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The U.​S. Department of the Treasury recently published a report entitled, "A Financial System that Creates Economic Opportunities Asset Management and Insurance," which contains a number of mentions on money market funds. The press release says, "The U.​S. Department of the Treasury today released a report that examines the current regulatory framework for the asset management and insurance industries and makes recommendations to ensure the regulatory framework is aligned with the Administration'​s Core Principles for financial regulation. Treasury'​s evaluation focuses on four key areas: the proper evaluation of systemic risk, ensuring effective regulation and government processes, rationalizing international engagement, and promoting economic growth and informed choices."

The Introduction explains, "The U.​S. asset management industry is a critical component of the nation'​s vibrant financial system.... Through mutual funds and exchange-​traded funds (​ETFs), an individual can assemble a diversified portfolio of investments, providing exposure to a variety of asset classes, at a very low cost.... The asset management industry makes it possible for all Americans to participate in the capital markets. In 2016, U.​S. registered investment companies owned 31% of U.​S. corporate equity, 19% of U.​S. and foreign corporate bonds, 13% of U.​S. Treasury and government agency securities, and 23% of U.​S. municipal securities. Notably, U.​S. money market mutual funds also play a key role in cash management for businesses as well as individuals, managing 22% of U.​S. nonfinancial businesses' short-​term assets."

The report continues, "Although the largest asset managers have had continued growth in assets under management (​AUM), fees charged to investors have decreased. On average, expense ratios for stock and bond funds have declined substantially over the past 20 years. Substantial asset flows are going to fewer asset managers and global competition for AUM has placed downward pressure on margins, with the effect of making it more difficult for smaller asset managers as well as new entrants to the market.... Moreover, implementation of compliance regimes under the current regulatory framework has put continued pressure on margins, has favored the largest asset managers by disproportionately affecting smaller asset managers, and reduced the ability of asset managers to reinvest for innovation and long-​term growth."

It notes that, "The performance of the asset management industry during periods of financial stress demonstrates that the types of industry-​wide '​runs' that occur in the banking industry during a systemic crisis have not materialized in the asset management industry outside of money market mutual funds. One reason for this outcome is structural; fund assets are financed with the capital of shareholders and redemptions constitute market value return of that capital from the fund itself. Mutual funds are owned by many investors, each with their own time horizons for investing, their own risk preferences, and their own investment goals."

The Treasury report tells us, "​The pace of regulatory expansion, reach, and complexity of regulation affecting funds in the asset management industry has been significant over the past nine years. Additional rules and regulations such as the SEC money market mutual fund rule reforms, enhanced fund reporting, liquidity rulemaking, the DOL fiduciary rule, new SRO rules, and requirements related to Dodd-​Frank and other compliance regimes, have resulted in a median increase in compliance costs of an estimated 20% over the past five years."

It also says, "Since 2014, the SEC has adopted numerous additional rules impacting the asset management industry, which provide additional transparency and mitigate potential systemic risks, including: ... Moving institutional prime money market funds to a floating NAV and permitting the imposition of liquidity fees and redemption gates for money market mutual funds.... Where appropriate, the SEC has imposed regulations on mutual funds to address potential risks that funds might face as a result of stressed market conditions, including revised rules for money market mutual funds and new liquidity risk management requirements for other mutual funds."

The piece then discusses "Liquidity Risk Management," saying, "Liquidity can be defined as the ability by a financial market participant to quickly liquidate assets as needed and without a significant impact on price to meet immediate, short-​term financial obligations with cash. Since the financial crisis, regulators have correctly focused on liquidity risk in global financial markets. This concern stems from deep scars left by the liquidity crunch during the financial crisis, in which stressed market conditions led rapidly to liquidity crises at various market participants as concerned counterparties and investors withdrew credit and funding, which precipitated further liquidity-​driven asset sales, or '​fire sales.' An example of how stressed liquidity conditions can present risks is the failure of Bear Stearns in 2008, which stemmed in part from the rapid withdrawal of credit lines and funding by the firm'​s creditors and counterparties as the firm experienced losses due to its exposure to subprime mortgages."

A sidebar on "Money Market Mutual Fund Reform," tells us, "A money market mutual fund (​MMMF) is a type of open-​end investment company that seeks to maintain a stable NAV of $​1 per share. MMMFs invest in short duration, low risk securities such as U.​S Treasuries and high quality commercial paper to provide investors with liquidity and higher returns than can otherwise be found in other cash equivalent investments. The combination of principal stability, liquidity, and competitive yields has made MMMFs popular with retail and institutional investors as a cash management vehicle. MMMFs were first established in the early 1970s as a solution to the Federal Reserve'​s then-​Regulation Q, which at the time prohibited bank demand deposits from paying interest and capped the rate of interest on other types of bank accounts at 5.​25%. MMMFs are typically used by investors seeking short-​term, liquid, and cash-​like investments with the potential for some incremental yield relative to cash held at a bank."

It continues, "During the fall of 2008, many MMMFs experienced large-​scale redemptions and other money market funds saw reduced liquidity for the securities of otherwise credit-​worthy issuers. Due to illiquidity concerns across the market, some MMMFs were not able to satisfy investor redemption requests. In September 2008, the Reserve Primary Fund'​s exposure to Lehman Brothers led the fund to "​break the buck," or fall below the value of $​1 per share. The federal government subsequently intervened in the money market, specifically through the Asset-​Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. The facility was introduced to help MMMFs that held asset-​backed commercial paper (​ABCP) meet investors' demands for redemptions, and to foster liquidity in the ABCP market and money market mutual funds more generally. In addition, in September 2008, Treasury established a Temporary Guarantee Program for Money Market Funds to guarantee the share price of any publicly offered eligible MMMF that applied to and paid a fee for participation in the program. The program was designed to address temporary dislocations in the credit markets. President Bush approved Treasury'​s use of the assets of the Exchange Stabilization Fund to guarantee payments under the program."

The sidebar says, "In 2010, the SEC undertook a series of reforms to Rule 2a-​7, which governs MMMFs. The reforms included: (​1) daily and weekly liquidity minimums of 10% and 30% of total assets respectively, (​2) general liquidity requirements, which require portfolio managers to determine whether they have additional liquidity needs beyond the rule'​s minimum requirements to meet reasonably foreseeable shareholder redemptions, (​3) portfolio maturity limits of weighted average maturity of 60 days or less, and weighted average life of 120 days or less, (​4) stress testing requirements, requiring funds to determine how they would perform in stressed market conditions, (​5) portfolio holdings disclosure requirements for the funds to file a report with the SEC on a monthly basis, and (​6) new Rule 22e-​3, which permits fund boards to suspend redemptions and payment of redemption proceeds."

It adds, "In 2014, the SEC, following the issuance of proposed recommendations by the FSOC, undertook additional reforms, the pillar of which requires '​prime' (​non-​government) institutional MMMFs to float the NAV of their shares instead of letting the funds maintain the stable $​1 NAV per share. In addition, boards of directors were given discretion to lower '​gates' on redemptions, or charge fees of up to 2% if market stress causes a fund'​s weekly liquid assets to fall below 30%. Retail and government MMMFs were exempted from the rule. The compliance date for the floating NAV requirement and liquidity fees and gates was October 14, 2016. By October 31, 2016, prime and tax-​exempt MMMFs experienced a decrease in assets of $​1 trillion since the beginning of the year, and government MMMFs saw an increase in assets of $​968 billion during the same period."

The Treasury report also discusses how, "Registered investment companies are subject to many ongoing disclosure requirements. Mutual funds, which are engaged in a continuous offering, must update their prospectuses and registration statements on an annual basis. Funds other than MMMFs are required to report portfolio holdings on a quarterly basis. The portfolio holdings data will be significantly enhanced by recently adopted Form N-​PORT, which will require reporting on a monthly basis once it becomes effective.... The SEC requires MMMFs to disclose information pursuant to a specially tailored reporting regime. The SEC requires MMMFs to report their portfolio holdings monthly and to publicly disclose monthly holdings on the fund'​s website. MMMFs also have a requirement to report to the SEC within one business day after the occurrence of a material event, such as a default, insolvency of a portfolio security, or imposition of liquidity fees."

Finally, a table on the, "Top 50 Worldwide Mutual Funds, Money Market Funds, and Exchange-​Traded Funds" shows JP Morgan U.​S. Government Money Market Fund as the 9th largest fund and the largest money fund with $​142.​1 billion. Other money funds making the Top 50 include: Fidelity Government Cash Reserves ($​130.​9B) ranked 11th; Vanguard Prime Money Market Fund ($​96.​2B) ranked 19th; `​JP Morgan Liquidity Funds-​U.​S. Dollar Liquidity Fund ($​93.​7B) ranked 22nd; Fidelity Government Money Market Fund ($​85.​3B) ranked 30th; Goldman Sachs Financial Square Government Fund ($​85.​1B) ranked 31st; BlackRock Liquidity Funds Fed Fund ($​79.​3B) ranked 35th; Vanguard Federal Money Market Fund ($​76.​2B) ranked 38th; Dreyfus Government Cash Management Fund ($​67.​3B) ranked 42nd; Federated Government Obligations Fund ($​66.​3B) ranked 45th; Wells Fargo Government Money Market Fund ($​60.​8B) ranked 49th; and, Amundi Cash Corporate ($​59.​7B) ranked 50th.

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Federated released its Q3 earnings late last week and hosted an earnings call on Friday. Their press release, entitled, "Federated Investors, Inc. Reports Third Quarter 2017 Earnings," states that, "Federated ... reported earnings per diluted share (​EPS) of $​0.​56 for Q3 2017, compared to $​0.​54 for the same quarter last year on net income of $​56.​4 million for Q3 2017, compared to $​54.​9 million for Q3 2016. Federated reported YTD 2017 EPS of $​1.​57, compared to $​1.​48 for the same period in 2016 on YTD 2017 net income of $​159.​5 million compared to $​153.​1 million for the same period last year. Federated'​s total managed assets were $​363.​7 billion at Sept. 30, 2017, down $​0.​6 billion from $​364.​3 billion at Sept. 30, 2016 and up $​3.​3 billion or 1 percent from $​360.​4 billion at June 30, 2017. Lower money market assets were partially offset by higher equity and fixed-​income assets at the end of Q3 2017 compared to the end of Q3 2016." The company also posted a new "10-​Q" filing. (​See Seeking Alpha'​s earnings call transcript here.)

Federated says, "Money market assets were $​243.​8 billion at Sept. 30, 2017, down $​4.​6 billion or 2 percent from $​248.​4 billion at Sept. 30, 2016 and up $​1.​7 billion or 1 percent from $​242.​1 billion at June 30, 2017. Money market fund assets were $​177.​9 billion at Sept. 30, 2017, down $​31.​5 billion or 15 percent from $​209.​4 billion at Sept. 30, 2016 and up $​4.​6 billion or 3 percent from $​173.​3 billion at June 30, 2017. Since Sept. 30, 2016, approximately $​21 billion in money market assets have transitioned from Federated funds to Federated separate accounts. Federated'​s money market separate account assets were $​66.​0 billion at Sept. 30, 2017, up $​27.​0 billion or 69 percent from $​39.​0 billion at Sept. 30, 2016 and down $​2.​8 billion or 4 percent from $​68.​8 billion at June 30, 2017."

They state, "Revenue decreased by $​16.​3 million or 6 percent primarily due to lower average money market assets and a decrease in revenue resulting from a change in a customer relationship. The decrease in revenue was partially offset by a decrease in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields (​voluntary yield-​related fee waivers) and an increase in revenue from higher average equity and fixed-​income assets."

Federated'​s release continues, "During Q3 2017, Federated derived 60 percent of its revenue from equity and fixed-​income assets (​43 percent from equity assets and 17 percent from fixed-​income assets) and 40 percent from money market assets. Operating expenses decreased by $​16.​4 million or 8 percent primarily due to a decrease in distribution expenses related to lower average money market fund assets and a change in a customer relationship, partially offset by an increase in distribution expenses related to a decrease in voluntary yield-​related fee waivers. The decrease in operating expenses is also attributable to a decrease in compensation and related expenses resulting from lower incentive compensation."

During the earnings call, President & CEO Christopher Donahue comments, "Money market mutual fund assets increased by about $​5 billion from Q2. Separate account money market assets were down $​3 billion, reflecting tax and other seasonal factors. Our money market mutual fund market share at the end of Q3 was 7.​3%, down slightly from the prior quarter, 7.​4%."

He continues, "Prime money fund assets increased about 5% in Q3. We believe more investors will consider prime based cash management options over time, including our private and collective funds which preserve the use of amortized cost accounting and do not have the burden of a redemption fee and gate provisions. Assets in these newer products were just under $​750 million at quarter end, up from $​636 million in the prior quarter."

During the Q&​A, Donahue responded to a question about fee pressures, saying, "​There are obvious pricing [​impacts] when $​1 trillion moves from prime to govies, so you get some of that. However, a bigger factor for the future will be the spread between the govie funds and the prime funds, which is right now running at about 30 basis points. [​This] is more than double the historic spread that caused prime funds to have all that money in the first place. It is our belief that over time you will start to see people move to that direction, which we are starting to see because it'​s worth it to them."

