tests the fund manager produces."

Finally, the update adds under the subhead, "Liquidity Analysis Remains An Important Part Of Our Principal Stability Fund Ratings," "We believe our PSFRs offer investors an independent third-party opinion of a fund's ability to maintain principal value. We will continue to actively monitor all of our PSFRs on a weekly basis as well as provide the market with the highest transparency of our process and methodology for rating MMFs. One of the key areas of assessment is funds' liquidity--both asset and fund liquidity. Understanding funds' specific characteristics has proven valuable throughout our ratings history, and our analysis of their liquidity has been especially important to our ratings during times of financial stress in the market."

S&P's other update says, "On Oct. 14, 2016, the last of the SEC's revised rules that govern money market funds (MMFs) will go into effect. The key provisions of these guidelines include requiring institutional prime and institutional municipal MMFs to change from maintaining a stable net asset value (NAV) to a floating NAV and giving fund boards the ability to impose fees or gates (a temporary suspension of redemptions) if a fund's level of liquidity falls below certain thresholds. S&P Global Ratings' assessment at the time these amendments were adopted in July 2014 was that they were unlikely to affect our ratings; today, we continue to hold this belief (see "Principal Stability Fund Ratings Will Likely Hold Steady Amid Money Market Fund Reform," published Aug. 5, 2014)."

It adds, "A principal stability fund rating (PSFR), commonly referred to as a money market fund rating, is a forward-looking opinion about a fixed-income fund's ability to maintain principal value (i.e., NAV). We typically assign PSFRs to funds that seek to maintain stable or, as is prevalent in non-U.S. funds, accumulating NAVs. S&P Global Ratings' PSFR analysis focuses primarily on the creditworthiness of the fund's investments and counterparties. We also assess the fund's investment maturity structure and management's ability and policies to maintain the fund's stable NAV. Below, S&P Global Ratings answers questions on how we rate funds and how these regulations may affect our rating process."

BlackRock issued a client update yesterday related to expense limitations on its Government money market funds. It also recently announced a money fund liquidation, and a share class closure for one of its institutional funds. (Note: BlackRock Vice Chair Barbara Novick will keynote Crane's Money Fund Symposium, which begins Wednesday at the Philadelphia Marriott. Watch for news from Symposium later this week and next week.) Also, we review an update from Invesco on the implementation dates for its CNAV and FNAV funds and one on strike times for its Liquid Assets Portfolio.

Yesterday, BlackRock's Global Head of Cash Management Tom Callahan sent a letter to clients, which says, "Several criteria are frequently evaluated and measured when selecting money market funds, one of which is the expense ratios of the funds. BlackRock strives to provide money market fund investment solutions that are competitive and compelling. To that end, we recognize that pricing plays an important role in the decision making process, particularly for government money market funds."

He comments, "We are pleased to inform you that effective July 1, 2016, we will be implementing an expense limitation for certain of our government money market funds as recently approved by our Funds' Board of Trustees. We have been voluntarily waiving fees in most of these funds for some time, and in an effort to demonstrate long term commitment to our clients, have moved to make certain of these waivers contractual. For more detail about the affected funds, please see below." The update cuts the expense ratio for the "Inst" class of FedFund, Federal Trust Fund, T-Fund, and Treasury Trust from 0.20% to 0.17%, and for the "Inst" class of BlackRock Premier Government Institutional Fund from 0.17% to 0.14%.

Also, on June 16, BlackRock announced plans to liquidate BlackRock US Treasury Money Market Portfolio. A letter states, "On June 13, 2016, the Board of Trustees of the BlackRock Funds approved a proposal to close the BlackRock U.S. Treasury Money Market Portfolio to new investors and thereafter to liquidate the Fund. Accordingly, effective 4:00 P.M. (Eastern Time) on September 15, 2016, the Fund will no longer accept purchase orders from new investors. Effective July 1, 2016, checkbooks for the Fund's check writing privilege will no longer be ordered. Checks will continue to be honored if presented for payment on or before September 15, 2016."

It continues, "On or about September 29, 2016 (the "Liquidation Date"), all of the remaining assets of the Fund will be liquidated completely. Any shares held on the Liquidation Date will be redeemed at the net asset value per share and the Fund will then be terminated. Shareholders may redeem their shares or exchange their Fund shares for shares of another BlackRock mutual fund at any time prior to the Liquidation Date. The Fund may not achieve its investment objective as the Liquidation Date approaches."

Finally, a May 23 client update discusses plans to eliminate a share class for one of BlackRock's funds. It reads, "We want to share with you an important update as it relates to BlackRock Cash Funds: Institutional, a series of BlackRock Funds III. The Board of Trustees of the Trust has approved a proposal to close the Aon Captives Shares and Institutional Shares of the Fund to new share purchases. As of the close of business on August 1, 2016, the Fund will no longer accept purchase orders for Institutional shares. As of the close of business on June 1, 2016, the Fund will no longer accept purchase orders for Aon Captives Shares. Shareholders may continue to redeem Aon Captives Shares and Institutional Shares following June 1, 2016, and August 1, 2016, respectively."

In other money fund manager news, Invesco also put out a couple of client updates last week. The first is titled, "Updated Implementation Date for FNAV Funds." It says, "Today, we announce our intended implementation dates for our Constant Net Asset Value (CNAV) and Floating Net Asset Value (FNAV) funds.... On or about August 1, 2016: Invesco's CNAV prime and municipal funds will only accept new accounts that are beneficially owned by natural persons and will no longer accept new institutional accounts. Existing institutional clients may continue to transact as usual. On or about October 4, 2016: Institutional investors will no longer be eligible for our CNAV prime and municipal funds and we will begin transitioning remaining institutional clients out of these funds. Invesco intends to communicate with impacted clients prior to Oct. 4." On FNAV funds, it states, "On or about October 12, 2016: Invesco's designated FNAV prime and municipal funds will begin transacting at a floating net asset value."

The letter also provides a list of Invesco's money fund roster going forward. Government money market funds include: Government and Agency Portfolio, Government TaxAdvantage Portfolio, Premier US Govt Money Portfolio, Treasury Portfolio, Invesco Money market Fund, and Invesco VI Govt MMF. CNAV Retail funds include: Invesco Tax-Exempt Cash Fund (Muni), Tax-Free Cash Reserve Portfolio (Muni), and Premier Portfolio (Prime). Floating NAV funds include: Liquid Assets Portfolio (Prime), STIC Prime Portfolio (Prime), and Premier Tax-Exempt Portfolio (Muni).

Finally, Invesco also sent a letter to clients June 15 called, "Updated Strike Times for the Liquid Assets Portfolio." It explains, "The following Invesco funds, which intend to transact as FNAV funds, plan to offer the following intraday price times in order to provide same-day settlement and intraday liquidity to our investors." Liquid Assets Portfolio will transact three times daily – 8am, 12 pm, and 3 pm. Both STIC Prime and Premier Tax-Exempt will strike once at 3 pm each day. "All three portfolios plan to begin transacting at a FNAV on or about October 12, 2016. We will announce more detail on specific timing in the future. At this time, Invesco's government and Constant NAV money market funds intend to maintain their current settlement times."

Below, we review two recent articles on US MMF reforms. The first, by Treasury & Risk magazine, is entitled, "Bracing for New Money Fund Rules," while the second, from The Treasurer, is entitled, "All stocked up and nowhere to invest." Also, we excerpt from a statement by the London-based Institutional Money Market Fund Association, entitled, "IMMFA Reacts to European Council's Money Market Fund Regulation." (See our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs.")

T&R's "Bracing" piece says, "The approach of the October implementation date for new rules governing institutional prime money market funds is shaping up as a dividing line for corporate treasuries and other institutional investors, with many observers predicting a mass exodus from prime funds in the months before the rules take effect."

It quotes Fitch Ratings' Roger Merritt, "There is an expectation that sometime this summer -- the end of the second quarter, certainly going into the third quarter -- a significant amount of the money that is in institutional prime funds will move over into government money market funds. Treasurers are either undecided about how they feel about the new features of institutional prime funds or they're just sort of nervous about getting through this period of transition.... I think many of them will choose the safest route and move the money into government money market funds."

It continues, "Michael Berkowitz, head of North America and global liquidity product management at Citi, said a Citi survey last year of its institutional and corporate clients showed they expected from $200 billion to $400 billion of the roughly $900 billion in prime funds at the time would flow out of the funds. Berkowitz predicted that the move out of prime funds "is likely to ramp up in the September time frame."

Treasury & Risk writes, "Many observers expect, though, that corporate investors' move out of prime funds will be temporary and that companies will filter back into prime funds once they see how they're operating under the new regime.... Others question whether treasurers will flee prime funds at all. "The companies we know that invest in institutional prime intend to keep doing it in the future," said Paul LaRock, a partner at consulting firm Treasury Strategies."

The article adds, "Tory Hazard, president and chief operating officer at ICD, a trading portal for institutional investors, said monitoring the NAVs of prime funds shows there's very little movement. Since funds began providing daily data in mid-April, "four of the biggest funds on our portal have not had any variability and two have varied by a basis point," Hazard said.... "The clients that we've spoken with that are in prime funds don't intend to move, once they understand it," Hazard said. "We don't think there will be a huge migration."

Finally, the article says, "One wild card going into the fall is Federal Reserve monetary policy.... If the Fed tightens again and the spread widens more, that could convince some corporate investors to stay put in prime funds. "Once the yield differential between prime and government funds gets between 25 to 40 basis points, that would make prime funds significantly more attractive to investors," Berkowitz said.... Citi has also been talking to the fund companies it works with about possible new offerings, Berkowitz said, including seven-day funds and private funds.... Fund companies are also adding short-term bond funds, which have the same floating NAV as prime funds will have once the new rules go into effect, but aren't subject to fees and gates."

In The Treasurer's "All Stocked Up" piece, Treasury Strategies' Tony Carfang writes, "Prime institutional funds will be required to float the net asset value (NAV) and their boards will be empowered to institute liquidity fees and redemption gates. These regulations have led to steady outflows since the first proposals in 2010. Assets have fallen from $1.7 trillion to $1.2 trillion, mostly flowing into government MMFs. There is speculation that the decline will continue as the effective date approaches. In preparation, many fund managers are shortening their maturities. Some managers are investing very little with maturities beyond October 2016."

He continues, "Several problems flow from this: Prime institutional funds are the market's largest purchaser of commercial paper. With assets shrinking, there are fewer buyers of corporate commercial paper. As fund managers shorten their maturities, treasurers are left with issuing shorter-term securities, creating transaction cost and rollover risk. As investors, treasurers find themselves relegated to lower-yielding government funds. Some treasurers feel that the combination of a floating NAV, liquidity fees and redemption gates render prime MMFs a less effective instrument and possibly at odds with the company's investment policies. We have the contrary view that the regulations simply remove some of the clear advantages of prime MMFs and place them on par with other MMF instruments and bank deposits."

Carfang explains, "Consider the three key planks: 1) Floating NAV -- Prime funds had enjoyed a constant NAV of $1 per share and treasurers loved that. Now they must float. In reality, though, every other instrument in the market that is not held to maturity with absolute certainty also floats continuously.... MMFs are now simply on par with all other instruments." 2) Liquidity fees -- Again, MMFs enjoyed daily liquidity, even when market stress imposed 'fees' on all other market instruments."

He continues, "3) Redemption gates -- This is probably the most misunderstood market phenomenon. Money markets are generally robust and there are always buyers available to match sellers. Well, not quite. Markets can and do experience liquidity gaps, sometimes severe, in which no transactions take place. The market participants themselves impose the gate. The most significant recent example was the freezing of the auction rate securities market in 2008.... Most bank depositors are unaware that, in the event of a bank failure, the Federal Deposit Insurance Corporation is not obligated to immediately repay depositors. Uninsured depositors (most corporations) could conceivably wait for years in the case of a complex resolution."

Carfang concludes, "Treasurers are gradually becoming aware that, from the standpoint of investor utility, prime institutional funds are still the most attractive instrument. We believe that, although assets will continue to decline as we approach the October go-live date, they will rebound quickly and remain the instrument of choice for US treasurers."

Finally, on pending European money fund reforms, IMMFA states, "On Friday June 17 the European Council adopted its compromise position on the Money Market Fund Regulations. This step enables the Council, the European Parliament and the European Commission to commence negotiations in trialogue to finalise the regulation. Further changes are expected as negotiations continue, and unfinished work remains on several key aspects. Nevertheless, this is a milestone for the MMFR, which is now at a more advanced and workable stage than ever before."

Jane Lowe, IMMFA Secretary General, comments, "We welcome and acknowledge the Council's hard work to find an acceptable compromise amongst the 28 Member States. The introduction of three forms of money market funds (government stable NAV, low volatility NAV and variable NAV) provides optionality and clarity, benefiting money market fund investors. We welcome the Council's pragmatism in permitting fund ratings to be sought by money market fund managers, and in providing for an implementation period that allows investors, managers and service providers to ready themselves."

She continues, "Nevertheless, the IMMFA is disappointed that the restriction of government debt as a liquid asset means that government debt stable NAV funds and the low volatility NAV funds may ultimately prove unworkable. If properly constructed, these structures would provide security and optionality for investors. Bringing certainty to the future shape and regulation of the €500 billion European constant NAV money market funds sector will enhance their ability to serve clients and help ensure they are better positioned for European efforts to build alternatives to bank funding in the Capital Market Union."

