News Archives: August, 2016

PIMCO, which recently announced the liquidation of its Treasury Money Market Fund (see yesterday's News), also has filed to merge PIMCO Money Market Fund into PIMCO Government Money Market Fund. A Prospectus Supplement states, "The Board has approved the reorganization of the PIMCO Money Market Fund (the 'Acquired Fund') into the PIMCO Government Money Market Fund (the 'Surviving Fund,' and together with the Acquired Fund, the 'Funds') (the 'Reorganization')." We discuss this most recent Prime exit below, and `we also review a new client survey from BlackRock and updates from Citi and Fitch Ratings.

PIMCO's filing proceeds to state that assets of the Money Market Fund will be shifted into the Government MMF. These transferred shares will then be distributed to the Acquired Fund's shareholders in a "complete liquidation.... The Board considered multiple factors, including, but not limited to, the Funds' substantially similar investment objectives, principal investment strategies, principal risks, policies, restrictions and distribution schedules and the fact that the Funds are managed by the same portfolio manager."

It continues, "In addition, while the fees and expenses for the Funds are mostly identical, the Surviving Fund currently has lower supervisory and administrative fees as compared with corresponding share classes of the Acquired Fund, resulting in a lower total expense ratio for the Surviving Fund as compared with the Acquired Fund.... The Reorganization is expected to occur on September 23, 2016, or on such other date as determined by appropriate officers of the Trust."

In other news, BlackRock recently sent clients a brief survey on overall client service in an e-mail entitled, "Comments for a Cause." Tom Callahan, Global Head of BlackRock Cash Management, writes, "We believe there has never been a more important time for us to be focused on providing the best possible service we can to you. With this in mind, we have created this brief survey to help us understand where you think we're doing well and where we can improve."

Callahan explains to Crane Data, "At BlackRock, we focus on 4 key things when it comes to Cash Management: risk management, performance, thought leadership and client service. During this time of incredible change in our industry, it is essential that we continue to deliver excellence to our clients across all four of these critical dimensions."

He adds, "As it relates to Client Service, we are constantly looking for ways to enhance service levels for our clients and change only creates more opportunities to improve. We wanted to take this opportunity to hear directly from our clients on areas where we might be able to add more value to their cash investing needs. And we are doing it for a good cause -- we plan to donate $5k to the charity of a randomly selected client's choosing."

The survey asks questions such as, "How would you rate the quality of client service that you receive from BlackRock Cash Management?" "How easy do you find doing business with BlackRock Cash Management?" and "How would you rate the quality and frequency of information you receive from BlackRock around portfolio strategy and markets?" It also included a series of questions requesting feedback towards service improvement and additional assistance. Clients of BlackRock Cash Management have until September 14, 2016 to complete the survey.

Citi's Steve Kang, in a recent "Short-End Notes," featured a brief entitled, "FAQs on money market reform and LIBOR." He states, "We compiled frequently asked questions on the upcoming money market reform and LIBOR to summarize our thoughts on the matter." The FAQs that Kang refers to are as follows: "What is money market reform?" "Why did LIBOR move higher on this?" "What would happen to LIBOR after the reform?" "Would the Fed be worried about higher LIBOR rates?" "Does the Fed have a toolkit to deal with even higher LIBOR?" and "Are there any investment opportunities as a result of this?"

Kang continues, "This October 14th will mark the beginning of a new chapter for the $2.7 trillion U.S. money market industry as the long awaited (and feared) reform will go into effect. Since the reform was announced, the composition of MMF changed dramatically and brought heterogeneous impacts on short-end markets, with the most publicized being the uptick in LIBOR.... During the crisis in September 2008, one prime MMF 'broke the buck' and it led to widespread panic among investors who thought of it as stable/liquid assets. Large outflows ensued and eventually the Treasury and the Fed stepped in to stabilize."

Lastly, in response to the question, "What would happen to LIBOR after the reform?" Kang explains, "High levels of LIBOR and wide basis in 3s1s and 6s3s are largely due to term premiums on uncertainty of the scale of outflows from prime funds. With large-scale retail conversions behind us, most outflows are likely to occur from the institutional space. The MMF community has long been preparing for large-scale outflows."

He adds, "As of end of July, institutional investors have 60% of AUM in weekly assets, 30% above the regulatory minimum of 30%, and set to increase even more. Retail counterparts have 40% AUM. This means that the prime community can meet $300bn of outflows without selling much of their CD/CP portfolio. WAM of prime institutional is only around 14-days as of August, much lower than the regulatory maximum of 60-days."

Finally, a release entitled, "Fitch: Commercial Paper Rates Rise Ahead of Money Fund Reform," tells us, "With less than two months remaining ahead of money market fund (MMF) reforms coming in October, the commercial paper (CP) market has experienced falling demand and rising borrowing costs, according to a new 'U.S. Commercial Paper Monitor' from Fitch Ratings."

Senior Director Greg Fayvilvech, comments, "Prime money fund managers have been maintaining extremely short maturity profiles as they are reluctant to invest in securities maturing beyond Oct. 14 when money fund reforms comes into effect, which has reduced prime MMF demand for three-month and longer CP.... Money fund holdings of asset-backed CP, Financial CP and Nonfinancial CP markets have decreased in recent months and the falling demand for CP and rising borrowing cost could be a challenge for some CP issuers."

The Fitch piece adds, "As of June 30, 2016, prime funds had $89.8 billion, or 30.2% of total CP, invested in CP with tenors of 3-Months or longer compared with $53.6 billion, or 19.6%, as of July 31, 2016. Falling demand for long dated paper has pushed borrowing costs higher with Tier 1 90-day CP rates increasing from 0.66% to 0.74% over the same period. Following the December 2015 Fed rate hike, the Tier 1 90-day CP rate has increased more than 30%."

With just a month and a half left before the SEC's major Money Fund Reforms go into effect, we continue to see the cash investment landscape shift by the week. The latest fund lineup merger, which happened last night, involves State Street combining its SSGA and State Street Institutional funds. State Street's merger filing explains, "At a joint special meeting of the shareholders of the Funds on August 22, 2016, the shareholders of Class N of each Fund approved its respective proposal to merge (each, a "Selling Fund") with and into the corresponding class of a corresponding buying fund (the "Buying Fund") listed in the table below (each, a "Reorganization"). Each reorganization had been previously approved by the Board of Trustees of each Selling Fund. Accordingly, it is expected that at the close of business on August 26, 2016, the Reorganization of the Selling Funds will be completed and your shares will be converted into shares of the corresponding Buying Fund." We've also seen `several new liquidations, prime to government conversions, name changes and fee adjustments. We review the most recent batch below.

The table shows the 2.6 billion SSGA Money Market Fund (SSMXX) merging into State Street Institutional Liquid Reserves Fund (Admin Class), the 6.2B SSGA Prime Money Market Fund (SVPXX) merging into State Street Institutional Liquid Reserves Fund (Trust Class), the 2.6B SSGA U.S. Govt Money Market Fund (SSGXX) merging into State Street Institutional U.S. Government Money Market Fund (Admin Class), and, the 8.3B SSGA U.S. Treasury Money Market Fund (SVTXX) merging into State Street Institutional Treasury Plus Money Market Fund (Trust Class).

For more information, see State Street's "Important Notice: Money Market Fund Reorganizations," which says, "Please note that each of the SSGA Money Market fund merger proposals has been Approved. Merger of the Money Market funds are scheduled to take place after the close of business on August 26, 2016." The New York Fed also commented in its "Revised Reserve Repo Counterparty List" that, "SSGA US Treasury Money Market Fund has been removed and State Street Treasury Plus Money Market Portfolio has been added to the list of reverse repo counterparties, effective August 29." (See too our July 19 News, "SSGA Merging MMFs Into State Street Lineup; State Farm Going Govt.")

In other fund "Change" news, Cavanal Hill is liquidating its Tax-Free Money Market Fund. Its Prospectus Supplement explains, "On August 5, 2016, the Board of Trustees (the "Board") of Cavanal Hill Funds approved a plan to liquidate and terminate the Cavanal Hill Tax-Free Money Market Fund (the "Fund"), upon the recommendation of Cavanal Hill Investment Management. Inc., the Fund's investment adviser. The Fund will distribute cash or in-kind pro rata to all shareholders who have not previously redeemed or exchanged all of their shares on or about October 23, 2016 (the "Liquidation Date"). These distributions may be taxable events. Once the distribution is complete, the Fund will terminate. Additionally, in anticipation of the Liquidation Date, the Fund will be closed to new shareholders on or about Friday, September 30, 2016."

It continues, "Shareholders may exchange shares of the Fund at net asset value at any time after September 15, 2016 but prior to the Liquidation Date for shares of the same class of the Cavanal Hill Funds Government Securities Money Market Fund. Shareholders may also redeem shares of the Fund at any time prior to the Liquidation Date. No sales charges, redemption or termination fees will be imposed in connection with such exchanges and redemptions. In general, exchanges and redemptions are taxable events for shareholders. In connection with the termination of the Fund and in order to facilitate the exchange of Fund shares for Cavanal Hill Funds Government Securities Money Market Fund shares, Cavanal Hill will make Government Securities Money Market Fund Select shares available for sale beginning September 15, 2016. The Government Securities Money Market Fund Select trades using the ticker symbol APSXX and CUSIP 14956P810."

CNR Prime Money Market Fund and CNR CA Tax Exempt also liquidated Friday. (See our July 7 News, "Deutsche Daily Assets to Float; CNR Prime, Wells, GS Munis Liquidate.") CNR's Prospectus Supplement explains, "The Board of Trustees of the Trust has approved a Plan of Liquidation for the City National Rochdale Prime Money Market Fund, which authorizes the termination, liquidation and dissolution of the Fund. In order to effect such liquidation, the Fund is closed to all new shareholder accounts. Shareholders may redeem their shares until the date of liquidation. The Fund will be liquidated on or about August 31, 2016."

We also learned that UBS changed the name of its UBS Select Tax-Free Institutional Fund to UBS Tax-Free Reserves Fund. The Prospectus filing for UBS Money Series, UBS Select Prime Institutional Fund and Select Tax-Free, which also indicates which funds will be "retail," says, "The purpose of this supplement is to update the Prospectus and SAI in response to amendments (the "Amendments") to Rule 2a-7 under the Investment Company Act of 1940, as amended, the primary rule governing money market funds, including UBS Select Prime Institutional Fund and UBS Select Tax-Free Institutional Fund (each, a "Fund"). These regulatory changes, which have a tiered compliance period that extends until October 2016, impact key aspects of how money market funds are structured and operate. Later this year, on or before the October 2016 compliance deadline, UBS Select Prime Institutional Fund will no longer be able to use the amortized cost method of valuation to seek to maintain a stable $1.00 net asset value ("NAV") per share as a result of the Amendments and will have a floating NAV. This means that the Fund's share price will fluctuate based on the current market value of the securities in the Fund's portfolio."

It adds, "UBS Select Tax-Free Institutional Fund intends to qualify and operate as a "retail money market fund," as defined in the Amendments, and will continue to seek to maintain a stable $1.00 NAV per share. In order to qualify as a "retail money market fund," later this year this Fund will adopt policies and procedures reasonably designed to limit all beneficial owners to "natural persons." Shareholders who do not so qualify will no longer be permitted to own Fund shares and are expected to receive information at a future time regarding alternative money market funds. Each of UBS Select Prime Institutional Fund and UBS Select Tax-Free Institutional Fund may be subject to the imposition of liquidity fees and/or the temporary suspension of redemption privileges (i.e., redemption gates) if the Fund's portfolio liquidity falls below certain required minimum levels because of market conditions or other factors once transitioned later this year in compliance with the Amendments. Effective on or about August 31, 2016, the name of UBS Select Tax-Free Institutional Fund will be changed to "UBS Tax-Free Reserves Fund."

Finally, UBS says, "In addition, effective October 30, 2015, the Funds' investment advisor and distributor were renamed UBS Asset Management (Americas) Inc. and UBS Asset Management (US) Inc., respectively. All references to "UBS Global Asset Management (Americas) Inc." in the Funds' Prospectus and SAI are hereby replaced with "UBS Asset Management (Americas) Inc." Similarly, all references to "UBS Global Asset Management (US) Inc." in the Funds' Prospectus and SAI are hereby replaced with "UBS Asset Management (US) Inc."

A separate filing for UBS Select Government Institutional Fund and UBS Select Government Preferred Fund also explains a recent fee reduction. It says, "The purpose of this supplement is to update certain information contained in the Prospectuses for UBS Select Government Institutional Fund and UBS Select Government Preferred Fund (each, a "Fund" and together, the "Funds") regarding a new voluntary fee waiver for the Funds. The Prospectus for each Fund is hereby supplemented as shown below. Effective from August 22, 2016 through October 31, 2016, UBS Asset Management (Americas) Inc. ("UBS AM") will voluntarily waive 0.04% of its management fee (imposed at the related master fund level) and 0.04% of its administrative fees (imposed at each feeder fund level) in order to voluntarily reduce each Fund's expenses by 0.08%.... Effective from November 1, 2016 through December 31, 2016, UBS AM will voluntarily waive 0.04% of its administrative fees for each Fund."

Also, another variable annuity money fund is "going government". A new filing for Prudential's Pruco Life Variable Universal and Appreciable annuity accounts explains, "Effective September 12, 2016, the PSF Money Market Portfolio will become the PSF Government Money Market Portfolio. The investment objective of the portfolio will remain unchanged. The investment objective is to seek maximum current income consistent with the stability of capital and the maintenance of liquidity. Prudential Investments LLC remains the investment manager. Prudential Fixed Income is now the Sub-Adviser. On the effective date all references to PSF Money Market Portfolio are hereby deleted and replaced with PSF Government Money Market Portfolio."

Finally, a PIMCO Funds filing says in a "Disclosure Related to the PIMCO Treasury Money Market Fund," "The Board of Trustees of PIMCO Funds (the "Trust") has approved the termination (the "Termination") of the PIMCO Treasury Money Market Fund (the "Fund"). The Termination is expected to occur on or about September 29, 2016. This date may be changed without notice at the discretion of the Trust's officers."

Below, we reprint our latest BFI profile, "PIMCO's Schneider & Leach: Minding the Short-Term Gap".... This month, Bond Fund Intelligence interviews PIMCO Managing Director and Head of the Short-Term Portfolio Management Jerome Schneider and Vice President and Product Manager Brian Leach. We interviewed Schneider in the inaugural January 2015 issue of BFI (see "Short Now Big at PIMCO: Talking w/Schneider & Reisz"), but wanted to check back with him to review the short-term bond and ETF space. Our latest discussion follows.(Contact us if you'd like to see our latest Bond Fund Intelligence.)

BFI: Tell us about your history and philosophy. Leach: Cash management has been a key tenet of what we do here at PIMCO, really since we founded the firm in 1971. In terms of offering dedicated strategies, we have a nearly 30-year history, both with our short term strategy as well as our low duration strategy. It's really in our DNA.... Because we're an active fixed-income manager, we're looking to meet client needs and generate strong risk-adjusted returns across portfolios. If you look at the way we've built out our structure, the idea is to take what we're doing in the front-end, in the cash management space, and really use it to generate alpha across client portfolios. That's really been a focus of the firm since inception.

Schneider: I came to PIMCO in 2008 to work alongside Paul McCulley and bring my 20+ years of investment experience to the PIMCO short-term franchise. Since taking the helm of the desk in 2010, the team and I have continued to evolve our capital preservation and liquidity-mind strategies, including overseeing the launch of other key short-term products, like MINT, our short term enhanced cash ETF, and also our Short Asset Investment Fund. All together, we manage about $170 billion in cash equivalent assets for clients, across a variety of mutual funds, ETFs and separate account strategies.

When you think about PIMCO, one of the things you think about is our core competencies. What we ultimately are trying to do is manage liquidity for clients, provide capital preservation, and generate some income on top of that. The convergence of changing regulatory frameworks, monetary policies that we've never seen before, along with differing supply/demand mechanics ... are really changing the landscape of management of liquidity management as we know it. So [historical] solutions are being tested in a variety of ways.

PIMCO has recognized the fact that liquidity management, capital preservation, and income is an iterative process, and more importantly, an evolutionary process. The key thing is when we think about it, we understand and we offer money market funds. But we also recognize that our clients have different aspirations for what to do with their cash, as well as different time horizons.... Those translate into differing approaches depending upon client needs.

So over the years, we've built out our franchise to include things like our Short-Term fund [and] Low Duration fund. Subsequent to that, we've looked to fill in the gap shorter on the curve between money market and low duration strategies.... Since the financial crisis, PIMCO has been at the forefront ... in the construction of new strategies.... It's important to understand because of those core competencies, which are really born out of macroeconomics, doing fundamental credit research, and understanding the plumbing of the system. Those three things have allowed us to be a leader in the short term landscape. Those were acknowledged over the past year when our Short Term fund portfolio management team won the 2015 Morningstar bond fund of the year award, and Lipper awards for 3- and 10-year performance.

It's important to understand that our philosophical approach has always been different from traditional money market managers. When we realized the market was changing as we approached ... money market reform, we knew that there was going to be another gap to fill, somewhere between PIMCO's Short Term Fund and the money market strategy. That's when we filled that gap, working with the product management team to create a strategy focused on providing income, having multiple degrees of freedom to control liquidity, and at the same time, have a very low volatility footprint. That's where the notion of our Short Asset Investment Fund (SAIF) came from. That was launched 4 years ago and is now over $1 billion dollars in size.

Clients are mostly institutional, ranging from healthcare, pension plans, middle market institution, and corporate cash clients. It's accessible through a variety of means.... People flock to SAIF because they [recognize] that they still have a tremendous amount of liquidity, given the short term nature of its assets. Yet they don't necessarily need to [stick to] the 2a-7 requirement. Rule 2a-7 reform is exciting because it is the perfect time for investors to pause and determine the best approach to manage their liquidity. Ultimately that is where SAIF came from as a potential solution for reform. The goal is to take small and incremental steps beyond regulated space.

We realize that there is no panacea. If you're a corporate treasurer, a CFO, a retail investor, there is simply no 'one size fits all' solution. So that's why we have these different solutions, recognizing that most of our clients ... are going to use these solutions in a tiered approach. They may be incorporating a little money market fund, but taking an incremental step out and using SAIF or MINT or LDUR, etc.

BFI: Do investors use multiple bond funds? Schneider: This is a philosophical discussion. No longer can clients have one default strategy for how they manage liquidity and earn a positive return.... There is a big difference by nominal returns and real inflation adjusted returns. The discussions we are having right now are not just about simply preserving capital in a nominal sense ... now what we are focused on [is a discussion of] purchasing power preservation. This is important and hasn't really been evident in money market realm for 40 years as these strategies tended to generate positive real returns pre-2008.

Leach: `Now with the combination of money market reform, as well as this purchasing power preservation consideration, the default has changed.... So we're thinking about adapting to this immediate consideration of money market reform but also thinking of forward-looking solution that allows you achieve purchasing power preservation. The way to achieve this is by looking at a mix of strategies ... some usage of money market funds as well as usage of [short-term bond fund] strategies.