Cunningham adds, "On a year-​to-​date basis, Prime assets have gained about $​70 billion from an industry standpoint. We have products that are up over 50% in that prime space. Absolutely, the products are competitive from a pricing standpoint. But historically that has always been the case. I don'​t think it is really any different at this point than it has been in prior cycles." Donahue also says, "​The two new [​private] funds we created, that I referenced in my [​earlier] remarks ... are now over $​850 million. We'​re having meetings and customer interest in those funds."

Donahue answered another question about money moving out of Government funds, responding, "One of our top funds for the quarter was our ultra-​short fund, and that was about $​250 million of positive flows. So, you do see some of that. But the other factor that is ... that since [​2008], you'​ve seen a dramatic increase in deposits, deposits in banks at no interest or very, very low interest. At some point, that is going to unwind and return itself to the thrilling days of yesteryear where money funds in general and prime funds in particular have a substantial interest advantage over those. I think you are going to see a return to that.... The banks have their own issues."

Another question asked about brokerage sweep assets shifting to banks. Federated President Ray Hanley responds, "Over the last year or two we have seen [​some more of] that; we still see some modest activity there. But the majority of the brokers that we are working with would be not as big as the type you mentioned. But we have seen over several quarters where brokers have shifted money onto their affiliated bank'​s balance sheets."

Federated'​s new 10-​Q states, "Revenue Concentration by Customer. Approximately 16% of Federated'​s total revenue for both the three- and nine-​month periods ended September 30, 2017, and 15% for both the three- and nine-​month periods ended September 30, 2016, was derived from services provided to one intermediary customer, The Bank of New York Mellon Corporation, including its Pershing subsidiary. Significant negative changes in Federated'​s relationship with this customer could have a material adverse effect on Federated'​s future revenues and, to a lesser extent, net income due to a related reduction in distribution expenses associated with this intermediary."

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The Investment Company Institute released its latest "Money Market Fund Assets" report yesterday. It shows that Prime money market funds dipped in the latest week, but they'​ve risen in 10 out of the past 12, and the 17 out of the past 20 weeks. Prime MMFs have risen by $​37.​2 billion, or 9.​1%, over the past 19 weeks, and $​75.​7 billion, or 20.​5%, year-​to-​date. We review ICI'​s latest money fund asset totals below, and we also summarize the SEC'​s new quarterly "​Private Funds Statistics" update, which includes some totals and information on "​private liquidity funds."

ICI writes, "Total money market fund assets increased by $​3.​61 billion to $​2.​75 trillion for the week ended Wednesday, October 25, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $​4.​61 billion and prime funds decreased by $​1.​38 billion. Tax-​exempt money market funds increased by $​382 million." Total Government MMF assets, which include Treasury funds too, stand at $​2.​174 trillion (​79.​1% of all money funds), while Total Prime MMFs stand at $​445.​4 billion (​16.​2%). Tax Exempt MMFs total $​128.​5 billion, or 4.​7%.

They explain, "Assets of retail money market funds decreased by $​2.​58 billion to $​981.​09 billion. Among retail funds, government money market fund assets decreased by $​2.​35 billion to $​596.​83 billion, prime money market fund assets increased by $​97 million to $​262.​26 billion, and tax-​exempt fund assets decreased by $​329 million to $​122.​00 billion." Retail assets account for over a third of total assets, or 35.​7%, and Government Retail assets make up 60.​9% of all Retail MMFs.

ICI'​s release adds, "Assets of institutional money market funds increased by $​6.​19 billion to $​1.​77 trillion. Among institutional funds, government money market fund assets increased by $​6.​96 billion to $​1.​58 trillion, prime money market fund assets decreased by $​1.​48 billion to $​183.​11 billion, and tax-​exempt fund assets increased by $​711 million to $​6.​52 billion." Institutional assets account for 64.​3% of all MMF assets, with Government Inst assets making up 89.​3% of all Institutional MMFs.

In other news, the SEC released it latest quarterly "Private Funds Statistics" report, which summarizes Form PF statistics and includes some data on "Liquidity Funds." The publication shows a decrease in overall Liquidity fund assets in the latest quarter to $​546 billion. A previous press release, entitled, "SEC Staff Supplements Quarterly Private Funds Statistics" tells us, "The U.​S. Securities and Exchange Commission staff ... published a suite of new data and analyses of private fund statistics and trends. The Private Funds Statistics ... offers investors and other market participants valuable insights by aggregating data reported by private fund advisers on Form ADV and Form PF. New analyses include ... characteristics of private liquidity funds." We review the latest SEC report below.

The document'​s "Introduction" explains, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/​or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2015 through First Calendar Quarter 2017 as reported by Form PF filers." (Note: Crane Data believes these are primarily securities lending reinvestment pools and other short-​term investment funds; these aren'​t the new breed of "​3c-​7" private liquidity funds being marketed by Federated, JPMorgan and a few others.)

The tables in the SEC'​s "Private Funds Statistics: First Calendar Quarter 2017," the most recent data available, now show 115 Liquidity Funds (​including "​Section 3 Liquidity Funds," which are Liquidity Funds from advisors with over $​1 billion total in cash), up 2 funds from the prior quarter and up 15 from a year ago. (​There are 70 Liquidity Funds and 45 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 39 Liquidity Fund advisers and 24 Section 3 Liquidity Fund advisers, or 63 advisers in total, the same number as last quarter (​and seven more than a year ago).

The SEC'​s table on "​Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $​546 billion, down $​20 billion from Q4'​16 and up $​28 billion from a year ago (​Q1'​16). Of this total, $​281 billion is in normal Liquidity Funds while $​265 billion is in Section 3 (​large manager) Liquidity Funds.

A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $​75 billion is held by Private Funds, $​60 billion is held by Unknown Non-​U.​S. Investors, $​51 billion is held by Other, $​18 billion is held by SEC-​Registered Investment Companies, zero is held by Banking/​Thrift Inst, $​9 billion is held by Insurance Companies, $​5 billion is held by Pension Plans, and $​4 billion is held by Non-​U.​S. Individuals. State/​Muni Govt Pension Plans held $​3 billion, while Non-​Profits held $​2 billion.

The tables also show that 78.​0% of Section 3 Liquidity Funds have a liquidation period of one day, $​246 billion of these funds may suspend redemptions, and $​215 billion of these funds may have gates (​out of a total of $​265 billion). The Portfolio Characteristics show that these funds are very close to money market funds. WAMs average a short 31 days (​40 days when weighted by assets), WALs are a short 65 days (​78 days when asset-​weighted), and 7-​Day Gross Yields average about 1.​10% (​0.​80% asset-​weighted). Daily Liquid Assets average about 45% while Weekly Liquid Assets average about 60%. Overall, these portfolios appear shorter with a much heavier Treasury exposure than money market funds in general; half of them (​48.​9%) are fully compliant with Rule 2a-​7.

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Crane Data, which has been tracking money market mutual funds since 2006 and tracking bond funds since 2015, recently officially launched its high-​end bond fund product "​suite," Bond Fund Wisdom. Like its Money Fund Wisdom counterpart, Bond Fund Wisdom includes our Bond Fund Intelligence newsletter, our BFI XLS monthly performance spreadsheet and indexes, and our new Bond Fund Portfolio Holdings data set. Online access to our historical spreadsheets is included and a database query engine is planned for late 2018. We further describe our latest bond fund information service below. We also review our latest Weekly Money Fund Portfolio Holdings, and quote from a recent update on the ultra-​short bond fund marketplace by J.​P. Morgan Securities.

Our new Bond Fund Portfolio Holdings collection, which compiles, cleans and "​tags" lists of securities held by bond mutual funds, includes data on Ultra-​Short and Conservative Ultra-​Short bond funds (​the latest is as of Sept. 30, 2017). We'​re also producing a Short-​Term bond fund holdings file, and we plan to add Intermediate-​Term and other longer-​term categories of bond funds in coming months. The release of our latest "​live" issue file follows several months of "​beta" tests. Our Bond Fund Holdings will be available only to Bond Fund Wisdom subscribers; our Bond Fund Wisdom sells for $​2K a year. (​Please let us know if you'​d like to subscribe, or if you'​d like to see our latest data set.)

Note that many bond mutual funds disclose holdings on a rolling quarterly basis, so, unlike our Money Fund Portfolio Holdings, this monthly file contains the most recent updates (​and may contain holdings files with different dates -- e.​g., many are 9/​30 but some are 8/​31, 7/​31 or earlier). We'​ll be leaving the old holdings for funds in the file until they post, or until we receive, updated holdings. We'​ll also be changing this product substantially once the SEC'​s Form N-​PORT disclosure mandates kick in during the summer of 2018. We'​ve started to map the "​Issuer" field, but our Category and Country "​meta-​tagging" are still a work in progress.

In related news, Crane Data also has begun publishing a Summary of our Weekly Money Fund Portfolio Holdings product. Our weekly holdings track a subset of our monthly Portfolio Holdings collection, and the latest cut (​with data as of Oct. 20) includes Holdings information from over 90 money funds, representing $​1.​516 trillion of the $​2.​943 (​51.​5%) in total money fund assets tracked by Crane Data. (​For our monthly Holdings recap, see our Oct. 11 News, "Oct. Money Fund Portfolio Holdings: Treasuries Rebound, FICC Grows.")

Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (​Repo) totaling $​601.​5 billion, or 39.​7%, Treasury debt totaling $​433.​5 billion or 28.​6%, and Government Agency securities totaling $​319.​1 billion, or 21.​1%. Commercial Paper (​CP) totaled $​47.​2 billion, or 3.​1%, and Certificates of Deposit (​CDs) totaled $​46.​9 billion, or 3.​1%. A total of $​38.​4 billion or 2.​53%, was listed in the Other category (​primarily Time Deposits), and VRDNs accounted for $​28.​9 billion, or 1.​91%.

The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $​433.​5 billion, Federal Home Loan Bank with $​240.​9 billion, BNP Paribas with $​88.​3 billion, Credit Agricole with $​43.​8 billion, Federal Farm Credit Bank with $​41.​7 billion, the Federal Reserve Bank of New York with $​40.​1 billion, Nomura with $​34.​4 billion, Societe Generale with $​33.​9 billion, RBC with $​31.​2 billion, and Wells Fargo with $​30.​7 billion.

The Ten Largest Funds tracked in our Weekly include: JP Morgan US Govt ($​135.​3B), Fidelity Inv MM: Govt Port ($​98.​7B), Goldman Sachs FS Govt ($​87.​4B), BlackRock Lq FedFund ($​80.​5B), Federated Govt Oblg ($​70.​9B), Wells Fargo Govt MMkt ($​70.​3B), Dreyfus Govt Cash Mgmt ($​69.​9B), BlackRock Lq T-​Fund ($​57.​3B), State Street Inst US Govt ($​49.​8B), and Goldman Sachs FS Trs Instruments ($​47.​5B).

Returning to ultra-​short bond funds, a recent J.​P. Morgan "Short Duration Strategy Weekly" featured a "Low duration fund update." The piece explains, "The completion of MMF reform one year ago profoundly changed the structure of money markets for both investors and issuers. As institutional shareholders of MMFs were forced to choose between CNAV government MMF and VNAV prime MMF, there was some question if cash would leave MMF, particularly VNAV funds, and pursue low duration alternatives that offer slightly higher returns."

J.​P. Morgan'​s Alex Roever, Teresa Ho and Ryan Lessing explain, "​The data we have analyzed suggest there has not been a post reform move away from MMFs. Through 9/​30/​17, total taxable MMF outstandings have actually increased by a relatively small amount YTD (​about $​11bn relative to $​2.​5tn), although there has been a very modest rotation (​about $​70bn) from government to prime MMF, prompted by the roughly 30bp net yields advantage of the latter."

According to the update, "While the money fund data doesn'​t support this liquidity shifting hypothesis, mutual fund data show demand has grown for some low duration mutual funds and ETFs during the past year, and our own discussions with several managers of Separately Managed Liquidity Accounts (​SMLAs) indicate demand for this product has also grown. We suspect the noise around MMF reform in recent years prompted liquidity-​focused investors to consider other options, and as a consequence, new cash is being deployed to deposits, low duration funds and SMAs."

It continues, "We believe the beginning of Fed interest rate normalization in late 2015 also contributed to demand for these products. Among institutional investors choosing non-​deposit alternatives, our conversations with many industry participants lead us to suspect SMLAs have attracted more money in recent years than ETFs or mutual funds, helped by SMLAs' greater ability to be customized and what is typically a lower fee structure. For these reasons we think SMLAs are the low investment vehicle of choice for many large corporations."

JPM'​s piece tells us, "Even so, the low duration fund space is large and transparent, and because many of the largest fund managers also manage SMAs with similar low-​duration mandates, these funds shed light on the relative demand for various short duration asset classes. With roughly $​550bn in AUM, low duration funds are now larger than prime MMF ($​441bn)."