A webinar hosted recently by Fitch Ratings and online money fund trading "portal" Treasury Partners called, "Changing Cash Management: Are You Ready?" looked at how the process of managing cash is evolving due to money market reform and other changes. Panelists Ian Rasmussen, a Senior Director at Fitch Ratings; Jerry Klein, a Managing Director at Treasury Partners; and Ben Montes, Client Services Team Lead at Clearwater Analytics, discussed a range of topics related to MMFs, including the development of new products, low or negative yields, liquidity, spreads, and Prime to Government flows. Said Fitch's Rasmussen, "Money fund regulation is pushing investors to reconsider what they want to invest in, which is pushing managers to develop new options, so there is a whole slew of new products coming to market." (Note: Safe travels to those heading to this week's Crane's Money Fund Symposium, which is June 22-24 at the Philadelphia Marriott. The Conference Binder will be sent to the record 540 Attendees this morning, and it's also now available to registered Attendees and Subscribers at the bottom our "Content" page. We look forward to seeing many of you in Philly later this week!)

Treasury Partners' Klein explains, "One of the trends we've seen ramping up with our clients over the past 18 months is that they're more actively looking to segment their cash." This trend, among others, is resulting in the development of new products. Klein presented a chart listing some of the available options, including bank deposits, structured bank deposit products, private money funds, ultra-short bond funds, separately managed accounts, short duration ETFs, time/certificates of deposit, direct investment in money market securities, Retail Prime MMFs, Inst Prime MMFs, short maturity Prime MMFs, and Government MMFs.

One of the areas of increased interest is Private funds. He commented, "Private money market funds are funds that look very similar to the prime 2a-7 funds and AAA-rated prime funds of today in that they seek to maintain a one dollar NAV. They generally are looking to operate under the same guidelines as current 2a-7 guidelines; however, these are non-registered products." However, he said, they face the hurdle of not being included in most corporate investment policies.

Klein explained, "Ultra short bond funds and short duration ETFs have been around for some time, but we are hearing more about them from our clients and from the fund companies. The view from part of the industry is that if investors are going to get comfortable with floating NAV money market funds, they may also look to these ultra-short bond funds, which will have a slightly higher yield." But they also face the hurdle of investment policy acceptance.

In the money fund space, he told the webinar audience, "This is where we're seeing massive changes coming in October. We are constantly having conversations with our clients about whether they expect to stay in prime funds or move to government funds or other types of products. I think there's been a shift over the past four or five years since this discussion first got going. At that point in time the consensus was clear that floating NAV would drive most corporate investors out of prime funds. As corporate treasurers have had some time now to evaluate the data, learn more about how this product will work, we're seeing more who will actually continue to use prime funds."

Klein continued, "But we still expect some significant migration into Government funds, particularly from our clients who are looking for a lot of intraday liquidity." Rasmussen concurred that the concern has shifted from floating NAV to fees and gates. "The one [concern] that investors are focused on now is liquidity fees and the redemptions gates," he said.

Klein also commented, "We've been seeing for some time now that fund managers are clearly building liquidity inside of their funds.... It's becoming a little bit of a tougher trade-off right now because the curve is a little bit steeper than it has been.... However, in general fund managers are still going to err on the side of caution and try to stay as far away from that 30%, 7 day liquidity zone as possible." He said managers are generally running between 40% and 50% in 7-day liquidity, so they are nowhere near that 30% level that could potentially trigger the gates and the liquidity fees."

Rasmussen discussed asset flow trends. "What we've seen, which isn't a surprise, is that government funds have increased in assets ... while Prime funds have declined in assets. A lot of the asset flows thus far have been from managers deciding to proactively re-categorize or change a prime fund to a government fund.... We do anticipate that there will be more flows at some point over the next couple of months; we just don't know when that will take place. I guess investors are feeling fairly comfortable in their prime fund given the benefit that it offers them now."

He continued, "The million dollar question is: How much will move? The numbers are all over the place but we'll be watching this very closely over the next couple of months. Part of the story will be how much investors are paid to stay in prime funds."

Klein asked, "What spread would make it attractive for an investor to stay in a prime fund with a floating NAV as opposed to going into a government fund with the stable NAV?" He provided some historical data, saying that in the years leading up the 2008 financial crisis, the spread was generally in the 10 to 15 basis point range. After that, when the Fed lowered rates to near zero, the spread sank to about 5 basis points. "Since the Fed tightened in December, we've seen that spread climb significantly to where it's now over 20 basis points, so it's a meaningful differential for a lot of investors. In fact, now you get about twice the return in a prime fund as you do in a government fund."

He added, "Will that go up from here? I think it is likely we will see a little bit more widening as there is increased demand for government paper and a little diminished demand for corporate paper. It should cause some spread widening between prime and government funds. The other part of that equation is what the Fed will do between now and then. If the Fed does in fact make a move over the next few months -- that would likely add to some spread widening as well."

In the Q&A portion of the webinar, Klein was asked when investors will move out of Prime. He said, "Many of them are still waiting to take action. I've had only one client so far that has moved from Prime to Government funds. I've had some others who have told me they will be making that move, and many who are still a undecided on this." He believes that most clients will end up with a combination of both Prime and Government funds.

Finally, another audience member asked if the 30% liquidity threshold will create an unnecessary trigger for investors? Klein said, "I think it's certainly a concern that some investors will hyper-focus on that liquidity number. The real result of it is that it is basically going to force managers to maintain more liquidity than they would otherwise ... and perhaps forgo some yield in doing so ... knowing that they are not coming close to that 30% threshold. I think you'll see fund managers basically do everything in their power to avoid getting into that position."

Bank of America Merrill Lynch released, "Money Fund Investor Survey: Reform Expectations," which finds that respondents expect "a sizable reallocation from prime funds," mostly into Government funds, ahead of the October floating NAV implementation date. We review this, as well as a "Reform Update" from JP Morgan Asset Management, which includes strike times for its Floating NAV fund. Finally, we also look at the latest "Money Market Fund Statistics" report from the Securities & Exchange Commission, which shows assets and trends for April. (Note: Crane Data has recently started publishing "beta" reports on Form N-MPF data, so look for more on this once we've begun releasing the summary data.)

BofA Merrill Rates Strategist Mark Cabana writes, "Given the uncertainty associated with 2a-7 money market mutual fund reform, we recently conducted a survey of our short-duration clients to learn more about their expectations. Our survey was conducted from June 2nd to 10th and it was sent mostly to corporate accounts that invest in money funds, along with a small number of institutional accounts."

He continues, "Key takeaways from the survey include: (1) respondents expect sizeable reallocations from prime money funds ahead of the October implementation date, most of which will be invested in government funds, (2) the market impact of money fund reform should result in modestly higher LIBOR rates, although expectations were diverse, (3) commercial paper or certificate of deposit issuance was expected to hold steady or decline somewhat, and (4) investors may not adjust prime holdings until late summer or early fall."

Cabana explains, "Responses to the survey generally reaffirmed our expectations for money fund reform. We have been expecting an additional $300 to $500 billion in prime fund outflows and believe that roughly half of this will find its way into government funds. We also expect this flow to result in a widening of LIBOR spreads and downward pressure on short-dated US government securities, although this will partially be offset by increased bill supply in 2H 2016. We have also been expecting that prime fund outflows would increase over the summer and into the fall."

He adds, "We were surprised by the large majority of respondents who indicated that 50% or less of prime outflows would return to the product within 18-to-24 months of full reform implementation, even if offered attractive yields. We had thought investors might be willing to return to prime funds over time if offered sufficient yield. We were also surprised that some expected lower or no change in 3M LIBOR rates leading into reform."

JPMAM's Update lists the firm's roster of funds going forward and includes strike times for its lone Prime Institutional fund, JP Morgan Prime. It says, "Under the amendments to Rule 2a-7 adopted by the Securities and Exchange Commission in July 2014, JPMorgan Money Market Funds (MMFs) will, beginning in October 2016, fall under the following qualification: Institutional – JP Morgan Prime; Government – JP Morgan US Govt, JP Morgan US Treasury Plus, JP Morgan Federal, JP Morgan 100% US Treasury Securities; Retail – JP Morgan Liquid Assets, JP Morgan Tax-Free, JP Morgan Municipal, JP Morgan California Municipal, JP Morgan New York Municipal <b:>`_."

The brief continues, "Under the amended SEC rules, Institutional Prime MMFs will transition to a floating NAV, which will be priced at multiple times per day. The JPMorgan Prime Money Market Fund will ordinarily calculate its share class NAV three times on each day the fund accepts purchases and redemptions -- at 8 AM, 12 PM, and 3 PM ET." The fund will transition to a floating, four decimal NAV and calculated strike times thrice daily starting October 1. Also, the Retail funds will meet the new Retail qualification standards and shareholder eligibility requirements on October 1, says the Update.

For more on JPM's plans and strike times, see our March 3 News, "JPM Details Fund Updates, Cutoffs, Gates in Filing; Linton Comments;" our May 24 News, "BlackRock Latest to Set FNAV Strike Times, Fitch on Weekly Liquidity;" and, our June 14 News, "Western Asset Sets Lineup, Strike Times; Wells Fargo on Reform Flows."

In other news, the SEC's "Money Market Fund Statistics" for April 2016 shows that assets fell (led by a sharp drop in Prime MMFs) and yields rose last month. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends.

The SEC's latest statistics show total money market fund assets dropped by $40.5 billion in April to $3.032 trillion. This after assets fell $50.1 billion in March, rose $58.5 billion in February, and fell $21.4 billion in January, according to the SEC's broad total. (This series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Year-to-date, total assets are down $53.5 billion through 4/30.

Of the $3.032 trillion in assets, $1.470 trillion was in Prime funds, down $48.0 billion in April. Prime funds now represent 48.5% of total assets. Government & Treasury funds total $1.338 trillion, or 44.1% of assets, up $26.5 billion in April. Tax Exempt Funds were down again, dropping $19.1 billion to $223.4 billion, or 7.4% of all assets. The number of money funds was 472, down 18 for the month and down 70 from 4/30/15.

Yields continued to tick up in April, led by a big jump for T-E funds. The Weighted Average Gross 7-Day Yield for Prime Funds on April 30 was 0.56%, up 1 basis point from the previous month and more than double the 0.27% of Nov. 2015. Gross yields were 0.39% for Government/Treasury funds, unchanged from last month and up 0.24% from 11/15. Tax Exempt Weighted Gross Yields rose 8 basis points in April to 0.41% after jumping 25 bps in March. The `Weighted Average Net Prime Yield was 0.34%, up 1 basis point from the month before and up 0.23% since 11/15. For the year-to-date, 7-day gross yields are up 15 basis points and net yields are up 12 basis points. The Weighted Average Prime Expense Ratio was 0.22% (up 1 basis point from March). Prime expense ratios have risen from 0.16% in Nov. 2015 to 0.22% currently.

Maturities continued to move lower and liquidity continued to inch higher in April. The average Weighted Average Life, or WAL, was 51.7 days (down 3.8 days from last month) for Prime funds, 95.1 days (down 0.4 days) for Government/Treasury funds, and 23.4 days (down 4.0 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 33.3 days (down 1.8 days from the previous month) for Prime funds, 40.8 days (down 1.1 days) for Govt/Treasury funds, and 21.2 days (down 2.2 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 32.5% in April (up 1.5% from last month). Total Weekly Liquidity was 45.7% (up 1.0%).

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, France topped the list with $177.8 billion, followed by the US with $171.4 billion and Japan with $159.4 billion. Canada was fourth with $139.1 billion, followed by Sweden ($122.9B), Australia/New Zealand ($71.4B), UK ($69.1B), and Germany ($53.3B). The Netherlands ($47.8B) and Switzerland ($40.1B) round out the top 10. The biggest gainers among Prime MMF bank related securities for the month were France (up $45.5B), Sweden (up $31.3B), Norway (up $27.9B), Belgium (up $8.7B), and UK (up $5.3B). The biggest drops came from Canada (down $26.5B), US (down $4.9B), Japan (down $3.9B), China (down $2.7B), and the Netherlands (down $2.0B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $571.4 billion (up $454.7B from last month), while its subset, the Eurozone, had $297.2 billion (up from $242.3B). The Americas had $312.7 billion (down from $344.0B), while Asia and Pacific had $255.5 billion (down from $257.9B).

Of the $1.468 trillion in Prime MMF Portfolios as of April 30, $633.9B (43.2%) was in CDs (up from $470.1B), $296.9B (20.2%) was in Government (including direct and repo), down from $409.5B), $214.1B (14.6%) was held in Non-Financial CP and Other Short Term Securities (down from $301.9B), $228.9B (15.6%) was in Financial Company CP (up from $223.8B), and $93.9B (6.4%) was in ABCP (down from $99.4B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 42.4% at month-end, down from 39.0% the previous month. All MMF Repo with Federal Reserve plummeted to $60.0B in April from $257.1 billion the previous month. The $60B is the lowest since the SEC began recording this information in April 2014.

Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 32.4% were in maturities of 60 days and over (down from 37.2%), while 4.5% were in maturities of 180 days and over (down from 4.6%).

Money fund reforms in Europe took a giant step towards becoming a reality this week as the European Council of the EU agreed to a compromise proposal. The Council is expected to vote on the reform proposal Friday, then it goes to the EU Parliament for "trilogue" approval before becoming law. (See our May 10 Link of the Day, "Reuters on EU Reform Compromise.) The statement, "Money market funds: Council agrees its negotiating stance," was issued yesterday, as well as the release, "Commission welcomes EU Council's backing for a new regulatory framework of Money Market Funds." Reuters first reported the news in its story, "European Union states agree rules on money market funds."

The European Council's release says, "On 15 June 2016, the Permanent Representatives Committee (Coreper) agreed, on behalf of the Council, a negotiating stance on a draft regulation on money market funds, aimed at making such products more robust. The draft regulation is intended to ensure the smooth operation of the short-term funding market, maintaining the essential role that money market funds play in the financing of the economy. The Council will confirm Coreper's agreement at a meeting on 17 June 2016, and will ask the presidency to start talks with the European Parliament. The Parliament's ECON committee approved its negotiating stance in March 2015."

It continues, "Jeroen Dijsselbloem, Netherlands minister for finance and president of the Council, said: "For the Dutch presidency it is important to have an agreement on this essential file, to ensure the future stability and viability of the MMF sector, which is an important source of short-term finance to the real economy. We expect endorsement of the preliminary agreement during the Ecofin Council this Friday."

The statement adds, "Money market funds (MMFs) are an important source of short-term financing for companies and government entities. There are currently two kinds of MMFs: those that offer a variable net asset value (VNAV) that mainly depends on market fluctuations; those that offer a constant net asset value (CNAV) and aim to offer share purchases and redemptions for a fixed price. With assets under management of around E1 trillion, MMFs are mainly used to invest excess cash within short timeframes. They represent an important tool for investors because they offer the possibility to diversify their excess cash holdings, whilst maintaining a high level of liquidity."

It explains, "However, the financial crisis of 2007-08 showed that MMFs can be vulnerable to shocks and may even spread or amplify risks throughout the financial system. Investors are likely to redeem investments as soon as they perceive a risk, which can force funds to sell assets rapidly in order to meet redemption requests. This can fuel an investor 'run' and liquidity crisis for an MMF, potentially triggering further negative effects on other parts of the financial system."

The Council's release adds, "The draft regulation lays down rules for MMFs, in particular the composition of their portfolios and the valuation of their assets, to ensure the stability of their structure and to guarantee that they invest in well-diversified assets of good credit quality. It also introduces common standards to increase the liquidity of MMFs, to ensure that they can face sudden redemption requests when market conditions are stressed. In addition, the text provides for common rules to ensure that the fund manager has a good understanding of his/her investors, and provides investors and supervisors with adequate and transparent information. In order to further mitigate 'contagion risk', an MMF would not be allowed to receive external support from a third party, including from its sponsor, as the discretionary nature of external support might contribute to uncertainty in times of instability."

It explains, "An important new element of the draft regulation is the introduction of a permanent category of "low volatility net asset value" (LVNAV) MMFs. These LVNAV MMFs will gradually replace most of the existing CNAV MMFs, which would be required to convert into LVNAV MMFs within 24 months of entry into force of the regulation. LNAV MMFs would be allowed -- to a limited extent and under strict conditions -- to offer a constant net asset value. Only two types of CNAV MMFs would be allowed to continue to operate under the draft regulation, namely: those that invest 99.5% of their assets in public debt instruments; those with a specific investor base solely outside the EU. Both categories of CNAV and LVNAV MMFs would be subject to reinforced liquidity requirements as well as safeguards such as "liquidity fees and redemption gates." These would be designed to prevent and/or limit the effects of sudden investor runs."

The EU Commission's statement, "Commission welcomes EU Council's backing for a new regulatory framework of Money Market Funds," says, "The European Commission welcomes the agreement on the reform of Money Market Funds (MMFs) that was reached today at the Permanent Representatives Committee (COREPER) of the Council. The agreement marks a further step in the completion of the post-crisis reform agenda and paves the way for trilogues with the European Parliament."

It tells us, "The Commission adopted its proposal for a regulatory framework of MMFs in September 2013 in order to address their potential impact on the financial system. MMFs are a key part of the international work on shadow banking and sustainable, market-based finance. These funds serve as an important source of short-term financing for financial institutions, businesses and governments. However, they have also been vulnerable to investor 'runs' on redemptions and have given rise to misperceptions that their returns are guaranteed. Today's Council agreement marks a major step in our efforts to ensure that MMFs can better withstand redemption pressures in stressed market conditions, while at the same time ensuring that they continue to provide a secure tool for European companies to manage their finances."

Jonathan Hill, EU Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union, comments, "Today's agreement is a step in the right direction. Strengthening the regulation and oversight of MMFs will ensure that the potential systemic risks are addressed, in line with the recommendations issued by the Financial Stability Board. It will also ensure MMFs can continue to provide their key role in supporting financing in the wider economy." The release adds, "Now that the Council has a negotiating mandate, the Commission expects trilogues with the European Parliament to commence shortly."

The Commission's release provided some background on the MMF reform process. It says, "Money market funds are an important source of short-term financing for financial institutions, corporates and governments. In Europe, around 22% of short-term debt securities issued by governments or by the corporate sector are held by MMFs. They hold 38% of short-term debt issued by the banking sector. Because of this systemic interconnectedness of MMFs with the banking sector and with corporate and government finance, their operation has been at the core of international work on shadow banking."

Furthermore, they write, "The Commission published its proposal for a regulation on Money Market Funds in September 2013. The proposal reflected the recommendations issued by the Financial Stability Board (FSB) in October 2012, the main one being that all stable redemption MMFs (CNAV MMFs) should float their NAV (VNAV MMFs), where workable. Where conversion is not workable, the FSB proposed measures that are "functionally equivalent in effect to capital, liquidity, and other prudential requirements on banks that protect against runs on their deposits." European-domiciled MMFs hold short-term assets accounting for approximately EUR 1 trillion, half of these assets are held by CNAV MMFs, the other half by VNAV MMFs. Given the significance of MMFs to the European short-term debt funding market, the Commission set out proposals to ensure risks were appropriately managed, whilst ensuring that money market funds can continue to support the financing of the wider economy."

Reuters "European Union states agree rules on money market funds" story," summarizes, "European Union member states have agreed rules on money market funds, the bloc's financial services commissioner said on Tuesday, ending three years of deadlock with a compromise that will force half the industry to lay off various risks.... The deal would give CNAV funds the option of investing in lower-risk products or becoming safer variable net asset value (VNAV) funds within two years of the new rules being adopted, a draft of the proposed regulation, seen by Reuters, said."

Finally, it adds, "An official said that the draft law, prepared by the Netherlands which holds the rotating EU presidency, will be formally adopted by EU envoys on Wednesday and endorsed by finance ministers on June 17 at a regular meeting in Luxembourg. Germany wanted CNAV to be phased out but countries with a strong fund industry presence -- such as Ireland, Luxembourg and Britain -- opposed that. The deal needs European Parliament approval to become law."

We learned from JP Morgan Securities' latest "Short Term Market Outlook and Strategy" about a lobbying effort led by BlackRock to overturn the National Association of Insurance Commissioners' plans to remove its Class 1 classification for Prime money funds. (See our April 18 News, "NAIC Eliminates Class 1 Status for Prime Money Funds; American Update.") JPM writes, "A couple months ago the National Association of Insurance Commissioners (NAIC) Securities Valuation Office voted to amend the classification category of prime institutional MMFs on the balance sheets of insurance companies."

They explain, "[T]he office voted to amend the classification to equities, basically treating prime institutional MMFs like mutual funds, effective September 30, 2016.... While exposure is low (we estimate insurers held $33bn of Class 1 MMF holdings as of year-end 2015), the change has nonetheless brought about some concerns among those impacted in the industry. Fortunately, following a comment letter from BlackRock to NAIC last month, it appears that the staff at NAIC is reconsidering some of their classification changes based on a detailed agenda for a meeting on June 9 that we obtained online."

BlackRock's letter, with the Subject line, "Re: Amendment to the P&P Manual to Remove Class 1; Amendment to add New Money Market Mutual Fund Category," says, "BlackRock, Inc. is pleased to have the opportunity to comment to the Valuation of Securities Task Force on the removal of the Class 1 Money Market Fund List from the Purposes and Procedures Manual of the National Association of Insurance Commissioners Securities Valuation Office. BlackRock is proposing to add a new money market mutual fund category to the P&P Manual."

It explains, "Insurance companies currently use and rely upon prime MMFs to assist in the management of claims reserves, premium receipts and other working capital and treasury related functions on a daily basis. By eliminating the Class 1 List, we understand from our insurance clients that prime institutional MMFs will essentially be precluded from being used as a cash management tool by them. Companies using these MMFs for daily cash management needs would be subject to statutory equity limitations; we understand that many insurance companies are already allocating investments to their statutory equity limitations and will be unable to have the large cash balances they use daily in MMFs also count towards these limits."

BlackRock writes, "From a yield perspective, prime MMFs have historically provided more yield than government and treasury MMFs by a margin of 10bps. With several factors at play now in the short-term markets, we anticipate that this spread between government and treasury MMFs and prime MMFs funds could widen substantially, with industry estimates ranging between 30 and 50bps; today's spreads sit at over 20bps on average. In this low-yield environment which has plagued the industry for a number of years, every basis point matters within a cash investment portfolio. Additionally, while BlackRock has observed that prime MMFs are used by both large and small insurance companies, and across life companies, Property & Casualty companies and health companies, we believe small and mid-sized companies predominantly benefit from prime MMFs."

They continue, "With the removal of the Class 1 List from the P&P Manual, prime institutional MMFs will be treated in a starkly different manner by the NAIC than the SEC, the Financial Accounting Standards Board and the Internal Revenue Service. Each of these entities continues to treat prime institutional MMFs as cash equivalents.... With the removal of the Class 1 List which sits in Part Six, Section 2 of the P&P Manual, Prime Institutional MMFs would no longer meet the conditions set forth in Part 2, Section 9, e) of the P&P Manual and would not be eligible to receive bond treatment, or be treated as Cash or Cash Equivalents on Schedule DA. If a MMF is not treated as a bond, it would be classified as common stock."

BlackRock's letter adds, "In our view, the changes made by the SEC to the Rule will only strengthen the quality of the investments of prime institutional MMFs. We believe that the 2014 amendments to the Rule continue the efforts from the 2010 amendments and will help provide additional stability, greater transparency and more diversification to MMFs. Coupled with the increase in stress-testing requirements under the Rule, in our view, MMFs will be more robust than they ever have been."

It goes on, "As the Class 1 List is being eliminated, BlackRock proposes another category of MMFs be captured within the Accounting Practices & Procedures Manual, the P&P Manual, and the Quarterly and Annual Statement Instructions. Our recommendation would be for a prime institutional MMF to be classified as a Short-term Investment, receive treatment as a bond, and continue to be treated as a cash equivalent. BlackRock is proposing that the P&P Manual be amended to provide for a new classification of "Other Money Market Mutual Funds" to allow prime institutional MMFs to continue to be reported on Schedule DA as a short-term asset and receive treatment as a bond. Specifically, BlackRock would propose that the following parts of the P&P Manual be revised as follows." (The letter goes on to detail the specific changes to the ruling that BlackRock recommends, with changes highlighted in red.)

The NAIC responded to the letter at a June 9 meeting with the following comments: "Recommended Action: Staff agrees that clarification is necessary for the reporting of Money Market Mutual Funds (MMMFs). Staff has proposed revisions to SSAP No. 2 -- Cash, Drafts, and Short-Term Investments to clarify MMMFs as short-term investments and suggests a referral to the Blanks (E) Working Group to retain the existing reporting line number, but rename the current Class 1 reporting line on Schedule DA to "Other Money Market Mutual Funds.... Additionally, staff suggests a referral to the Valuation of Securities (E) Task Force to remove reporting references for MMMFs. The revisions proposed are detailed in the agenda item; however, the key changes are shown below."

Finally, it adds, "Staff has proposed retaining the MMMFs as short-term investments as that is consistent with the prior reporting of the Class 1 MMMFs. With this approach, the removal of the Class 1 distinction should have virtually no impact on the reporting of MMMFs.... If there is a desire to reconsider the "short-term" reporting of MMMFs and instead assess whether these items should be classified as "cash equivalents," it is recommended that the Working Group direct staff to work with interested parties in developing a separate agenda item for subsequent consideration."

Western Asset Management is the latest manager to announce updates to its money market fund lineup. In a press release entitled, "Western Asset Update on Plan for Money Market Fund Offerings: SEC Reforms Drive Proposed Changes to Product Lines," the firm laid out its roster of US Treasury/Government, Retail, and Institutional funds (including a new Prime Retail fund) and set strike times for the latter. We review this, and we also excerpt from Wells Fargo MMFs' latest "Overview, Strategy, and Outlook."