BFI: What are the main sectors and securities you buy? Schneider: I think that there is a tactical assessment under way.... No longer can you be comfortable in a world, and this is highlighted by 2008, outsourcing your credit homework and due diligence. For 3 decades now, PIMCO has had a huge, dedicated, independent credit analysis team ... to determine prospect of capital being returned and most importantly the valuation metric.... The second thing is structure.... We want portfolio positioning to be reflective current market condition.... We recognize that interest rate exposure is probably not a great bet right now.

BFI: What about the future? Schneider: The future is now. We've been talking about this for years.... We've been planting the seeds and have been excited for money market reforms for years. The reality is that [investors] are finally starting to react.... They are finally pulling the trigger.... A lot of it frankly is in separately managed accounts and specific solutions and so they recognize that our approaches are different, they might need a little bit of hand holding and ultimately that is where we do a lot of business.

Leach: Jerome and team, as well as the product team, are busier than ever on this front. We are increasingly having conversations and it is materializing in flows. You're seeing it already in the move from prime to government. But our expectation is that [it] continues over the fall. The combination of reform, but also the recognition that rates aren't likely going higher in a meaningful way over the near or long-term is causing many investors to move. So we anticipate a pickup in conversations over the coming year, but also more of a focus on this part of the portfolio allocation on a permanent basis as well.

Schneider: People are very scared of volatility but yet they want income. So ultimately they want to de-risk out of other asset classes.... Short-term bond funds have a unique advantage. They are no longer an afterthought, simply being a step out of money market fund. They are actually a core part of fixed income strategies. The reason they like them is the fact that they are 1, 2% and more compared to long duration bond funds.... So with the risk-reward tradeoff, this is really an attractive class. [It's] a huge growing opportunity.

Kroll Bond Rating Agency published a new paper entitled, "Money Market Funds Brace for Regulatory Launch." Written by Barry Weiss, Marjan Riggi and Christopher Whalen, it says, "As summer draws to a close, the money market fund industry is bracing itself for the October deadline for implementation of new rules for money market funds, rules that could reshape the short duration marketplace. In July 2014, the Securities and Exchange Commission (SEC) voted to adopt amendments to the rules that govern money market funds, Rule 2a-7. The amendments, which followed earlier attempts at regulatory reform, were meant to address risks of investor runs in money market funds. However, like many regulatory changes put in place since the 2008 crisis, it seems the new SEC amendments to Rule 2a-7 may be causing unintended ripples that threaten to disrupt the liquidity of the very industry they were meant to stabilize."

The update tells us, "The new rules include the requirement for institutional prime money market funds (MMFs) to 1) no longer maintain a stable value $1 per share net asset value (NAV), 2) to have the ability to drop "gates" to limit redemptions, and 3) to assign liquidity fees to redeeming shares under certain guidelines so as to mitigate the risk that the remaining shareholders will be redeemed at less than a dollar per share. Additionally, the reforms detail enhanced reporting requirements, as well as updated diversification requirements and stress testing. Lastly, the amendments to Rule 2a-7 focus on the removal of references to and a reliance on credit ratings for the underlying portfolio investments (not ratings on the funds themselves)."

It continues, "[D]espite such forward planning and testing, recent anecdotal evidence and AUM movements have pushed the topic back into the headlines, causing market participants and those on the periphery much concern. It isn't just a drop in institutional prime money market funds AUM, however, that is the sole cause of anxiousness among investors. Prime funds have credit exposure, lending to borrowers in the short duration market on an unsecured and secured basis.... As AUM moves out of these funds, there are ramifications for those borrowers who have come to rely on this funding, as well as an impact on those funds to which the AUM is flowing, government and treasury money market funds."

The update comments, "KBRA notes that fund managers and internal risk management teams have spent the past few years planning for the October deadline. Previous regulatory amendments had brought forth liquidity rules, (10% daily and 30% weekly liquidity requirements) for funds in the prime institutional space to have a ready level of liquid assets in place to serve as a preventive measure against redemption runs on the fund.... Managers have also attempted to lower weighted-average maturities (WAMs) and weighted average lives (WALs) of their prime portfolios as a preventative measure against redemptions runs. This coincided with AUM flowing out of prime funds with broader strategies and into government and treasury-only money market funds.... [This] has led to the divergence between government and prime funds.... WAMs and WALs of prime portfolios continue to be brought in, while government and treasury MMF portfolios' WAMs and WALs extend."

The Kroll piece also says, "[T]he outflow from prime MMFs or credit funds has been significant during the past 10 months and for some funds larger than previously anticipated, even being two months away from MMF reform implementation. Revised expectations by market participants now anticipate further AUM outflows from prime funds; thus, some of the more dire predictions about the impact of the MMF rule changes are no longer considered so farfetched.... [P]lunging AUM for prime funds is almost counter to the rise of 1 month Libor, as credit is becoming more and more expensive to finance. Less demand for the short duration funds has meant that even those who are willing to pay the punitive end of the capital charges must also pay up to attract the dwindling short duration demand."

It continues, "For the past few years, banks and other financial institutions which tapped the short-duration market had found that there was ample demand for their obligations in the overall bond market and that the structure of credit spreads was very accommodating. Many issuers, including nearly 100 banks rated by KBRA, chose to take the opportunity to term debt out that previously they might have financed via the short duration MMF or Federal Home Loan Bank markets. However, with one rate hike under its belt and the FOMC debating further hikes, short term rates are rising (as illustrated by the movement of 1 month Libor ...), and demand on the short end is ebbing. Thus, even in this still low-rate environment, issuers are facing the fact that the cost of financing with short duration paper is up to 5 times higher than even 6 months ago and market conditions are indicating this could get even worse."

Weiss, Riggi and Whalen write, "Over the past two years, the spread between prime funds and government funds has been around 16 basis points (bps). Recently, however, this spread has even reached levels around 20 bps. Last month, in July 2016, according to Crane Data, spreads again closed to around 17 bps, while at the same time the outflows and liquid assets requirements meant fund managers of prime funds had to keep maturities short. As a result, prime MMF managers could not take advantage of the widening spreads borrowers, such as banks and other financial institutions, who were now being forced to offer to capture the short-duration financing they have come to rely on."

They state, "For investors, the question is: how much farther do spreads need to widen before the outflows from prime funds slow and perhaps even reverse? Expectations are that as we approach the October implementation date outflows will continue and maybe even pick up velocity. And as they do so, the cost of short-duration funding for credit will continue to widen. However, at a certain point, perhaps shortly after implementation of the SEC MMF reforms, outflows may slow, and prime MMF managers may then see more clearly what their base AUM will be going forward, and upon this event, returns on the prime MMF funds should grow. This is expected to occur at the same time the now heavy-AUM government and treasury funds MMF may see their returns continue to contract."

They add, "KBRA believes that in the short term prime funds must weather the outflows, but at some point, expectations are that the higher-yield prime funds will once again attract shareholders in search of yield. At present, consensus among fund managers point to spreads of nearly 30 bps between prime and government and treasury funds. However, given current market dynamics, it could very well be much higher. Nevertheless, KBRA expects the spread to be wide enough at some point as to attract AUM back into prime MMFs. This scenario implies that while short-term funding might be higher and demand lower for credit borrowers, prime funds should survive and be able to provide some semblance of funding in the short-term market for those borrowers who need it."

The paper adds, "KBRA expects prime funds will continue to see noteworthy outflows as we approach the October implementation of MMF reforms. However, KBRA anticipates post the implementation date, as shareholders become more comfortable with the floating NAV nature of the prime funds, and are further enticed by a widening of spread between the returns of treasury and government funds versus that witnessed in prime funds, that we should see outflows slow and ultimately reverse. While a full recapturing of the AUM lost in prime funds is not expected, a return of up to 25% of the amount lost seems plausible based on what we see and hear today."

Finally, it comments, "Nevertheless, over the next year and more, the short-duration market for corporate borrowers will change dramatically. Furthermore, depending on what we witness over the next few months and issuer responses to this changed market, there could very well be rating implications based on changes in demand for short duration funds and the widening of liability costs. In terms of the big picture, KBRA continues to believe that regulators and policymakers need to tread carefully in the market for short-duration liabilities, lest we create another liquidity crisis even as we take measures to prevent such an eventuality."

CME Clearing, a division of the CME Group that clears futures, options and swaps, released a statement entitled, "IEF2 Impact Due to Recent CFTC Staff Interpretation on Prime Money Market Funds earlier this week. It says, "On August 8, 2016, staff of the Commodity Futures Trading Commission's Division of Clearing and Risk released an interpretation concerning the impact of new Securities Exchange Commission (SEC) regulations that, as part of a more comprehensive reform effort, require the boards of directors of prime money market funds to have discretion, under certain circumstances, to temporarily suspend redemptions in such funds. In staff's view, when these discretionary redemption gates take effect on October 14, 2016, prime funds and government funds electing to have this discretion would cease to be eligible as margin collateral for a derivatives clearing organization."

The update explains, "CME Clearing fully recognizes the impact that staff's interpretation may have on our IEF-2 program for clearing members and money market funds, and we stand ready to facilitate steps that our clearing members and money market funds may need to take to minimize disruptions to their businesses and the markets generally. CME Clearing is taking two steps to assist clearing members invested in the impacted money market funds that are interested in orderly drawing down their investments."

It tell us, "First, CME Clearing is providing a suggested draw down schedule, which clearing members could use as a guideline for a measured draw down of investments in the impacted money market funds. [The draw down schedule says 50% of Prime MMFs must be sold by Sept. 15, and 100% by Sept. 23.] Second, `CME Clearing will enact a temporary suspension of new deposits into the impacted money market funds, effective September 1, 2016. Please note that clearing members may transition balances into any of the government funds on CME's IEF-2 platform (none of which are planning to become electing government funds)."

The document from the CFTC, entitled, "Staff Interpretation Regarding CFTC Part 39 In Light Of Revised SEC Rule 2a-7," says, "Part 39 of the Commodity Futures Trading Commission ("CFTC") regulations governs the activities of derivatives clearing organizations ("DCOs"). The CFTC published Part 39 in 2011 to implement revised Section 5b(c)(2) of the Commodity Exchange Act ("CEA"), which sets forth core principles a DCO must comply with in order to be registered and to maintain registration as a DCO. As relevant here, Part 39 regulations restrict the types of assets in which a DCO may choose to hold initial margin and funds belonging to clearing members and their customers. An additional regulation under Part 39 restricts the types of assets in which a SIDCO or Subpart C DCO may hold its own funds. Each of these regulations contains provisions requiring DCOs to minimize the liquidity risk of financial resources relied upon by the DCO. In this letter, the Division of Clearing and Risk ("Division") interprets these provisions in light of amendments to Securities and Exchange Commission ("SEC") Rule 2a-7 to the Investment Company Act that will take effect on October 14, 2016."

Acting Director Jeffrey Bandman writes, "Rule 2a-7 is the principal rule governing money market funds. The rule's provisions include: requirements pertaining to the maturity, quality, diversification, and liquidity of the assets comprising a fund's portfolio; recordkeeping and reporting obligations; and share price calculation requirements. In 2014, the SEC published amendments to Rule 2a-7, including several pertaining to a money market fund that is not a "government money market fund" (hereinafter, a "Prime Fund"). These amendments include: new reporting rules;7 new stress testing requirements; the requirement that a Prime Fund compute its price per share according to a floating net asset value instead of according to a stable $1 per share; and the requirement that a Prime Fund charge a fee on redemptions if the fund has less than 10 percent of its total assets invested in "weekly liquid assets," unless the fund's board of directors, including a majority of the directors who are not interested persons of the fund, determines that imposing this fee would not be in the fund's best interests."

He explains, "One provision of revised Rule 2a-7 that will take effect on October 14, 2016 requires the board of directors of a Prime Fund to reserve the right to suspend redemptions in the fund for up to 10 days under certain circumstances. Specifically, redemptions may be suspended if the fund has less than 30 percent of its total assets invested in weekly liquid assets, and the fund's board of directors, including a majority of the directors who are not interested persons of the fund, determines that such a suspension would be in the fund's best interests. This provision is intended to enable a Prime Fund to manage high levels of redemptions, as well as to create time for the fund to rebuild its own internal liquidity and for shareholders to reconsider whether redemptions are still desired or warranted. Rule 2a-7 does not permit a fund's board of directors to waive the right to suspend redemptions. Whereas it may not be in the best interests of some of the fund's shareholders for a fund to suspend redemptions, Rule 2a-7(c)(2)(i) requires the board to consider the best interests of the fund, not the interests of particular shareholders."

The letter adds, "Finally, revised Rule 2a-7 permits a "government money market fund" "to choose to rely on the ability to impose liquidity fees and suspend redemptions" in the same manner that a Prime Fund must consider imposing a liquidity fee and suspending redemptions under Rule 2a-7(c)(2)(i). A government money market fund that opts into this framework (“Electing Government Fund”) would notify investors of the election in Form N-1A."

The CFTC letter continues, "Regulation 39.13 obligates a DCO to follow certain risk management practices. Under Regulation 39.13(g)(10), a DCO "shall limit the assets it accepts as initial margin to those that have minimal credit, market, and liquidity risks [emphasis added]." To date, the Division has not defined "minimal." A dictionary definition of "minimal" is "least possible." Together with the other Part 39 regulations discussed below, Regulation 39.13(g)(10) requires a DCO to maintain liquid financial resources in order that the DCO can accomplish one of its most important functions: making on-time payments to its members with net gains, despite any default by members with net losses. In the event of a default by a member, it is crucial for a DCO to maintain initial margin in assets that can be promptly liquidated in order that the DCO can, even on the day of default, make prompt payments to members with positions opposite the defaulting member."

It adds, "As a result of the fact that under revised Rule 2a-7(c)(2)(i), a Prime Fund might suspend redemptions for up to 10 days, the Division believes that a Prime Fund poses more than minimal liquidity risks. With regard to other securities, such as equities and U.S. government securities, a secondary market may generally be available even when an issuer is in financial distress. Such securities may be sold at a discount (which may be a material discount to face value), but can still be liquidated. By contrast, the Division has not been presented with any evidence suggesting there may be a secondary market for interests in a Prime Fund or Electing Government Fund for which redemptions have been suspended. For all the reasons stated above, the Division interprets Regulation 39.13(g)(10) to prohibit a DCO from holding or accepting shares in a Prime Fund or Electing Government Fund as initial margin beginning October 14, 2016."

Finally, it says, "The fact that revised SEC rule 2a-7 will, after October 14, 2016, require a Prime Fund or Electing Government Fund to consider suspending redemptions for up to 10 days under certain circumstances means that a DCO holding assets in Prime Funds or Electing Government Funds would face the risk that its access to such assets would be delayed, and thus the risk of such delay would not be minimized. In other words, such funds will have a liquidity profile that is materially different than other asset classes. The Division believes that in order for a DCO effectively to minimize the risk that the resources the DCO relies on to fulfill its cash obligations may become illiquid, a DCO cannot rely on an investment in a Prime Fund or Electing Government Fund after revised Rule 2a-7(c)(2)(i) takes effect. For all the reasons stated above, the Division interprets Regulation 39.11(e)(1)(i) to prohibit a DCO from holding assets in a Prime Fund or Electing Government Fund beginning October 14, 2016."

Larry Locke Associate Dean at McLane College of Business at the University of Mary Hardin-Baylor, sent Crane Data a recent commentary entitled, "The Mysterious, and Critical, Future of Money Market Fund Regulation." He explains, "The compliance date for the new money market fund regulations is October 14, 2016, and the industry has been furiously preparing for the new regulatory regime. Most visibly, fund companies have been altering their product mix to include fewer institutional prime funds that will be required to trade at a floating Net Asset Value. Institutional funds are furiously converting from prime funds to government funds, which will be able to continue to sell shares at $1.00."

He continues, "Even more is happening behind the scenes. Retail funds are preparing their procedures, and their investors, for the possibility of liquidity fees and trading gates that might be imposed if a fund's weekly liquid assets falls below preset levels. Fund companies and their service providers are building the infrastructure to handle multiple strike prices per day, vastly increased disclosure requirements, and new diversification limits. Record keepers, selling brokers, plan sponsors, accountants, lawyers, and trustees are also preparing for the new world of money market funds. Most importantly, the industry is continuing to consolidate."

Locke states, "The fund provider universe is shrinking even as total assets remain more or less stable. After the selloff from 2008 to 2011, total money market funds assets have risen slightly every year from 2011 to 2015.... Starting in October, the business also will become exponentially more complex.... Marginal players are exiting rapidly."

He adds, "Those fund companies remaining in the money market business are making a major bet on an industry in transition. Whether the determination of the remaining firms will pay off is largely dependent on the future after October 14. If investor markets adapt to the new universe and remain invested in the funds, and regulatory authorities seem satisfied with the results, profits for fund companies may follow as interest rates increase and the new systems and administrative requirements create barriers that help protect the firms from new entrants."

Locke writes, "Whether the regulatory landscape remains stable after October 2016 depends on one thing -- systemic risk. The reforms promulgated in 2014 that are now about to take effect have nothing to do with failures of disclosure or investor satisfaction. They are driven by the desire to reduce the real or perceived systemic risk that money market funds throw off on the larger economy. [O]n that front the new regulations appear to have a mixed scorecard. The fundamental effectiveness of the new regulatory regime is unknowable, but the restructuring of the industry in anticipation of that regime has already had obvious effects on its overall risk profile."

The commentary says, "Whether the overarching stated purpose of reducing runs on money market funds will be promoted by having prime institutional funds trade at a variable NAV is unknowable. There are certainly experiences in equity and bond funds that might offer some insights but whether those same dynamics would hold true in a money fund context is anyone's guess. Whether liquidity fees and trading gates will create more stable fund markets is also unknowable. Certainly both mechanisms are very unpopular with investors and fund managers and boards will do their best to avoid invoking them. The fundamental behavioral question of whether an imminent possibility of a trading gate or liquidity fee would increase or decrease redemptions from that fund or from others is very much an open question."

It adds, "The migration from institutional prime to government funds, however, should produce a reduction in credit risk within those funds, contributing to an overall reduction in systemic risk. At the same time, increased competition within the government fund space may well lead to an increase in derivative investments designed to pass through tax and credit characteristics of the underlying government securities that will entail an increase in structural and counterparty risk. (It behooves us to recall that the last money market fund that broke the buck before 2008 was the Community Bankers' U.S. Government Money-Market Fund, a government fund that failed in 1994 after purchasing derivative structures its manager may not have fully understood.)"

Locke concludes, "The consolidation in the industry is pushing out marginal players and reducing the breadth of regulatory scope. This will make it easier for the SEC and other regulators to police the industry and reduce systemic risk. At the same time, consolidation of funds and stability of total assets has caused the average size of money market funds to increase. In 2015 the mean size of all money market funds was $5.7 billion, 17% larger than it was in 2008. This consolidation of fund assets in fewer funds also increases the risk that any fund failure will have systemic impact.... Clearly, the net systemic risk impact of the regulatory changes and the industry restructuring it is producing is an open issue."

In other news, StoneCastle and Fitch Ratings published the results of a "Money Fund Reform Survey." The release says, "According to the Fitch Ratings and StoneCastle Treasurer Money Fund Reform Survey, the majority of financial professionals have liquidity concerns related to money fund reform. The survey, completed by 76 corporate treasurers from a wide array of sectors and company sizes, indicates that only 7% of treasurers plan to stay in prime funds with many others searching for alternative vehicles."