It says, "At a high level, low duration funds are typically marketed as "​ultrashort" or "​short term" with the former targeting portfolio duration between 0.​5 and 1.​5 years, and the latter 1.​5 to 3.​5 years. There are both ETF and open-​end forms of each."

Finally, the piece adds, "At this point we should note that while there may be dozens of funds in each category and style, there are significant manager concentrations in the low duration fund space, with a few large funds tending to dominate each. Consequently, the behavior and composition of these funds can sometimes distort summary statistics. For example, funds and ETFs managed by Vanguard account for about 3% of all ultrashort AUM but 37% of short term AUM. As an aside, since a significant percentage of Vanguard'​s clients are non-​institutional, its scale speaks to the concentration of retail demand in some of these fund categories."

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Charles Schwab Investment Management posted a notice, "Announcing Lower Minimums and Expenses for Schwab Money Funds," earlier this month that reveals a series of changes to the advisor'​s money market funds. It says, "Effective October 3, 2017, initial investment minimums and Net Operating Expense Ratios (​OERs) will be reduced for all Schwab Purchased Money Funds. Certain money fund share classes will also be closed or renamed so that "Investor Shares" refers to share classes with no initial investment minimum and "Ultra Shares" refers to share classes with a $​1 million initial investment minimum, simplifying the Schwab Money Funds product line up." (​See our Oct. 23 Link of the Day, "Schwab Earnings Talk MMFs," and see a Schwab filing here.)

The piece explains, "On or about November 17, 2017, shareholders in Schwab Value Advantage Money Fund – Select Shares and Premier Shares will be consolidated into Schwab Value Advantage Money Fund - Ultra Shares. Shareholders in Schwab Municipal Money Fund – Select Shares will be consolidated into Schwab Municipal Money Fund – Ultra Shares (​formerly, Premier Shares). No action is required by existing shareholders."

Changes to the "Schwab Purchased Money Funds Line Up, which took effect October 3, 2017, include: Schwab Value Advantage Money Fund - Investor Shares (​SWVXX) now has no minimum investment and an expense ratio of 0.​35%; Schwab Value Advantage Money Fund - Ultra-​Shares (​SNAXX) now has a minimum initial investment of $​1 million and an expense ratio of 0.​19%; Schwab Government Money Fund - Investor Shares (​SNVXX) now has no minimum initial investment and an expense ratio of 0.​35%; and, Schwab Treasury Obligations Money Fund - Investor Shares (​SNOXX) now has no minimum initial investment and an expense ratio of 0.​35%.

Additional changes are as follows: Schwab Municipal Money Fund - Investor Shares (​SWTXX) now has no minimum initial investment and an expense ratio of 0.​35%; Schwab Municipal Money Fund - Ultra Shares (​SWOXX) now has a minimum initial investment of $​1 million and an expense ratio of 0.​19%; Schwab AMT Tax-​Free Money Fund - Investor Shares (​SWWXX) has no minimum initial investment and an expense ratio of 0.​35%; Schwab CA Municipal Money Fund - Investor Shares (​SWKXX) now has no minimum initial investment and an expense ratio of 0.​35%; Schwab NY Municipal Money Fund - Investor Shares (​SWYXX) has no minimum initial investment and an expense ratio of 0.​35%; and, Variable Share Price Money Fund - Ultra Shares (​SVUXX) now has a minimum initial investment of $​1 million and an expense ratio of 0.​19%.

The update features a few "Frequently asked questions," including: "Do any of these changes affect how Schwab Money Funds are managed?" Schwab answers, "Our day to day money fund portfolio management activities and investment philosophies have not changed. The focus continues to be stability of capital, liquidity and income."

The second question is: "Why are the minimums and net expense ratios changing?" They tell us, "In order to provide more Schwab clients with access to a broad range of taxable and tax-​exempt purchased money funds that offer a convenient way to access potentially higher yields on cash."

Finally, the Q&​A asks, "Where can I find latest yields?" It answers, "Latest yields and additional fund information such as fund profiles, portfolio holdings, and regulatory documents can be found at www.​schwabfunds.​com. To research a specific fund, enter the symbol into the search box or use the product finder tool."

In other news, Federated Investors has begun liquidating a number of its Municipal money market funds. A Prospectus Supplement filing for Money Market Obligations Trust and Federated Municipal Trust, Federated Connecticut, Florida, Michigan, Minnesota, New Jersey, North Carolina, and Ohio Municipal Cash Trusts says, "On July 31, 2017, the Board of Trustees (​the "​Board") of Money Market Obligations Trust approved a Plan of Liquidation for above named funds (​the "​Funds") pursuant to which the Funds will be liquidated on or about October 27, 2017 (​the "​Liquidation" or the "​Liquidation Date"). In approving the Liquidation, the Board determined that the liquidations of the Funds is in the best interests of each of the Funds and their respective shareholders."

It explains, "Accordingly, the Adviser will begin positioning the portfolios of the Funds for liquidation, which may cause the Funds to deviate from their stated investment objectives and strategies. It is anticipated that each Fund'​s portfolio will be positioned into cash on or some time prior to the Liquidation Date. Effective as of the close of business on September 29, 2017, the Funds will be closed to new investors and closed to investments by existing shareholders on October 18, 2017."

It adds, "​Any shares outstanding at the close of business on the Liquidation Date will be automatically redeemed.... Shareholders of each Fund, with the exception of Federated Municipal Trust, may also exchange their shares of the Funds for shares of any Federated fund or share class that does not have a stated sales charge or contingent deferred sales charge.... Shareholders of Federated Municipal Trust may exchange their shares for shares of Federated Capital Reserves Fund or Federated Government Reserves Fund, if the shareholder meets the relevant eligibility criteria and investment minimums." (​See too our August MFI article, "Managers Flee from State Tax Exempt Money Funds.")

​

We finally had a chance to put our notes together from last week'​s Association for Financial Professionals Annual Conference in San Diego. While most of the institutional money fund industry attended, there were only a handful of sessions actually addressing cash investing. Among the hot topics discussed by money market professionals and corporate treasurers were the gradual return to Prime money funds, a shift away from bank deposits into market-​based instruments, and the possibility of using alternative cash investments. We briefly review three of the sessions we attended below.

The first segment, "Disruption: Turning Change into Opportunity in Liquidity Management Practices" featured Jason Granet from Goldman Sachs Asset Management, Geoffrey Nolan of Qualcomm, and Rene Bustamante of FedEx Corporation. Granet commented, "I think the single biggest thing [​is] how quickly things can change on this front. I joke about checking my phone because there have been so many situations, [​where you] wake up in the morning and you see something on your device, and ... scramble to do different things." He discussed a series of events impacting the money markets, and added, "We are making sure that we are in touch with clients ... to connect on the issues that matter."

Nolan told us, "Disruptions are going to continue to happen. What we have done to help us manage through these turbulent times is we have developed an investment framework in which we think ... 2-​5 years out.... The key is that portfolio design, whether asset management or corporate, is part of the process.... Another key to that for the investment team you have to socialize the results up the chain of command. That is really important. What we don'​t want to have happen is bad news, something goes sideways in the markets, the portfolio takes a hit, and then the treasurer sees what those results are going to be. I call that a career limiting maneuver. You want transparency: [​when] things go bad, [​you want to know] what it'​s going to look like. If I can be invisible to the organization, then I am doing my job."

Bustamente said, "​In the 24 years I have been with [​FedEx], I have seen just about everything.... I will tell you, the climate right now is one that we have to continue to monitor.... Money never sleeps. Money is always moving. A disruption can create both positives or negatives. We have to plan for both.... No matter what happens, no matter what the world throws at you, you are ready to execute a plan. That is the one thing I would say that has to become part of your overall culture.... We have to develop good people that we can just pick up the phone and call.... Principle number one is to always prepare for the worst."

Another session, "When Cash Comes at a Cost: Efficient Methods for Managing Global Cash in Today'​s Regulatory Regime," was run by Beccy Milchem of BlackRock. It also included Qualcomm'​s Nolan, as well as Jamie Cortas of Dell. Milchem said, "In this current environment, every decision you make can have an impact and comes with a cost." She asked panelists to comment on their investment policies, and about "tips on how you can invest your cash more opportunistically."

Cortas commented, "​I get to be a recipient of the cash that goes into that portfolio. This is what drives your investment policy ... it all starts with how much ... can you say is extra liquidity and how much can I earn incremental income? That helps to drive your policy.... You can do something more interesting with it than if it'​s cash to pay the electric bill or payroll. You have to be very cognizant about where you are putting that money."

Milchem asked about technology, which was also a hot topic at AFP. Nolan responded, "​Given a portfolio of our size, identifying and managing that risk is an important topic. And it is something we spend an inordinate amount of time on every day and every week. You cannot do it on a spreadsheet.... Without the technology, we could not keep on top of it. There are different ways to use the technology, and we identify and define risk, we measure it, and then we manage it.... In our portfolio, we'​re fortunate to have an analytics system which helps us identify those risks. This isn'​t a paid advertisement for BlackRock but we do use BlackRock'​s analytic systems.... Over and over again, whether it is Asia crisis or financial crisis, you look at how the portfolio reacts. If you are okay with that way it reacts, fantastic, move on. Check it a couple of weeks later. If you don'​t like it, then you have to tweak the portfolio."

Cortas added, "​I think for anyone that'​s been around the last five to ten years, if you think about when the European crisis was happening, or even the credit crisis, maybe you get that call from the treasurer or CFO, [​asking] '​What was in the money market fund? Do you have exposure?' I remember looking through PDFs ... trying to somehow consolidate them into something that was legible. The last 5-​10 years have [​seen a lot of developments] in the money market world. As a result of, for better or worse, money market reform, [​we'​ve seen] standardization [​and] reporting.... It makes life a lot easier ... having a system so I can look across and see all of my exposures."

Milchem told the AFP audience, "​We talked earlier about the effects US money market fund reform, and I'​m sure many of the audience are aware that we will be embarking on reforming in Europe within the next year. On a very high level in Europe, what we have is two structures which are very similar to the 2a-​7 reforms. We have stable government money market funds, and we will have short term private funds. Within Europe, we do have this third structure, ... this hybrid structure called a low volatility NAV, which is LVNAV for short.... There was a lot of debate within the industry about what that threshold should be and I think the asset management industry community is fairly comfortable with that 20-​basis point threshold."

Nolan also commented, "Regulations in the U.​S. are really putting a lot of constraints on the banks ... so, they really just don'​t want your money." But Asian banks, he added, have an "​unbelievable demand for dollars."

The final session, "The Return of Returns: Transforming Your Investment Strategy for a Nonzero-​Interest-​Rate World," was led by Garrett Sloan of Wells Fargo Securities and included Dana Laidhold of The Carlyle Group and Zeke Loretto of eBay. Sloan commented, "​For you as corporate cash investors ... one of the things that really characterized the market 5 to 7 years ago was ... banks started to really outperform market products. Every single time the Federal Reserve raises rates and we get further away from zero, that dynamic starts to shift and we are back to market based instruments. Short term interest rates have come up from zero, which certainly begs the question '​What else can I be doing with my money?' Are there other options other than sitting in these bank products."

Laidhold commented, "[​Following] the crisis, the concept of return fell out of the marketplace. So it really didn'​t behoove us to be investing our cash.... The infrastructure over time had gotten stale and lagged. Earnings credit was the best return on our cash, where we stayed for a long period of time. Then the market pushed us to reevaluate.... [​We embarked on an] 18-​month journey on platforms and infrastructure, focusing on building the capabilities to have alternatives to cash, being ready for when the first Fed funds hike would occur."

When asked, "Did you get completely out of prime?" She answered, "We did for a period of time and then we got back in.... [​We] got out [​and] we went back in 6 to 8 months later. We were very focused on which fund we were using, the size, the liquidity, the assets that were being held, etc. We didn'​t just jump back into the same products we were using before."

Finally, Loretto explained, "​In 2009, eBay divested an asset, Skype, and with these cash proceeds that took our cash balances north of $​5 billion. Prior to that we had outsourced 100% of our cash management.... The decision was made internally that with this amount of cash, we should begin to develop the in-​house expertise to manage at least a portion of this.... Over time we were managing 100% of our cash in house. At this point, the thing that distinguishes eBay is that we manage that across 3 portfolios, 2 liquidity portfolios and 1 short duration. Our guiding principles are capital preservation, liquidity and earning a respectable risk vs. return. That framework goes into how we buy each security and how we construct a portfolio."

​

The U.​S. Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary last week. It shows that total money fund assets were up $​46.​2 billion in September to $​3.​034 trillion, with Prime funds increasing for the 9th month in a row. Prime MMFs gained $​22.​8 billion (​after gaining $​16.​8 billion in August, $​9.​5 billion in July, and $​4.​0 billion in June) to $​664.​5 billion. Government money funds increased by $​24.​5 billion, while Tax Exempt MMFs fell by $​1.​0 billion. Gross yields were flat for Prime MMFs, but they increased for Tax Exempt MMFs. 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. We review their latest numbers below.