The update says, "Western Asset Management Company, an investment affiliate of Legg Mason, today announced an update to the preliminary plan for its money market mutual fund product suite's compliance with the U.S. Securities and Exchange Commission (SEC) money market fund reform rules. The initial plans were announced in April 2015, and after further consultation with both investors and distribution partners, the firm can advise the following fund line‐up and floating net asset value strike times." (See our April 8, 2015 Link of the Day, "Western Asset Keeps Full Money Fund Lineup; Adds Ultrashort Bond Funds.)

In its post-reform lineup, Western will have 6 U.S. Treasury and Government Money Market Funds, including: Western Asset Institutional U.S. Treasury Reserves, Western Asset Premium U.S. Treasury Reserves, Western Asset U.S. Treasury Reserves, Western Asset Institutional U.S. Treasury Obligations Money Market Fund, Western Asset Institutional Government Reserves, and Western Asset Government Reserves.

The release explains, "Funds will continue to seek to transact at a $1.00 net asset value and already meet the new SEC requirement to invest at least 99.5 percent of their assets in cash, government securities, and/or repurchase agreements that are fully collateralized. Legg Mason Partners Fund Advisor, LLC and Western Asset have no current intention to recommend to the Board to institute liquidity fees or redemption gates on these funds."

The firm will have 4 Retail and Tax-Exempt Money Market Funds, including the new Western Asset Prime Obligations MMF (see our October 14, 2015 Link of the Day, "Western Files for Prime Retail.") The fund's prospectus was filed in January, but we haven't seen the fund go live yet. The other Retail funds are: Western Asset Tax Free Reserves, Western Asset Institutional Tax Free Reserves (to be renamed Western Asset Select Tax Free Reserves at a later date), Western Asset California Tax Free Money Market Fund, and Western Asset New York Tax Free Money Market Fund.

Western says, "Funds will only be available to accounts beneficially owned by "natural persons." Under the new SEC money market fund regulations, these funds will be permitted to continue to seek to transact at a $1.00 net asset value. The funds will adopt policies to impose liquidity fees (up to 2 percent of redemption proceeds), as well as provide for redemption gates in times of market stress, if the Board deems it to be in the best interests of a fund." A footnote adds, "Prior to reform implementation, the funds will undertake to confirm that all existing shareholders meet the SEC definition of "natural person" or will notify ineligible shareholders that their shares will be involuntarily redeemed."

Furthermore, they will offer 4 Institutional Prime Money Market Funds: Western Asset Institutional Cash Reserves, Western Asset Institutional Liquid Reserves, Western Asset Premium Liquid Reserves, and Western Asset Liquid Reserves. The release comments, "On or about October 11, 2016, the funds will price and transact at a floating net asset value, which will reflect the current market‐based values of the portfolio securities it holds and will adopt required policies relating to liquidity fees and redemption gates. The floating net asset value price will be quoted to four decimal places e.g. $1.0001 and the funds will provide intraday liquidity by offering three net asset value strikes per day at 8:00 a.m., 12:00 p.m. and 3:00 p.m. (Eastern time). Note: Fund end of day cutoff time will be 3:00p.m. (Eastern time)."

Finally, Western adds, "Although the key SEC money market fund reforms do not come into effect until October 14, 2016, there have been a number of reporting changes in order to provide shareholders with more current information. Beginning on April 14, 2016, all 2a‐7 money market funds were required to provide the following information via N‐MFP filings and also on the fund's website. The following information is uploaded on a daily basis and includes historic 6 month rolling data: Current market based net asset value (NAV) rounded to the fourth decimal place; Daily and Weekly Liquid Assets; Net shareholder flows."

In other news, Wells Fargo's latest monthly commentary, written by Jeff Weaver, Laurie White, and Wells MMF PM team, says, "In our last commentary, we noted that, with fewer than six months until the implementation deadline of the Securities and Exchange Commission's (SEC's) revisions to Rule 2a-7, not much had changed in the world of money market mutual funds, and May seemed to continue the trend. While overall money market fund assets increased by $24 billion, that change primarily was driven by $60 billion in growth of government funds. Offsetting that, prime fund assets declined by $40 billion, with $25 billion leaving retail prime funds and $15 leaving institutional money market funds."

The piece continues, "Additionally, portfolio managers continued to shorten the maturities on their funds and to build liquidity. According to Crane Data, the WAM on prime institutional money market mutual funds dropped 5 days in May to 26 days; Crane has indicated the daily liquid assets in these portfolios remained the same at 33%, while weekly liquid assets increased from 45% to 48% in May. We still expect this trend to continue through to the implementation date, as portfolio managers prepare their prime funds for cash flows whose timing and size are unknown at this time."

Wells adds, "Over the next few months, this is what we expect investors will observe: Some money market funds will liquidate. Some fund companies have made the decision to close their prime funds or convert those funds to government strategies. Some money will flow out of the retail sector. A number of fund families currently offer multiple share classes, including institutional and retail classes, in the same fund. Since the SEC is requiring funds be designated as institutional or retail, any institutional shareholders in a retail-designated fund must leave the fund. Some of this cash will go into institutional prime funds, some will go into government funds, and some will go into fund alternatives (such as bank deposits). The mix of these flows is still uncertain."

They continue, "Additionally, some retail shareholders may face liquidation because a third party (neither the fund manager nor the beneficial owner but another individual such as a broker or trust officer) makes the decision as to whether a retail fund subject to fees/gates may be appropriate for their clientele. And finally, some money will flow out of institutional funds due to a lack of appetite for either the possibility of fees/gates being imposed or a variable NAV. In some cases, there may be operational constraints (such as a trust system that cannot handle multiple variable NAV strike times).... Add all of those up and the money flows could be very large."

Finally, Wells adds, "What is likely not to change, though, is the investment objective of prime fund managers.... Even though institutional prime and municipal funds must convert to a variable NAV, it's not clear that the underlying shareholders want the NAV to fluctuate; consequently, we expect very little change from the way portfolio managers will manage their portfolios before or after the implementation date. Between now and then, though, with portfolio managers shortening maturities, we also expect yields to decline and the spread between the gross yields of government and prime funds to compress.... Once all the moving parts come to rest and both investors and portfolio managers become accustomed to a new normal, one could reasonably expect that fund characteristics will return to pre implementation levels. Until then, this scenario probably is described best as temporary in nature and a cost of implementing regulatory change."

Crane Data released its June Money Fund Portfolio Holdings Friday, and our latest collection of taxable money market securities, with data as of May 31, 2016, shows increases in Agencies, Repos, and VRDNs, and decreases in Time Deposits, CP, CDs, and Treasuries. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $24.6 billion in May to $2.604 trillion. MMF holdings decreased by $21.0 billion in April, dropped by $75.5 billion in March, and increased by $64.2 billion in February. Repos remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were in fourth place, followed by Commercial Paper, Time Deposits and VRDNs. Money funds' European-affiliated securities fell to 27.4% of holdings, down from the previous month's 28.6%. Below, we review our latest Money Fund Portfolio Holdings statistics. Note: we recently made a number of category changes to reflect the SEC's new disclosure mandates, which went live on April 14, and we now also offer a separate "beta" cut of fund info holdings from the SEC's Form N-MFP.

Among all taxable money funds, Repurchase Agreements (repo) increased $32.6 billion (6.0%) to $574.8 billion, or 21.0% of holdings after decreasing $65.3 billion in April and increasing $49.3 billion in March. Treasury securities fell $3.8 billion (0.7%) to $535.1 billion, or 20.9% of holdings, after dropping $36.8 billion in April and rising $37.5 billion in March. Government Agency Debt jumped $34.4 billion (7.3%) to $507.5 billion, or 19.5% of all holdings, after decreasing $9.0 billion in April and decreasing $14.7 billion in March. The rise in Agencies is in large part due to the massive conversion of ($300.1 billion) of Prime to Government assets.

Certificates of Deposit (CDs) were down $4.6 billion (1.1%) to $409.2, or 15.7% of holdings, after declining $17.0 billion in April and dropping $41.8 billion in March. Commercial Paper (CP) was down $17.5 billion (5.0%) to $335.3 billion, or 12.9% of holdings, while Other holdings, primarily Time Deposits, dropped $18.6 billion (7.9%) to $216.4 billion, or 8.3% of holdings. VRDNs held by taxable funds increased by $2.1 billion (8.7%) to $25.9 billion (1.0% of assets).

Prime money fund holdings tracked by Crane Data totaled $1.270 trillion (down from $1.326 trillion last month), or 48.8% of taxable money fund holdings' total of $2.604 trillion (down from 51.4% last month). This is the first time Prime assets have fallen below combined Treasury and Government portfolio holdings assets in our "Holdings" series. Among Prime money funds, CDs represent just under one-third of holdings at 32.2% (up from 31.2% a month ago), followed by Commercial Paper at 26.2% (down from 26.6%). The CP totals are comprised of: Financial Company CP, which makes up 15.8% of total holdings, Asset-Backed CP, which accounts for 6.7%, and Non-Financial Company CP, which makes up 4.0%. Prime funds also hold 4.1% in US Govt Agency Debt (down from 4.3%), 5.5% in US Treasury Debt (down from 7.1%), 3.8% in US Treasury Repo (up from 3.7%), 3.0% in Other Instruments, 13.1% in Non-Negotiable Time Deposits, 4.7% in Other Repo, and 4.1% 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. (Let us know if you'd like to see our spreadsheet comparing the old vs. new Holdings categories.)

Government money fund portfolios totaled $789 billion, up from $735 billion in April, while Treasury money fund assets totaled $545 billion, up from $519 billion in April. Government money fund portfolios were made up of 57.7% US Govt Agency Debt, 19.6% US Government Agency Repo, 7.6% US Treasury debt, and 14.8% in US Treasury Repo. Treasury money funds were comprised of 74.4% US Treasury debt, 25.2% in US Treasury Repo, and 0.3% in Government agency repo, Other Instrument, and investment company shares. Government and Treasury funds combined total $1.334 trillion, or 51.2% of all taxable money fund assets, up from 48.6%.

European-affiliated holdings decreased $25.4 billion in May to $712.4 billion among all taxable funds (and including repos); their share of holdings decreased to 27.4% from 28.6% the previous month. Eurozone-affiliated holdings decreased $20.6 billion to $414.0 billion in May; they now account for 15.9% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $400 million to $273.9 billion (10.5% of the total). Americas related holdings increased $51.0 billion to $1.613 trillion and now represent 62.0% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $24.6 billion, or 8.8%, to $302.9 billion, or 11.6% of assets; US Government Agency Repurchase Agreements (up $12.3 billion to $211.9 billion, or 8.1% of total holdings), and Other Repurchase Agreements ($59.9 billion, or 2.3% of holdings, down $4.3 million from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $9.4 billion to $200.4 billion, or 7.7% of assets), Asset Backed Commercial Paper (down $5.8 billion to $84.6 billion, or 3.2%), and Non-Financial Company Commercial Paper (down $2.3 billion to $50.3 billion, or 1.9%).

The 20 largest Issuers to taxable money market funds as of May 31, 2016, include: the US Treasury ($535.1 billion, or 22.3%), Federal Home Loan Bank ($372.0B, 15.5%), Federal Reserve Bank of New York ($86.7B, 3.6%), BNP Paribas ($81.0B, 3.4%), Wells Fargo ($78.1B, 3.4%), Credit Agricole ($75.9B, 3.3%), Mitsubishi UFJ Financial Group Inc. ($55.5, 2.3%), RBC ($52.5B, 2.2%), Societe Generale ($52.3B, 2.2%), Federal Farm Credit Bank ($51.8B, 2.2%), Federal Home Loan Mortgage Co. ($49.5B, 2.1%), Bank of Nova Scotia ($47.1B, 2.0%), Bank of America ($44.8B, 1.9%), Credit Suisse ($42.5B, 1.8%), Sumitomo Mitsui Banking Co ($40.1B, 1.7%), Natixis ($39.4B, 1.6%), HSBC ($37.8B, 1.6%), Mizuho Corporate Bank ($37.3B, 1.6%), JP Morgan ($36.7B, 1.5%), and DnB NOR Bank ASA ($35.7B, 1.5%).