StoneCastle explains, "A recent survey conducted ... throughout the end of July shows the potential for considerable additional flows of cash from prime funds. 71% of respondents used prime funds as part of their cash strategy, but 33% of these noted they will move entirely out of prime funds and 29% will move a percentage. Only 7% do not plan to make additional re-allocation. Of the respondents currently invested in prime funds, 19% expect to reallocate out of prime funds by the end of August, while a significant 52% plan to reallocate by the end of September. Underscoring the uncertainty that prime fund managers contend with, more than a quarter of survey respondents needed to determine their cash strategy post reform."

They explain, "So far government money funds have been the primary recipients of cash leaving prime money funds, and this trend is expecting to persist. Investors also indicated interest in other alternative products such as structured bank deposits and separately managed accounts. However, in an effort to attract prime fund flows, fund managers have also been launching ultra-short bond funds, and other cash alternatives like private and short maturity MMFs that investors are considering."

Finally, StoneCastle adds, "The yield spreads between the various liquidity products will be a key driver of asset flows. Recent declines in prime money fund yields due to the general shortening of these portfolios ahead of Oct 14 increases the likelihood of cash migrating out of prime funds to government funds and these other alternatives."

The SEC released its "Money Market Fund Statistics" for July 31, 2016 late last week, and the latest data shows that assets rose slightly (with yet another sharp drop in Prime and Tax Exempt MMFs and jump in Govt MMFs) and yields decreased slightly. 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 Commission's latest statistics show total money market fund assets increased by $21.2 billion in July to $3.014 trillion. (The SEC's series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Assets fell $20.7 billion in June, $18.7B in May, and $40.5B in April. Year-to-date, total assets are down $71.7 billion, or 2.3%, through 7/31. We analyze the latest numbers below, and also quote from a new Deutsche piece, "Primed for October."

Of the $3.014 trillion in assets, $1.234 trillion was in Prime funds, which dropped by $44.5 billion in July after falling $124.5 billion in June, $66.9B in May, $48.0B in April and $68.5B in March. Prime funds now represent 41.0% of total assets; they've declined by $337.7 billion YTD, or 21.5%, and they've fallen $556.6 billion, or 31.1% since 10/31/15. Government & Treasury funds total $1.589 trillion, or 52.7% of assets, up $77.0 billion in July, after being up $120 billion in June and $53.7B in May. Govt & Treas MMFs are up $339.5 billion YTD and $548.0 billion since 10/31/15, just prior to the start of the Prime to Govt conversion trend. Tax Exempt Funds were down again, dropping $11.3 billion to $190.3 billion, or 6.3% of all assets. The number of money funds was 453, down 11 for the month and down 78 from 7/31/15.

Yields decreased slightly in July. The Weighted Average Gross 7-Day Yield for Prime Funds on July 31 was 0.55%, down 2 basis point from the previous month, but still more than double the 0.27% of November 2015 (before the Fed hike). Gross yields were 0.41% for Government/Treasury funds, down 0.02% from the previous month but up 0.26% from 11/15. Tax Exempt Weighted Gross Yields rose 1 basis point in July to 0.47%. The `Weighted Average Net Prime Yield was 0.34%, down by 0.01% from the previous month 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 11 basis points. The Weighted Average Prime Expense Ratio was 0.21% in July (down one bps from June). Prime expense ratios have risen from 0.16% in November 2015.

Maturities continued to move lower and liquidity continued to inch higher in July. The average Weighted Average Life, or WAL, was 39.8 days (down 5.3 from last month) for Prime funds, 98.9 days (down 0.3 days) for Government/Treasury funds, and 26.7 days (up 1.4 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM was 24.8 days (down 4.2 days from the previous month) for Prime funds, 40.6 days (down 0.1 days) for Govt/Treasury funds, and 24.9 days (up 1.6 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 34.6% in July (up 4.1% from previous month). Total Weekly Liquidity was 55.7% (up 6.9%).

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, France topped the list with $157.2 billion, followed by Japan with $128.9 and the U.S. with $127.7 billion. Canada was fourth with $112.6 billion, followed by Sweden ($102.6B), Australia/New Zealand ($60.8B), the UK ($52.6B) and Germany ($47.6B). The Netherlands ($35.7B) and Switzerland ($34.0B) round up the top 10.

The biggest gainers among Prime MMF bank related securities for the month were France (up $45.8B), Norway (up $22.6B), Sweden (up $10.1B), Belgium (up $7.7B), and Switzerland (up $4.8B). The biggest drops came from Canada (down $25.1B), Japan (down $17.0B), the US (down $15.8B), the UK (down $4.9B), and the Netherlands (down $3.9B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $478.2 billion (up from $392.0 last month), while the Eurozone subset had $256.2 billion (up from 202.0B). The Americas had $241.7 billion (down from $282.6B), while Asian and Pacific had $219.5 billion (down from $241.9B).

Of the $1.233 trillion in Prime MMF Portfolios as of July 31, $528.7B (42.8%) was in CDs (up from $493.6B), $276.8B (22.5%) was in Government securities (including direct and repo), down from $315.9B, $177.2B (14.4%) was held in Non-Financial CP and Other Short Term Securities (down from $188.1B), $179.3B (14.5%) was in Financial Company CP (down from $192.0B), and $70.8B (5.7%) was in ABCP (down from $82.3B).

The Proportion of Non-Government Securities in All Taxable Funds was 34.6% at month-end, down from 34.9% the previous month. All MMF Repo with Federal Reserve declined to $84.8B in July from $242.8B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 21.1% were in maturities of 60 days and over (down from 25.9%), while 3.5% were in maturities of 180 days and over (down from 3.6%).

In other news, Deutsche Bank Securities' Steven Zeng writes in the latest "US Fixed Income Weekly," "The increase in Libor took a short pause this week. Three-month Libor fixing was 2 bps lower on Monday and Tuesday before creeping back up slightly toward the end of the week. Corresponding Libor spreads and Libor basis were also little changed during the week. The deceleration in Libor is supported by MMF fundamentals. We believe that the liquidity buffer built up by prime money market funds in anticipation of October has likely reached target levels for many, judging by the latest MMF statistics which we highlight below. This suggests that Libor should be rising at a slower pace from here on."

He explains, "Weekly liquidity for institutional prime funds rose to 67% of total assets this week, the highest level ever and more than twice the 30% threshold required by the SEC. Daily liquid assets have also climbed above 45% for the first time, according to Crane Data. The current buffer size suggests that institutional prime funds can now accommodate up to $200 billion of redemption requests without risking the need to impose liquidity fees and redemption gates…. Looking at the funds individually, roughly one-third of all institutional prime funds still have WLA of below 60% as of August 18. Getting everyone to above that threshold requires a further rotation of $19 billion (3% of total assets) out of credit investment with 5 day+ maturity and into shorter maturity paper or T-bills and agency discount notes. Getting everyone to 70%+ WLA raises that amount to $48 billion."

The DB piece states, "Weighted average maturity for large institutional prime funds has dropped precipitously over the last two months to a record low of 12.7 days this week. This compares to over 20 days just before July and over 30 days for earlier this year. The shift of MMF assets toward shorter-maturity has been the main driver of the widening in 3s1s basis and by large, the widening of 3m Libor-OIS. Prime money funds could shorten their WAM further still, but there is not much more room for it to fall from here. WAM showed some stabilization on Friday, which could be a sign that it has reached or is close to the bottom…. Prime funds (institutional and retail) recorded outflows of a further $40 billion this week -- the largest of the year -- bringing total reductions in their holdings since October 2015 to $550 billion. (Correspondingly, government funds, both institutional and retail, saw aggregate inflows of $640 billion.)"

Finally, it adds, "The Fed acknowledged at its July meeting the upcoming October reforms have had an impact on US money markets. According to the minutes released this week, the Fed saw potential risks for "some disruptions in the short run" caused by large MMF investor withdrawals, but changes in monetary policy, financial regulations and market business practices should make the money markets more stable than in the past. The minutes contained no reference to the increase in Libor or tighter financial conditions resulting from it. It's worth keeping in mind that the Fed saw only half of the Libor increase at the July meeting. Between June 30 and July 27, Libor rose 10 bps and Libor-OIS widened 6 bps. Since the meeting, Libor has risen another 7 bps and Libor-OIS widened a further 6 bps. It raises a question mark over whether the Fed would remain so sanguine still at the September meeting, especially if the Libor trend worsens."

S&P Global published a paper on "Negative Rates," which contains a section on European money funds, entitled, "Pay me to give you back less than what you gave me: the new era for money market investors." Written by Andrew Paranthoiene and Emelyne Uchiyama, it says, "Money market funds (MMFs) are well-regarded by investors as an alternative to bank deposits for short-term cash management. Investors benefit primarily from a diversified portfolio of high-credit, short dated liquid assets that seek to provide them with stability of capital, provision of liquidity and a return. Over the last eight years of ultra-low or negative interest rates, these objectives in major markets have been challenged. But for euro-denominated funds, it is business as usual, despite negative interest rates." (See Paranthoiene on CNBC Europe here and note that he'll be speaking at our European Money Fund Symposium next month in London.) We review S&P's negative rates brief below, and also excerpt from an S&P update on ABCP.

S&P writes, "Money market funds -- seeking to provide a return slightly exceeding cash but with the idea of cash-like stability -- cannot control the actions of central banks. When those banks go to negative rates, all short-term investments follow suit. So what have European funds undertaken to mitigate the effects of negative interest rates? One of the key distinguishing characteristics of European MMFs is their valuation methodology. A European fund can either be a CNAV (constant net asset value) -- which is the current basis for funds in the U.S. -- or it can be a VNAV (variable net asset value) structure. (Later this year, U.S. rules will require that institutional money market funds be more like a VNAV, though the rule will not apply to retail funds.)"

They tell us, "A CNAV MMF seeks to maintain an unchanging NAV (for example, $1, E1, or L1 per share) at all times, and uses amortized cost accounting to value all of its assets. A CNAV fund is also commonly linked to the phrase "breaking the buck," a term that references when a fund’s NAV per share falls below 0.9950, as was the case for the Reserve Primary Fund following the Lehman Brothers collapse. But a VNAV MMF generally uses mark-to-market accounting to value its underlying assets, so seeing a declining share price is not considered a momentous failure, in the same way for CNAVs. European-based CNAV funds, in order to try not to have the NAV drop below E1 in an era of negative interest rates, began in late 2013 to find ways to manage negative yields. Following shareholder approval, "share cancellation" mechanisms were introduced to a majority if not all euro-denominated CNAV money market funds."

The report explains, "Share cancellation is a method used by operators of CNAV MMFs to stabilize the NAV of the fund at 1.00 per share when a fund is encountering negative yields. The negative income rising from negative interest rates is transmitted to shareholders in the form of fewer shares.... For VNAV funds -- generally issued with a NAV per share of E1,000.00 -- such steps were not necessary, as they had always allowed for market movements to be reflected in the NAV. In an environment of negative income being "earned" by the fund, the NAV will slowly trickle down to accurately reflect that yield."

It adds, "It’s worth noting that not all MMF jurisdictions have allowed this CNAV share cancellation mechanism; regulators in the U.S., U.K and Japan have not granted approval. Many Japanese money market funds, faced with the negative interest rates in that country, either have shuttered or are set to close operations and return money to shareholders. But the flexibility provided in the VNAV structure has not protected all European money market funds. The universe of S&P Global Ratings MMFs denominated in euros has shrunk since the advent of negative yields, primarily as sponsors rationalize their product offerings or choose to have a more flexible investment approach not suited to being assessed under our money market fund criteria."

S&P also comments, "Many MMF managers believe negative rates will continue for the foreseeable future and may fall further. Investors have become more accustomed to negative yields and thus, fund managers can concentrate on providing liquidity and a diversified portfolio. Credit quality has been maintained, despite a reducing number of high credit quality short-term issuers in Europe, by diversifying into assets from around the world. The result? For those EUR-denominated rated MMFs, the average net 7-day yield is -0.25%, still a better return than a bank deposit on a relative basis."

Finally, the piece adds, "Money market funds continue to be attractive to institutional investors, despite negative yields, as investors have accepted negative market yields as a tax on savings. However, a long-term era (think “lost-decade”) of negative returns could eventually see investors realize that investments need to have a positive return and will look elsewhere. For now, it’s business as usual."

S&P Global Ratings also recently published, "Impending Reforms Will Likely Pressure Future ABCP Issuances." It comments, "Following a 20% growth spurt from historical lows, asset-backed commercial paper (ABCP) issuances have since significantly slowed in the second quarter of 2016. The accelerated growth earlier in the year was largely contingent upon transitory circumstances for the asset class, as higher financing rates for auto-related issuers temporarily increased demand for short-term financing with products such as ABCP.... As this trend faded, growth in outstanding paper related to auto securitizations tapered off.... Adding to this slowing growth, ABCP conduits could lose an additional portion of investors over the coming months if prime institutional money market funds (MMFs) continue to close shop or convert into government funds in response to regulatory reforms. This shifting demand dynamic should pressure issuance levels throughout the next two quarters."

The article explains, "Prime institutional MMFs traditionally hold a substantial amount (roughly one-third) of outstanding ABCP, making these funds a key player in conduits' placement strategy. The impending October implementation of money market reforms, though, appears to be accelerating conversions and wind-downs of prime institutional MMFs. These reforms will make structural and operational changes to prime institutional MMFs (in order to address the risk of shareholder runs) by requiring (via Rule 2a-7) floating-rate net asset values, liquidity fees, and redemption gates for these funds.... Prime institutional MMF assets are estimated to substantially decline over the course of this year, which would initially hinder conduits' ability to issue ABCP and would leave outstanding ABCP (once again) near all-time lows. At the very least, these conversions would not only affect ABCP rates and issuances but also alter the competitive dynamics for these programs."

S&P tells us, "ABCP issuances, though, can rebound from this demand shock if investors are compensated with rising spreads, or if demand from another investor group replaces that of prime institutional MMFs. Fundamentally, investors will demand a higher premium on these funds for the additional costs related to these regulatory reforms; to a certain extent, this is already occurring…. As yields for prime institutional MMFs rise, though, investor demand for these funds should eventually return (given an adequate spread). Because these funds often look to ABCP as a core investment, ABCP issuances would therefore rise as well."

They add, "However, the offered yields of these funds are inherently bound by the yield they can receive from short-term investments such as ABCP.... As such, any upward reversion in ABCP issuances due to rising MMF spreads is limited. In contrast, private liquidity funds may serve as an effective means of absorbing a decline in demand for ABCP issuances as these funds aren't required to maintain compliance with the requirements of Rule 2a-7. Their exemption means that these funds could attract short-term investors by maintaining a fixed net asset value calculation method; as of late 2015, nearly 85% of these funds did not maintain floating-rate net asset values, according to the SEC. In addition, demand for private liquidity funds could grow even further if they deviate from prime institutional MMFs' liquidity, maturity, diversification, and credit requirements. If institutional investors familiarize themselves with these new structures, and are comfortable with the differences to 2a-7 registered funds, private funds could replace part of the lost-demand in time."

S&P's ABCP piece continues, "Regardless of the level of growth in ABCP issuances, as prime institutional MMF conversions accelerate over the course of this year, the market's largest conduits will be able to use this shifting dynamic to their advantage. Conduits' reliance on prime institutional MMFs varies across the industry, with the largest conduits typically least exposed to MMF investors. According to Crane's Money Fund Portfolio Holdings, larger sponsor programs generally placed no more than 15% of their paper with prime institutional MMFs in the past year. In contrast, smaller-rated programs often placed around 50% (and sometimes more than 75%) of their paper with these clients.... All of these factors will give larger conduit programs an inherent advantage in placing paper over the coming months, so we expect their market share to rise even further throughout the rest of the year, and settle at levels visibly higher than before."

Finally, it says, "As a whole, ABCP conduits may struggle to sustain issuance levels over the coming months. With a sizeable portion of conduits' investor base dissipating, issuance volume will be sure to follow; what's more, any reversal in this trend will be particularly reliant on private liquidity funds given today's low-rate environment. Digging deeper, though, these trends should also lead to long-lasting effects on the competitive dynamics among individual ABCP programs. Conduits whose fixed costs represent a smaller portion of their overall business and those least exposed to a decline in prime institutional MMFs are best-positioned to increase their market share over the coming months. In this sense, the forthcoming demand shock will only lengthen the industry's most reliable trend since the financial crisis: consolidation."

The slow-motion run on Prime and Tax Exempt MMF assets picked up speed in the latest week. Prime assets had their steepest decline of the year and are now poised to break below $900 billion overall. Their declines since late 2015 now total over $550 billion, or 38.0%. The shift continues to be fueled by the conversion of sweep assets (more Morgan Stanley assets moved this week). But the carnage was widespread this week as 25 money funds saw outflows of over $1.0 billion, according to our Money Fund Intelligence Daily. ICI's weekly "Money Market Fund Assets" report shows all MMFs decreasing $34.9 billion in the latest week. Prime funds fell $40.0 billion -- their 13th decline out of the past 14 weeks (-$276.0B) and more than double the average rate of the past 13 weeks. Government funds gained just $15.1 billion, reversing a 2-week trend of Govt MMFs gaining more than the prime outflows.

Since Oct. 29, 2015, just prior to Fidelity Cash Reserves' huge conversion, Prime assets have fallen by a massive $554.0 billion, or 38.0%. Govt MMFs have increased by $628.9 billion during this same time while Tax Exempt MMFs have fallen by $82.0 billion (-33.5%). YTD in 2016, Prime MMFs are down by $379.4 billion, or 29.6% while Govt MMFs are up by $421.7 billion, or 34.5%. The shift was initially fueled by the conversion of over $300 billion of Prime funds into Govt funds, but since June appears to be driven by investors and investor segments.

ICI's latest weekly says, "Total money market fund assets decreased by $34.88 billion to $2.71 trillion for the week ended Wednesday, August 17, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $15.13 billion and prime funds decreased by $39.98 billion. Tax-exempt money market funds decreased by $10.02 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $1.642 trillion, while Prime assets, which dipped below the $1.0 trillion level for the first time in 17 years 4 weeks ago, are at $904.4 billion.

The release explains, "Assets of retail money market funds decreased by $9.70 billion to $936.39 billion. Among retail funds, government money market fund assets increased by $6.14 billion to $487.49 billion, prime money market fund assets decreased by $8.49 billion to $324.12 billion, and tax-exempt fund assets decreased by $7.35 billion to $124.78 billion.... Assets of institutional money market funds decreased by $25.18 billion to $1.77 trillion. Among institutional funds, government money market fund assets increased by $8.99 billion to $1.15 trillion, prime money market fund assets decreased by $31.49 billion to $580.31 billion, and tax-exempt fund assets decreased by $2.67 billion to $38.20 billion."