Overall assets increased by $​46.​2 billion in September, $​71.​2 billion in August, and $​19.​9 billion in July. They decreased by $​23.​7 in June, increased $​3.​8 billion in May, and decreased $​12.​7 billion in April. Over the past 12 months through 9/​30/​17, total MMF assets have increased by $​89.​6 billion, or 3.​0%. (​Note that the SEC'​s series includes some private and internal money funds not reported to ICI or others, but Crane Data has added many of these to our collections.)

Of the $​3.​034 trillion in assets, $​664.​5 billion was in Prime funds, which increased by $​22.​8 billion in September. Prime MMFs increased by $​16.​8 billion in August, $​9.​5 billion in July, $​4.​0 billion in June, $​2.​5 billion in May, $​9.​8 billion in April, $​12.​1 billion in March, $​24.​9 billion in February, and $​11.​7 billion in Jan. Prime funds represented 21.​9% of total assets at the end of September. They'​ve increased by $​114.​1 billion, or 20.​7%, YTD. But they'​ve declined by $​75.​4 billion the past 12 months, or -​10.​2%, and by $​1.​084 trillion over the past 2 years.

Government & Treasury funds totaled $​2.​238 billion, or 73.​8% of assets,, up $​24.​5 billion in September, their third monthly increase in a row and fourth this year. They were up $​56.​8 billion in August and $​8.​0 billion in July, down $​26.​9 in June, up $​0.​4 billion in May, and down $​19.​9 billion in April. Govt & Treas MMFs are up $​168.​6 billion over 12 months (​81.​5%). Tax Exempt Funds decreased $​1.​0B to $​132.​0 billion, or 4.​4% of all assets. The number of money funds is 406, the same number as last month but down 73 from 9/​30/​16.

Yields were relatively flat in September for Taxable MMFs. The Weighted Average Gross 7-​Day Yield for Prime Funds on September 30 was 1.​28%, unchanged from the previous month but more than double the 0.​63% of September 2016. Gross yields increased to 1.​08% for Government/​Treasury funds, up 0.​01% from the previous month, up 0.​66% since September 2016. Tax Exempt Weighted Average Gross Yields increased by 0.​10% in September to 0.​96%; they'​ve increased by 15 bps since 9/​30/​16.

The Weighted Average Net Prime Yield was 1.​07%, up 0.​01% from the previous month and up 0.​67% since 9/​30/​16. The Weighted Average Prime Expense Ratio was 0.​21% in September (​down one basis point from the previous month). Prime expense ratios are down by two bps over the past year. (​Note: These averages are asset-​weighted.)

WALs and WAMs were mostly down in September, down across all categories (​except WAMs for Govt MMFs). The average Weighted Average Life, or WAL, was 61.​9 days (​down 2.​1 days from last month) for Prime funds, 85.​9 days (​down 0.​8 days) for Government/​Treasury funds, and 28.​2 days (​down 0.​9 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 27.​7 days (​down 2.​9 days from the previous month) for Prime funds, 32.​1 days (​up 0.​6 days) for Govt/​Treasury funds, and 25.​7 days (​down 0.​5 days) for Tax-​Exempt funds. Total Daily Liquidity for Prime funds was 35.​4% in September (​up 3.​9% from previous month). Total Weekly Liquidity was 51.​5% (​up 2.​4%) for Prime MMFs.

In the SEC'​s "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $​84.​7 billion, followed by the U.​S. with $​55.​8 billion, and France with $​54.​4 billion, Japan with $​51.​6B, then Sweden ($​49.​1B), Australia/​New Zealand ($​41.​3B), Germany ($​29.​8) and the UK ($​29.​7). The Netherlands ($​21.​3B) and Switzerland ($​15.​0B) rounded out the top 10.

The gainers among Prime MMF bank related securities for the month included: Canada (​up $​7.​8B), Sweden (​up $​5.​7B), the UK (​up $​3.​7B), Japan (​up $​3.​1B), Australia/​New Zealand (​up $​2.​6B), Germany (​up $​1.​4B), Singapore (​up $​1.​1B), Switzerland (​up $​315M), and China (​up $​155M). The biggest drops came from France (​down $​10.​5B), The Netherlands(​down $​10.​2B), Belgium (​down $​5.​6B), the US (​down $​5.​6B), Other (​down $​594M), Norway (​down $​360M), and Spain (​down $​51M). For Prime MMF Holdings of Bank-​Related Securities by Major Region, Europe had $​219.​8B (​down $​16.​4B from last month), while the Eurozone subset had $​112.​4 billion (​down $​25.​2B). The Americas had $​141.​0 billion (​up $​2.​1B), while Asian and Pacific had $​107.​7 billion (​up from $​7.​3B).

Of the $​660.​4 billion in Prime MMF Portfolios as of Sept. 30, $​263.​1B (​39.​8%) was in CDs (​down from $​271.​3B), $​150.​2B (​22.​7%) was in Government securities (​including direct and repo), up from $​117.​6B, $​93.​9B (​14.​2%) was held in Non-​Financial CP and Other Short Term Securities (​up from $​92.​3B), $​115.​3B (​17.​4%) was in Financial Company CP (​down from $​118.​8B), and $​38.​1B (​5.​7%) was in ABCP (​down from $​41.​2B).

The Proportion of Non-​Government Securities in All Taxable Funds was 17.​9% at month-​end, down from 18.​5% the previous month. All MMF Repo with Federal Reserve increased to $​298.​5B in September from $​204.​1B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 36.​1% were in maturities of 60 days and over (​down from 38.​6%), while 9.​3% were in maturities of 180 days and over (​down from 10.​1%).

​

Two new publications discuss the possibility of the "​repatriation" of offshore corporate profits, its mechanics and the potential impact on the cash and money fund markets. The first, a "Liquid Insight" published by Bank of America Merrill Lynch, is entitled, "Repatriation Could Result in Modest USD Funding Pressure," while the second, written by Capital Advisors Group, is entitled, "The Trump Tax Plan and Its Implications for Cash Portfolios." BofAML'​s Mark Cabana explains, "​As Washington has increasingly focused on tax reform, clients have asked questions about how repatriation might impact the front end of the US rates curve. While there are still many unknown elements of the plan, we believe repatriation could provide modest upward USD funding pressure for foreign banks but likely leave the overall stock of commercial paper outstanding little changed." We excerpt from both of these updates below.

Bank of America Merrill Lynch'​s piece, which cites some Crane Data statistics on "​offshore" money market fund holdings, continues, "The modest bank funding pressure could come as corporates trim unsecured bank lending, both outright and through offshore money market mutual funds (​MMF). This could modestly widen short-​dated FRA-​OIS spreads by 2-​6bp. It could also contribute to more negative levels of the EURUSD and JPYUSD cross currency basis given EU and Japanese financials' exposure to offshore prime MMF.... A potential repatriation next year could add to existing expected funding pressures as the Treasury boosts its cash balance and the Fed'​s balance-​sheet unwinds."

They say, "It is unclear how long after any tax reform legislation would be passed that the one-​time levy might take effect and when offshore cash might come back onshore. During the last repatriation episode in 2005, there was a 1Y window in which foreign profits could be repatriated, which led to $​312bn being brought back onshore. We currently assume that most of the offshore earnings would be brought back relatively soon after the mandatory tax, given there is limited incentive to keep any excess funds offshore. Although the prospects for broad tax reform are uncertain, we continue to believe that international tax reform resulting in some form of repatriation has a reasonable chance of success."

Cabana states, "​Estimates for the total size of US corporate offshore holdings generally range from $​1.​5-​3tn ... leaving at least $​1.​5tn offshore that could potentially be repatriated.... In our view, any near-​term offshore repatriation should serve as a tailwind to the US dollar and also tighten corporate credit spreads while also leading to a modest amount of upward funding pressure. We do not expect any offshore USD repatriation to result in a meaningful decline of corporate supply at the very front-​end of the curve but could see greater supply constrains further out on the corporate credit curve."

He tells us, "While corporate credit supply is slated to contract with repatriation, we think the overall impact on the commercial paper market will likely be limited. CP programs serve as cheap sources of funding where issuers generally aim to maintain stable program sizes due to their high turnover and investors prefer to roll maturities with the same issuer. During the 2005 repatriation, the amount of commercial paper outstanding increased as non-​financial CP outstanding rose $​10bn, while financial CP grew $​57bn."

The Merrill piece adds, "Repatriation could potentially lead to upward pressure on bank funding costs, primarily through reduced holdings in ST investments, including deposits, CP, or offshore prime MMF holdings. We expect any offshore prime MMF investments to be shifted into government MMF as they are brought back onshore to avoid any gate or fee provisions in the US. Offshore prime USD money funds hold $​313bn in assets with $​242bn in CP (​mostly financial), CD, and time deposits, according to Crane.... Eurozone, Japanese, and Canadian bank issuance comprise the largest portion of offshore USD MMF holdings at $​57, $​32, and $​31bn, respectively (​Chart of the Day). The largest funding impact would likely be seen in the most exposed foreign banks, in our view."

Finally, they say, "The withdrawal of offshore funding could result in funding pressures similar to, but on a much smaller scale than, what occurred with 2a-​7 MMF reform last year. Between end-​May and October 2016, prime money market mutual fund CP and CD holdings declined $​485bn while 3M LIBOR-​OIS spreads widened 15bp.... Assuming a similar relationship applied to offshore USD MMF withdrawals or to offshore CP/​CD redemptions, we think 3M LIBOR-​OIS spreads could widen 2-​6bp in repatriation.... We expect impacted foreign financial institutions to eventually find other sources of USD funding and thus lead to a relatively short-​lived increase in funding strains, similar to what was seen with 2a-​7 MMF reform."

Capital Advisors' new paper, written by Lance Pan, tells us, "​The Republican bill represents a starting point for tax and budget negotiations. While details are lacking, the current plan offers some interesting angles for market participants to think about their liquidity investment strategies. We highlighted parts of the bill relevant to corporate cash investors and their potential impact on issuers and investors in the short-​term debt market. We advise our readers to be patient, stay liquid and think strategically during this waiting period."

They explain, "Since the tax framework touches many important subjects that impact the corporate treasury management community, we want to keep the dialog going by addressing the plan'​s potential impact on market liquidity and treasury investment strategies. Although the plan represents an early blueprint of the finished legislation, understanding the key issues at stake may assist our readers with their internal discussions and perhaps advanced planning."

Regarding "Repatriation of offshore cash at a reduced tax rate," Pan says, "Institutional cash investors are keenly interested in the movement of the stockpiles of cash and liquid investments stashed offshore by foreign subsidiaries of US companies. The tax plan proposes a territorial system to tax US corporations only on domestic earnings. It offers partial exemption on foreign earnings and full exemption on dividends from foreign subsidiaries. Accumulated untaxed earnings offshore will be treated as already repatriated and subject at an unspecified, presumably low, tax rate. The repatriation tax will be spread over several years."

He adds, "The tax plan did not specify the repatriation rate, the scope, or the timeframe it will be applied, but it is apparent that the "​repatriation tax" will be mandatory on all accumulated earnings and that it will be lower than the 20% domestic rate. An earlier Republican tax plan suggested 10% for cash repatriation. Companies that hold significant cash positions offshore, including pharmaceutical and technology companies, likely already have strategies in anticipation of these changes. Such strategies may include keeping their offshore portfolios liquid to bring it onshore for capital expenditures, equity and bond buybacks, mergers and acquisitions and other planned activities."

Finally, the CAG piece comments, "Together with repatriation of offshore cash, the implication of this tax provision is that the market for offshore investments will be reduced meaningfully as cash moves back onshore and loopholes are closed. Providers of offshore investments, such as non-​US money market funds and banks borrowing Eurodollar deposits, should be prepared for this wave of asset migration."

​

The Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (​with data as of Sept. 30, 2017) Monday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (​WAM and WAL) for Prime and Government money market funds. The MMF Holdings release says, "The Investment Company Institute (​ICI) reports that, as of the final Friday in September, prime money market funds held 30.​0 percent of their portfolios in daily liquid assets and 45.​0 percent in weekly liquid assets, while government money market funds held 57.​6 percent of their portfolios in daily liquid assets and 75.​4 percent in weekly liquid assets." Prime DLA increased from 27.​3% last month and Prime WLA increased from 43.​1% last month. We review ICI'​s latest Holdings update, and a new update from Fitch on European MMF reforms, below. (Note: Thanks to those who stopped by to visit us at AFP in San Diego! It was great to see all our money fund friends and was a great time in SD.... See you next year in Chicago!)

ICI explains, "At the end of September, prime funds had a weighted average maturity (​WAM) of 30 days and a weighted average life (​WAL) of 71 days. Average WAMs and WALs are asset-​weighted. Government money market funds had a WAM of 32 days and a WAL of 86 days." Prime WAMs were down three days from the prior month, and WALs were down two days. Govt WAMs increased by 1 day and Govt WALs decreased by 1 day from last month.