In the repo space, the `10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($86.7B, 15.1%), Wells Fargo ($51.4B, 8.9%), BNP Paribas ($50.3B, 8.8%), Societe Generale ($40.0B, 7.0%), Credit Agricole ($38.1B, 6.6%), Bank of America ($34.0B, 5.9%), RBC ($29.0B, 5.0%), Credit Suisse ($28.0B, 4.9%), Bank of Nova Scotia ($23.7B, 4.1%), and Citi ($21.6B, 3.8%). The 10 largest Fed Repo positions among MMFs on 5/31 include: Goldman Sachs FS Govt ($12.4B), JP Morgan US Govt ($11.6B), Fidelity Govt Cash Reserves ($9.6B), Federated Treas Obligs ($8.5B), Fidelity Cash Central ($8.2B), JP Morgan US Treas Plus ($6.6B), Fidelity Inst MM Prm ($5.7B), Fidelity Inst MM MMkt ($5.5B), Fidelity Inst MM Treas Port ($5.1B), and Goldman Sachs FS Treas Sol ($5.1B).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($43.5B, 5.1%), Sumitomo Mitsui Banking Co. ($40.1B, 4.7%), Credit Agricole ($37.9B, 4.4%), DnB NOR Bank ASA ($35.7B, 4.2%), BNP Paribas ($30.7B, 3.6%), Svenska Handelsbanken ($30.6B, 3.6%), Skandinaviska Enskilden Banken AB ($30.0B, 3.5%), Swedbank AB ($28.4B, 3.3%), Wells Fargo ($26.7B, 3.1%), and Natixis ($26.0B, 3.1%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($32.1B, 7.9%), Mitsubishi UFJ Financial Group Inc. ($29.3B, 7.2%), Bank of Montreal ($22.9B, 5.7%), Wells Fargo ($20.9B, 5.2%), Mizuho Corporate Bank Ltd ($20.6B, 5.1%), Toronto-Dominion Bank ($18.0B, 4.5%), Sumitomo Mitsui Trust Bank ($18.0B, 4.4%), Canadian Imperial Bank of Commerce ($16.8B, 4.1%), Bank of Nova Scotia ($15.4B, 3.8%), and Norinchukin Bank ($15.2B, 3.8%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($19.1B, 6.8%), ING Bank ($12.3B, 4.4%), JP Morgan ($11.9B, 4.2%), Mitsubishi UFJ Financial Group Inc. ($11.5B, 4.1%), Commonwealth Bank of Australia ($11.5B, 4.1%), Societe Generale ($11.0B, 3.9%), Credit Agricole ($10.9B, 3.9%), RBC ($10.0B, 3.6%), HSBC ($10.0B, 3.6%), and NRW Bank ($8.5B, 3.0%).

The largest increases among Issuers include: Federal Reserve Bank of NY (up $34.1B to $86.7B), Federal Home Loan Bank (up $29.3B to $372.0B), Bank of Montreal (up $6.8B to $31.9B), Canadian Imperial Bank of Commerce (up $5.8B to $22.9B), Federal National Mortgage Association (up $3.2B to $31.3B), Sumitomo Mitsui Banking Co. (up $2.7B to $40.1B), Federal Home Loan Mortgage Co. (up $2.2B to $49.5B), Credit Suisse (up $1.9B to $42.5B), Bank of America (up $1.4 to $44.8B), and RBC (up $1.4B to $52.5B).

The largest decreases among Issuers of money market securities (including Repo) in March were shown by: Wells Fargo (down $6.1B to $78.1B), Credit Agricole (down $5.1B to $75.9B), Australia and New Zealand Banking Group Ltd. (down $5.0B to $16.2B), BNP Paribas (down $4.0B to $81.0B), US Treasury (down $3.8B to $535.1B), Bank of Nova Scotia (down $3.5B to $47.1B), Societe Generale (down $3.2B to $52.3B), Skandinaviska Enskilda Banken AB (down $3.1B to $30.0B), Mizuho Corporate Bank Ltd. (down $3.1B to $37.3B), and Commonwealth Bank of Australia (down $2.4B to $13.3B).

The United States remained the largest segment of country-affiliations; it represents 54.3% of holdings, or $1.414 trillion (up $44.0B). France (10.7%, $278.0B) remained second, followed by Canada (7.6%, $198.2B), which held third. Japan (7.3%, $189.8B) stayed in fourth, while Sweden (4.3%, $112.9B) held fifth. The United Kingdom (3.5%, $89.9B) remained sixth, while Germany (2.3%, $60.5B) jumped to seventh from ninth. Australia (2.3%, $58.9B) fell one spot to eighth, while The Netherlands (2.2%, $57.7B), and Switzerland (2.1%, $55.1B) 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 May 31, 2016, Taxable money funds held 30.1% (up from 29.8%) of their assets in securities maturing Overnight, and another 13.9% maturing in 2-7 days (up from 13.2%). Thus, 44.0% in total matures in 1-7 days. Another 20.9% matures in 8-30 days, while 12.5% matures in 31-60 days. Note that more than three-quarters, or 77.4% of securities, mature in 60 days or less (up from 76.1% last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11.0% (up from 10.9%) of taxable securities, while 10.0% matures in 91-180 days (down from 10.9%), and just 2.2% matures beyond 180 days (down from 2.1%).

Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Friday, and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio Holdings will be released early 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.

The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds"). Among the 4 tables it includes on money market mutual funds, the First Quarter, 2016 edition shows that the Household Sector remains the largest investor segment, though these assets dipped slightly in Q1. Funding Corporations, State & Local Governments, Life Insurance Companies, and Private Pension Funds showed gains in the latest quarter, while Households, Nonfinancial Corporate Businesses, State & Local Governments, and Funding Corporations showed increases over the past 12 months. We review the latest Fed Z.1 numbers below, and we also review an article from Bloomberg on Treasury bill market volatility and money fund regulatory shifts. (Note: Crane Data's June Money Fund Portfolio Holdings were delayed slightly due to recent SEC category changes. Watch for our "Reports" later this morning and for our News on this on Monday. We've also begun posting Form N-MFP data on our Holdings page.)

The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets inching up by $4.1 billion, or 0.14%, in the first quarter to $2.759 trillion. Over the year through March 31, 2016, assets are up $114.1 billion, or 4.3%. The largest segment, the Household sector, totals $1.036 trillion -- or 37.5% of assets. The Household Sector decreased by $30.2 billion, or -2.8%, in the quarter, after increasing $65 billion in the 4th quarter, and increasing $5 billion in Q2. Over the past 12 months through March. 31, 2016, Household assets are up $21.0 billion, or 2.1%. Household assets remain well below their record level of $1.581 trillion (from year-end 2008).

Nonfinancial Corporate Businesses were the second largest investor segment, according to the Fed's data series, with $573.4 billion, or 20.8% of the total. Business assets in money funds decreased $3.4 billion in the quarter, or -0.6%, but have risen by $28.1 billion over the past year, or 5.2%. Funding Corporations, which includes Securities Lending cash, remained the third largest investor segment with $464.4 billion, or 16.8% of money fund shares. They increased by $26.7 billion in the latest quarter, and remain up $19.4 billion over the previous 12 months. Funding Corporations held over $906 billion in money funds at the end of 2008.

The fourth largest segment, State and Local Governments held 6.9% of money fund assets ($189.1 billion) -- up $5.1 billion, or 2.9%, for the quarter, and up $19.5 billion, or 11.5%, for the year. Private Pension Funds, which held $150.9 billion (5.5%), remained in 5th place. The Rest of the World category was the sixth largest segment in market share among investor segments with 4.2%, or $114.7 billion, while Nonfinancial Non-Corporate Businesses held $92.3 billion (3.3%), State and Local Government Retirement Funds held $59.2 billion (2.1%), Life Insurance Companies held $58.3 billion (2.1%), and Property-Casualty Insurance held $20.6 billion (0.7%), according to the Fed's Z.1 breakout.

The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.632 trillion, or 59.1%. Debt securities includes: Open market paper ($333.4 billion, or 12.1%; we assume this is CP), Treasury securities ($545.5 billion, or 19.8%), Agency and GSE backed securities ($460.9 billion, or 16.7%), Municipal securities ($239.1 billion, or 8.7%), and Corporate and foreign bonds ($52.7 billion, or 1.9%). Overall, Credit Market Instruments are up $49.6 billion, or 3.1%.

Other large holdings positions in the Fed's series include Security repurchase agreements ($597.1 billion, or 21.6%) and Time and savings deposits ($493.0 billion, or 17.9%). Money funds also hold minor positions in Foreign deposits ($17.6 billion, or 0.6%), Miscellaneous assets ($12.3 billion, or 0.4%), and Checkable deposits and currency ($7.3 billion, 0.3%). Note: The Fed added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $39.4 billion, up $400 million in the quarter.

During Q1, Treasury Securities (up $62.6 billion), Open Market Paper (up $34.6 billion), Time and Savings Deposits (up $48.0 billion), Foreign Deposits (up $6.5 billion), and Miscellaneous Assets (up $2.3 billion), showed increases. Security Repurchase Agreements (down $102.2 billion), Municipal Securities (down $29.3 billion), Agency- and GSE-Backed Securities (down $6.5 billion), Corporate and Foreign Bonds (down $11.7 billion), and Checkable Deposits and Currency (down $300 million) all showed declines.

In other news, Bloomberg wrote the piece, "World's Safest Market Beset by Most Volatility Since 2008." It says, "The $1.5 trillion market for U.S. Treasury bills, known as an oasis of stability for investors worldwide, is experiencing the most volatility since the financial crisis. Daily swings in the government's shortest-maturity obligations are widening as debate over the Federal Reserve's path collides with rising demand for the securities before the implementation of regulations intended to make money-market funds safer. The gyrations underscore how it's a precarious time for investors in bills and other instruments in the money market, which the Fed uses to implement policy changes. Asset managers looking to park cash in the short-term securities have to navigate officials' efforts to normalize interest rates while also adapting to post-crisis rules."

It continues, "Skepticism toward the Fed's plans to boost its overnight target, following liftoff from near zero in December, is fueling the volatility. Futures assign a 2 percent chance of an increase at officials' June 14-15 gathering, and the probability doesn't exceed a coin toss until December. "The Fed has hiked once already, so we are in a tightening cycle, but there is enough uncertainty about what that will look like," said William Marshall, an interest-rate strategist in New York at Credit Suisse Group AG, one of the Fed's 23 primary dealers <b:>`_. "The other big uncertainty, where there is still a lot of debate, is what is going to be the end state for front-end demand once the money-fund reforms go into effect."

Bloomberg adds, "On Oct. 14, Securities and Exchange Commission rules take effect that may lead investors to shift into money-market funds focused on government debt, from prime funds, which typically buy commercial paper. The new regulations mandate that institutional prime funds report prices that fluctuate, rather than sticking to $1 per share. The measures also allow fund companies to use steps such as redemption fees to prevent runs in times of panic. Amid all the changes, which have already led many money-market companies to alter their offerings, institutional investors may pull about $400 billion from prime funds, JPMorgan Chase & Co. predicted in the first quarter."

It concludes, "The combination of fluctuating Fed bets and purchases of bills related to regulatory changes will spur volatility, said Jerome Schneider, head of short-term portfolio management at Newport Beach, California-based Pacific Investment Management Co., which oversees $1.5 trillion. "Until these stimuli become reconciled and resolved, we may continue to see relative repricing a normal event in this sector," he said."

Crane Data's latest Money Fund Market Share rankings show asset declines for roughly half of U.S. money fund complexes in May as money market fund assets decreased by $9.7 billion, or 0.04%. Overall assets have fallen by $71.3 billion, or 2.6%, over the past 3 months, but over the past 12 months through May 31, they are up $113.0 billion, or 4.5%. The biggest gainer in May was J.P. Morgan, whose MMFs rose by $6.3 billion, or 2.7%. Western, Invesco, UBS, Fidelity, and HSBC also saw assets increase, rising by $3.8 billion, $2.5 billion, $1.5 billion, $1.5 billion, and $1.4 billion, 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 review these below, and we also look at money fund yields the past month, which rose slightly.

BlackRock, Invesco, Vanguard, First American, and Western had the largest money fund asset increases over the past 3 months, rising by $31.1 billion, $4.8B, $3.2B, $2.3B, and $1.5B, respectively. BlackRock was buoyed by its acquisition of BofA's money funds -- a deal which closed in April. Over the past year through May 31, 2016, BlackRock was the largest gainer (up $48.0B, or 23.5%), followed by Fidelity (up $47.9B, or 12.0%), Goldman Sachs (up $41.1B, or 27.6%), SSGA (up $15.8B, or 20.4%), and Vanguard (up $11.3B, or 6.5%).

Other asset gainers for the past year include: Northern (up $10.1B, 12.7%), Federated (up $8.3B, or 4.3%), Morgan Stanley ($6.9B, 5.9%), Schwab (up $6.6B, 4.3%), Invesco (up $5.4B, or 10.0%), and UBS (up $5.4B, 15.7%). The biggest decliners over 12 months include: Dreyfus (down $17.4B, or -10.6%), JP Morgan (down $12.2B, or -4.9%), Deutsche (down $7.5B, or -24.2%), and RBC (down $4.7B, or -32.0%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $446.0 billion, or 17.0% of all assets (up $1.5 billion in May, down $1.2B over 3 mos., and up $47.9B over 12 months. BlackRock is second with $252.2 billion, or 9.6% of assets (down $4.6B, up $31.1B, and up $48.0B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is third with $257.3 billion, or 9.0% market share (up $6.3B, down $1.4B, and down $12.2B for the past 1-month, 3-mos. and 12-mos., respectively). Federated Investors remained fourth with $201.9 billion, or 7.7% of assets (down $4.4B, down $12.7B, and up $8.3B). Goldman Sachs stayed in 5th place with $189.9 billion, or 7.2% of assets (down $4.7B, down $884M, and up $41.1B).

Vanguard held onto sixth place with $184.5 billion, or 7.0%, (up $928M, up $3.2B, and up $11.3B). Schwab ($160.5B, 6.1%) was in seventh place, followed by Dreyfus in eighth place with $147.4B (5.6%), Morgan Stanley was in ninth place with $123.5B (4.7%), and Wells Fargo was in tenth place with $107.7B (4.1%).