In other news, we also discuss the latest on European, "International" or "offshore" money fund assets, yields, and portfolio holdings below. European money fund assets domiciled in Dublin and Luxembourg and denominated in USD, Euro and Sterling are down $20.1 billion month-to-date in August to $734.2 billion, but they're up $35.1 billion year-to-date, according to our Money Fund Intelligence International. U.S. Dollar (USD) funds (156) tracked by MFII account for over half ($367.7 billion, or 50.1%) of the total, while Euro (EUR) money funds (97) total just E87.2 billion (11.9%) and Pound Sterling (GBP) funds (107) total L186.1 (25.3%). (As a reminder, Crane Data will host its 4th Annual European Money Fund Symposium in one month -- Sept. 20-21, 2016 -- at the London Tower Bridge Hilton. We hope to see you there!)

USD funds are down $20.3 billion in August (through 8/15), down $22.6B since 6/30, and down $24.4 billion, or 6.5%, YTD. Euro funds are up E6.4 billion in August, up 2.3B since June 30, and up E11.7 billion YTD, while GBP funds are down L4.7 billion in August, up 13.8B since 6/30 and up L35.6 billion YTD. USD MMFs yield 0.35% (7-Day) on average (8/15/16), up 19 basis points from 12/31/15. EUR MMFs yield -0.41% on average, down 22 basis points YTD, while GBP MMFs yield 0.31%, down 6 bps YTD.

European-domiciled US Dollar MMFs, on average, consist of 21% in Certificates of Deposit (CDs), 25% in Commercial Paper (CP), 22% in Treasury securities, 18% in Other securities (primarily Time Deposits), 11% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 34.8% of their portfolios maturing Overnight, 10.9% maturing in 2-7 Days, 17.8% maturing in 8-30 Days, 13.1% maturing in 31-60 Days, 9.6% maturing in 61-90 Days, 10.4% maturing in 91-180 Days, and 3.4% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (33.6%), France (16.5%), Japan (9.7%), Canada (8.5%), Sweden (8.2%), Germany (4.9%), Australia (4.4%), the Netherlands (3.5%), Great Britain (2.3%), and Norway (2.1%), according to our latest MFII MF Portfolio Holdings report, with data as of July 31, 2016.

The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $102.1 billion (22.2% of total portfolio assets), Credit Agricole with $16.5B (3.6%), BNP Paribas with $16.4B (3.6%), Mitsubishi UFJ with $14.5B (3.2%), Natixis with $11.9B (2.6%), Svenska Handelsbanken with $10.4B (2.3%), Societe Generale with $9.5B (2.1%), DnB NOR Bank ASA with $9.4B (2.0%), Skandinaviska Enskilda Banken AB with $9.3B (2.0%), Bank of Nova Scotia with $8.9B (1.9%), Swedbank AB with $8.9B (1.9%), RBC with $8.8B (1.9%), Credit Mutuel with $8.4B (1.8%), Sumitomo Mitsui Trust Bank Ltd with $8.2B (1.8%), Sumitomo Mitsui Banking Co with $7.6B (1.6%), Nordea Bank with $7.5B (1.6%), Wells Fargo with $7.0B (1.5%), Federal Reserve Bank of New York with $6.6B (1.4%), Australia & New Zealand Banking Group Ltd with $6.5B (1.4%), and Mizuho Corporate Bank Ltd with $6.4B (1.4%).

Euro MMFs tracked by Crane Data contain, on average 22% in CDs, 44% in CP, 18% in Other (primarily Time Deposits), 10% in Repo, 1% in Agency securities, and 5% in Treasury securities. EUR funds have on average 20.2% of their portfolios maturing Overnight, 6.9% maturing in 2-7 Days, 16.2% maturing in 8-30 Days, 16.3% maturing in 31-60 Days, 17.5% maturing in 61-90 Days, 19.3% maturing in 91-180 Days, and 3.6% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (28.9%), US (16.9%), Germany (11.0%), Japan (10.1%), Sweden (7.5%), Netherlands (5.9%), Belgium (5.3%), Switzerland (3.2%), Great Britain (1.6%), and Canada (1.6%).

The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E4.5B (5.7%), Svenska Handelsbanken with E3.3B (4.2%), Proctor & Gamble with E3.1B (4.0%), Societe Generale with E2.9B (3.7%), Credit Mutuel with E2.6B (3.3%), Rabobank with E2.6B (3.3%), Credit Agricole with E2.4B (3.1%), Republic of Germany with E2.3B (3.0%), Mitsubishi UFJ with E2.1B (2.6%), Republic of France with E2.0B (2.6%), DZ Bank AG with E2.0B (2.6%), Sumitomo Mitsui Banking Co. with E2.0B (2.5%), Mizuho Corporate Bank with E2.0B (2.5%), Nordea Bank with E1.8B (2.3%) and KBC Group NV with E1.7B (2.2%).

The GBP funds tracked by MFI International contain, on average (as of 7/31/16): 34.0% in CDs, 18.0% in CP, 30.0% in Other (Time Deposits), 14.0% in Repo, 3.0% in Treasury, and 1.0% in Agency. Sterling funds have on average 17.9% of their portfolios maturing Overnight, 12.1% maturing in 2-7 Days, 16.3% maturing in 8-30 Days, 13.9% maturing in 31-60 Days, 13.5% maturing in 61-90 Days, 20.5% maturing in 91-180 Days, and 5.8% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (15.0%), Great Britain (14.0%), Japan (12.8%), Australia (9.4%), Netherlands (7.6%), Germany (7.5%), Canada (7.3%), US (7.1%), Sweden (5.9%), and Switzerland (2.0%).

The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L8.7B (6.6%), Mitsubishi UFJ Ltd with L5.6B (4.2%), Rabobank with L5.3B (4.1%), Bank of America with L4.9B (3.7%) <b:>`_, BNP Paribas with L4.2B (3.2%), Mizuho Corporate Bank Ltd. with L3.9B (2.9%), Credit Agricole with L3.8B (2.9%), Commonwealth Bank of Australia with L3.8B (2.9%), Sumitomo Mitsui Banking Co with L3.7B (2.8%), Toronto Dominion Bank with L3.6B (2.7%), ING Bank with L3.6B (2.7%), Bank of Nova Scotia with L3.5B (2.6%), Erste Abwicklungsanstalt with L3.2B (2.5%), Westpac Banking Co. with L3.1B (2.4%), and Standard Chartered Bank with L3.0B (2.3%). (E-mail us at to request a copy of our latest MFI International or MFII Portfolio Holdings.

For more on European money fund reforms, see our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs," our April 16 News, "European Compromise Moves MMF Reforms Closer; Sterling MFs Jump," and our March 2 News, "IMMFA on European Reforms; MFI Intl Review; European MF Symposium." (Let us know too if you'd like to see our Money Fund Intelligence International, which tracks these markets, or our MFI Intl Portfolio Holdings data.)

The following is reprinted from the August issue of Crane Data's Money Fund Intelligence newsletter.... This month, MFI interviews Mark Santero, C.E.O of the Dreyfus Corporation, and Charlie Cardona, President of Dreyfus Corporation and C.E.O of BNY Mellon's Cash Investment Strategies division. Cardona will be retiring at the end of the year, and Santero recently became the leader of the cash business at Dreyfus. We wanted to discuss their transition, their latest plans and strategies, and some lessons learned from Cardona's extensive history in the money fund business. Our interview follows.

MFI: Tell us about the latest changes. Santero: My role as the C.E.O of Dreyfus is really to run the Dreyfus mutual fund family, which includes the cash funds.... Dreyfus is a great brand; it's been in existence for 60-plus years. It's something which in a former life was a formidable competitor of mine when I spent over 11 years at AIM Management Group.... When we look at Dreyfus, we look at the cash business as a true growth opportunity, given the resources that we have within the bank to support it and the types of clients we have at the bank. The synergies [with the bank] are very strong.... We have some very distinct and unique boutiques, and we're looking to grow that business.

My background is 33-plus years in financial services, including stints at Oppenheimer Funds and AIM (now Invesco) and on the investment side as a portfolio manager and muni bond analyst, as well as on the sales and marketing side. At Dreyfus we have all those capabilities under one roof. We have alternative strategies, we have cash strategies, we have intermediary distribution and we have direct distribution to individual investors, making it a great platform from which grow the organization and deliver a full suite of investment solutions to clients.

Cardona: Through the Cash Investment Strategies (CIS) division of the Dreyfus Corp., we oversee approximately $220 billion in assets under management. This includes the Dreyfus money market funds, the BNY Mellon offshore liquidity funds based out of Dublin, the bank's commingled funds, and a handful of third-party funds that we sub-advise. Our CIS credit analysts and risk resources also provide oversight for the bank's cash reinvestment book for securities lending. We also work closely with a BNY Mellon investment boutique, Standish, which is based in Boston for short duration separate accounts.

Dreyfus launched its first money market fund in 1974, so we've obviously been around the business for a significant period of time.... I've been with Dreyfus for 35 years, and have lived through a lot of the history. I've always been part of, or responsible for running, the cash business the past 20 years. As I thought about seeing the reform-related changes through in 2016, it seemed like the right time to retire and pass things along as we move into this next paradigm.... Mark is beginning to spend time now working closely with the team here, with Patricia Larkin, our chief investment officer, and Tracy Hopkins, our chief operating officer. We're getting integrated, and we will have everything in place for a smooth transition on December 31.

MFI: What's your biggest priority? Cardona: Our biggest priority [has been] preparing for the new regulations. This includes streamlining our products and segregating the institutional vs. retail funds ... and really taking a hard look at the product lineup. We merged funds that made sense to merge, and closed funds that didn't look viable. We have one merger pending, which, once approved, will basically take our institutional prime money market fund lineup down to two funds. We will have the Dreyfus Cash Management Fund that will price once a day at 3pm, targeted towards sweep platforms that want to continue to use a prime money market fund but do not do not want to deal with intraday pricing. We will also offer one institutional prime fund that will price three times a day for intraday liquidity, at 9am, noon and 3pm.

We've offered a private placement fund in a 3c-7 structure, a Treasury portfolio that is a Delaware business trust with an offshore Cayman sleeve. We recently added a prime portfolio to that and have seeded it, and are now in dialogue with large sophisticated institutional investors.... Through the bank, we have a capital markets group that offers securities, direct purchases for people that want to buy and 'roll their own' paper.

So, as an enterprise, we really try to position ourselves with product in all of these spaces, not being certain where people will eventually migrate to. We don't advise clients on where they should move their money, but instead help them to understand what their options are, and how those options will change as the regulations take hold. We think between now and October clients will largely go to government and treasury funds, while they continue to revisit their investment guidelines and look at other products. When the dust settles, we'll see what succeeds and what doesn't. But we didn't want to take anything for granted.

Santero: Certainly with money market reform, there will continue to be challenges, as individuals and institutions become acclimated to the new environment.... Whether it's in a packaged product, whether it's in a private placement, structured product outside the U.S., or in separate accounts ... given our capabilities, our mission is to meet those challenges. So, to summarize, our focus is to continue to build on what Charlie and the CIS team has put together, and utilize the scale and strength of BNY Mellon and our Investment Management business to meet our investor's challenges.

MFI: How are you positioning portfolios? Santero: To say there is a lot of money in motion would be an understatement. So the challenge is truly setting expectations with clients about the ramifications for money market reform. What is going to happen? What are their options? We're being upfront, and being as proactive as possible to get ahead of it. There's an old saying, 'It's not 'hot money' if you know where it is going.' So our focus is working with Tracy and our clients, and ensuring that everybody is fully aware of what October means, and positioning their needs in advance so that the transition on the investment side with Patricia [Larkin] and her team is seamless. So that is the biggest challenge -- truly understanding what the client's needs are. Not everybody knows what those needs are right now. That is not just our concern, but I think all of our peers' concerns as well.

MFI: What about fee waivers? Cardona: The 25 basis point move [in federal interest rates] in December has mitigated about 40% of the waivers that we were experiencing prior.... If we get another 25 basis point move, [that] would mitigate about 70-75% of waivers. So obviously the slow return to normalized interest rates has been very helpful.

MFI: Are there other reform issues? Cardona: We've actually been in dialog with insurance companies, which links to the NAIC ratings [issue], and educating them about these changes. We think that institutional prime funds should continue to qualify, but that's a work in progress... We are optimistic that will play out well ... as we are able work through all the questions and get some support behind it. When I think about reform at this point, I see two major issues between now and October: We have one last merger to complete to finalize our institutional prime funds and then it's managing our portfolios between now and October for this significant shift in cash.

Santero: It's 'round one'. It's a major event. But I think as people get acclimated to the new liquidity market, and they see how it effects their cash situation, they will look to shift assets.... Also, I think banks, with regulatory reforms and capital requirements, do not want to keep deposits on the balance sheet. They are going to look more towards money funds as reform continues in the banking industry. There is a lot of money in motion. I think where we sit, we're well placed to meet the needs of our investors.... It's certainly not going to be the end stage; it's going to continue to evolve.

MFI: Any thoughts on the future? Santero: I think the future of the money fund business, or I would call it the liquidity business, is very bright.... October 2016 will be one of those months that you remember.... With our multiple businesses, we have an exceptionally strong desk in New York; we've got a team in Boston that is a liquidity manager of short duration; we've got a team [Insight Investment] in the U.K. So I'm extremely optimistic about our ability of meeting the challenges and opportunities that may come after October 2016.

It's the ability to be flexible and adaptive to leverage resources that you have.... We have client contacts through all these different lines of businesses, and conversations that can only enhance and help us run our cash portfolios. Using those client feedback loops through all of our different lines of business helps us be better investment managers. So another lesson is really that things change, times changes, regimes change, regulations change, and you've got to have the breadth of business to adapt. Certainly, Dreyfus has changed over the years. It's transformed itself over the years. But at the end of the day, we're still strong and optimistic about the direction we're headed.

Cardona: You just really need to embrace change and not be afraid of it, because it is the only constant that we all deal with.... We are fortunate to be part of an organization like Dreyfus, and part of a very strong financial organization in the form of BNY Mellon.... The other [advice I have] is: Stay very close to your clients and prospects, that's where you really learn what is going on. That is what is going to drive the solutions that you are going to create. Make sure that you are relevant and reliable with your clients in a way that is helpful and beneficial to them and is productive to us. MFI: Thanks, and we'd like to thank Charlie for his years of service and extensive contributions to the money fund industry, and to wish Mark best of luck in his new role!

Yet another Tax Exempt money market mutual fund is giving up the ghost. The $2.0 billion ($3.3B as of a month ago) Federated Tax Free Money Market Fund filed to liquidate, the latest in a long line of municipal exits. (See our August 4 News, "Muni MMFs "Decimated" by Rules Says Bloomberg; More Liquidations," and our Feb. 24 "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche.") This latest T-E liquidation filing says, "On August 12, 2016, the Board of Trustees (the "Board") of Money Market Obligations Trust approved a Plan of Liquidation for Tax-Free Money Market Fund (the "Fund") pursuant to which the Fund will be liquidated on or about September 23, 2016 (the "Liquidation" or the "Liquidation Date"). In approving the Liquidation, the Board determined that the liquidation of the Fund is in the best interests of the Fund and its shareholders." Also this week, Wilmington Prime merged into Wilmington U.S. Government, and Nicholas MMF and Putnam Liquidity MMF liquidated. We review the latest money fund carnage below, and we also excerpt from a recent article on Investment Policies.

Federated's prospectus supplement continues, "Accordingly, the Fund may begin positioning the portfolio of the Fund for liquidation, which may cause the Fund to deviate from its stated investment objective and strategies. It is anticipated that the Fund's portfolio will be positioned into cash and overnight variable rate demand notes on or some time prior to the Liquidation Date. Effective as of the close of business on August 30, 2016, the Fund will be closed to new investors. Investments by existing shareholders may continue until September 22, 2016."

It adds, "Any shares outstanding at the close of business on the Liquidation Date will be automatically redeemed. Such redemption shall follow the procedures set forth in the Fund's Plan of Liquidation. Final dividends will be paid with the liquidation proceeds. Any capital gains will be distributed to shareholders, if necessary, prior to the Liquidation."

The filing explains, "Any time prior to the Liquidation Date, the shareholders of the Fund may redeem their shares of the Fund pursuant to the procedures set forth in the Fund's Prospectus. Shareholders may also exchange their shares of the Fund into shares of the same class of another Federated fund if the shareholder meets the eligibility criteria and investment minimum for the Federated fund for which the shareholder is exchanging."

Wells Fargo Securities' Garret Sloan and Vanessa Hubbard commented on the Tax Exempt space, "The weekly SIFMA index reset last week at 0.46 percent, a gain of 2 basis points over the prior reset and the highest weekly reset since May 2009. The driver of SIFMA continuing to reset at higher levels is assets pulling out of tax-exempt money market funds. Last week, tax-exempt funds lost $11.6 billion in assets, the largest outflow YTD and the largest outflow over the same timeframe (May 2009 to present) outside of a $15.8 billion outflow during the tax season in 2014. Tax-exempt funds ended last week at $173.0 billion, down from $184.6 billion the prior week and down 33.0 percent since the start of the year." (For more on the T-E outflows, see Monday's News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps.")

Finally, it says, "If you are a taxable shareholder, the Liquidation of the Fund will be a recognition event. In addition, any income or capital gains distributed to shareholders prior to the Liquidation Date or as part of the liquidation proceeds will be subject to tax. All investors should consult with their tax advisor regarding the tax consequences of this Liquidation."

In other news, "Investments and Wealth Monitor features an article entitled, "The Impact of New Money Market Fund Regulations on Investment Policies." Authors Anthony Carfang and Cathryn Gregg write, "In July 2014, the U.S. Securities and Exchange Commission (SEC) issued new regulations for U.S.–domiciled money market funds (MMFs). The new regulations primarily impact institutional prime and municipal MMFs; government and U.S. Treasury MMFs (both retail and institutional) are exempt from these structural reforms. A two-year transition period allows fund companies and investors time to adapt, with implementation scheduled for October 2016."

They explain, "More corporate investors are aware that new MMF regulations have been approved and have some understanding of the impact. However, most are not yet sure whether their investment activities will be affected and whether they need to change something to continue investing in MMFs. This article presents a four-step process to deal with the new regulations, according to the following thought sequence: Understand the new regulations, Examine your current investment policies, Have a conversation with your chief financial officer, and Develop an action plan."

In a section entitled, "Examine your current investment policies," the article tells us, "Once you understand the new money fund regulations, the next step is to examine your investment policies. Most companies and institutions maintain approved investment policies at either a board level or with the chief financial officer (CFO). Some policy statements are broad and others are more prescriptive. To help you evaluate your own policies, we examined more than 20 investment policy statements from our corporate clients representing a cross section of industries, revenue, and portfolio size."

Its conclusion says, "Regulatory changes to institutional prime and municipal MMFs are far less onerous than we once feared they would be. The value proposition of money funds remains intact, and the U.S. Treasury action will mitigate most, if not all, tax and recordkeeping concerns for the corporate investor. MMF changes have been regularly covered in the financial press, frequently with bits of misinformation or hyperbole. CFOs and investment committees are bound to wonder how the corporate treasurer views this issue and whether the treasurer will continue investing in MMFs."

Finally, the authors write, "It makes sense to have a discussion about the MMF value proposition constancy, the parallels between post-change MMFs and other permitted investments, and the continued valuable role you see for MMFs in your firm's short-term investment strategy.... After examining a large representative sample of our clients' investment policies, we conclude that most companies will not require formal policy changes to continue investing in institutional prime or municipal MMFs."