Regarding Holdings By Region of Issuer, ICI'​s release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $​170.​19 billion in August to $​177.​68 billion in September. Government money market funds’ holdings attributable to the Americas rose from $​1,​687.​99 billion in August to $​1,​781.​12 billion in September.” (​See too Crane Data'​s Oct. 11 News, "Oct. Money Fund Portfolio Holdings: Treasuries Rebound, FICC Grows.")

The Prime Money Market Funds by Region of Issuer table shows Americas-​related holdings at $​177.​7 billion, or 40.​4%; Asia and Pacific at $​91.​4 billion, or 20.​8%; Europe at $​164.​4 billion, or 37.​4%; and, Other (​including Supranational) at $​6.​3 billion, or 1.​4%. The Government Money Market Funds by Region of Issuer table shows Americas at $​1.​781 trillion, or 82.​9%; Asia and Pacific at $​95.​3 billion, or 4.​4%; and Europe at $​269.​3 billion, or 12.​5%.

In other news, Fitch Ratings recently published, "Reform Gate Risk Low for European Funds." It tells us, "Fitch considers the probability of a mandatory MMF reform-​driven liquidity fee or redemption gate being imposed as low, barring any systemic shock or idiosyncratic credit event. There have been no incidents of weekly liquidity dropping below 10% in the Fitch-​rated CNAV MMF universe over the last five years, reflecting funds' adherence to Fitch'​s minimum liquidity criteria standards and successful outflow management through prudent liquidity positioning."

Fitch explains, "The 10% one-​week liquidity level is significant, as this is the point at which the reforms require a fund'​s board of directors to apply a redemption gate or liquidity fee. Importantly, even in this mandatory scenario, the board retains discretion over whether a fee or a gate serves investors' interests best. In the period reviewed, MMF managers were largely able to maintain regulatory and rating agency liquidity guidelines by maintaining liquidity buffers and anticipating large redemptions. Fitch recognises, however, that credit conditions were relatively benign in the period reviewed."

They write, "CNAV MMF with less than 2 billion (​EUR, GBP or USD) in AUM had more than twice as many instances of dropping below the reform'​s weekly liquidity (​discretionary) threshold for LVNAV fund types.... Smaller funds were more sensitive to redemptions, causing those rated '​AAAmmf' to hold 5%- 7% more weekly liquidity than their larger equivalently-​rated counterparts to manage liquidity risk, according to the same study."

The paper tells us, "Some investors are sensitive to fees and gates according to a recent Fitch survey, where it was cited as the area of greatest concern. Therefore, LVNAV managers are likely to hold much higher levels of weekly liquidity to position the portfolio against large unanticipated redemptions. Some fund providers and investors may also focus on short-​term VNAV funds as their preferred post-​reform option, as these funds will not feature reform-​driven gates and fees (​but will be subject to the standard extraordinary liquidity management measures authorised under the UCITS regime)."

Fitch adds, "The July 2017 EU MMF reforms codified how and when redemption gates and liquidity fees should be applied for Public debt CNAV and LVNAV funds. If weekly liquidity falls below 30% and there is a simultaneous net outflow of over 10%, a fund'​s Board of Directors is required to consider applying a discretionary gate or fee; if weekly liquidity falls below 10%, the Board must apply a gate or fee. As a result, a lot of emphasis is put on the role of Fund Board of Directors and their independence, as they ultimately make the decision to take action or not -- in the best interest of investors."

Finally, they comment, "We do not expect to see a significant shift between fund types in Europe, as was witnessed in the US following its reforms.... In Europe, four important factors mitigate the likelihood of an equivalent shift: 1. The presence of reform-​related fees and gates in both European government only and LVNAV funds.... 2. The introduction of the LVNAV fund category can be viewed as embodying characteristics seen within the equivalent US Government and Prime fund types; specifically, the flexibility to invest in non-​government securities, but permitted to maintain a stable asset value. Early indications suggest investors view this fund type as their preferred option in Europe post-​reform. 3. Liquidity fees, redemption gates and a host of other liquidity control measures already exist in European mutual fund regulations and fund prospectuses, including in MMFs.... 4. We estimate only a low probability of gates and fees being triggered based on historic data. Factoring in a likely change in fund behaviour post-​reform to increase liquidity reduces that probability further."

​

This month, Bond Fund Intelligence recaps a session from our 5th Annual European Money Fund Symposium, which took place late last month in Paris, France. The segment, "Ultra-​Short Bond Funds and Separate Accounts," featured Neil Hutchison from J.​P. Morgan Asset Management, Rob Sabatino from UBS Asset Management, and Thierry Darmon from Amundi. The three discussed positioning in the fund space just beyond money funds, regulations, and the popularity of bond funds in Europe. (Note: This "​profile" is reprinted from the September issue of BFI. Contact us if you'​d like to see the full issue, or if you'​d like to see our new Bond Fund Portfolio Holdings product.)

Crane: Tell us about the positioning of your offerings. Where is the sweet spot? Hutchison: We share a lot of the same best practices [​as] Global Liquidity. So we still have a focus on principal preservation. We still have a '​buy list' approach. But we sort of go longer and lower with respect to duration and credit risk as well. So, the sweet spot for us [​is] 20 to 40 bps over liquidity funds ... with minimal volatility. Strategies such as a half-​year duration, 20% to maybe 30% triple-​B investments, and a step out further in terms of final maturities, out to 3 years, is where we need to go to get these type of returns. So I suppose the key takeaway here ... is we go to 3 years as opposed to 2 years, which means we don'​t qualify for cash or cash equivalency.

Sabatino: In our U.​S. business ... it'​s mostly SMAs [​separately managed accounts] once you leave money market space.... For ultra short and short duration clients, the trend we'​ve seen for a number of years, with the low interest rate environment, has been lower credit quality and longer duration.... Obviously, in USD [​we'​re] concerned about rising interest rates. But given flatness of the curve, and the ability to use floating rate notes, we continue to see the sweet spot being higher yields, more credit, longer duration.

In terms of European strategy across multiple currencies, we do have standard money market funds in addition to our CNAV short term money market funds. [​Editor'​s note: Europe has both "​short-​term" money funds, which are similar to U.​S. MMFs, and "​standard" MMFs, which are like ultra-​short bond funds.] We position the standard funds more in that "​ultra short, enhanced cash" space for those clients that want to take a little bit more risk both in duration and credit. Then we do have short-​term corporate, Luxembourg-​domiciled funds. Clearly, we'​ve had more traction with SMAs with our U.​S. clients, some being multinational with trapped cash offshore.

Crane: Are ultra shorts more popular in euros because of the negative yields? Darmon: Yes, probably the negative yields have been a trigger of a rise in not only the standard MMFs compared with Short Term, but also for the ultra-​short term bonds.... I think in Europe there is a historical reason for this attraction of the Euro-​denominated for short term bond funds. French asset managers have developed these ... products even before the rates turned to negative. There is a [​diversity] of offerings in terms of expertise and assets in this space ... that enabled these Euro denominated products to [​grow faster] than those in GBP [​sterling] and USD. For the Euro denominated product, we have been helped by this negative environment.... Even if the rate in the Euro zone should come back to positive territory, the short term bond category in Europe should remain a [​robust] asset class.

Crane: Do investors in ultra short funds use them in tandem with MMFs? Sabatino: Many of our conversations start with cash. We'​ve had clients that we'​ve had in money market funds for a number of years that have decided they don'​t need to keep as much cash. So the first initial conversation is typically about cash strategy, informing them what the options are: money market funds, separate accounts, ultra shorts, etc. [​T]​his idea of bucketing your cash is very common. Your longest-​term would be strategic cash, reserves that you might need in 3 to 6 months, then obviously your operating cash being your most liquid.... We'​ve even seen some multinationals ... take sliver of their overall treasury portfolio and put it into something higher yielding. They'​re still looking to stay in very short duration space, but going into ultra short high yield or emerging markets.... It'​s definitely a suite of products that we look to offer our clients.

Crane: Is there standardization? Hutchison: Clearly within the AAA [​money fund] world there'​s a lot of similarities within the funds.... But once you step out from that, it'​s a real mixed bag.... Literally, it could be liquidity funds plus a little bit. Some funds could be rated; some could have derivative overlays; some could utilize ABS. Others have almost home biases as well. If you look at French funds, you have overweight to a certain French corporates, A3, P3 or nonrated. The same could be said for Spanish and Italian short duration offerings. You have different credits in there that arguably we wouldn'​t be buying in our strategy. So there is a huge range, and trying to pull that into some form of composite approach is very difficult, especially in Europe. It'​s probably a little easier in the sterling currency to be fair. A lot of the '​step-​out' funds or managed reserve type solutions in sterling. There may be some differences but they'​re less broad than European equivalents.

Sabatino: The further away from a highly regulated product you get, there'​s more deviation.... Once you get into the ultra-​short space, and especially the SMAs, it gets more difficult. But as the space evolves, you could potentially see more standardization. But [​in many case] they want products that are different.

Crane: Talk about naming, and what restricts how those funds can invest in? Darmon: At Amundi, our range is quite simple. In terms of naming, we have our money market fund range with a flagship name for the investment horizon, for example our "​3M" is rated by Fitch standard money market fund.... Our safest short term bond fund named Amundi 6M obviously has investment horizon recommended of 6 months and maximum maturity is 3 years. You will find our internal limits regarding the maturity, the credit ratings, the liquidity [​in] the commercial material we provide the clients.

In the prospectus, we give the general way we manage the fund.... When pitching this product, we precisely give the information of the internal limits of the products we sell. We have of course piles of information in the prospectus but the precise info on the investment process and risk process we follow within the portfolio management is the commercial materials and through regular reporting we have with the clients.

Hutchison: That'​s part of the reason we call these funds Managed Reserve funds. There isn'​t any reference to '​cash.' Basically, we not looking to mis-​sell. These are purely for strategic cash purposes. That'​s the way we set up these funds, so it'​s very important that we make this distinction. That'​s part of the reason we say our universe is 1 to 3 years, as opposed to 1 to 2 years.... It really comes down to how we sell this to our client base. We'​re not selling it as a higher yielding alternative to the AAA-​rated money market funds that are effectively there for operational cash reasons. This is purely because some of the SMA business is to carefully work with clients for specific purposes.... We make it very clear point and not try to mis-​sell, that'​s clearly with lessons learned from the crisis.

​

The latest Barron'​s magazine features the article, "Money-​Market Funds Are Back," which discusses money fund yields moving over 1% and compares them with the dismal yields on brokerage sweep accounts. It says, "It'​s not much, but as the Federal Reserve edges short-​term interest rates higher, money funds are finally starting to offer a yield -- sometimes even more than 1%. With a rate hike probable in December and three more expected in 2018, "money market funds will become more attractive than they'​ve been in a decade," says Peter Crane, president of Crane Data. Consider the Vanguard Prime Money Market fund (​ticker: VMMXX), yielding 1.​13%, or the Fidelity Money Market fund (SPRXX), yielding 0.​99%." We quote from some of the Barron'​s piece, and we also excerpt from a recent AFP Conversations Podcast featuring SSGA'​s Todd Bean and Will Goldthwait, below.

Barron'​s continues, "Ten years ago, on the cusp of a financial crisis, net annual returns on money funds were just under 5%. Afterward, rates dropped so low that fund companies had to lower their fees to prevent investors from actually losing money. Those partial fee waivers began disappearing after the first and second Fed rate hikes in December 2015 and December 2016, Crane says. The June 2017 hike was the "​nail in the coffin" for those waivers. Expense ratios are now 0.​44%, on average, up from 0.​2% in December 2015. At this time, Crane Data'​s index of the 100 largest money funds showed an average yield of 0.​13%; as of the end of September, it was up to 0.​87%."

They explain, "Investors should know that near zero-​percent rates haven'​t gone away yet. They are prevalent on many "​sweep" accounts associated with brokerages -- FDIC insured bank accounts in which cash from dividend and interest payments and securities sales accumulate. Sweep rates are rising, but for investors with less than $​500,​000 in household assets, they average 0.​1% or less at major brokerages, Crane Data reports."

Finally, Barron'​s piece adds, "Leaving cash in a fund with a paltry yield didn'​t matter when money-​fund rates were zip, but the gap between sweep rates and money-​fund rates today means staying put could be costly. Investors who stand to gain $​1,​000 more annually in a money fund should probably make the switch, Crane says. Still, investors should first weigh the convenience and safety of a bank sweep account versus the added yield of a money fund, he adds."

In other news, a recent SSGA Cash Market Commentary PodCast discusses the debt ceiling, the Fed and Govt vs. Prime MMFs. (​See the transcription here.) Bean tells AFP, "Well the debt ceiling is like that gift that just keeps on giving for the money markets. I mean we'​ve been dealing with this and every other year basis now since 2011 and it just won'​t seem to go away. But as everyone probably knows by now, Congress and President Trump recently approved a hurricane relief bill that included a short term suspension of the debt limit to December 8th."

He continues, "The good news for investors is that there are no longer any near-​term concerns about a possible default or a delayed payment this year. The bad news is that we'​re probably going to have to relive this all over again at some point in the first half of next year, precisely when that new D-​Day [​is] could be up for a lot of debate. A lot of the analysts out there have it falling sometime and either late February or early March at this point. But there are certainly a lot of factors that could influence that."