The eleventh through twentieth largest U.S. money fund managers (in order) include: SSGA ($93.5B, or 3.6%), Northern ($90.1B, or 3.4%), Invesco ($60.0B, or 2.3%), Western Asset ($44.7B, or 1.7%), First American ($41.7B, or 1.6%), UBS ($40.2B, or 1.5%), Franklin ($23.9B, or 0.9%), Deutsche ($23.6B, or 0.9%), American Funds ($16.2B, or 0.6%), and HSBC ($15.2B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except: Western moved ahead of First American, Franklin moved ahead of Deutsche, and HSBC displaced T. Rowe Price from the top 20. Crane Data currently tracks 64 U.S. MMF managers, same as last month.

When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman moving up to No. 4 (dropping Vanguard to 6) and SSGA breaking into the top 10. Also, J.P. Morgan moved back ahead of BlackRock as the second largest global money market fund manager after dropping to third in April.

Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($454.1 billion), JPMorgan ($362.1 billion), BlackRock ($360.0 billion), Goldman Sachs ($276.6 billion), and Federated ($205.2 billion). Vanguard ($184.5B) was sixth, followed by Dreyfus/BNY Mellon ($172.1B), Schwab ($160.5B), Morgan Stanley ($145.3B), and SSGA ($116.0B), 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 June Money Fund Intelligence and MFI XLS show that yields were flat or inched higher in May across most Crane Indexes, except for Tax-Exempt, which jumped for the second straight month. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 763), remained unchanged at 0.11% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield was also unchanged at 0.11%. The MFA's Gross 7-Day Yield was 0.43% (up 1 basis point), while the Gross 30-Day Yield was also 0.43% (unchanged).

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.22 (up 1 basis point) and an average 30-Day Yield of 0.22% (up 1 basis point). The Crane 100 shows a Gross 7-Day Yield of 0.47% (up 1 basis point), and a Gross 30-Day Yield of 0.47% (unchanged). For the 12 month return through 5/31/16, our Crane MF Average returned 0.06% (up 1 basis point) and our Crane 100 returned 0.11% (up 1 basis point). The total number of funds, including taxable and tax-exempt, fell to 1,054, down 9 from last month. There are currently 763 taxable and 291 tax-exempt money funds.

Our Prime Institutional MF Index (7-day) yielded 0.26% (up 1 bp) as of May 31, while the Crane Govt Inst Index was 0.13% (unchanged) and the Treasury Inst Index was 0.10% (unchanged). Thus, the spread between Prime funds and Treasury funds is 16 basis points. The Crane Prime Retail Index yielded 0.08% (unchanged), while the Govt Retail Index yielded 0.03% (up 1 basis point) and the Treasury Retail Index was 0.02% (unchanged). The Crane Tax Exempt MF Index yielded 0.06% (up 1 bp).

The Gross 7-Day Yields for these indexes in May were: Prime Inst 0.55% (unchanged), Govt Inst 0.38% (up 1 bp), Treasury Inst 0.34% (unchanged), Prime Retail 0.50% (unchanged), Govt Retail 0.37% (unchanged), and Treasury Retail 0.31% (down 1 bp). Also, the Crane Tax Exempt Index jumped 4 basis points to 0.38%. The Crane 100 MF Index returned on average 0.02% for 1-month, 0.05% for 3-month, 0.08% for YTD, 0.11% for 1-year, 0.05% for 3-years (annualized), 0.05% for 5-years, and 1.10% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)

BMO Global Asset Management officially launched a new Prime Institutional money fund, which will have a floating NAV once the SEC's money market fund reforms are implemented in October. It's not the first new Prime Inst fund that's been launched since MMF reforms were announced, and it likely won't be the last. But it is one of just a few that we've come across. Schwab introduced a new Prime Inst fund with the launch of Schwab Variable Share Price Money Fund earlier this year (see our Nov. 10, 2015 News, "Schwab Files Variable NAV Money Fund; Invesco Announces Changes), and T. Rowe Price is planning to launch a Prime Inst fund in September, as PM Joe Lynagh tells us in the June issue of our Money Fund Intelligence newsletter. Also, we report on the retirement of three veteran money market fund executives below, Rich Hoerner from BlackRock, Mike Fields from American Beacon, and Tom Territ from Federated.

A press release, entitled, "BMO Global Asset Management Launches Institutional Prime Money Market Fund" explains, "BMO Global Asset Management today introduced the BMO Institutional Prime Money Market Fund to provide institutional and retail investors with a money market fund that will eventually have a floating net asset value (NAV). Managed by BMO Global Asset Management's team of experienced money market professionals, this new fund is expected to have a stable NAV until approximately October 3, 2016. Thereafter, the fund's NAV may begin to float as a result of an expanded four decimal NAV (e.g. $1.0000) and slight changes to the market values of the underlying portfolio of very short term, income securities. The new fund also may be subject to liquidity gates and/or redemption fees as required by the new money market fund regulations."

John Blaser, President of BMO Funds, comments, "As a global investment solutions provider, BMO strives to meet the ever-changing needs of our institutional and retail clients by continuing to build our selection of funds. The new regulatory reforms will soon restrict institutional investors from stable NAV money market funds other than government money market funds. We expect a significant shift of assets out of prime money market funds and into government money market funds. As a result, the new fund is expected to provide enhanced total returns well above the expected low rates of return in government money market funds in the new regulatory environment."

He adds, "This new fund brings BMO Global Asset Management's total U.S. suite to 45 mutual funds. It will be an excellent addition to our existing family of money market funds, comprised of the BMO Prime Money Market Fund, BMO Tax-Free Money Market Fund and BMO Government Money Market Fund, which will remain ideal for institutions with a preference for a stable NAV." (See our April 13 News, "BMO Files for Floating NAV Prime MMF; GuideStone Going Government" for more.)

In other news, three giants of the money market fund industry announced their retirements in recent weeks. The latest is Rich Hoerner, BlackRock's Co-Head of Global Cash Management, who will be leaving at the end of the year. BlackRock shared with us a memo from Richie Prager, Global Head of the Trading, Liquidity and Investments Platform. He writes, "Few individuals have lengths of service that extend beyond the life of the firm. After 29 years with BlackRock in many roles across the Cash Management business, Rich Hoerner has informed me of his intention to retire from BlackRock at the end of 2016."

Prager explains, "Rich joined the cash business in 1992 when it was part of PNC Bank after having spent five years in PNC's Trust division. In 1996, BlackRock assumed the investment management responsibilities for PNC's fixed income platform, and his length of service reflects his time spent at PNC. Throughout his tenure, he rose through the ranks of the cash management investment platform, managing multiple money market portfolios and leading teams of investment professionals. Prior to becoming Chairman of the Global Cash Management business, Rich was most recently the co-Head of Global Cash Management alongside Tom Callahan."

He continues, "Rich's leadership and investment acumen have had a direct impact on the success and evolution of our Cash Management platform. Under his careful watch, the business successfully navigated some of the most tumultuous market conditions in the short term markets and persevered in delivering to our clients the safety and security they expect from their cash investments. Rich's conservative, yet savvy approach to money market management has shaped the investment philosophy of the team and his influence is measurable across all corners of the cash business. Rich will continue to advise the team through the implementation of US money market fund reform to ensure a smooth transition for our clients. His contributions to BlackRock will continue long into retirement, particularly in those individuals he has mentored and guided over his career. Please join me in thanking Rich for his lasting impact on BlackRock and wish him all the best in retirement."

We also learned that Mike Fields, Chief Fixed Income Officer at American Beacon Advisors and former Portfolio Manager of American Beacon's Money Funds, retired on May 31. An internal memo comments, "As a founding member of the firm, Mike, along with former Chairman and CEO Bill Quinn, were responsible for the original business plan of American Beacon Advisors back in 1986. Throughout his tenure, Mike has seen our Fixed Income team and clients through the ups and downs of volatile markets while assisting with the unprecedented growth of the firm. Mike will continue to provide support as needed on a consultant basis." Sam Silver, Vice President, Fixed Income Investments, will be assuming Field's responsibilities, according to the firm <b:>`_.

Finally, a press release, "Federated Investors, Inc. Appoints New Head of Sales," It says, "Federated Investors ... today announced the appointment of Paul A. Uhlman as president of Federated Securities Corp., Federated's distribution arm for domestic markets, effective June 15, 2016.... Uhlman will replace Thomas E. Territ who will remain with Federated and participate in the transition of duties over the next three months before retiring later in the third quarter. Territ joined Federated in 1983 and held several positions with increasing levels of responsibility during his outstanding career."

Federated President and CEO Chris Donahue comments, "Tom was an important part of Federated's growth over many years and during his tenure as president of the sales organization, led Federated's domestic sales effort to record highs in sales and assets. I'd like to thank him for his dedication and many contributions over the past 33 years."

The release continues, "In his new role, Uhlman will report to Donahue and provide overall leadership to Federated's four domestic sales units: broker/dealer; wealth management and trust; institutional and retirement; and separately managed accounts (SMAs). A 26-year veteran of the company, Uhlman has most recently served as national sales director for Federated's Institutional and Retirement Sales Division with assets totaling more than $60 billion. In this role, he led the group responsible for sales to pension accounts and other retirement programs, endowments, foundations, states and other government entities. He joined the company in 1990, serving as an account administrator and sales representative and later as a vice president in trust sales. In 1999, his role expanded to sales director, global accounts. He was named senior vice president in 2004, national sales director for institutional sales in 2007 and executive vice president in 2010."

Donahue adds, "Paul has successfully led the institutional sales division at Federated to new heights, expanding our relationships in the demanding world of top-level institutional investors. In his new role, Paul will apply his leadership skills and management abilities to a broader, more diverse group of customers."

Crane Data would like to thank Hoerner, Fields and Territ for their many and excellent years of service to the money market mutual fund industry. We wish them all the best of luck in retirement!

The June issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Tuesday morning, features the articles: "MMF Reform Countdown: 4 Months to Go; Sorting, Bracing," which looks at changes, trends, and question marks leading up to the October reform deadline; "T. Rowe Price's Lynagh on Lineup; Do No Harm," which profiles Joe Lynagh, Portfolio Manager and Head of Cash Management at T. Rowe Price; and "MMF Managers Set Variety of Strike Time Models," which reviews firms that have announced strike times for their floating NAV funds. We have updated our Money Fund Wisdom database query system with May 31, 2016, performance statistics, and also sent out our MFI XLS spreadsheet Tuesday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our June Money Fund Portfolio Holdings are scheduled to ship Thursday, June 9, and our June Bond Fund Intelligence is scheduled to go out Tuesday, June 14.

MFI's lead "MMF Reform" article says, "With just four months to go before Money Market Reforms are finalized, fund managers continue to make announcements, tweaks to their lineups and funds and to prepare for the great unknown -- what investors will do come October. The total of funds converting from Prime to Government has now broken over $300 billion (it's over $340 billion when Prime to Ultra-short conversions are included), and the exodus from Tax Exempt funds continues. We review the latest moves below."

The article adds, "Most of the major players have announced their lineup changes, but filings continue to surface. The most recent batch is from Northern Trust, which announced plans for its Prime and Tax-Exempt money funds. The $9.1 billion Northern Institutional Diversified Assets fund will be "going Government," the $3.8 billion Northern Inst Prime Obligations will remain Prime Institutional and adopt a floating NAV, and the $7.4 billion Northern Trust Money Market Fund has been declared a (prime) Retail fund. Also, Northern Inst Tax-Exempt Fund and Northern Trust CA Muni MMF will be liquidated; Northern Municipal MMF has been declared "Retail," and Northern Inst Municipal MMF will be "Institutional." (See our June 2 News for more.)

Our latest fund manager interview reads, "This month, MFI profiles Joe Lynagh, Fixed Income Portfolio Manager and Head of the Cash Management team at T. Rowe Price, in charge of all the firm's money market and ultra short funds. Lynagh discusses the changes that T. Rowe Price has made to its money fund lineup as the firm prepares for reforms, based on the mandate of "do no harm to existing shareholders." T. Rowe Price plans to offer a range of options, including a Prime Institutional fund. Lynagh also talks about why retail investors will stay with Prime funds, why Ultra-Short Bond funds will grow in popularity, and why differentiation will return to the market."

MFI asks, "How long have you been running money funds? Lynagh says, "`T Rowe Price's history with money funds goes way back. Our first money fund -- Prime Reserve Fund -- was launched in January of 1976.... Our first tax exempt money fund was launched in 1981 and our California and New York tax exempt money funds followed in 1986. We launched our Summit series of funds in 1993, starting with Summit Cash Reserves Fund and Summit Municipal Money Fund. Three years after that we launched our Maryland tax exempt money fund. So ... it's been a steady progression building out our product line-up."

He adds, "As our mutual fund business grew, we launched two internal money funds -- the Reserve Investment Fund and our Government Reserve Fund. These funds serve as cash sweeps for our other mutual funds, primarily our stock and bond funds. They are internal money funds, but they have the lion's share of the money fund assets. In all, we manage about $45 billion in money fund assets."