BlackRock's "Cash Academy" learning center features a new "Focus on Government Money Funds" section including a video from Portfolio Manager Joseph Markowski and a paper entitled, "Differentiating in a Commoditized Market." Markowski explains, "Given the current market dynamics and shifting regulatory framework facing cash investors, we expect government money market funds to become increasingly attractive. Regulatory change is a key driver, due to the ability of government money market funds to retain constant net asset value pricing, with optional adoption of the liquidity fee and redemption gate provisions under Rule 2a-7 of the Investment Company Act of 1940. As cash investors confront a possible re-allocation between prime and government money market funds, we feel it is important to carefully evaluate providers as well as the construction of these products, even government money market funds. Here's why."

He continues, "Liquidity assumptions are, in our opinion, a significant feature of government money market funds, as investors have historically turned to these solutions for their lower risk, and for the liquidity resulting from holding high quality government securities. Shifting secondary market demand for government and Treasury securities has led some managers to be even more meticulous about how they construct government money market funds with liquidity at the forefront of their consideration. For example, U.S. Treasury Bill and agency discount note sectors have historically demonstrated higher liquidity in the secondary market when compared to U.S. Treasury Notes."

The video tells us, "Relative value is another important factor to consider when comparing government money market funds. It is not so much an issue of credit risk as it is liquidity risk, which can be monitored through careful evaluation of market technicals, such as bid-ask spreads and market price movements. BlackRock continually seeks to understand and adapt to market technicals to avoid pockets of poor execution or illiquidity, and to take advantage of market dislocations.... BlackRock carefully considers whether the potentially higher yields offered by a Treasury FRN warrants the extension of WAL. Seeking out relative value and risk/reward tradeoffs within a dynamic market structure is something we feel sets us apart in the government space, however, executing on this knowledge would not be possible without a platform of scale."

It adds, "We believe scale and access to the market are key to providing a government money market fund platform with the breadth and depth that investors are seeking. The ability for a fund manager to accept and efficiently manage flows is critical to delivering scale and meeting clients' liquidity needs. BlackRock offers a variety of government money market fund strategies, totaling over $140 billion as of June 30, 2016 including Treasury-only, Treasury and repurchase agreements, or repo, government-only, government and repo, and Treasury and repo with the Federal Reserve Bank of New York.... We believe liquidity, relative value, and scale should drive investment decisions for all money market funds, especially government strategies."

BlackRock's paper says, "As the October 2016 compliance date for certain money market funds (MMFs) to adopt a floating net asset value per share (FNAV) and liquidity fee and redemption gate provisions approaches, we anticipate that many investors will shift their MMF investments into U.S. government and Treasury strategies. Between June 2015 and June 2016, the assets invested in government MMFs has grown by more than $500 billion (source: Crane Data) indicating, in our view, a seismic shift between MMF Categories is underway. At BlackRock, we have sought to position our government MMF complex to accommodate potentially high levels of inflows, and still continue to provide our clients a cash investment solution that preserves capital, is liquid and delivers competitive yield."

It also comments, "We are at the early stages of a potentially historic shift of assets into government MMFs. As cash investors carefully consider their investment policies and determine what strategies best fit their needs and risk tolerances in light of current market dynamics and the shifting regulatory framework, we recommend a careful evaluation of MMF providers and their processes in constructing money market portfolios and managing risk. We believe BlackRock's U.S. government and Treasury money market strategies set themselves apart from others because of our focus on liquidity and relative value, and our access to scale."

In other news, a release entitled, "Fitch: Money Fund Reliant US Corporates Eye Liquidity Challenges," says, "Corporations that heavily rely on money funds for cash management may need to enhance disclosures and risk management in light of upcoming money fund reform, according to Fitch Ratings. We believe the reform is creating a new paradigm for corporations' cash management, which will require a more sophisticated approach to managing liquidity."

It explains, "Regulatory changes to money funds coming into effect in October are expected to cause some US corporates to re-examine their comfort level with prime money funds. Under the new reforms, institutional prime money funds that are used by corporates may restrict investor liquidity during a time of stress. The funds' boards of directors can impose liquidity fees on shareholders looking to redeem cash, or gate the fund altogether, if the fund's liquidity level falls below the required regulatory threshold. Government money funds are not subject to these provisions, and many corporate treasurers plan to move cash from prime to government funds to avoid this risk."

Fitch writes, "Non-financial corporates historically have been big investors in money funds in absolute terms, holding $573 billion in money fund investments as of 1Q2016, according to Federal Reserve data. Fitch's analysis of the non-financial firms in the Fortune 100 showed that 33 noted investments in money funds and 22 disclosed the amount invested in money funds. For the 22 firms that disclosed investments, money funds accounted for 26% of their cash and cash equivalents on average."

They continue, "Some corporates use money funds sparingly or not at all, while others utilize money funds extensively for daily cash flow management and strategic cash buffers. For example, Walgreens held $2.4 billion in money funds, which accounted for as much as 72% of its cash and cash equivalents.... Cisco was the largest money fund investor in the sample, with holdings of $7.2 billion, accounting for 81% of its cash and cash equivalents. Conversely, Apple invested $3.3 billion in money funds, representing a modest 18% of its cash and cash equivalents. These firms often had additional short-term financial assets, such as US Treasuries and commercial paper, which could be used for liquidity but were not classified as cash and cash equivalents."

The brief adds, "From our review of these firms' financial disclosures, it is unclear whether they invest in prime funds, government funds, or both. For corporations that continue to rely on money funds, enhanced disclosures and risk management will be important to appropriately monitor key weekly liquidity measures in prime funds."

Finally, it says, "While Fitch's rating criteria for prime money funds have always focused on the funds' liquidity, the new rules introduce a higher standard in the form of a regulatory "tripwire." In light of this new risk, Fitch updated its money fund criteria in December 2015 to clarify our analysis of funds' intrinsic liquidity levels compared to the volatility of flows driven by the funds' investor profiles."

As we wrote in Friday's Link of the Day, "Prime and Muni MMFs Fall Hard Again," Prime and Tax Exempt MMF assets continued their steep slide last week. Though at this point it appears everybody is selling or switching, brokerage sweep accounts continue to be the major contributor of the now over $500 billion shift from Prime and Muni into Government MMFs. As we hinted, shifts by Morgan Stanley money funds drove much of last week's flows. According to our Money Fund Intelligence Daily, which tracks daily asset flows, yields, MNAVs and WLA liquidity figures, Morgan Stanley Govt Sec Inst took in a massive $21.5 billion in the week through Thursday, while while MSIM's Prime and Municipal Active Assets, and Liquid Assets funds showed declines of $12.9 billion. While there is no official word that their retail Prime and Muni funds are liquidating, they did lose over half of their assets and are showing single-digit WAMs (often a sign of an imminent liquidation). We review a recent statement by Morgan Stanley brokerage on changes to their sweep program, and also quote from an ignites article on strike and cutoff times below.

Though there is no mention of any liquidations in Active Assets' recent filings, a recent Morgan Stanley "Bank Deposit Program Disclosure Statement" says, "Under the Bank Deposit Program, free credit balances in your Active Assets Account ... will be automatically deposited into deposit accounts established for you by and in the name of Morgan Stanley Smith Barney LLC and Morgan Stanley Bank, NA, and Morgan Stanley Private Bank, NA ... and for free credit balances above $2 million, Morgan Stanley will sweep such balances into a Sweep Fund."

The disclosure continues, "Beginning August 10, 2016, funds will be deposited into your Deposit Accounts at the Sweep Banks up to the Deposit Maximum. Once the deposited funds reach the Deposit Maximum, any additional free credit balances will be swept into the Sweep Fund for eligible accounts. If your account is eligible, the Sweep Fund available for your Account is the Morgan Stanley Institutional Liquidity Funds Government Securities Portfolio (symbol MGPXX). The Deposit Maximum and the Sweep Fund are subject to change with prior notice to you from Morgan Stanley."

It also says, "As required by federal banking regulations, the Sweep Banks reserve the right to require seven days' prior notice before permitting a transfer of funds out of an MMDA. While the Sweep Banks have indicated that they have no present intention of exercising their right to require such notice, the Sweep Banks may exercise this right at any time in their sole discretion. For applicable accounts, beginning August 10, 2016, all withdrawals necessary to satisfy debits from your Account will be made by Morgan Stanley, as your agent, first from your Sweep fund." Moody's also withdrew its "Aaa-mf" money market fund ratings on Morgan Stanley Liquid Assets Fund Inc. and Active Assets Money Trust.

We haven't added the Morgan Stanley totals to our "Prime to Government" conversion spreadsheet yet, which shows funds which have switched, because the MS Active Assets funds continue to hold assets. But without these totals, we show almost $300 billion converted to date. (Two more moves occurring Monday, Aug. 15 -- the $1.6 billion internal Putnam Money Market Liquidity Fund and the $3.9B Wilmington Prime MMF.) Morgan Stanley Inst Gov Sec skyrocketed from just 500 million a week ago to $21.5 billion, while Morgan Stanley Active Assets Tax-Free, Active Assets Money Trust and Liquid Assets all shrunk by more than half (down $3.7 billion to $3.1B, down $2.3B to $2.2B, and down $2.0B to $1.9B). Morgan Stanley Active As CA T-F, Morgan Stanley Act As Prime Tr, and Morgan Stanley T-F Daily Inc Tr also all lost around half of their assets.

In other news, ignites published a story on Fidelity's recent update entitled, "Fido Sets Oct. 1 Float Date, NAV Strike Times for Money Funds (see our Aug. 11 News, "Fidelity Reveals Final Lineup Changes: Prime Inst MMFs, Two Strikes"), and BlackRock filed to change the strike time on its T-Fund from 5:30pm to 5:00pm.

The ignites piece says, "Fidelity plans to move the two prime money market funds that it sells to institutional investors to a floating net asset value on Oct. 1, two weeks before the deadline for doing so under the SEC's 2014 reforms. In a recent communication with investors, Fidelity also laid out the times throughout the day that its $61.6 billion Prime Money Market Portfolio and $444 million Prime Reserves Portfolio will strike their NAVs."

It explains, "Fidelity Prime Money Market Portfolio will strike its NAV at 9:00 a.m. and 3:00 p.m. (ET) and will offer same-day settlement. Prime Reserves Portfolio, launched in June of this year, will strike its NAV at 4:00 p.m. (ET) and also will offer same-day settlement.... A spokesman for Fidelity notes that the strike times were chosen "based on our investors' preferences."

The article continues, "Fidelity's decisions regarding intraday NAV strike times are noteworthy in light of the fact that a number of other large money fund sponsors have opted to set three times during the day -- typically either 8:00 or 9:00 a.m., noon and 3:00 p.m., says Peter Crane, CEO of Crane Data."

It explains, "BlackRock, Federated, JPMorgan, Goldman Sachs and Invesco, for example, have taken this route with certain funds, as previously reported. "It looks like Fidelity said, 'Why bother with the noon cutoff time?'" says Crane. The firm could have done so to save costs or simply because they did not see it as worthwhile, he says."

The piece tells us, "In March, JPMorgan Asset Management was among the first to set a specific date for its funds to transition to a floating NAV: Oct. 1. BlackRock in May chose Oct. 11 as the day it will make the change. Deutsche disclosed in June that its Daily Assets Fund will transition to a fluctuating NAV on Oct. 10. Invesco says in a June communication with investors that it will do so "on or about" Oct. 12. At the end of July, Wells Fargo Funds updated the disclosure regarding its funds' float date, setting it as Oct. 5."

Ignites adds, "With roughly two months to go before the compliance deadline for the most significant parts of the SEC's money fund reforms, providers are wrapping up final changes to their product lines, says Crane. "This is the homestretch.... [A]t this point it's watching what investors do and gearing up for the transition that remains."

Finally, BlackRock Liquidity Funds' T-Fund posted a Prospectus Supplement which says, "Effective on October 11, 2016, the deadline for purchases and redemptions in the Fund will be changed from 5:30 p.m. Eastern time to 5:00 p.m. Eastern time. Consequently, effective October 11, 2016, the sections of the prospectuses entitled "Account Information - Purchase of Shares" and "Account Information - Redemption of Shares" are amended to delete the row of each table relating to the Fund in those sections in its entirety and replace it with the following: Fund: T-Fund, Deadline (Eastern time): 5:00 p.m."

Contrary to what they said this spring (see our April 1 News, "All In: TDAM to Maintain Full MMF Roster; ICI Trends, Composition"), TD Asset Management has filed a Prospectus Supplement (497) to liquidate its TDAM Institutional Money Market Fund and TDAM Institutional Municipal Money Market Fund. TDAM, the 28th largest money fund manager with $6.4 billion (down from $7.8 billion 3 months ago), issued a March 31 press release ("TD Asset Management Announces Product Strategy for Money Market Funds) detailing its plans to maintain a full roster of Prime Retail, Prime Institutional, Tax-Exempt Retail, Tax-Exempt Inst MMFs, and Govt MMFs in its post-reform money fund lineup. But it appears to have changed its mind. We review the latest update as well as another recent liquidation and two fund merger filings below.

TDAM's new filing says, "On June 23, 2016, the Board of Directors (the "Board") of TD Asset Management USA Funds Inc. (the "Company") approved the liquidation of each of the TDAM Institutional Money Market Fund and the TDAM Institutional Municipal Money Market Fund, each a series of the Company, pursuant to the terms of a Plan of Liquidation for each Fund. The liquidations were proposed as a result of anticipated lack of demand in the marketplace for the Funds and potential difficulty in attracting and retaining assets given changes to the Funds that would be required by recent amendments to the rules that govern the operation of money market funds. Under these amendments, each Fund would have been required to price and transact in its shares at a floating net asset value ("NAV"), among other things."

It continues, "Under its Plan of Liquidation, the applicable Fund will be liquidated during the third quarter of 2016 (each, a "Liquidation Date"). On or before the applicable Liquidation Date, all portfolio securities of the relevant Fund will be converted to cash or cash equivalents, and the Fund will cease investing its assets in accordance with its stated investment objective and policies." (Note: Assets in the funds have shrunk to almost zero, so it appears the liquidations are imminent.)

The TDAM filing explains, "On the Liquidation Date, shareholders in the applicable Fund as of the Liquidation Date will receive, as a liquidating distribution, an amount equal to their proportionate interest in the net assets of the Fund, after the Fund has paid or provided for all of its charges, taxes, expenses, and liabilities. A shareholder may voluntarily redeem his or her shares prior to the relevant Liquidation Date to the extent that the shareholder wishes to do so. Shareholders remaining in a Fund just prior to the relevant Liquidation Date may bear increased transaction fees incurred in connection with the disposition of the Fund’s portfolio holdings."

It adds, "Although the liquidation is not expected to be a taxable event for a Fund, for taxable shareholders the automatic redemption of shares of the Fund on the Liquidation Date will generally be treated as any other redemption of shares, i.e., as a sale that may result in a gain or loss for federal income tax purposes. A Fund may also make a distribution of undistributed net income and/or net capital gains prior to its Liquidation Date. Shareholders, including shareholders that own Fund shares in a tax deferred account, such as an individual retirement account, 401(k) or 403(b) account, should consult their tax advisers regarding the tax treatment of the liquidations."

Finally, the 497 says, "In connection with its liquidation, effective June 23, 2016, each Fund will no longer be available for purchase by new investors. Effective August 15, 2016, each Fund will be closed to all investments, including through exchanges into the Fund from other funds of the Company. Investors may continue to redeem shares of each Fund."

A separate "Money Market Mutual Fund Reform FAQ" from brokerage firm TD Ameritrade explains the pending new money market fund regulations and says, "These regulations will impact money market mutual fund sweep options. If your account type is not considered a natural person (see below) and your cash sweep vehicle currently holds prime or municipal money market mutual funds that seek a stable value, you will receive notice that you need to change your sweep vehicle. The TD Bank FDIC Insured Deposit Account (IDA) and TD Ameritrade Cash will NOT be affected, as they are not money market mutual funds."

It adds, "The affected money market mutual fund cash sweeps include all classes of: Prime funds: TDAM Money Market Portfolio, Vanguard Prime Money Market; Municipal funds: TDAM California Municipal Portfolio, TDMA Municipal Portfolio, and TDAM New York Municipal Portfolio. (Watch for News on Morgan Stanley's shift of "sweep" assets from Prime and Muni funds into Govt MMFs and an update on overall brokerage sweep Prime and Muni to "Govie" conversions to date on Monday.)

In other news, as expected, Nicholas Money Market Fund is liquidating. Its latest filing says, "At a meeting held on August 1, 2016, the Board of Directors of the Fund (the “Board”) approved a Plan of Liquidation and Dissolution (the "Plan") of the Fund pursuant to which the assets of the Fund will be exchanged, redeemed, or liquidated on a pro rata basis to stockholders as described herein. The liquidation of the Fund is expected to occur during the third quarter of 2016.... If the liquidation is approved by stockholders, the Fund will cease to engage in any investment activities, except for the purpose of winding up its business and affairs, preserving the value of its assets, discharging or making reasonable provision for the payment of all of its liabilities and distributing its remaining assets to stockholders in accordance with the Plan."

Finally, a couple of filings gave notice of two pending mergers, one involving Dreyfus Prime Inst funds and one involving Wells Muni funds. The first details Dreyfus' plans to merge two funds. It says, "This Supplement updates and supplements the Prospectus/Proxy Statement (the "Prospectus/Proxy Statement") and related Statement of Additional Information (the "SAI"), each dated June 2, 2016, for the Special Meeting of Shareholders of Dreyfus Institutional Cash Advantage Fund (the "Fund"), a series of Dreyfus Institutional Cash Advantage Funds, relating to an Agreement and Plan of Reorganization providing for the transfer of all of the assets of the Fund to Dreyfus Institutional Preferred Money Market Fund (the "Acquiring Fund")." (See our August Money Fund Intelligence "profile" of Dreyfus for more details.)

The other, from Wells Fargo, says, "At a meeting held on August 9-10, 2016, the Wells Fargo Funds Trust Board of Trustees unanimously approved the merger of the Wells Fargo Municipal Money Market Fund ("Target Fund") into the Wells Fargo National Tax-Free Money Market Fund ("Acquiring Fund"). The merger was proposed by Wells Fargo Funds Management, LLC, investment manager to the Wells Fargo Funds.... The merger, if it is approved by shareholders and all conditions to the closing are satisfied, is expected to occur in January 2017. Prior to the merger, shareholders of the Target Fund may continue to purchase and redeem their shares subject to the limitations described in the Target Fund's Prospectus."

Fidelity Investments, the largest manager of money market mutual funds with over $450 billion in assets, released an "Update: Fidelity Money Market Mutual Fund Changes" and a new "Q&A: Money Market Mutual Fund Regulatory Update" on its latest reactions to pending money market fund reforms. They write, "Since July 2014, when the U.S. Securities and Exchange Commission (SEC) issued new rules for money market mutual funds and a multi-year implementation period for those rules, we have spent significant time listening to our investors' preferences and taking steps to ensure that our funds will meet the new requirements by the SEC's October 14, 2016 final implementation date. We know that money market mutual funds are very important to investors and these funds continue to be an integral part of our business. Over the past year, we have made several changes to our money market mutual funds." (See Fidelity's recap of previously announced money fund changes here, and see our previous News stories: "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt (2/2/15)," "Fidelity Operational Update Details More Changes; Alpine Liquidates (4/14/15)," "Fidelity Details Retail vs. Inst MMF Changes; Only One Floating Fund (10/15/15)," and "Fidelity's Prior at AFP on Recent and Pending Changes; No Silver Bullet (10/28/15).")