Bean explains, "​I would say one thing that we do know, and one thing that'​s probably one of the biggest direct impacts on our markets is on T-​bills supply. Had they gotten a long term deal done, analysts were estimating that we could have seen upwards of $​300 to $​400 billion in additional Treasury supply by the end of the first quarter of next year. Unfortunately now with the shorter suspension analysts expectations are coming closer to just $​150 billion in additional year term bill supply."

He also comments, "I think you'​re trying to balance the potential rate hikes from the Fed in December.... Trying to get your funds invested over the turn ... is tricky but it certainly isn'​t new to short [​term] investors. This is the third year in a row now that we'​ve had to deal with that exact scenario.... The market has been pretty skeptical that that they'​ll be able to get that last hike in, which makes this year a little bit trickier versus the last couple of years.... And so the rates were more pricing in the move. But I think in general you know whether you think they'​re going in December or not you have to respect the risks that they could go."

Bean tells the AFP, "I think fund managers and shareholders both have welcomed the rate hikes we have seen this year, and are enjoying the higher yields [​they] are getting on their cash holdings. Liquidity has been good, spreads are reasonably tight, and I'​d say we'​ve seen ... very well functioning secondary markets for both government and credit paper on the credit front. You know we'​ve seen spreads widen just a little bit.... Floating rate notes with maturities between six months and a year have been really popular trades. Given the rising rate environment I'​d say the majority of the fixed rate trades we have seen in recent months have been kind of in that one of four months."

He says, "On the agency front, you know the Federal Home Loan Bank system is just huge. It continues to kind of dominate that space. Currently they make up over 84 percent of the discount notes outstanding and they are by far the most frequent issuer of floating rate notes as well. So when you look at that market overall, since the end of 2015, just the outstandings are down by almost 200 billion. So generically when you look at those spreads versus treasuries you know that spreads pretty tight. Lastly, for government funds, the Fed'​s reverse repo facility remains an important source of supply."

Goldthwait comments, "Prime funds continue to grow their AUM from the lows in November of 2016. We'​ve seen Prime fund assets grow by $​70 billion. This has been both encouraging and frustrating -- frustrating because I thought based on client conversations that I had and have had that more money would have moved back into prime funds by now. But it'​s also encouraging because ... the flows back in prime funds have been steady and consistent on a week over week basis, indicating the clients are moving back with purpose and appreciation of the value of prime strategies. And we see that when we look at the breakdown so the majority of the gains in prime fund asset have come from institutional clients so you know those of you listening on this call."

He explains, "​Retail prime assets have risen by just $​10 billion over the last 11 months. But institutional prime assets have risen by about $​60 billion. So that'​s been encouraging. And this is quoting ICI data. But the gains have been have been good. So we'​re encouraged also by the yield difference between prime fund strategies and government strategies. You know lots of folks are calling that that yield spread [​will] widen ... maybe out to 50 or 75 basis points.... The average spread right now between a government fund and prime fund stands a 27 basis points. And so this continues to support the thesis the prime funds provide good relative value it should also be noted that overall liquidity."

Finally, he adds, "And that weekly liquidity number that we know is a key focus for investors remains elevated and well above the required amount. So the average liquidity in prime funds is right around 44 percent. And this has been this number has been over 40 percent for the past two years on average. So [​this is] very reassuring to investors that portfolio managers you know are keenly aware of that liquidity number and want to keep them well above the 30 percent required. I think lastly it should be noted that the variable net asset value or the price of the funds has not varied that much."

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As treasury managers and money market fund providers gather in San Diego for this week'​s AFP conference, online money market trading portal ICD announces the release of a new white paper, as well as an outside investment. Their latest release, entitled, "ICD Publishes Comprehensive Whitepaper on Treasury Investment Options and Investment Risk Management," explains, "Institutional Cash Distributors (​ICD), the world'​s largest independent fund portal, today released their latest ICD Intelligencer. The whitepaper investigates various surveys on institutional short-​term portfolio asset allocation, strengths and weaknesses of treasury investment options, yield comparisons on various products, and best practices for trading and investment risk management." We review this, as well as an earlier press release, "ICD Announces Major Growth Investment from Parthenon Capital Partners," below. (​See also our June 28 News, "BlackRock to Acquire Money Fund Trading Portal Tech Firm Cachematrix," and visit us at Booth #​1101 at AFP 2017!)

ICD'​s first release continues, "This latest edition rates Bank Deposits, Money Market Funds (​MMFs), Bond Funds, Commercial Paper, US Treasuries and other investments on the three primary treasury objectives: Capital Preservation, Liquidity and Yield. Additionally, the whitepaper includes analysis from leading treasury consulting firm, Treasury Strategies, on the strengths and weakness of investment options and ratings before and after the post financial crisis regulations."

Tory Hazard, ICD'​s Chief Executive Officer, comments, "​The optimal portfolio will differ from organization to organization. The key is to evaluate all investment options and use best practices to achieve the firm'​s investment objectives within their risk tolerance. This issue of the ICD Intelligencer was developed as a desk reference for institutional investors and to advance dialogue with our clients to help guide ICD’​s 2018 development decisions."

The release says, "A wide variety of survey findings are included in the Intelligencer, including: ICD clients are experiencing average Earnings Credit Rates of approximately 43 basis points; AFP Liquidity Survey respondents continue to place the majority of their short-​term investments into instruments with very short maturities and invest in very few investment vehicles; J.​P. Morgan Asset Management'​s worldwide clients have the largest allocation of their cash portfolios in MMFs – regardless of the size of the client or their region."

Sebastian Ramos, ICD SVP and Global Head of Trading, states, "ECRs were a favored treasury investment option during the zero interest rate environment that persisted after the 2008 financial crisis. We were surprised to hear from our clients that the current ECRs were so low and have not kept pace with the recent increases in interest rates."

The latest release adds, "The whitepaper also compares Prime and Government MMFs to illustrate the significant opportunity cost of excluding Prime MMFs from treasury portfolios; and examines technology, compliance and reporting solutions that were developed to mitigate U.​S. Prime MMF Reform concerns. Additionally, the ICD Intelligencer covers the spectrum of best practices for trading and investment risk management including: uniform trading protocol, compliance, Treasury Management System integrations, secure automated settlement and on-​demand exposure analytics to ensure that portfolios are compatible with investment guidelines."

ICD'​s Parthenon investment release explains, "Institutional Cash Distributors (​ICD), the world'​s largest independent money market fund portal, and Parthenon Capital Partners ("​Parthenon"), a growth-​oriented private equity firm, have announced a strategic partnership, that - while remaining subject to standard regulatory approvals - provides ICD with an opportunity to leverage Parthenon'​s resources to invest in client-​centric technology, products, and people, as well as to expand its business model into new markets. ICD Portal services more than $​100B in assets across hundreds of clients, including much of the Fortune 100."

CEO Hazard comments, "We are excited to partner with Parthenon to accelerate growth, capitalize on opportunities and better serve our clients. Parthenon'​s shared vision, values and resources will help take ICD to another level."

Parthenon Managing Partner Andrew Dodson tells us, "​In speaking with ICD'​s clients as part of our diligence, each expressed a level of praise for the Company'​s technology and service that I'​ve rarely heard, which speaks to ICD'​s client-​centric operating philosophy. ICD has a very strong history of growth and leadership in the institutional trading and investment risk management space and is remarkably well positioned to expand globally and into new products. We are excited to partner with the ICD team to help the company reach its full potential."

The release continues, "The company'​s day-​to-​day operations and leadership team will remain unchanged, with Ed Baldry, Jeff Jellison and Tom Newton, co-​founders of ICD, remaining in their ICD management and board of director roles. Ed Baldry, MD and Global Head of Sales, says, "ICD'​s ethos of providing extraordinary client service is why we have been so successful over the past 14 years. Our partnership with Parthenon provides resources that will serve to enhance our clients' overall ICD experience for years to come."

Brian Golson, Managing Partner and co-​CEO of Parthenon, adds, "​We'​re thrilled to partner with Tory, the ICD founders and the rest of the ICD team. Throughout our research into technology-​enabled investment management and treasury services, ICD distinguished itself through best-​in-​class technology and exceptional customer service. We look forward to a partnership that allows the team to add multiple new areas of growth."

Finally, the statement says, "ICD'​s technology group is expanding its Golden, Colorado operations to accommodate significant personnel growth. The additional resources will enable ICD Portal to add products, better integrate with strategic partners and release enhancements at a faster pace. The firm is actively pursuing regulatory approval to expand into new markets and offer additional currency products on ICD Portal."

​

The October issue of Crane Data'​s Bond Fund Intelligence, which was sent to subscribers Friday, features the story, "Worldwide Bond Funds Show Record Asset Gains in Q2," which reviews asset changes in the largest bond fund markets globally. BFI also includes the article, "EMFS Discusses Ultra-​Short Bond Funds in Europe," which quotes panelists from a session on Ultra-​Short Bond Funds at our recent European Money Fund Symposium. In addition, we recap the latest Bond Fund News, including the briefs: Yields Higher in September; Returns Down; Invesco on Investing in a Low Yield World; and more. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the October issue below. (Contact us if you'​d like to see a copy of our latest Bond Fund Intelligence, which is $​500 a year, and BFI XLS data spreadsheet, which is $​1,​000, and watch for our latest Bond Fund Portfolio Holdings data late next week.)

Our lead "Worldwide Bond Funds" story says, "​The Investment Company Institute released its "Worldwide Regulated Open-​​End Fund Assets and Flows Second Quarter 2017" late last month, and the latest data collection on mutual funds in other countries (​as well as the U.​​S.) shows that global bond fund assets rose by $​426.​5 billion, or 4.​6%, in Q2'​17, led by huge jumps in U.​S. and Luxembourg bond funds. Worldwide bond fund assets have increased by $​968.​9 billion, or 11.​0%, the past 12 months."

It continues, "The U.​S., Luxembourg, Ireland, Germany and France showed the biggest asset increases in Q2'​17. Over 12 months, the US, Luxembourg, Ireland, Brazil and China showed the largest increases. China and Brazil posted the largest declines in the past quarter, while Japan and The Netherlands were among the only losers the past year."

ICI'​s release says, "​On a US dollar-​denominated basis ... bond fund assets increased by 4.​6 percent to $​9.​78 trillion in the second quarter. Balanced/​mixed fund assets increased by 4.​8% to $​5.​93 trillion in the second quarter, while money market fund assets increased by 3.​4 percent globally to $​5.​33 trillion."

They write, "​At the end of the second quarter of 2017, 43 percent of worldwide regulated open-​end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/​mixed funds was 13 percent. Money market fund assets represented 12 percent of the worldwide total.... Globally, bond funds posted an inflow of $​219 billion in the second quarter of 2017, after recording an inflow of $​270 billion in the first quarter."

Our second BFI piece says, "This month, Bond Fund Intelligence recaps a session from our 5th Annual European Money Fund Symposium, which took place late last month in Paris, France. The segment, "Ultra-​Short Bond Funds and Separate Accounts," featured Neil Hutchison from J.​P. Morgan Asset Management, Rob Sabatino from UBS Asset Management, and Thierry Darmon from Amundi. The three discussed positioning in the space just beyond money funds, regulations and the popularity of bond funds in Europe."

Crane said, "Tell us about the positioning of offerings. Where is the sweet spot?" Hutchison responded, "​We share a lot of the same best practices as Global Liquidity, so we still have a focus on principal preservation. We still have a '​buy list' approach. But we sort of go longer and lower with respect to duration and credit risk as well. `​So the sweet spot is to get ... 20 to 40 bps over liquidity funds."

He adds, "​We can do this with minimal volatility. The strategy is such that half your duration, 20% to maybe 30% is triple-​B investments. We also step out further in terms of final maturities ... 3 years is where we have to go to get these type of returns. So I suppose the key takeaway here ... is we go to 3 years as opposed to 2 years, which means we don'​t qualify for cash or cash equivalency, that'​s by design. We feel clearly the growth of the strategy has been adequate without that."

Sabatino says, "​In our U.​S. business ... it'​s mostly SMAs [​separately managed accounts] once you leave money market space.... For ultra short and short duration clients, the trend we'​ve seen for a number of years, with the low interest rate environment, has been lower credit quality and longer duration.... Obviously, in USD [​we'​re] concerned about rising interest rates given flatness of the curve, and [​we have] the ability to use floating rate notes. We continue to see the sweet spot being higher yields, more credit, longer duration." (​Watch for more excerpts of this article later this month, or ask us to see the full issue of BFI.)