The article on the "Strike Times" explains, " While it's not a mandated requirement of the SEC money market fund reform, money fund managers are adopting multiple intra-day "strike," or pricing, times for some of their floating NAV funds to try and preserve the same-day liquidity that Prime funds have always had. As Wells Fargo Securities' strategists Garret Sloan and Eric Vos explain in a recent report, "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. In the past month we have seen several managers announce their intra-day pricing times including: Dreyfus, BlackRock, Federated and First American."

In a sidebar, we discuss, "Fitch on Liquidity Profiles." This brief says, "Fitch Ratings issued a press release, "`U.S. Money Funds' Liquidity Profiles Vary Ahead of Reform," which 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."

We also do a sidebar on "OCC Guidance on MMFs," which says, "The Office of the Comptroller of the Currency issued "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." Finally, as we do every month, we review all the important "Money Fund News."

Our June MFI XLS, with May 31, 2016, data, shows total assets decreased $9.7 billion in May to $2.626 trillion after decreasing $42.0 billion in April, dropping $20.3 billion in March, and increasing $37.4 billion in February. Our broad Crane Money Fund Average 7-Day Yield remained unchanged at 0.11% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) increased 1 basis point to 0.22% (7-day).

On a Gross Yield Basis (before expenses were taken out), the Crane MFA was unchanged at 0.43% and the Crane 100 was up 1 bp to 0.47%. Charged Expenses averaged 0.31% and 0.25% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 33 days (down 2 days from last month) and for the Crane 100 was 32 days (down 3 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

Money fund managers continue executing what we've called the "big sort," which involves going through funds and accounts and determining which one are Institutional and which ones are Retail. (See our Jan. 15 News, "The Big Sort: Who's Going Retail or Floating Inst Among Prime MMFs?") The next phase involves actually removing institutional investors from retail funds, and we've started to see some activity in this regard. Charles Schwab recently posted a document entitled, "News and Resources for New Money Market Fund Rules," which spells out the sorting process and includes implementation dates. Invesco also released an update on "reform implementation dates." We cite these below, and we also excerpt from a story on the Association for Financial Professionals' website called, "Money Market Fund Regulations: 3 Myths Debunked."

Schwab's update, targeted at advisors, says, "Some of your clients' accounts will not qualify for retail prime and municipal money market funds under the SEC's "natural person" exception as part of its new money market fund reform rules -- these accounts will be categorized as "institutional." Accounts that are categorized as institutional and that hold retail prime and municipal money market fund shares are required under the new rules to have those positions removed before the SEC deadline of October 2016. For these accounts, purchased positions in retail prime and municipal money market fund shares will be redeemed before the compliance deadline of October 2016. The cash proceeds will be deposited into the accounts' existing free credit balance feature."

It continues, "Also, certain cash sweep features will no longer be available to institutional accounts. Accounts that now fall under the "institutional" definition may currently have a sweep feature for which the account will no longer be eligible, and as such, will need to have the sweep feature updated according to the new rules. Accounts deemed to be institutional will not be eligible to make purchases of retail prime and municipal money market funds (or enroll in certain sweep features) starting June 1, 2016."

Schwab's Timeline explains, "4/4/16: Your affected clients will be mailed a 60-day notice about the changes to their accounts. The sweep change letter will be a negative consent letter, and the purchased positions letter will be a notification only.... 6/1/16: New and existing institutional accounts will not be permitted to enroll in retail prime and municipal sweep money funds. If eligible, government sweep money fund may be the only money market fund sweep option.... June–September 2016: Schwab will take the necessary actions in affected accounts, including selling retail prime and municipal money market fund positions and replacing ineligible sweep features."

Finally, it adds, "No action is required on your part. Schwab will automatically determine which of your clients' accounts are affected by the new SEC rules, and will evaluate positions and sweep features as required. Affected clients will receive a notification ... to let them know about the actions that Schwab will take in their accounts. Schwab will take those actions sometime between June and September 2016. A list of affected client accounts will be available through your relationship manager or service team.... If you feel that a client's account has been incorrectly identified as being ineligible for retail money market funds, please call your relationship manager or service team to discuss any needed documentation to re-categorize the account."

Also, an Invesco's "Money market regulatory reform" update says, "On or about August 1, 2016, Invesco's CNAV and prime and municipal funds will only accept new accounts that are beneficially owned by natural persons and will no longer accept new institutional accounts. Existing institutional clients may continue to transact as usual." It adds, "On or about October 4, 2016, Institutional investors will no longer be eligible for our CNAV prime and municipal funds and we will begin transitioning remaining institutional clients out of these funds. Invesco intends to communicate with impacted clients prior to Oct. 4." Finally, "On or about October 6, 2016, Invesco's designated FNAV prime and municipal funds will begin transacting at a floating net asset value."

In other news, AFPonline featured a MMF Regulation story last week on "3 Myths Debunked." The AFP says, "Wednesday morning at New York Cash Exchange 2016, Tony Carfang, partner, Treasury Strategies attempted to clear up some misunderstandings about money market fund regulations set to take effect in October. While some treasurers might be concerned over the floating net asset value (FNAV), liquidity fees and redemption gates, he pointed out that the market already imposes these factors on all other instruments."

It explains, "Myth 1 -- Floating NAV: Carfang noted that prime money market funds have been able to maintain a stable net asset value because the Securities and Exchange Commission (SEC) granted them some unique privileges other instruments do not have. "Moving to a fluctuating net asset value is really nothing more than taking that privilege away, and putting prime funds back on par with other instruments," he said. He added that if Treasuries, agencies and commercial paper (CP) aren't held to maturity, they fluctuate every day. "They already have a variable net asset value," he said. "So the point is, the fluctuating net asset value doesn't penalize money market funds, relative to other instruments, it simply brings them back down from a privileged position. That's generally misunderstood."

The AFP piece continues, "Myth 2 -- Liquidity fees: In terms of fees, Carfang advised attendees to consider bank time deposits. "If you were to exit a time deposit prematurely, you will pay a penalty," he said. "You may forfeit some interest, you may pay a fee, you may have to sell it at a discount. There is a penalty for basically early access to liquidity." Likewise, liquidity fees provide a fund the opportunity to stabilize itself. He added that "part of the goal of imposing fees is to, very simply, require the funds to reflect the reality of the underlying instruments in the money market."

It adds, "Myth 3 -- Redemption gates: By Carfang's estimation, redemption gates are the most misunderstood part of the regulation. While treasurers may be apprehensive about not being able to pull their money out of a fund as needed, the fact is that other instruments also impose gates. "Bank deposits are subject to gates, but you don't hear that a lot. Bank boards have a privilege known as suspension of convertibility, which is to convert your money into cash," he said. Banks rarely employ this tactic, but they do. "If you want to know the probability of a gate being imposed, think about the 3,000 or so banks that have failed in the last 20 years and then think about the one money fund that failed," Carfang said. "Where do you think the probability is?"

Finally, the AFP brief says, "Carfang added that many corporates are under the false impression that under the new MMF regulations, if the fund's liquidity drops below 30 percent, it will immediately impose a gate. In actuality, its board is required to vote on imposing a gate if liquidity falls below 30 percent. "They're not required to do it at all; they're required to vote on it," he said."

While most of the heavy lifting is done, money fund managers continue to tweak and fine tune their lineups in preparation for October reforms. Among the latest -- on May 31, PNC completed the liquidation of its Prime and Tax-Exempt money funds, while Morgan Stanley Investment Management changed the names of two funds, removing "Inst". In addition, we report on a couple more small Variable Annuity funds converting from Prime to "Govie." When we include the Northern Trust conversion we reported on yesterday (see "Northern Streamlines MMFs: One Prime to Govie, Two T-E Liquidations"), we now count over $300.1 billion in Prime to Govie conversions. We discuss these below, and we also review an ignites story on TIAA and fee recapture.

In effect "going Government" by proxy, PNC funds completed the liquidation of its Prime and Tax-Exempt funds on May 31. (See our March 1 News, "More Exits: PNC Liquidates, PIMCO Goes Govt; First American Update.") The SEC filing explained, "On February 25, 2016, the Board of Trustees of PNC Funds and PNC Advantage Funds approved plans of liquidation for each of PNC Money Market Fund, PNC Tax Exempt Money Market Fund, and PNC Advantage Institutional Money Market Fund, with such liquidations expected to take place on or about May 31, 2016."

PNC Money Market Fund had $1.5 billion in assets, PNC Advantage Institutional Money Market Fund had $1.2 billion, and PNC Tax-Exempt fund had $535 million prior to liquidation. PNC still has a full slate of Government funds, including PNC Government, PNC Treasury, and PNC Advantage Institutional Treasury. We expect most of the $3 billion in liquidated assets to flow into PNC's government funds. In fact, over $2.5 billion has shifted into PNC Government MMF over the past month, according to the pending issue of MFI. As of May 31, PNC Government MMF has $5.1 billion in AUM, PNC Treasury MMF has $1.3 billion, and PNC Advantage Inst Treasury has $455 million.

The Trend towards removing "Institutional" from funds destined to be "Retail" also continues. A Morgan Stanley filing announced recent name changes for two of its funds. It states, "At a meeting held on February 24-25, 2016, the Board of Active Assets Institutional Government Securities Trust approved changing the Fund's name to "Active Assets Government Trust," effective as of March 31.... At the same meeting, the Board of Active Assets Institutional Money Trust approved changing the Fund's name to "Active Assets Prime Trust," effective as of March 31, 2016. Accordingly, all applicable references to each Fund's name are hereby revised. Also effective March 31, 2016, the original class of Active Assets Prime Trust is redesignated as the "S Class."

It continues, "In addition, the Board of Active Assets Prime Trust approved the designation of the Fund as a "retail money market fund," as such term is defined in or interpreted under Rule 2a-7 under the Investment Company Act of 1940, as amended, effective on or before October 14, 2016. As a retail money market fund, the Adviser of Active Assets Prime Trust will be permitted to continue to seek to maintain the Fund's share price at $1.00. In addition, as a result of Active Assets Prime Trust's designation as a retail money market fund, on or before the Effective Date, the Fund will implement, and will work with its intermediaries to develop and implement, policies and procedures reasonably designed to limit all beneficial owners of the Fund to natural persons. Effective on or about June 30, 2016 or such other date as selected by the Adviser, Active Assets Prime Trust may, upon advance written notification, involuntarily redeem investors that do not satisfy these eligibility requirements."

In other "Changes" news, two Variable Annuity funds switched from Prime to Government. The first is the $609 million MainStay VP Cash Management Portfolio, which is converting to MainStay VP US Government Money Market Portfolio. Its filing explains, "At a meeting held on March 22-23, 2016, the Board of Trustees of MainStay VP Funds Trust approved certain changes regarding the MainStay VP Cash Management Portfolio. Effective August 26, 2016, the following changes will take place: The name of the Portfolio is changed to "MainStay VP U.S. Government Money Market Portfolio.... Effective October 14, 2016, the Portfolio will commence operations as a "government money market fund" as defined in Rule 2a-7 under the Investment Company Act of 1940, as amended."

The second conversion is the $669 million Transamerica Aegon Money Market VP, which is converting to Transamerica Aegon Government Money Market VP. This filing says, "In response to recent amendments to Rule 2a-7 under the Investment Company Act of 1940 passed by the Securities and Exchange Commission, the Board of Trustees of Transamerica Series Trust has approved changes to the Portfolio's investment objective and principal investment strategies that will allow the Portfolio to operate as a "government money market fund." Under amended Rule 2a-7, a government money market fund is a money market fund that invests at least 99.5% of its total assets in U.S. government securities, cash, and/or repurchase agreement that are fully collateralized by U.S. government securities or cash.” Effective May 1 the name changed to Transamerica Aegon Government Money Market VP."

Finally, Ignites published the story, "TIAA's Plan to Recoup Money Fund Fees Irks U. of Maine." Author Beagan Wilcox Volz writes, "The University of Maine has shown its disapproval of TIAA's plan to recoup fee waivers on its $11.4 billion CREF Money Market fund. The fund is currently an investment option for the University of Maine's defined contribution plans.... "Along with removal of the fee waivers, TIAA will also begin recouping lost expenses," the investment committee states. "The recoupment is subject to a three-year lookback period, with the clock already started for the R3 shares." The last possible date for recouping waivers would be April 14, 2020, and the rate of the clawback is capped at 25% of gains on a daily basis, the committee notes."

The piece quotes our Peter Crane, "Although this is a small piece [of the money fund market], it may be representative of much bigger moves and changes to come." It adds, "With the SEC's reforms, managers expect to see a lot of "money in motion" -- moving not just between vendors but also between types of products, he says."

The ignites story continues, "The investment committee notes that it's not removing the CREF Money Market fund from the lineup altogether because participants have individual contracts with TIAA that require them to have access to the fund. The plans' consultant, Captrust Financial Advisors, recommended that the investment committee add the Vanguard Federal Money Market Fund to the plans. The investment committee last week approved the addition of the Vanguard product, according to the University of Maine's director of finance."

It concludes, "Some fund groups have said they will not recoup previous money fund fee waivers, while others have disclosure that would allow them to do so. Vanguard and Schwab are among the money fund providers that have said they won't recapture previous fee waivers, as previously reported. Fidelity's money funds disclose that they may recoup previously waived fees within the fund's fiscal year. "We do not presently intend to recapture the fees we have waived on our money market funds," says a spokesman in a statement. Similarly, OppenheimerFunds' money funds also disclose that they may recoup previously waived fees. A spokeswoman declined to comment beyond the disclosure."