Fidelity's document explains, "We now would like to share an update on our plans to convert Fidelity's two publicly available institutional prime money market funds to a floating net asset value (NAV), and to add to all Fidelity municipal and prime money market funds the ability, during periods of extraordinary market stress, to potentially apply liquidity fees and redemption gates. Communicating the effective dates of these final changes now will allow investors to know how each Fidelity money market mutual fund will be affected in advance of the SEC compliance deadline."

It tells us, "First, let's review the forthcoming rules. Upon implementation, the rules establish new definitions for government funds and retail funds, and will require institutional prime (also known as "general purpose") and institutional municipal money market mutual funds to price and transact at a "floating" (or variable) NAV. During periods of extraordinary market stress, under the new rules, both retail and institutional prime and municipal money market mutual funds may charge shareholders liquidity fees, payable to the fund upon redemption, as well as provide for redemption gates that would temporarily halt all withdrawals. Government and U.S. Treasury money market mutual funds will not be subject to any of the new structural changes."

On the "Floating (or Variable) NAV," the update says, "When the new rules are fully implemented, the daily price per share of all institutional prime and institutional municipal money market mutual funds will be required to "float." This means that instead of fund shares being priced at $1.00, as they are today, a fund will be required to price and transact at an NAV that uses four-decimal-place precision (e.g., $1.0000), a process known as "basis-point rounding. When a fund uses basis-point rounding to calculate its NAV, its shareholders may experience a gain or loss if the per-share value of the fund changes by 1/100th of a penny. For example, if a shareholder owned 10,000 shares priced at $1.0000, a 1 basis point change in a floating NAV fund would result in a gain or loss of $1.00."

Fidelity continues, "FIMM Prime Money Market Portfolio and FIMM Prime Reserves Portfolio are the only two Fidelity money market funds publicly available to investors that will be converting to a floating (or variable) NAV. Both funds will begin transacting at a floating NAV, effective October 1, 2016. Five Fidelity money market central funds, which are not publicly available to investors, will convert to a floating NAV throughout September. Central funds are available as cash investments by other mutual funds and are not available directly to individual investors."

Regarding "Liquidity Fees and Redemption Gates," it explains, "The SEC rules permit both retail and institutional prime and municipal money market mutual funds to limit redemptions under certain rare circumstances, by imposing liquidity fees or redemption gates. Subject to the discretion of a fund's board of trustees, these funds can impose a fee of up to 2% on shareholder redemptions if weekly liquid assets were to fall below 30%. Additionally, a fund's board may impose a temporary suspension of redemptions ("gate") if weekly liquid assets were to fall below 30%. This redemption gate can only be in effect for up to ten business days during any ninety day period. The potential for liquidity fees and redemption gates for all Fidelity prime and municipal funds will be effective October 1, 2016. Unlike the floating (or variable) NAV, the introduction of these features will not result in any immediate change for fund shareholders, as they would only be applicable in very rare circumstances."

Fidelity's Prime Retail funds ("Liquidity fees and redemption gates may apply at times of extraordinary market stress") include: Fidelity Money Market and FIMM Money Market Portfolio. Its Institutional MMFs "that will have a floating or variable NAV, and/or be subject to the potential for liquidity fees and redemption gates, as of October 1, 2016" include: FIMM Prime Money Market Portfolio and FIMM Prime Reserves Portfolio.

The piece adds, "FIMM Prime Money Market Portfolio will "strike" or "set" its NAV at 9 am ET and at 3 pm ET on days when the fund is open and will offer only same day settlement (not available on all platforms). FIMM Prime Reserves Portfolio, which was launched in June 2016, will "strike" or "set" its NAV at 4 pm ET on days when the fund is open and will offer only standard next day settlement. Shareholders of record of FIMM Prime Money Market Portfolio on August 8, 2016, may receive an additional distribution from the fund prior to the fund’s conversion to a floating NAV. The amount and payment date of any such distribution will be determined at a time closer to the conversion date. U.S. Treasury and Government Funds All U.S. Treasury and government money market funds are exempt from these structural reforms and will not be subject to fees, gates or a floating NAV."

It says, "None of Fidelity's prime or municipal money market mutual funds are yet subject to the potential for liquidity fees or redemption gates. Similarly, Fidelity's two institutional prime money market mutual funds do not yet have a floating NAV. Today's announcement gives prime and municipal money market fund shareholders information and time to prepare for these structural changes, which Fidelity plans to implement by October 1, 2016."

Finally, Fidelity writes, "These are the final set of changes planned for our money market mutual funds and represent the culmination of a significant, multi-year effort to ensure that our money market mutual funds meet the stringent new SEC requirements. At Fidelity, we remain committed to offering a variety of investment options and will continue to have a robust money market mutual fund product lineup that includes retail and institutional funds, prime and municipal funds, and government and U.S. Treasury funds. As market conditions and investor preferences evolve, we will continue to review our money market mutual fund lineup to ensure that we are meeting investors' needs. Investors can find an overview of the new SEC rules and the types of money market mutual funds in these key resources."

Crane Data released its August Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of July 31, 2016, shows big increases in Other (Time Deposits), Treasuries and Agencies, and decreases in CD, CP and Repo in July. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $47.9 billion to $2.592 trillion, after decreasing by $59.7 billion in June, increasing by $24.6 billion in May, and decreasing $21.0 billion in April. Repos remained the largest portfolio segment, followed by Agencies and Treasuries. CDs were in fourth place, followed by Commercial Paper, Time Deposits and VRDNs. Money funds' European-affiliated securities rose to 26.7% of holdings, up from the previous month's 19.6%. (U.K.-affiliated holdings increased by $7.5 billion to $88.4 billion, or 3.4% of assets.) Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase Agreements (repo) fell by $13.3 billion (-2.1%) to $632.9 billion, or 24.4% of holdings, after increasing $71.4 billion in June, $32.6 billion in May and decreasing $65.3 billion in April. Government Agency Debt increased $27.0 billion (5.0%) to $571.9 billion, or 22.1% of all holdings, after increasing $37.4 billion in June, $34.4 billion in May and decreasing $9.0 billion in April. Treasury securities rose $38.8 billion (7.4%) to $561.1 billion, or 21.6% of holdings, after falling $12.8 billion in June, $3.8 billion in May and dropping $36.8 billion in April. `The rise in Agencies is in large part due to a shift of almost $500 billion (since late 2015) of Prime MMF asset into Government MMFs (so far).

Certificates of Deposit (CDs) were down $37.6 billion (-10.6%) to $318.0 billion, or 12.3%, after declining $53.6 billion in June, $4.6 billion in May and falling $17.0 billion in April. Commercial Paper (CP) was down $23.3 billion (-7.8%) to $273.9 billion, or 10.6% of holdings, while Other holdings, primarily Time Deposits, jumped $55.8 billion (37.1%) to $205.9 billion, or 7.9% of holdings. VRDNs held by taxable funds increased by $0.5 billion (1.7%) to $28.6 billion (1.1% of assets).

Prime money fund holdings tracked by Crane Data totaled $1.074 trillion (down from $1.123 trillion last month), or 41.4% (down from 44.1%) of taxable money fund holdings' total of $2.592 trillion. Among Prime money funds, CDs represent under one-third of holdings at 29.6% (down from 31.7% a month ago), followed by Commercial Paper at 25.5% (down from 26.5%). The CP totals are comprised of: Financial Company CP, which makes up 15.2% of total holdings, Asset-Backed CP, which accounts for 6.6%, and Non-Financial Company CP, which makes up 3.7%. Prime funds also hold 3.9% in US Govt Agency Debt (down from 4.7%), 5.3% in US Treasury Debt (up from 4.5%), 4.6% in US Treasury Repo (down from 7.9%), 3.9% in Other Instruments, 16.8% in Non-Negotiable Time Deposits, 5.6% in Other Repo, 4.6% in US Government Agency Repo, and 2.2% in VRDNs.

Government money fund portfolios totaled $962 billion, up from $875 billion in June, while Treasury money fund assets totaled another $556 billion, up from $546 billion the prior month. Government money fund portfolios were made up of 55.1% US Govt Agency Debt, 18.1% US Government Agency Repo, 9.5% US Treasury debt, and 17.0% in US Treasury Repo. Treasury money funds were comprised of 74.3% US Treasury debt, 25.3% in US Treasury Repo, and 0.3% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined total $1.518 trillion, or 58.6% of all taxable money fund assets, up from 55.9%.

European-affiliated holdings increased $191.9 billion in July to $691.2 billion among all taxable funds (and including repos); their share of holdings increased to 26.7% from 19.6% the previous month. Eurozone-affiliated holdings increased $135.9 billion to $424.3 billion in July; they now account for 16.4% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $39.9 billion to $248.5 billion (9.6% of the total). Americas related holdings decreased $129.9 billion to $1.650 trillion and now represent 63.6% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $56.8 billion, or 14.1%, to $347.0 billion, or 13.4% of assets; US Government Agency Repurchase Agreements (up $41.1 billion to $225.3 billion, or 8.7% of total holdings), and Other Repurchase Agreements ($60.6 billion, or 2.3% of holdings, up $2.4 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $9.2 billion to $163.6 billion, or 6.3% of assets), Asset Backed Commercial Paper (down $8.9 billion to $70.6 billion, or 2.7%), and Non-Financial Company Commercial Paper (down $5.2 billion to $39.7 billion, or 1.5%).

The 20 largest Issuers to taxable money market funds as of July 31, 2016, include: the US Treasury ($561.1 billion, or 21.6%), Federal Home Loan Bank ($407.7B, 15.7%),`BNP Paribas <b:>`_ ($89.2B, 3.4%), Federal Reserve Bank of New York ($80.7B, 3.1%),`Credit Agricole <b:>`_ ($79.2B, 3.1%), Wells Fargo ($76.0B, 2.9%), Federal Home Loan Mortgage Co. ($66.9B, 2.6%), Societe Generale ($59.3B, 2.3%), Federal Farm Credit Bank ($53.6B, 2.1%), Mitsubishi UFJ Financial Group Inc. ($52.0B, 2.0%),`RBC <b:>`_ ($51.5B, 2.0%), Federal National Mortgage Association ($40.6B, 1.6%), Natixis ($39.6B, 1.5%), Credit Suisse ($39.6B, 1.5%), Bank of Nova Scotia ($38.9B, 1.5%), Bank of America ($38.7B, 1.5%), Citi ($36.1B, 1.4%), HSBC ($34.8B, 1.3%),`JP Morgan <b:>`_ ($31.0B, 1.2%), and Mizuho Corporate Bank Ltd ($30.7B, 1.2%).

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 ($80.7B, 12.8%), BNP Paribas ($63.5B, 10.0%), Wells Fargo ($56.2B, 8.9%), Credit Agricole ($46.2B, 7.3%), Societe Generale ($45.3B, 7.2%), RBC ($34.9B, 5.5%), Bank of America ($30.8B, 4.9%), Credit Suisse ($27.1B, 4.3%), JP Morgan ($22.9B, 3.6%), and HSBC ($22.7B, 3.6%). The `10 largest Fed Repo positions among MMFs on 7/31 include: JP Morgan US Govt ($10.2B), Fidelity Cash Central Fund ($3.9B), Wells Fargo Govt MMkt ($3.9B), Goldman Sachs FS Treas Sol ($3.3B), Dreyfus Cash Mgmt ($3.0B), Northern Trust Trs MMkt ($3.0B), UBS RMA Govt MM ($2.9B), Western Asset Inst Gvt ($2.5B), Schwab Gvt MMkt ($2.4B), and Morgan Stanley Inst Lq Gvt ($2.2B).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($38.8B, 5.5%), Credit Agricole ($33.0B, 4.7%), Sumitomo Mitsui Banking Co. ($28.6B, 4.0%), DnB NOR Bank ASA ($27.9B, 3.9%), Svenska Handelsbanken ($27.1B, 3.8%), Natixis ($25.8B, 3.6%), BNP Paribas ($25.6B, 3.6%), Swedbank AB ($24.0B, 3.4%), Skandinaviska Enskilda Banken AB ($23.1B, 3.3%), and Nordean Bank ($23.0B, 3.3%).

The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($23.9B, 7.6%), Sumitomo Mitsui Banking Co ($23.3B, 7.4%), Bank of Montreal ($18.4B, 5.9%), Wells Fargo ($15.5B, 4.9%), Canadian Imperial Bank of Commerce ($13.1B, 4.2%), Sumitomo Mitsui Trust Bank ($13.1B, 4.2%), Mizuho Corporate Bank Ltd ($12.6B, 4.0%), Citi ($11.3B, 3.6%), Toronto-Dominion Bank ($10.9B, 3.5%), and Credit Mutuel ($10.4B, 3.3%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($15.2B, 6.6%), Societe Generale ($11.9B, 5.1%), Mitsubishi UFJ Financial Group Inc. ($11.6B, 5.0%), Credit Agricole ($9.4B, 4.1%), Bank of Nova Scotia ($8.9B, 3.9%), Commonwealth Bank of Australia ($8.4B, 3.6%), Australia and New Zealand Banking Group Ltd. ($8.3B, 3.6%), ING Bank ($7.0B, 3.0%), Natixis ($7.0B, 3.0%), and JP Morgan ($6.8B, 3.0%).

The largest increases among Issuers include: Credit Agricole (up $45.0B to $79.2B), US Treasury (up $38.8B to $561.1B), Societe Generale (up $28.4B to $59.3B), DnB NOR Bank ASA (up $22.2B to $27.9B), Credit Suisse (up $19.9B to $39.6B), Natixis (up $17.6B to $39.6B), BNP Paribas (up $15.0B to $89.2B), Skandinaviska Enskilda Banken AB (up $13.2B to $23.1B), Federal Home Loan Bank (up $12.5B to $407.7B), and Barclays PLC (up $11.7B to $28.9B).

The largest decreases among Issuers of money market securities (including Repo) in July were shown by: Federal Reserve Bank of New York (down $145.0B to $80.7B), RBC (down $9.7B to $51.5B), Toronto-Dominion Bank (down $7.9B to $23.8B), Wells Fargo (down $7.6B to $76.0B), Svenska Handelsbanken (down $6.5B to $27.1B), Canadian Imperial Bank of Commerce (down $6.0B to $15.2B), Bank of Nova Scotio (down $5.9B to $38.9B), Sumitomo Mitsui Banking Co (down $5.5B to $28.6B), Bank of Montreal (down $5.3B to $26.4B), and Sumitomo Mitsui Trust Bank (down $4.1B to $17.7B).

The United States remained the largest segment of country-affiliations; it represents 57.1% of holdings, or $1.480 trillion (down 92.0BB). France (11.6%, $300.0B) moved to second while Canada (6.5%, $168.1B) dropped one spot to 3rd. Japan (6.3%, $163.6B) stayed in fourth, while Sweden (3.8%, $97.8B) held fifth. The United Kingdom (3.4%, $88.4B) remained sixth, while Germany (2.3%, $59.2B) jumped two spots to seventh, while Australia (2.2%, $57.3B) fell one spot to eighth and The Netherlands (2.0%, $50.7B) fell to ninth, lastly Switzerland (1.9%, $48.9B) held tenth place among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)

As of July 31, 2016, Taxable money funds held 31.1% (up from 30.9%) of their assets in securities maturing Overnight, and another 15.2% maturing in 2-7 days (up from 13.1%). Thus, 46.3% in total matures in 1-7 days. Another 20.0% matures in 8-30 days, while 13.8% matures in 31-60 days. Note that more than three-quarters, or 80.1% of securities, mature in 60 days or less (same as last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 9.0% (down from 10.9%) of taxable securities, while 8.7% matures in 91-180 days (down from 9.4%), and just 2.2% matures beyond 180 days (down from 2.3%).

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

Crane Data's latest Money Fund Market Share rankings show slight asset increases for the majority of U.S. money fund complexes in July as money market fund assets grew $11.4 billion, or 0.4%. Overall assets have been relatively flat of late, falling by $12.1 billion, or 0.5%, over the past 3 months, but over the past 12 months through July 31, they are up $42.9 billion, or 1.7%. The biggest gainer in July was JP Morgan, whose MMFs rose by $9.3 billion, or 4.1%. Fidelity, Vanguard, Wells Fargo, Invesco, and Northern also saw assets increase, rising by $5.7 billion, $4.3 billion, $3.9 billion, $3.5 billion, and $3.4 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 declined slightly.

Fidelity, Vanguard, PNC, Wells Fargo, and JP Morgan had the largest money fund asset increases over the past 3 months, rising by $9.1 billion, $6.5B, $5.3B, $3.6B, and $2.7B, respectively. Over the past year through July 31, 2016, Fidelity was the largest gainer (up $43.4B, or 10.6%), followed by BlackRock (up $35.7B, or 17.0%), Goldman Sachs (up $29.4B, or 18.8%), Vanguard (up $16.1B, or 9.2%), SSGA (up $15.5B, or 20.1%), and Northern (up $11.5B, or 14.5%). BlackRock was buoyed by its acquisition of BofA's money funds -- a deal which closed in April.

Other asset gainers for the past year include: PNC (up $7.6B, 174.0%), Schwab (up $3.8B, or 2.4%), Invesco ($2.6B, 4.7%), Wells Fargo (up $1.8B, or 1.6%), UBS (up $1.7B, 4.5%), and American Funds (up $562M, 3.7%). The biggest decliners over 12 months include: JP Morgan (down $23.4B, or -9.1%), Dreyfus (down $19.2B, or -11.2%), Deutsche (down $7.6B, or -25.3%), RBC (down $4.1B, or -28.6%), and Franklin (down $2.2B, or -8.9%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $453.7 billion, or 17.3% of all assets (up $5.7 billion in July, up $9.1 billion over 3 mos., and up $43.4B over 12 months). BlackRock is second with $245.2 billion, or 9.3% of assets (up $910M, down $11.6B, and up $35.7B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is third with $233.8 billion, or 8.9% market share (up $9.3B, up $2.7B, and down $23.4B for the past 1-month, 3-mos. and 12-mos., respectively). Federated Investors remained fourth with $204.3 billion, or 7.8% of assets (down $4.1B, down $2.0B, and down $2.0B).

Vanguard was in 5th place with $190.1 billion, or 7.2% of assets (up $4.3B, up $6.5B, and up $16.1B). Goldman Sachs held onto sixth place with $185.3 billion, or 7.1%, (down $4.6B, down $9.2B, and up $29.4B). Schwab ($159.7B, 6.1%) was in seventh place, followed by Dreyfus in eighth place with $151.7B (5.8%), Morgan Stanley was in ninth place with $125.3B (4.8%), and Wells Fargo was in tenth place with $111.7B (4.3%).