Our Bond Fund News includes a brief entitled, "Yields & Returns Dip in September." It says, "Both yields and returns were down across most of the Crane BFI Indexes last month. The BFI Total Index averaged a 1-​month return of -​0.​11% and gained 1.​91% over 12 months. The BFI 100 had a return of -​0.​11% in September and rose 2.​36% over 1 year. The BFI Conservative Ultra-​Short Index returned 0.​11% and was up 1.​24% over 1-​year; the BFI Ultra-​Short Index had a 1-​month return of 0.​14% and 1.​53% for 12 mos. Our BFI Short-​Term Index returned -​0.​01% and 1.​49% for the month and past year. The BFI High Yield Index increased 0.​60% in Sept. and is up 6.​93% over 1 year.(​See p. 6+ or BFI XLS for more returns.)"

The new issue also includes a News brief entitled, "Beware Floating Rates." It tells us, "​A statement entitled, "Beware the Risks of Floating-​Rate Funds" says, "High yields can blind income seekers to the dangers of these below-​investments. Words are powerful, and for investors seeking income, the words '​floating rate' are particularly alluring these days. The Federal Reserve is likely to raise the interest rates again in December, and rates globally have risen sharply in just the past week."

Finally, the October issue of BFI includes the sidebar, "Bond Inflows Unstoppable." It says, "​ICI'​s "Combined Estimated Long-​Term Fund Flows and ETF Net Issuance" as of Oct. 13 tells us, "Bond funds had estimated inflows of $​12.​40 billion for the week, compared to estimated inflows of $​6.​69 billion during the previous week. Taxable bond funds saw estimated inflows of $​12.​13 billion, and municipal bond funds had estimated inflows of $​263 million." Over the past 5 weeks through 10/​4, bond funds and ETFs have seen almost $​46.​2 billion in inflows vs. $​31.​0 billion in inflows over the prior 5-​weeks."

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We wrote earlier this year about the $​1.​0 trillion brokerage sweep cash sector and discussed how rates were finally inching higher after almost a decade stuck at virtually zero. As money fund yields, on average, approach 1.​0%, the much lower-​yielding brokerage sweep rates also continue to grind higher. The latest to bump rates up is Wells Fargo Advisors. Wells also announced an expansion of its available FDIC insurance, moving the total coverage limit from $​1 million to $​1.​25 million. We review Wells changes, and the overall brokerage sweep market, below. (​See our July 27 News, "WSJ on Corporate Deposits; Brokerages Raise Rates; TBS Deal on Sweeps," our July 6 News, "More Money Fund Symposium: European Reforms and Brokerage Sweeps," and our May 9 News, "Signs of Life in FDIC Brokerage Sweeps; StoneCastle on Sweep Platforms.")

Crane Data'​s Brokerage Sweep Intelligence product shows that the average rate on FDIC-​insured sweep vehicles has steadily risen in 2017, climbing from 0.​01% at the start of the year to 0.​07% currently (​for balances of $​100K). But several brokerages, including Schwab, Raymond James, and Fidelity, have increased rates on selected sweep tiers recently, and we expect more to follow in the coming weeks as the last of retail money funds lift off from zero. (​Let us know if you'​d like to see a copy of our most recent Brokerage Sweep Intelligence, which tracks the FDIC insured sweep market.)

Among the latest moves upwards, Wells Fargo Advisors this week raised rates across most of its tiers from 0.​05% to 0.​10%. (​This is for all household balances from $​1 to just under $​1 million.) For balances of $​1 million to just under $​5 million, rates were increased from 0.​05% to 0.​12%; for balances of $​5 million or greater, rates were increased from 0.​10% to 0.​25%; and for balances of $​10 million and above, rates were increased from 0.​20% to 0.​30%. A number of brokerages raised their rates over the spring and summer, but Wells' levels now rank them among the highest-​paying brokerages. (Fidelity and Merrill Lynch show the highest rates for a $​100K balance, 0.​14%, followed by Wells and Schwab at 0.​10%.)

Wells Fargo'​s updated Cash Sweep Program Disclosure Statement, includes a "​Notice of Important Changes to the Wells Fargo Advisors Bank Deposit Sweep Program." They write, "Wells Fargo advisors is introducing an expanded bank deposit sweep with increased FDIC coverage up to $​1,​250,​000. This expanded bank deposit sweep will include up to five banks, including affiliated banks. On or around November 13, 2017, the primary cash sweep will be the expanded bank deposit sweep for eligible new accounts. The number of affiliated banks in the existing "​standard" bank deposit sweep program will be reduced from four to two banks."

The disclosure explains, "If you have uninvested cash in excess of $​500,​000, your deposits in excess of that amount in the standard bank deposit sweep will not be FDIC insured. We will sweep up to $​248,​000 to each bank in the expanded and standard bank deposit sweeps. This deposit limit is set below the FDIC insurance limit to allow for the accumulation of accrued interest. Retirement accounts in certain discretionary advisory programs and resource accounts will not be eligible for the expanded bank deposit sweep."

Wells tell clients, "Existing eligible account owners must contact us to consent to being in the expanded bank deposit sweep. If your account is not eligible or you do nothing, you will remain in the standard bank deposit sweep.... The Expanded Bank Deposit Sweep will include unaffiliated and affiliated banks (​each a "​Program Bank"). The Expanded Bank Deposit Sweep will provide up to $​1.​25 million in FDIC insurance ($​2.​5 million for joint accounts with two or more owners). You will not be charged a fee in connection with the Expanded Bank Deposit Sweep but for your eligible accounts opened before November 13, 2017, you must contact us to consent to having your cash swept to the Expanded Bank Deposit Sweep."

The update continues, "On or about the same date, the number of affiliated banks in the existing Bank Deposit Sweep will be reduced from four to two. Wells Fargo Bank Northwest, N.​A. will no longer be available in the program and the overall amount of sweep deposits will be limited at Wells Fargo Financial National Bank and Wells Fargo Bank South Central, N.​A. The current Bank Deposit Sweep program will be renamed the "Standard Bank Deposit Sweep" at this time."

Wells says, "If you have uninvested cash in excess of $​500,​000, your deposits in excess of that amount in the Standard Bank Deposit Sweep will not be FDIC insured. If your deposits in the Standard Bank Deposit Sweep, when aggregated with any other deposits that you hold at the Affiliated Banks, do not exceed $​500,​000 ($​1 million for joint accounts with two or more owners), you will not be affected by the change in Affiliated Banks in the Standard Bank Deposit Sweep. Each of the Affiliated Banks and Wells Fargo Advisors are affiliates of Wells Fargo & Company, one of the largest bank holding companies in the United States based on assets."

They tell us, "Program Banks The list of Program Banks will be available on our website at `​wellsfargoadvisors.​com/​cashsweep on or about October 16, 2017, or by contacting your Financial Advisor or the number on your account statement. See the enclosed revised Cash Sweep Program Disclosure Statement for more information about the Bank Deposit Sweep programs."

The disclosure adds, "The available sweep options are as follows: 1) interest-​bearing deposit accounts at affiliated and unaffiliated banks (​together, the "​Program Banks") in our Expanded Bank Deposit Sweep program, 2) interest-​bearing deposit accounts at two affiliated banks in our Standard Bank Deposit Sweep program, and 3) one or more affiliated and non-​affiliated Money Market Mutual Funds. Eligibility for each available sweep vehicle is determined by account type. Through our Cash Sweep Program you may earn a rate of return on the uninvested cash balances in your account by automatically placing ("​sweeping") cash balances into a sweep vehicle until such balances are invested by you or otherwise needed to satisfy obligations arising in connection with your account."

Wells says in a disclaimer, "The rates of return for the sweep options vary over time. Current rates can be obtained from your investment professional, by calling the general inquiries phone number listed on the front of your account statement, or found on our website at www.​wellsfargoadvisors.​com. The rate of return on the Standard Bank Deposit Sweep and Expanded Bank Deposit Sweep is set by us, working with the Program Banks. We and the Program Banks may seek to pay as low a rate as possible consistent with our views of competitive necessities. We and the Program Banks can, at our and the Program Banks' sole discretion, change the rate at any time. With certain exceptions, the rate will be tiered based upon account type and the overall household value of your account(​s) with Wells Fargo Advisors. Money Market Mutual Funds seek to achieve the highest rate of return (​less fees and expenses) consistent with prudence and their investment objectives."

Finally, they comment, "There is no guarantee that the yield on any particular cash sweep will remain higher than others over any given period. The rate of return on any of our sweep vehicles may be lower than that of similar investments offered outside of the Cash Sweep Program. The Cash Sweep should not be viewed as a long-​term investment option. If you desire to maintain cash balances for other than a short-​term period and/​or are seeking the highest yields currently available in the market, please contact your investment professional at the number on your account statement to discuss investment options that may be available outside of the Cash Sweep Program to help maximize your return potential consistent with your investment objectives and risk tolerance."

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Crane Data released its October Money Fund Portfolio Holdings Tuesday, and our latest collection of taxable money market securities, with data as of Sept. 30, 2017, shows a strong rebound in Treasuries (​after a big drop last month), but most other segments were flat. Money market securities held by Taxable U.​S. money funds overall (​tracked by Crane Data) increased by $​8.​5 billion to $​2.​759 trillion last month, after increasing $​58.​6 billion in August and $​61.​5 billion in July. Repo remained the largest portfolio segment, while Treasuries reclaimed the No. 2 spot from Agencies. CDs remained in fourth place, followed by Commercial Paper, Other/​Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (​Visit our Content center to download the latest files, or contact us if you'​d like to see a sample of our latest Money Fund Portfolio Holdings reports.)

Among all taxable money funds, Repurchase Agreements (​repo) decreased $​4.​4 billion (-​0.​5%) to $​959.​5 billion, or 34.​8% of holdings, after increasing $​65.​1 billion in August, falling $​55.​6 billion in July, and rising $​12.​4 billion in June. Treasury securities rose $​27.​8 billion (​4.​3%) to $​673.​3 billion, or 24.​4% of holdings, after falling $​32.​7 billion in August and rising $​36.​7 billion in July. Government Agency Debt increased $​1.​2 billion (​0.​2%) to $​667.​0 billion, or 24.​2% of all holdings, after falling $​11.​2 billion in August and increasing $​48.​4 billion in July. Repo, Treasuries and Agencies total $​2.​300 trillion, representing a massive 83.​3% of all taxable holdings.

CDs and CPs decreased slightly last month, along with Other (​mainly Time Deposits) securities. Certificates of Deposits (​CDs) decreased $​7.​3 billion (-​4.​1%) to $​170.​5 billion, or 6.​2% of taxable assets, after increasing $​3.​4 billion in August, after increasing $​13.​6 billion in July. Commercial Paper (​CP) was down $​4.​4 billion (-​2.​4%) to $​178.​5 billion, or 6.​5% of holdings (​after increasing $​16.​2 in August and $​8.​0 billion in July. Other holdings, primarily Time Deposits, fell by $​5.​5 billion (-​5.​2%) to $​100.​8 billion, or 3.​7% of holdings. VRDNs held by taxable funds increased by $​1.​1 billion (​12.​2%) to $​9.​8 billion (​0.​4% of assets).

Prime money fund assets tracked by Crane Data increased to $​625 billion (​up from $​610 billion last month), or 22.​7% (​up from 22.​2%) of taxable money fund holdings' total of $​2.​759 trillion. Among Prime money funds, CDs represent just under a third of holdings at 27.​3% (​down from 29.​2% a month ago), followed by Commercial Paper at 28.​6% (​down from 29.​9%). The CP totals are comprised of: Financial Company CP, which makes up 17.​8% of total holdings, Asset-​Backed CP, which accounts for 6.​1%, and Non-​Financial Company CP, which makes up 4.​7%. Prime funds also hold 4.​8% in US Govt Agency Debt, 6.​4% in US Treasury Debt, 8.​0% in US Treasury Repo, 1.​8% in Other Instruments, 13.​3% in Non-​Negotiable Time Deposits, 4.​3% in Other Repo, 1.​8% in US Government Agency Repo, and 1.​1% in VRDNs.

Government money fund portfolios totaled $​1.​498 trillion (​54.​3% of all MMF assets), up from $​1.​497 trillion in August, while Treasury money fund assets totaled another $​636 billion (​23.​1%), up from $​644 billion the prior month. Government money fund portfolios were made up of 43.​0% US Govt Agency Debt, 18.​1% US Government Agency Repo, 12.​7% US Treasury debt, and 26.​0% in US Treasury Repo. Treasury money funds were comprised of 69.​8% US Treasury debt, 29.​9% in US Treasury Repo, and 0.​3% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $​2.​134 trillion, or 77.​3% of all taxable money fund assets, down from 77.​8% last month.

European-​affiliated holdings decreased $​101.​2 billion in September to $​491.​0 billion among all taxable funds (​and including repos); their share of holdings decreased to 17.​8% from 21.​5% the previous month. Eurozone-​affiliated holdings decreased $​76.​3 billion to $​325.​1 billion in September; they account for 11.​8% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $​7.​8 billion to $​210 billion (​7.​6% of the total). Americas related holdings increased $​115 billion to $​2.​055 trillion and now represent 74.​5% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $​12.​5 billion, or -​2.​0%, to $​628.​7 billion, or 22.​8% of assets; US Government Agency Repurchase Agreements (​up $​10.​1 billion to $​303.​5 billion, or 11.​0% of total holdings), and Other Repurchase Agreements ($​27.​4 billion, or 1.​0% of holdings, down $​1.​9 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​1.​4 billion to $​111.​0 billion, or 4.​0% of assets), Asset Backed Commercial Paper (​down $​2.​8 billion to $​38.​1 billion, or 1.​4%), and Non-​Financial Company Commercial Paper (​down $​0.​1 billion to $​29.​4 billion, or 1.​1%).