Northern Trust, the 12th largest money fund manager with $89.1 billion, made a series of SEC filings outlining lineup changes for its Prime and Tax-Exempt money funds. Specifically, the $9.1 billion Northern Institutional Diversified Assets fund will be "going Government," the $3.8 billion Northern Inst Prime Obligations will remain a Prime Institutional fund and adopt a floating NAV, and the $7.4 billion Northern Trust Money Market Fund has been declared a Retail fund. Also, the Northern Inst Tax-Exempt Fund and Northern Trust California Municipal MMF are being liquidated; Northern Municipal Money Market Fund has been declared "Retail" and Northern Inst Municipal Money Market Fund will be "Institutional."

Diversified Assets Fund's filing says, "At a meeting held on May 26, 2016, the Board of Trustees of the Northern Institutional Funds approved the conversion of the Diversified Assets Portfolio to a "government money market fund" as defined under Rule 2a-7 of the Investment Company Act of 1940, as amended. The conversion, and the changes described below, will become effective on or about September 30, 2016. Shareholders will be provided an updated summary prospectus upon conversion.... In addition, the Portfolio will continue to use the amortized cost method of valuation to seek to maintain a stable net asset value of $1.00 per share, and will not be required to impose a liquidity fee or redemption gate that might apply to other types of money market funds should certain triggering events specified in Rule 2a-7 occur."

It continues, "Upon the Portfolio's conversion to a government money market fund, the Portfolio will also change its name to "Government Assets Portfolio." In connection with the conversion of the Portfolio to a government money market fund, it is anticipated that the Portfolio will transition its portfolio to securities that are eligible investments for a government money market fund prior to the Conversion Date. Because the yields on government securities generally may be expected to be lower than the yields on comparable non-government securities, it is anticipated that the Portfolio's yield may decrease as more assets are invested in government securities."

The filing for Northern Prime Obligations explains, "Effective on or before October 14, 2016 (but in no event earlier than September 30, 2016), it is expected that the Portfolio will no longer use the amortized cost method of valuation to seek to maintain a stable $1.00 NAV per share and will have a floating NAV rounded to the fourth decimal place, which means the Portfolio will be required to sell and redeem its shares based on a share price that will fluctuate based on the current market value of the securities in the Portfolio's holdings."

It adds, "In addition, effective as of October 14, 2016, the Portfolio may impose a liquidity fee upon the redemption of your shares or may temporarily suspend your ability to redeem shares if the Portfolio's weekly liquid assets falls below certain minimums and the Portfolio's Board of Trustees determines that the liquidity fee or suspension of redemptions is in the best interests of the Portfolio. As a result of these changes, the Portfolio will be designated as an "institutional money market fund." Shareholders will be given written notice before the effectiveness of these changes."

Northern Money Market Fund and the Northern Municipal MMF's filing says, "Effective on or before October 14, 2016, each of the Money Market Fund and Municipal Money Market Fund intends to qualify and operate as a "retail money market fund," as defined in Rule 2a-7 of the Investment Company Act of 1940, as amended. As a "retail money market fund" under Rule 2a-7, a Fund (1) is permitted to continue to use the amortized cost method of valuation to seek to maintain a stable net asset value ("NAV") of $1.00 share price, and (2) effective October 14, 2016, may impose a liquidity fee upon the redemption of your shares or may temporarily suspend your ability to redeem shares if the Fund's weekly liquid assets falls below certain minimums and the Fund's Board of Trustees determines that the liquidity fee or suspension of redemptions is in the best interests of the Fund."

It continues, "On or before October 14, 2016, the Funds will adopt policies and procedures reasonably designed to limit all beneficial owners of the Funds to natural persons. A natural person is an individual human being with a social security number, taxpayer identification number, passport, and/or other government-issued identification evidencing nationality or residence. Shareholders must furnish to a Fund, or an authorized financial intermediary, if any, an account application that provides certain information (e.g., social security number or government-issued identification, such as a driver's license or passport) that confirms that such shareholder is a natural person."

Northern adds, "Shareholders who do not qualify as a natural person, such as institutional investors, will not be permitted to own shares of the Funds, and such shareholders must redeem any shares held in the Funds prior to October 14, 2016 or will be involuntarily redeemed. Such shareholders will be provided advance written notice prior to being involuntarily redeemed."

Also, Northern Institutional Municipal Money Market Portfolio will remain Institutional and adopt a floating NAV. Its Prospectus Supplement explains, "Effective on or before October 14, 2016 (but in no event earlier than September 30, 2016), it is expected that the Municipal Portfolio will no longer use the amortized cost method of valuation to seek to maintain a stable $1.00 NAV per share and will have a floating NAV rounded to the fourth decimal place, which means the Portfolio will be required to sell and redeem its shares based on a share price that will fluctuate based on the current market value of the securities in the Portfolio's holdings."

It continues, "In addition, effective as of October 14, 2016, the Portfolio may impose a liquidity fee upon the redemption of your shares or may temporarily suspend your ability to redeem shares if the Portfolio's weekly liquid assets falls below certain minimums and the Portfolio's Board of Trustees determines that the liquidity fee or suspension of redemptions is in the best interests of the Portfolio. As a result of these changes, the Portfolio will be designated as an "institutional money market fund." Shareholders will be given written notice before the effectiveness of these changes."

In addition, Northern's $1.2 billion Institutional Tax-Exempt Fund is being liquidated, according to a separate filing. It says, "The Board of Trustees of Northern Institutional Funds has determined, after consideration of a number of factors, that it is in the best interests of the Tax-Exempt Portfolio and its shareholders that it be liquidated and terminated on or about October 14, 2016. The Portfolio will discontinue accepting orders from new investors for the direct purchase of Portfolio shares or exchanges into the Portfolio from other funds of the Trust after the close of business on July 29, 2016. For existing shareholders who purchase Portfolio shares through a Northern Trust sweep account, the Portfolio will remain available until October 7, 2016. The plan of liquidation for the Portfolio provides that the Portfolio will begin liquidating its assets as soon as is reasonable and practicable after the effective date of the plan of liquidation, but in no event later than the Liquidation Date."

Finally, the $376 million Northern Trust California Municipal Money Market Fund is also liquidating, states a Supplement. It says, "The Board of Trustees of Northern Funds has determined, after consideration of a number of factors, that it is in the best interests of the California Municipal Money Market Fund and its shareholders that it be liquidated and terminated on or about October 14."

In the May issue of our Bond Fund Intelligence newsletter, we profile 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. Of its reception, Melchreit said, "As measured by growth of AUM, this was one of the most successful product launches in Pioneer's Boston investment hub. We have found it encouraging that a single fund strategy has appealed to such a wide range of investors with a range of objectives." The following is a reprint of the BFI article.

BFI: Tell us about your background? Melchreit: In 2006, I joined Pioneer to manage short-term and core fixed in-come funds while functioning as sector manager for MBS and ABS sectors. At this time, I lead the Investment Grade Portfolio Management group, which has responsibility for governments, money markets, investment grade corporates, and MBS/ABS.

BFI: What prompted the launch of the Multi-Asset Ultrashort Income Fund? Melchreit: The fund was launched on April 29, 2011. We saw interest from several institutional investors who had a "long expected holding period" cash position and faced the hard choice to invest in money markets, short-term income funds, or floating rate funds. Money market funds sought to maintain a stable NAV (net asset value) of $1.00, but lacked the ability to generate meaningful income in the low interest rate environment at that time. Short Term Income funds offered more potential income than a money market but their longer duration introduced additional interest rate and other risks. Finally, the floating rate fund alternative provided income and sought protection from rising rates. But since they were primarily in-vested in bank loans, they were subject to below investment grade credit risk ... and additional volatility.

In response to that need, we sought to develop a strategy that would "thread the needle" between the available short duration strategies in the market. Our portfolio construction process was designed to balance the twin objectives of pursuing a meaningful yield advantage to benchmark rates like T-bills or LIBOR and of doing so with less NAV volatility than short- and intermediate-term bond funds. The fund seeks enhanced income versus money market accounts. However, the Fund's NAV can fluctuate, so it's oriented toward longer-term investors. It is not a money market fund.

BFI: What is your investment strategy? Melchreit: The fund seeks to deliver attractive risk-adjusted returns relative to the BofA Merrill Lynch US Dollar 3- Month LIBOR Index. We seek to achieve this outperformance by investing in a multi-layered and diversified range of floating rate and short duration fixed income assets, with different sources of risk. The portfolio managers structure the portfolio with [an] approach that seeks to enable the portfolio to invest in potentially higher yielding but less liquid securities, while providing investors a strategy with a higher credit profile and liquidity.

The first layer is composed primarily of securities that provide high liquidity, including money market securities, U.S. Treasury bills, and agency notes. The second layer includes intermediate holdings that offer modestly lower liquidity, but may add incremental yield. These may include corporate bonds, agency mortgages, asset-backed securities and municipal bonds. The third layer is comprised of "core" holdings that generally offer lower liquidity, but afford the strategy's portfolio managers the best opportunity to add yield and alpha to the portfolio. Within each asset class and structure, Pioneer generally seeks to invest in senior securities. We believe this tiered construction can provide the opportunity to pursue higher yields while maintaining high credit quality and sufficient liquidity to accommodate significant flows in and out of the portfolio.

BFI: How does it differ from others in the space? Melchreit: Pioneer offers several key differentiators. The strategy uses a broad and diversified opportunity set to increase alpha potential. Pioneer's ability to invest across a broad range of U.S. dollar fixed income asset classes, sectors, credit ratings, and security structures, enables the strategy to pursue returns while diversifying risk. We believe Pioneer provides core competency in both structured and corporate credit. [We've] established a long, successful record as a credit manager, distinguishing itself in strong, bottom-up security selection and avoidance of high-risk sectors and securities. We have focused on downside risk protection and have sought to defend against permanent impairment of capital.... We seek to invest in higher quality sectors of the respective asset classes that we think are likely to offer stronger protection against ratings downgrades or permanent impairment of capital.

BFI: Tell us about the portfolio management team. Melchreit: In our view, management by a cohesive team is critical to the portfolio's success. I co-manage the strategy along with Seth Roman and Jonathan Sharkey. The portfolio management team is supported by a tightly knit, highly experienced group of central credit research analysts and structured research portfolio managers. The European-based teams of experienced credit and equity analysts represent additional resources available to the team. The portfolio management team shares responsibility for the management of the fund, but each member brings a complementary set of skills to the security selection and asset allocation process. I oversee Pioneer's structured credit research process.... Seth Roman has responsibility for Pioneer Investment's Money Market strategies and Jonathan Sharkey is responsible for managing bank loan securities in institutional strategies and bank prime rate portfolios including two closed-end funds. In Pioneer's organizational structure, there is no distinction between the liquidity side and fixed income side -- we see liquidity and risk as a continuum that is best managed in a single group.

BFI: What does the fund buy? Melchreit: The strategy's investment universe includes, but is not limited to, money market instruments, U.S. government securities, agency MBS, investment grade corporates, municipal bonds, asset backed securities, non-agency MBS, CMBS, high yield corporate bonds, bank loans, Yankee securities and event-linked (catastrophe) bonds. BFI: How has it been received? Melchreit: The fund received an excellent reception from investors and their advisors. It clearly solved an income need for many investors.... Fund investors have included small retail investors, high net worth individuals, family offices, nonprofits, and corporate treasurers.

BFI: Are you seeing interest from money fund or other investors? Melchreit: Some investors have been motivated by concerns about rising rates driven by Fed tightening. Others have told us that they were interested in protection against inflation -- because they did not think the Fed would tighten soon enough -- and they viewed an ultra-short fund as the best solution. Among investors without a particular rate view, we have seen individuals using the fund either as a long-term strategic allocation or as a medium-term allocation while waiting for entry points into other asset classes. So, the bottom line is that we are seeing interest from all sides, including both "low risk" investors looking to take incremental risk for a potential yield pickup and "medium risk" investors looking to dial back duration risk without giving up too much yield.

BFI: What impact will rising rates have on the portfolio? Melchreit: The fund seeks to maintain low duration in an effort to help manage portfolio volatility. Given the ultra-short nature of this strategy, we do not seek to add value through active management of duration. As a result, we will not manage the fund differently through various interest rate environments. We believe that a consistent, disciplined investment process can yield the competitive results over the long term, and therefore the portfolio management team does not expect to deviate from the established process.

BFI: What is your outlook for ultra-short? Melchreit: Following the aftermath of the financial crisis, financial markets have been in an environment of below average interest rates.... Given the portfolio's recent exposure to floating rate securities, we believe these moves should lead to greater potential income for fund shareholders. Hence the broader ultra-short space is potentially a match for investors with a constructive economic outlook. Conversely, we do not think that the attractiveness of this space is predicated on rising rate expectations. Should rates remain exceptionally low, we think the potential yield pickup in funds like Pioneer's Multi-Asset Ultrashort Income Fund could provide an income boost to investors at time when income is hard to find.