The eleventh through twentieth largest U.S. money fund managers (in order) include: SSGA ($92.7B, or 3.5%), Northern ($91.2B, or 3.5%), Invesco ($57.9B, or 2.2%), Western Asset ($42.8B, or 1.6%), First American ($39.7B, or 1.5%), UBS ($38.5B, or 1.5%), Deutsche <b:>`_ ($22.5B, or 0.9%), Franklin ($22.3B, or 0.9%), American Funds ($15.7B, or 0.6%), and T. Rowe Price ($14.9B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except: T. Rowe Price displaced HSBC from the top 20. Crane Data currently tracks 64 U.S. MMF managers, the same number as last month.

When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman Sachs moving up to #4 ahead of Federated and Vanguard and Western Asset bumping Wells Fargo from the top 10.

Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($461.8 billion), BlackRock ($362.0B), JPMorgan ($359.3B), Goldman Sachs ($273.4B), and Federated ($212.8B). Vanguard ($190.1B) was sixth, followed by Dreyfus/BNY Mellon ($177.6B), Schwab ($159.7B), Morgan Stanley ($148.6B), and Western ($117.0B), 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 August Money Fund Intelligence and MFI XLS show that yields inched lower in July across most of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 751), was down 1 basis point to 0.12% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield was flat at 0.12%. The MFA's Gross 7-Day Yield was 0.44% (flat), while the Gross 30-Day Yield was 0.45% (up 1 bps).

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.23 (down 1 basis points) and an average 30-Day Yield of 0.23% (flat). The Crane 100 shows a Gross 7-Day Yield of 0.48% (flat), and a Gross 30-Day Yield of 0.48% (up 1 bp). For the 12 month return through 7/31/16, our Crane MF Average returned 0.08% (up 1 bp) and our Crane 100 returned 0.15% (up 2 bps). The total number of funds, including taxable and tax-exempt, fell to 1,040, down 14 from last month. There are currently 755 taxable and 285 tax-exempt money funds.

Our Prime Institutional MF Index (7-day) yielded 0.24% (down 3 bps) as of July 31, while the Crane Govt Inst Index was 0.15% (down 1 bps) and the Treasury Inst Index was 0.12% (flat). Thus, the spread between Prime funds and Treasury funds is 12 basis points, down from 15 bps last month. The Crane Prime Retail Index yielded 0.09% (unchanged), while the Govt Retail Index yielded 0.03% (unchanged) and the Treasury Retail Index was 0.02% (unchanged). The Crane Tax Exempt MF Index yielded 0.07% (up 1 bp).

The Gross 7-Day Yields for these indexes in July were: Prime Inst 0.54% (down 3 bps), Govt Inst 0.41% (unchanged), Treasury Inst 0.37% (unchanged), Prime Retail 0.53% (up 1 bps), Govt Retail 0.40% (up 3 bp), and Treasury Retail 0.34% (up 2 bp). Also, the Crane Tax Exempt Index jumped 2 basis points to 0.40%. The Crane 100 MF Index returned on average 0.02% for 1-month, 0.06% for 3-month, 0.12% for YTD, 0.15% for 1-year, 0.07% for 3-years (annualized), 0.06% for 5-years, and 1.01% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)

In other news, see also Bloomberg's "There's a Big Dollar Crunch Brewing in Markets". The article says, "The dollar London Interbank Offered Rate, or Libor, has risen to the highest level in seven years while the cost of converting Japanese yen into greenbacks has surged ahead of U.S. money market reform that will come into effect this October. Those reform efforts will see prime money market funds -- an important source of short-term funding for banks -- build up so-called liquidity buffers and install redemption gates among other measures. While the changes are aimed at making the funds safer, they are causing turmoil in money markets as big banks adjust to the new reality of a shrinking pool of financing combined with the need to maintain their own large war chests of liquid assets."

Commentary continues to flood in on the recent spike in LIBOR, CP and CD rates, and on the massive asset exodus from Prime money market funds. J.P. Morgan Securities writes in its latest "Short-Term Fixed Income," "For another week, focus in the short-term fixed income markets was centered on Libor's ascent. Week over week, 1m, 3m and 6m Libor fixings rose 0.8bp, 3.3bp, 4.9bp respectively. Though the pace of increase slowed somewhat relative to prior weeks, it continued to make new multi-year highs, particularly in the longer tenors.... [T]he culprit remains very clearly the ongoing fallout from the approach of money market fund reform, influencing where banks have been funding in the wholesale unsecured markets. Based on fixed CP/CD transaction data from DTCC, average bank funding levels continued to trade above Libor fixings, dragging Libor higher along with it." We review this, as well as updates from OppenheimerFunds and Bank of America Merrill, below.

JPM's latest piece, by Alex Roever, Teresa Ho and John Iborg, explains, "To be sure, the heavy CP/CD maturity schedule over the next two months will likely continue to pressure Libor higher. Based on the most recent estimates from our banking partners, approximately $1,020bn of bank CP/CD paper was outstanding as of June month-end, with Japanese issuers in particular comprising the largest concentration.... If we assume the maturity schedule of those Japanese bank outstandings are similar to what’s in prime MMFs (which held roughly two-thirds of those outstandings), then there's at least $68bn of maturities that are going to be due over the course of this month. And of this amount, approximately $35-45bn are held in prime MMFs."

It adds, "That being said, there is some preliminary evidence that we have found a clearing level for some names, as reflected in the slower pace of increases in the Libor fixings. There are a few reasons that are contributing to this dynamic. First, as spreads have widened, participation from non 2a-7 prime institutional buyers has meaningfully increased, particularly in the longer tenors. These buyers include offshore funds, securities lenders, short-term bond funds, separately managed accounts, retail funds as well as large corporations that have excess cash on their balance sheets to deploy. Indeed, average weekly CP data from the Fed shows a 40% increase in 81+ days volumes week over week. While they are unlikely able to fill the void left behind by prime institutional funds, they have nonetheless helped to blunt some of the impact MMF reforms have imposed on some banks."

The weekly continues, "Second, and somewhat surprisingly, it appears banks have been willing to access shorter maturities in spite of regulatory incentives otherwise.... Third, it appears foreign banks have been willing to let their large deposit liabilities run off by drawing down on their reserve balances at the Fed.... Taken together, while pressures from MMF reform will likely continue to build as we draw closer to the deadline, we suspect the degree of impact on Libor will begin to subside, if it hasn't already. In other words, Libor will rise at a slower pace as funding levels begin to stabilize. Indeed, historically, we have found that Libor fixings tend to lag the funding markets, particularly during periods of volatility.... To this end, based on what we have seen bank in CP/CD data from DTCC, the intensity of funding pressures in 3m tenors may be close to peaking."

OppenheimerFunds' "The LIBOR Story Won't Go Away Anytime Soon," tells us, "Spikes to LIBOR tend to get noticed by market participants -- particularly, after the global financial crisis when LIBOR was seen as the figurative "canary in the coal mine." Recently LIBOR has spiked again, as our chief investment officer, Krishna Memani, noted in a recent blog. But the canary is quite healthy; it's the coal mine that has run out of coal. To explain in detail what is happening to LIBOR, we must study what we see as the root cause -- namely new Money Market Mutual Fund rules mandated by the industry's regulator, the Securities and Exchange Commission (SEC)."

Written by Adam Wilde and Ira Jersey, the piece continues, "The first and quite noticeable change has been a large shift of assets from prime to government MMFs. A large part of this shift so far has been from fund families converting their offerings from prime funds to government funds, while investors in some cases have also moved assets out of prime funds…. A second major change is that prime funds are positioning themselves for large outflows over the next several months."

It adds, "Estimates vary, but many predict hundreds of billions of dollars in outflows. Therefore, many prime funds have proactively reduced their weighted average maturity (WAM) and weighted average life -- both of which are now at all-time lows -- and are increasing fund liquidity. Flows have also been occurring as investor money is beginning to move out of funds that have chosen to remain institutional prime funds. More assets are anticipated to shift as we approach the October 14 date for the new rules to take effect."

Bank of American Merrill Lynch adds in a brief entitled, "70 days to Reform" in its "US Rates Weekly," "US dollar LIBOR settings have been shifting higher over recent weeks largely due to two factors (1) reluctance from prime money funds to offer unsecured funding at the 3-month tenor, which now extends beyond the mid-October reform implementation date, and (2) a potential pullback in willingness to lend post-Brexit. Of these two, we think that money fund reform is the larger contributing factor. The lack of prime fund supply has caused investors to raise their offering amounts to achieve funding beyond these tenors causing LIBOR rates to increase."

BofA's piece also discussed update survey results, saying, "With the ongoing focus on money fund reform, we recently expanded a survey of our short-duration clients to learn more about their expectations and hear how they were thinking of adjusting the cash balances as a result of reform.... In particular, we take away the following points: (1) respondents continue to expect a sizeable reallocation out of money funds ahead of the October implementation date (2) investments that shift out of prime funds are most likely to move into government money funds and bank deposits (3) most of the outflows from prime funds are not expected to return to this product even for the right yield (4) a large amount of prime fund outflow [will occur] in the month or two ahead of the reform date."

Finally, the BofAML survey results also show that: "Other alternative investments such as separately managed accounts, short-duration funds, and private placement funds were seen as much less likely alternatives;" "a roughly 30 basis point pickup would be required to keep investors in prime money funds;" "CP and CD issuers to adjust to money fund reform ... would be most likely to seek other financing sources or offer higher rates;" and, finally, "clients did not expect to move their holdings until less than one month ahead of the reform implementation date."

The August issue of our flagship Money Fund Intelligence newsletter, was sent to subscribers Tuesday morning, features the articles: "The Big Shrink: Prime Assets, Spreads; Latest Changes," which looks at Prime fund asset, yield and maturity declines; "New Lion King: Santero In at Dreyfus; Cardona Retiring," which profiles Mark Santero and Charlie Cardona of Dreyfus; and "AFP Liquidity Survey Shows Deposits Peaked, MMFs Up," which reviews last month's survey of corporate treasurers. We have updated our Money Fund Wisdom database query system with July 31, 2016, performance statistics, and also sent out our MFI XLS spreadsheet Friday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our August Money Fund Portfolio Holdings are scheduled to ship Tuesday, August 9, and our August Bond Fund Intelligence is scheduled to go out Friday, August 12.

MFI's lead "Big Shrink" article says, "Money funds jumped back into the mainstream press over the past week as Prime assets fell below $1 trillion for the first time in almost 20 years, and as a spike in LIBOR rates caught the attention of the broader financial markets. (See the recent News on for links to the host of articles.) Liquidations, Prime to Government conversions and tweaks, changes and filings continued in July and show no signs of abating. We review these below, and we discuss the continued flight from Prime and shortening of portfolios, building of liquidity and shrinkage of spreads."

The article adds, "Of course, one of the biggest variables influencing the amount of additional money (beyond the $450 billion already gone) that will leave Prime funds in the next 2-3 months is the spread between Prime and Government (​or Treasury) money funds. While money funds had been seeing stable spreads of about 15 basis points between Prime Institutional MMFs on average and Treasury Inst MMFs, these have quietly started shrinking."

Our latest fund interview reads, "This month, MFI interviews Mark Santero, C.E.O of the Dreyfus Corporation, and Charlie Cardona, President of Dreyfus Corporation and C.E.O of BNY Mellon's Cash Investment Strategies division. Cardona will be retiring at the end of the year, and Santero recently became the leader of the cash business at Dreyfus. We wanted to discuss their transition, their latest plans and strategies and some lessons learned from Cardona's extensive history in the money fund business. Our interview follows."

MFI asks about the latest changes. Santero says, "My role as the C.E.O of Dreyfus is really to run the Dreyfus mutual fund family, which includes the cash funds.... Dreyfus is a great brand; it's been in existence for 60-plus years. It's something which in a former life was a formidable competitor of mine when I spent over 11 years at AIM Management Group.... When we look at Dreyfus, we look at the cash business as a true growth opportunity, given the resources that we have within the bank to support it and the types of clients we have at the bank. The synergies [with the bank] are very strong.... We have some very distinct and unique boutiques, and we're looking to grow that business."

The article on the "AFP's Survey" explains, "The Association for Financial Professionals released its "2016 Liquidity Survey" last month, and the new report showed a tiny decrease in bank deposits and increase in money fund holdings. It also shows that a majority of respondents will make changes to how they invest in Prime money market funds. Specifically, it says 62% plan to make changes in how they invest in prime funds and that 37% of that number will move to Govt funds or Bank products. However, safety of principal remains the top priority among investment objectives, increasing to 68% in 2016 from 65% last year."

In a sidebar, we discuss, "Worldwide MMF Assets." This brief says, "The Investment Company Institute's latest "Worldwide Mutual Fund Assets and Flows" data shows that total global money fund assets inched lower by $9 billion, or 0.2%, to $5.063 trillion in Q1 2016. China, Ireland, and Luxembourg suffered the biggest declines, while France, Korea, Brazil, and the U.​S. saw gains." We also do a sidebar on "MMF Earnings Up," which says, "Charles Schwab & Co. and Federated Investors both reported higher profits due to lower fee waivers and increased money market fund revenues." Finally, as we do every month, we review all the important "Money Fund News."

Our August MFI XLS, with July 31, 2016, data, shows total assets increased $7.8 billion in July to $2.620 trillion after decreasing $13.8 billion in June, $9.9 billon in May, and $42.0 billion in April. Our broad Crane Money Fund Average 7-Day Yield decreased one basis point to 0.12% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) also decreased 1 basis point to 0.23% (7-day).

On a Gross Yield Basis (before expenses were taken out), the Crane MFA was unchanged at 0.44% and the Crane 100 was down 1 bps to 0.48%. Charged Expenses averaged 0.33% and 0.25% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 31 days (down 1 day from last month) and for the Crane 100 was 31 days (down 3 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

In other news, The Wall Street Journal wrote again about money market funds in "A $500 Billion Stampede in Money Markets Even Before New Rules Hit." The article says, "The last big post-Lehman regulatory change is reverberating across the financial system, potentially squeezing short-term lending for businesses and local governments. The rules haven't taken effect yet but are already upending the $2.7 trillion money-market industry, causing nearly $500 billion to move into, out of and among these funds, which are used by investors to stash their cash and by borrowers for short-term liquidity."

It continues, "Already, more than $420 billion has left prime money-market funds in the past year, pulling assets below $1 trillion for the first time since 1999, according to the Investment Company Institute, the industry's trade association. The money has flowed into government money-market funds, which have grown from $991 billion to $1.5 trillion. Funds holding federal government debt are the big winners because under the new rules they can still promise that investments won’t lose money. More money chasing government bonds isn't what the world needs right now."

Finally, the Journal says, "The flip side is that $420 billion that used to be loaned to companies, mostly in the form of commercial paper, has disappeared from the system. That has forced companies to find other ways to borrow -- either by taking loans from banks or selling longer-term bonds—both of which can be more costly. Peter Crane of Crane Data, which tracks money-market funds, says another $500 billion could leave prime funds."

Yesterday, Bloomberg featured the article, "Muni Money Market Funds Decimated by Rules Intended to Save Them." It says, "Municipal money market funds are hemorrhaging cash in advance of rules aimed at reducing the risk of runs on the pools. Assets have plunged $64 billion since the beginning of the year to the lowest levels since 1999 as investors pulled money from tax-exempt funds in 25 of the last 30 weeks and shifted into ones that buy only government debt." We review this and a cluster of Muni money fund liquidations from Northern, SEI and Western below, and we also add details to T. Rowe Price's recent Prime-to-Govt conversion of its internal money fund. (See yesterday's "Link of the Day for more on this, and see our last several Tax Exempt stories -- "BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt (7/15)," "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund (6/29)," and "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche (2/24).")

The Bloomberg piece continues, "These government-only funds are exempt from Securities and Exchange Commission rules effective in October that require floating net-asset values and impose liquidity fees and redemption suspensions under certain conditions. The new regulations are adding more pain to funds that have been plagued by seven years of the Federal Reserve's zero interest-rate policy." They quote Crane Data's Peter Crane, "They're in danger of going extinct, especially if you don't get a rate hike anytime in the next couple of years.... Municipal money market funds lobbied hard to get an exemption from the SEC's rules, but the SEC threw them under the bus.... Tax exemptions don't help you if there's no income to tax."

It explains, "The rules shocked muni money fund managers. The historical average for seven-day liquidity has been between 70 percent and 80 percent for decades, said Mary Jo Ochson, who oversees $14.7 billion in tax-exempt money funds at Pittsburgh-based Federated Investors Inc. The funds, which invest in highly rated short-term debt, remained liquid during the financial crisis, she said.... Colleen Meehan, who manages about $6 billion of muni money market funds at Dreyfus Corp., said investors are balking at the prospect of liquidity fees and redemption gates. In June, UBS Asset Management said it would transfer money in its tax-exempt sweep funds to a government money fund."

The most recent round of municipal money fund liquidations includes a prospectus supplement for Northern Institutional Funds' Tax-Exempt Portfolio. It states, "The Board of Trustees of Northern Institutional Funds (the "Trust") has determined, after consideration of a number of factors, that it is in the best interests of the Tax-Exempt Portfolio (the "Portfolio") and its shareholders that it be liquidated and terminated on or about October 14, 2016."

It continues, "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.... If no action is taken by a Portfolio shareholder prior to the Liquidation Date, the Portfolio will distribute to such shareholder, on or promptly after the Liquidation Date, a cash distribution."

SEI also recently completed the liquidation of its Tax Exempt Trust (as well as its Prime MMFs -- see our 3/29 News, "Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt"). Its prospectus supplement states, "As previously announced, at a meeting of the Board of Trustees of SEI Tax Exempt Trust (the "Board"), held on January 27, 2016, the Board approved the closing and liquidation of the Fund on or about July 22, 2016 ("Liquidation Date"). In connection with the Fund closing, at a meeting of the Board held on May 11, 2016, the Board approved the change of the Fund's fiscal year end from August 31 to June 30. As a result of activity associated with the planned liquidation, income earned after the close of the June 30, 2016 fiscal year end through the Liquidation Date of the Fund will be taxable. Shareholders wishing to avoid incurring taxable income during that period may elect to redeem their shares prior to July 1, 2016."

The prospectus supplement for the Prime Obligation Fund and one for SEI Daily Income Trust both say, "At a meeting of the Board of Trustees (the "Board") of SEI Daily Income Trust (the "Trust") held on January 27, 2016, the Board approved the closing and liquidation of the Funds, each a portfolio of the Trust. The U.S. Securities and Exchange Commission recently adopted amendments to the rules that govern money market funds, several key provisions of which are scheduled to go into effect later in 2016. These amendments will substantially change the way in which many money market funds operate and accordingly have resulted (and likely will continue to result) in significant changes to the money market fund industry as a whole. In general, any money market fund that does not limit its investors to natural persons and does not limit its investment portfolio to government securities (and equivalent instruments) will be required to incur significant compliance and operational costs. This changing regulatory environment was one of several factors that led SEI Investments Management Corporation ("SIMC"), the Funds' adviser, to recommend to the Board of the Trust that the Funds be closed and their portfolios be liquidated."

The release continues, "Accordingly, each Fund is commencing the orderly liquidation and distribution of its portfolio pursuant to a plan of liquidation approved by the Board. Each shareholder will receive its pro rata portion of the applicable Fund's liquidation proceeds. It is currently expected that the liquidation proceeds of the Money Market Fund will be distributed to shareholders on or about June 24, 2016 and that the liquidation proceeds of the Prime Obligation Fund will be distributed to shareholders on or about July 22, 2016. In anticipation of the Funds closing, each Fund will convert all or substantially all of its assets to cash or cash equivalents. Therefore, each Fund may not be managed in accordance with its stated investment strategy going forward, pending the distribution of the liquidation proceeds. SIMC will be available to consult with the current shareholders of the Funds regarding alternative investments."

Also, Western Asset liquidated the "B" shares of its Western Asset Tax Free Reserves and its Western Asset Liquid Reserves. Its filing says, "All outstanding Class B shares of the fund will be converted into Class A shares of the fund as soon as practicable on or about June 30, 2016 (the "Conversion Date"). The conversion of Class B shares into Class A shares will occur at the close of business on the Conversion Date. The conversion is not expected to be a taxable event for federal income tax purposes and should not result in recognition of gain or loss by converting shareholders. Effective as of the close of business two business days prior to the Conversion Date (approximately June 28, 2016), the fund will no longer offer Class B shares for incoming exchanges."

In other news, yesterday's Wall Street Journal wrote, "T. Rowe Price Prime Money Fund Switches to Government Focus." We found another mention of these recent shifts in T. Rowe Price's "An Annual Report on the Reserve Investment Funds." It explains, "While the funds' names are changing in response to new SEC money fund rules, the funds will retain the attractive features our investors have enjoyed, including a net asset value managed to stay at $1.00 per share and a focus on liquidity and stability of principal.... The Reserve Investment Fund will be changing its investment mandate to that of a government money market fund, with a new name -- T. Rowe Price Government Reserve Fund -- to reflect this."

TRP continues, "Effectively, this will limit the fund's investments to include U.S. Treasuries and U.S. government debt, as well as repurchase agreements backed by similar collateral. As nongovernment debt positions mature, we are moving the fund away from its current mandate and toward its future mandate, which becomes effective August 1, 2016. This mandate change, made in response to SEC rule changes, allows the fund to retain the attractive features our investors have enjoyed, including a net asset value (NAV) managed to stay at $1.00 per share and a focus on liquidity and stability of principal. Our hope is that this mandate change will not disrupt existing shareholders."

They states, "The Government Reserve Investment Fund will be changing its name to T. Rowe Price Treasury Reserve Fund, effective August 1, 2016. While this name change is made in response to SEC money fund rule changes, investors will see virtually no change in the way we manage the fund. As a government money market fund under the new SEC rules, it will invest almost exclusively in U.S. Treasuries and U.S. government debt, as well as repurchase agreements backed by similar collateral. Also, it will retain the attractive features our investors have enjoyed, including a net asset value (NAV) managed to stay at $1.00 per share and a focus on liquidity and stability of principal.”

Finally, the report tell us, "The Reserve Investment Fund and Government Reserve Investment Fund are not available for direct purchase by members of the public, and their shares are offered solely to institutional investors pursuant to an exemption from the registration requirements under the federal securities law. The investment in either fund is generally made by T. Rowe Price on behalf of its mutual funds and institutional clients. The disclosure of either of the fund's portfolio holdings shall not be deemed to be an offer or a solicitation to purchase shares of the fund."

Yesterday, Moody's released a statement entitled, "Sterling and Euro money fund assets to increase post-Brexit; US prime funds see surge in outflows ahead of regulatory reform," which reviews some issues involving Dublin and Luxembourg-based "offshore" money market funds. The article states, "Sterling and euro prime money market fund (MMF) assets will increase in the coming months amid post-Brexit uncertainty despite record low yields, says Moody's Investors Service. In parallel, US prime funds are experiencing a spike in outflows ahead of October's regulatory changes." We review Moody's update, and also quote from a recent Fitch Ratings "European MMF Quarterly" below. (Note: See Crane Data's Money Fund Intelligence International for more information on offshore and European money funds, and check out our upcoming European Money Fund Symposium, which will be Sept. 20-21 in London, to learn more about this sector.)

Vanessa Robert, Senior Credit Officer at Moody's, explains, "Uncertainties around Brexit and the lack of comparable investment alternatives have kept investors in money market funds. Lower investor confidence and higher risk aversion could cause corporate investments to be postponed, leading to inflows into low-risk, highly liquid assets such as MMFs."

The release goes on, "Despite the drop in MMF yields, Moody's says euro prime MMFs reached their largest size in a year, at EUR 62.9 billion at the end of June 2016, as investors have very few safe alternative investment options. Euro prime MMFs received EUR 7.3 billion of inflows in Q2, equal to a 13.1% increase. Sterling money funds withstood the perfect storm, as their assets under management (AUM) increased by 4.7% in Q2 to GBP107 billion. Meanwhile, the 10 largest Moody's-rated US prime MMFs lost USD 45 billion in June, the largest monthly outflow of the year."

Moody's Jordan Schoenberg comments, "The upcoming US regulatory reforms, which include a switch to floating net asset values and the introduction of liquidity fees and redemption gates, have led to a spike in outflows from US institutional prime funds -- a trend we expect to continue between now and the 14 October deadline."

The article adds, "Moody's expects that due to uncertainty surrounding the regulatory reform, US fund managers will continue to conservatively manage portfolios, with prudent duration and liquidity management taking precedence over yield. US Prime MMF liquidity balances hit new highs in June with the ten largest Moody's-rated US Prime MMFs maintaining close to 50% overnight liquidity in anticipation of a wave of investor redemptions in October."

Lastly, Moody's states, "Euro MMFs' liquidity was also at a 12-month high (35.5% of assets) in Q2.... Moody's expects euro prime MMFs' stability profiles to deteriorate slightly: there will be less overnight liquidity and WAMs will be higher, driven by more investments in long-term securities, since the ECB is not expected to raise its interest rates anytime soon. Sterling portfolio managers will continue to adopt a prudent investment strategy. Moody's anticipates high cash balances and high exposures to government securities, a positive for both credit and stability profiles."

Fitch Ratings also writes in its latest "European MMF Quarterly- 2Q16" about "Sustained Demand for European MMFs Amid Market Uncertainty." They say, "European CNAV assets in euros, US dollars and even sterling, increased in 2Q16 as investors sought safe havens around the date of the UK's vote to leave the European Union. They reached EUR562bn at end-June, close to their end-2015 highs."

The report states, "Flows in Fitch-rated sterling-denominated funds were muted during the week of the vote on 23 June. We have not detected any unusual outflows since; the largest weekly fund outflow was 11%, well below historical highs. We have seen more inflows and we expect this to continue in the near term as uncertainties remain. In contrast, US-dollar denominated funds saw more asset flow volatility during the weeks around the referendum, mostly driven by asset allocators seizing attractive investment entry points in risky assets, out of cash."

Elaborating on "Cautious Portfolio Positioning," they write, "MMFs were cautiously positioned ahead of the referendum in the event of material outflows and to contain the impact of market volatility. MMFs had overnight and one-week liquidity of 31% and 42% on average at end-June. This was their highest over the past 12 months and large relative to our 'AAAmmf' criteria. Average portfolio maturities have been shortened across all three currencies and fund managers reviewed their investment case and limits on those issuers most sensitive to a UK-leave vote."

Fitch adds, "The supply of high-quality short-term sterling debt could be significantly affected by adverse funding conditions for non-UK issuers (85% of sterling MMFs at end-June). We believe that UK government supply will be an important factor in mitigating any supply constraints. Brexit also poses considerable uncertainty for the presence of offshore UCITS in the UK, while the vast majority of MMFs used by UK investors are domiciled in Ireland and Luxembourg."

The article then discusses "MMF Regulation Entering Final Stage," explaining, "Fitch believes that the Council of the EU's proposed revised European MMF regulation would make MMFs safer, through portfolio diversification and liquidity rules. As proposed, low volatility NAV (LVNAV) MMFs would be a viable alternative to existing CNAV funds, although liquidity requirements could be an obstacle."

Finally, Fitch writes under "ECB Pushes Euro MMF Yields More Negative," "Euro MMFs saw their yields fall further into negative territory driven by the ECB's quantitative easing. The average euro MMF gross yield was negative 0.29% at mid-July. Sterling MMFs' yields slowly declined from mid-June, as portfolios were more cautiously positioned with higher exposure to sovereign debt."

Prime money market mutual fund assets dropped by another $56.4 billion in July, according to Crane Data's Money Fund Intelligence Daily, after declining by $119.3 billion in June and $29.2 billion in May. Since October 31, 2015, just prior to the massive conversion of Fidelity Cash Reserves into Fidelity Government Cash Reserves, Prime money fund assets have declined by $404.3 billion, or 29.2%, while Government MMF assets have risen by $432.8 billion, or 42.8%. Up until June, the shift was primarily driven by fund conversions (almost $268 billion to date), but now it appears as if institutional investors and cash fiduciaries are driving the outflows. After a long period of little attention, these changes in the money markets have recently caught the attention of the broader financial markets and press. We excerpt from a couple new stories that discuss the shift and approach of reforms, and we also touch on some recent "spread shrinkage" and the latest fund changes below.

Among the recent articles, ignites yesterday featured "Down to the Wire: Money Fund Sponsors Prod Clients for 'Pledges'," which says, "With the compliance deadline for the biggest parts of the SEC's reforms just over two months away, some money fund sponsors are stepping up efforts to get a better handle on where existing institutional clients plan to put their money when those provisions kick in. Starting October 14, institutional prime funds will move away from a stable $1-per-share net asset value and become subject to potential liquidity fees and redemption gates in times of market duress, under the rule. As that deadline approaches, the pace of decision making among institutional investors has picked up in the third quarter, and Federated Investors expects those decisions to accelerate with each passing week, says Bud Person, national director for the Pittsburgh-based shop's wealth management and cash division."

The piece continues, "The next wave of preparations for the October compliance deadline is likely fund firms looking for explicit pledges from their clients on how much money they plan on keeping with the manager and how much they'll pull out, says Peter Crane, CEO of Crane Data. "Fund companies are trying to get a better handle on what their clients are going to do," he says. Firms should take any pledges with a grain of salt, however, Crane warns. "You don't really get long-term commitments from short-term investors," he says."

Ignites adds, "Another factor complicating the decision-making process is that some clients have to rewrite their investment management agreements in order to buy shares of a floating NAV money fund, while others are grappling with systems and process issues that make it difficult to invest in such products, he [BlackRock's Tom Callahan] says. Investors are adjusting to intraday strike times, and some transact with fund sponsors through third-party portals, which are updating their interfaces."

Bloomberg also writes about the other side of the shift in "A $400 Billion Influx Squeezes U.S. Bond Market's Safest Asset." The piece, by Liz McCormick, says, "After years in the making, a post-crisis rule to prevent a run on the money-market industry will finally take effect this October. It will force funds that oversee about $600 billion to abandon a fixed $1-a-share price and float their net asset value. But because businesses and state governments treat the funds like bank accounts, the prospect of prices falling below a buck is causing a big shift into money-market funds that buy only government debt."

It explains, "To cope, the Treasury Department stepped up bill issuance and boosted supply by almost a quarter-trillion dollars after its share of U.S. government debt fell to multi-decade lows last year. That still might not be enough. Estimates suggest between now and mid-October, the influx may produce an extra $400 billion or more in demand for short-term government securities and put a squeeze on a sizable chunk of the $1.51 trillion bill market."

Bloomberg explains, "Since June of last year, assets in all funds that focus on buying government debt have ballooned by more than a half-trillion dollars and now stand at about $1.5 trillion, according to Crane Data LLC, which specializes in money-market research. That influx is likely to accelerate in coming months. Bank of America Corp. predicts half the $300 billion to $500 billion leaving prime funds will flow into the safer money-market alternatives."

Finally, the piece says, "Bill rates rose from rock-bottom levels in the lead-up to the Fed's rate increase last December, but they've held steady since. Across all maturities, they average 0.28 percent, data compiled by Bank of America show. More bill issuance from the Treasury and the Fed's reverse repo program will help mitigate any supply-demand issues, according to Michael Pak, a fixed-income trader at TCW Group Inc.... The Treasury will add about $188 billion in additional bill supply during the next two quarters, based on overall U.S. debt sales and how much cash on hand it plans to hold, according to Stone & McCarthy Research Associates."

One big variable influencing the amount that will leave Prime in the next 2 months is the spread between Prime and Government (or Treasury) money funds. While money funds had been seeing stable spreads of about 15 basis points between Prime Institutional MMFs on average and Treasury Inst MMFs, these have quietly started shrinking. (Historically, these spreads have been about 25 bps.) Over the month of July, Prime Institutional yields have declined from 0.27% to 0.23%, while Treasury Inst funds have remained at yields of 0.12%. (Govt Inst MMF yields have inched in from 0.16% to 0.15%.)

The most recent Prime to Government conversions include: the $7.4 billion T. Rowe Price Prime Reserves, which became T. Rowe Price Govt Money Market on August 1; the $6.3 billion SEI Daily Income Trust Prime Oblig and $1.6 billion SEI Liquid Asset Trust Prime Oblig, which liquidated July 22, and AB Exchange Reserves, which became AB Govt Exchange Reserves on July 1. (For more on the latest changes, see our July 19 News," "SSGA Merging MMFs Into State Street Lineup; State Farm Going Govt," and our July 15 News," "BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt.")

The New York Fed said yesterday of its latest "Reverse Repo Counterparty Name Change," "T. Rowe Price Prime Reserve Fund changed its name to T. Rowe Price Government Money Fund, Inc., T. Rowe Price Summit Cash Reserves Fund changed its name to T. Rowe Price Cash Reserves Fund and T. Rowe Price Reserve Investment Fund changed its name to T. Rowe Price Government Reserve Fund, effective August 1."

On Friday, Federated Investors, the 4th largest manager of money market mutual funds, hosted its "Q2 2016 Earnings Conference Call." (See Friday's "Link of he Day" too.) Ray Hanley, President of Federated Investors Management Company, commented, "Looking now at money markets, assets decreased by about $7 billion from Q1, reflecting both tax-related seasonality and certain client specific activity. Money market assets were up about $13 billion from Q2 of 2015. Our Money Market Fund share remained at approximately 8%. Now, we are beginning to see some client activity related to the October 2016 requirement for floating NAVs and redemption fees and gate provisions for institutional, prime, and muni funds. We have seen increased interest in our government funds. We're also working through final regulatory approvals in order to launch a collective fund with a prime portfolio and we are pursuing a private prime fund vehicle with institutional clients. We expect activity levels to increase as we move through the third quarter and investors sort through their options."

He continued, "To give you one idea of some of the movement, I'd like to compare the change in our Money Market Fund assets from the second quarter of 2015 to today and then compare them over the last quarter from year end to today. So, from 2015 second quarter, our total is up about $8 billion led by government up $21 billion and prime is down $5 billion and tax free is down $5 billion. Now, if you look at the change from the end of the year of 2015, we are down $5 billion, our government is up $17 billion and the prime is down $16 billion and tax free is down $5 billion. So, you can begin to see the movement from prime into govie. Taking a look now at some of our most recent totals as of July 27, managed assets were approximately $366 billion including $252 billion in money markets, $63 billion in equity, and $51 billion in fixed income. Our mutual fund money market assets were $215 billion, and the July average has been about $216 billion."

CFO Tom Donahue told the call, "Revenue was up 26% compared to Q2 of last year and 5% from the prior quarter due mainly to lower money fund yield related fee waivers.... Operating expenses increased 25% compared to Q2 of last year and 1% from the prior quarter due mainly higher money market fund distribution expense as a result of lower waivers.... The pretax impact of money fund yield related fee waivers of $5 million was down from the prior quarter and Q2 of last year. The decreases were due mainly to the higher fund gross yields."

He added, "Based on current assets and yields, we expect the impact of these waivers on pretax incomes in the third quarter to be about $4 million. An increase in yields of 25 basis points would lower this waiver impact to about $1 million per quarter and a 50 basis point increase would nearly eliminate the waivers. As we've previously discussed, the impact of the change in one of our customer relationships may reduce pretax income by about $6 million per quarter when fully implemented in late 2016. The actual reduction may vary based on asset levels and yields at the time." (Note: For more on this last point, see our March 10 News, "Federated, Edward Jones Restructure Money Fund Deal; New 10-K Filing.")

During the Q&A session of the call, Federated management was asked about non-U.S. distribution. Chris Donahue briefly touched money funds, saying, "In terms of the London distribution, we're seeing good positive flows in the Sterling Fund and positive flows in the Money Market Funds that are headquartered in our prime rate group in London."

Deborah Cunningham, Federated's Chief Investment Officer for Money Markets, answered a question about money market supply and new repo counterparties, "We have gone down that path. There has been a huge cutback in what was the traditional supply from traditional dealers in the repo marketplace over the course of the last seven or eight years. So, we begun to look under the rocks to try to find high quality, what I call, non-traditional counterparties.... [I]nsurers generally come to mind, what would they basically be semi-sovereign types of institutions. And we work directly with them the same type of contractual agreements that we would have with the dealer or a bank we put in place with those entities also. And we're finding capacity along those lines. It's slow going. It's one step forward, maybe a half a step back, but we're making progress in it."

When asked about investor acceptance of the new floating rate MMFs, Federated President & CEO Chris Donahue responded, "In terms of discussions with customers, they vary from customer to customer. Many are still biding their time. Some are just coming to the realization that October is real and some have begun to move from prime into a 'govie'. [This] can be viewed as the default option, because the client gets to keep daily liquidity at par and can put off a decision on what really to do with whether they want to go through systems changes etc. What are the spreads going to be? We don't know.... I'm going to have Debbie comment to you on the spreads and what's going on [with] that side. But we are seeing interest by people who are going to stay in a floating institutional fund."

Cunningham added, "The more conversations we have, the more interest people have in [segmenting] their cash.... So [they are] coming up with some estimate of cash that might be needed on an overnight to one week basis, and it has a lot more to do with what would be changing cutoff times than it does actually the floating NAV aspect of it. Because of that floating NAV aspect, the cutoff time to our prime institutional products that will be mark-to-market transaction ... those products will move [from] 5pm to 3pm. So, our government funds will stay at 5:00 o'clock, in addition to our retail funds.... [C]lients that are in need of the potential to have that 5:00 o'clock trading on a regular basis, will have [to] keep it in government... The next liquid segment [will be in a] floating NAV product as long as there's a total return advantage."

On spreads, she explained, "We're basically [seeing a prime institutional] spread of about 15 [bps] over government products right now. If you look at retail prime, we're looking at a spread of about 20 basis points. If we go out to offshore products regards impacted by the regulation, we're looking at something that is probably 25 to 35 basis points over government products right now. Our expectation would be that from a private and a collective fund standpoint, those will be similar types of spreads."

Finally, Cunningham added, "The reason that the institutional prime spread is lower at this point is just the conservative nature with which we're running those particular products with a huge amount in overnight and weekly liquidity to accommodate shareholders when and if they do actually need to leave that product. So, once we lift the calendar from October 14 to October 17, you'll see that spread on the institutional prime go out also. My expectation would be that it doesn't grow nearly as much through October 14 because of that conservative strategy."

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