The 20 largest Issuers to taxable money market funds as of Sept. 30, 2017, include: the US Treasury ($​673.​3 billion, or 24.​4%), Federal Home Loan Bank ($​520.​7B, 18.​9%), Federal Reserve Bank of New York ($​294.​3B, 10.​7%), BNP Paribas ($​115.​6B, 4.​2%), RBC ($​68.​9B, 2.​5%), Federal Farm Credit Bank ($​64.​9B, 2.​4%), Wells Fargo ($​54.​5B, 2.​0%), Nomura ($​44.​4B, 1.​6%), Mitsubishi UFJ Financial Group Inc ($​39.​7B, 1.​4%), Societe Generale ($​38.​1B, 1.​4%), Bank of America ($​35.​3B, 1.​3%), Bank of Nova Scotia ($​33.​2B, 1.​2%), HSBC ($​33.​1B, 1.​2%), Bank of Montreal ($​32.​8B, 1.​2%), Credit Agricole ($​32.​4B, 1.​2%), Toronto-​Dominion Bank ($​31.​1B, 1.​1%), Barclays PLC ($​29.​4B, 1.​1%), Citi ($​28.​0B, 1.​0%), and Federal National Mortgage Association ($​27.​8B, 1.​0%).

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 ($​294.​3B, 30.​7%), BNP Paribas ($​99.​5B, 10.​4%), RBC ($​50.​2B, 5.​2%), Nomura ($​44.​4B, 4.​6%), Wells Fargo ($​42.​0B, 4.​4%), Societe Generale ($​33.​4B, 3.​5%), Bank of America ($​29.​9B, 3.​1%), HSBC ($​27.​7B, 2.​9%), Mitsubishi UFJ Financial Group Inc ($​24.​1B, 2.​5%), and Citi ($​22.​0B, 2.​3%).

The 10 largest Fed Repo positions among MMFs on 9/​30 include: JP Morgan US Govt ($​30.​0B in Fed Repo), Fidelity Cash Central Fund ($​21.​4B), Goldman Sachs FS Gvt ($​16.​9B), Northern Trust Trs MMkt ($​15.​1B), Federated Govt Oblg ($​13.​0B), Vanguard Market Liquidity Fund ($​12.​8B), Fidelity Sec Lending Cash Central ($​11.​4B), Morgan Stanley Inst Lq Govt ($​10.​3B), Vanguard Prime MMkt Fund ($​9.​9B), and BlackRock Lq T-​Fund ($​9.​7B).

The 10 largest issuers of "​credit" -- CDs, CP and Other securities (​including Time Deposits and Notes) combined -- include: RBC ($​18.​7B, 4.​8%), BNP Paribas ($​16.​1B, 4.​1%), Mitsubishi UFJ Financial Group Inc. ($​15.​7B, 4.​0%), Skandinaviska Enskilda Banken AB ($​15.​4B, 3.​9%), Toronto-​Dominion Bank ($​15.​1B, 3.​9%), Canadian Imperial Bank of Commerce ($​14.​4B, 3.​7%), Svenska Handelsbanken ($​13.​3B, 3.​4%), Bank of Montreal ($​12.​9, 3.​3%), Wells Fargo ($​12.​4B, 3.​2%), and Sumitomo Mitsui Banking Co ($​12.​4B, 3.​2%).

The 10 largest CD issuers include: Bank of Montreal ($​12.​4B, 7.​3%), Wells Fargo ($​12.​4B, 7.​3%), Mitsubishi UFJ Financial Group Inc ($​11.​2B, 6.​6%), Sumitomo Mitsui Banking Co ($​11.​1B, 6.​5%), Toronto-​Dominion Bank ($​10.​9B, 6.​5%), RBC ($​10.​4B, 6.​1%), Sumitomo Mitsui Trust Bank ($​8.​7B, 5.​1%), Mizuho Corporate Bank Ltd ($​7.​2B, 4.​3%), Canadian Imperial Bank of Commerce ($​7.​2B, 4.​3%), and Landesbank Baden-​Wurttemberg ($​6.​3B, 3.​7%).

The 10 largest CP issuers (​we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($​8.​4B, 5.​4%), Westpac Banking Co ($​7.​9B, 5.​1%), BNP Paribas ($​7.​2B, 4.​6%), JP Morgan ($​7.​0B, 4.​5%), Bank Nederlandse Gemeenten ($​6.​5B, 4.​2%), Bank of Nova Scotia ($​6.​0B, 3.​9%), National Australia Bank Ltd ($​6.​0B, 3.​9%), RBC ($​5.​5B, 3.​6%) UBS AG ($​5.​0B, 3.​3%), and Australia & New Zealand Banking Group Ltd ($​4.​7B, 3.​0%).

The largest increases among Issuers include: Federal Reserve Bank of New York (​up $​93.​3B to $​294.​3B), US Treasury (​up $​27.​8B to $​673.​3B), Fixed Income Clearing Co (​up $​5.​9B to $​15.​6B), RBC (​up $​5.​4B to $​68.​9B), Svenska Handelsbanken (​up $​3.​4B to $​13.​3B), Canadian Imperial Bank of Commerce (​up $​3.​3B to $​26.​3B), Skandinaviska Enskilda Banken AB (​up $​3.​2B to $​15.​4B), Federal Home Loan Mortgage Co (​up $​2.​8B to $​48.​2B), and Norinchukin Bank (​up $​2.​4B to $​11.​1B).

The largest decreases among Issuers of money market securities (​including Repo) in September were shown by: Credit Agricole (​down $​36.​9B to $​32.​4B), Credit Suisse (​down $​15.​2B to $​9.​4B), Natixis (​down $​11.​2B to $​21.​2B), Nomura (​down $​10.​9B to $​44.​4B), JP Morgan (​down $​10.​2B to $​24.​7B), Barclays PLC (​down $​8.​5B to $​29.​4B), Societe Generale (​down $​8.​1B to $​31.​1B), ING Bank (​down $​7.​8B to $​25.​1B), HSBC (​down $​7.​3B to $​33.​1B), and Mizuho Corporate Bank Ltd (​down $​4.​5B to $​14.​9B).

The United States remained the largest segment of country-​affiliations; it represents 67.​2% of holdings, or $​1.​854 trillion. France (​7.​9%, $​217.​4B) remained in second place ahead of Canada (​7.​3%, $​200.​7B) in third. Japan (​5.​5%, $​152.​8B) stayed in fourth, while the United Kingdom (​3.​0%, $​83.​6B) remained in fifth place. The Netherlands (​1.​9%, $​51.​4B) remained in sixth place ahead of Germany (​1.​8%, $​48.​7B), while Sweden (​1.​7%, $​48.​0B) remained ahead of Australia (​1.​6%, $​43.​3B). Switzerland (​0.​8%, $​21.​2B) ranked tenth. (​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 Sept. 30, 2017, Taxable money funds held 35.​3% (​up from 33.​8%) of their assets in securities maturing Overnight, and another 15.​1% maturing in 2-​7 days (​down from 16.​2%). Thus, 50.​4% in total matures in 1-​7 days. Another 19.​4% matures in 8-​30 days, while 11.​0% matures in 31-​60 days. Note that over three-​quarters, or 80.​8% of securities, mature in 60 days or less (​up slightly from 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.​9% of taxable securities, while 8.​2% matures in 91-​180 days, and just 1.​2% matures beyond 181 days.

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Crane Data'​s latest Money Fund Market Share rankings show assets in U.​S. money fund complexes were up again in September, as overall assets increased by $​32.​0 billion, or 1.​1%. Total assets have increased by $​133.​6 billion, or 4.​8%, over the past 3 months. They'​ve increased by $​327.​5 billion, or 12.​6%, over the past 12 months through September 30, but note that our asset totals have been inflated by the addition of a number of funds. (​Crane Data added batches of previously untracked funds in December, February and April. These funds, which total over $​200 billion, include a number of internal funds that we hadn'​t been aware of prior to disclosures of the SEC'​s Form N-​MFP.) The biggest gainers in September were Fidelity, whose MMFs rose by $​7.​1 billion, or 1.​3%, SSGA, whose MMFs rose by $​4.​6 billion, or 5.​7%, and Dreyfus, whose MMFs rose by $​4.​5 billion, or 2.​5%.

BlackRock, Federated and Deutsche also saw assets increase in September, rising by $​3.​6B, $​2.​6B, and $​2.​4B, respectively. The only declines among the 25 largest managers were seen by JP Morgan, Invesco and PNC. (​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 market share totals below, and we also look at money fund yields the past month, which were up slightly in September.

Over the past year through Sept. 30, 2017, Fidelity (​up $​116.​4B, or 26.​2%), Vanguard (​up $​81.​2B, or 41.​6%), BlackRock (​up $​28.​5B, or 11.​6%), and T Rowe Price (​up 23.​2B, or 153.​7%) were the largest gainers. (​All of these families' totals were inflated by the addition of new funds earlier this year.) These 1-​year gainers were followed by Prudential (​up $​14.​2B, or 2282.​5%), JPMorgan (​up $​13.​3B, or 5.​7%), Columbia (​up $​12.​6B, or 844.​5%), Northern (​up $​11.​1B, or 12.​2%) and Invesco (​up $​8.​5B, or 15.​2%).

Fidelity, BlackRock, Columbia, and Dreyfus had the largest money fund asset increases over the past 3 months, rising by $​34.​8B, $​17.​5B, $​13.​2B, and $​11.​2B, respectively. The biggest decliners over 12 months include: Goldman Sachs (​down $​16.​0B, or -​8.​6%), Wells Fargo (​down $​14.​0B, or -​12.​2%), Morgan Stanley (​down $​11.​4B, or -​8.​8%), Western (​down $​10.​0B, or -​27.​1), and Federated (​down $​6.​0B, or -​3.​0%).

Our latest domestic U.​S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $​560.​6 billion, or 19.​1% of all assets. It was up $​7.​1 billion in Sept., up $​34.​8 billion over 3 mos., and up $​116.​4B over 12 months. Vanguard is second with $​276.​3 billion, or 9.​4% market share (​up $​1.​6B, up $​4.​4B, and up $​81.​2B for the past 1-​month, 3-​mos. and 12-​mos., respectively), while BlackRock is third with $​273.​7 billion, or 9.​3% market share (​up $​3.​6B, up $​17.​5B, and up $​28.​5B). JP Morgan ranked fourth with $​246.​2 billion, or 8.​4% of assets (​down $​1.​9B, down $​2.​4B, and up $​13.​3B for the past 1-​month, 3-​mos. and 12-​mos., respectively), while Federated was ranked fifth with $​193.​0 billion, or 6.​6% of assets (​up $​2.​6B, up $​9.​8B, and down $​6.​0B).

Dreyfus was in sixth place with $​179.​8 billion, or 6.​1% of assets (​up $​4.​5B, up $​11.​2B, and up $​23.​8B), while Goldman Sachs was in seventh place with $​170.​1 billion, or 5.​8% (​up $​245M, up $​4.​3B, and down $​16.​0B). Schwab ($​156.​9B, or 5.​4%) was in eighth place, followed by Morgan Stanley in ninth place ($​117.​8B, or 4.​0%) and Northern in tenth place ($​102.​4B, or 3.​5%).

The eleventh through twentieth largest U.​S. money fund managers (​in order) include: Wells Fargo ($​101.​1B, or 3.​5%), SSGA ($​85.​2B, or 2.​9%), Invesco ($​64.​2B, or 2.​2%), First American ($​50.​1B, or 1.​7%), UBS ($​42.​6B, or 1.​5%), T Rowe Price ($​38.​3B, or 1.​3%), Western ($​26.​9B, or 0.​9%), DFA ($​24.​6B, or 0.​8%), Deutsche ($​22.​4B, or 0.​8%), and Franklin ($​21.​6B, or 0.​7%). The 11th through 20th ranked managers are the same as last month, except Western moved ahead of DFA. Crane Data currently tracks 66 U.​S. MMF managers, the same number as last month.

When European and "​offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.​S. list, except JPMorgan moves ahead of Vanguard and BlackRock, BlackRock moves ahead of Vanguard, Goldman Sachs moves ahead of Federated and Dreyfus, and SSGA moves ahead of Wells Fargo.

Looking at our Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (​domestic U.​S.) and our MFI International ("​offshore") products, the largest money market fund families include: Fidelity ($​570.​5 billion), JP Morgan ($​417.​0B), BlackRock ($​403.​0B), Vanguard ($​276.​3B), and Goldman Sachs ($​269.​6B). Dreyfus/​BNY Mellon ($​206.​0B) was sixth and Federated ($​201.​6B) was in seventh, followed by Schwab ($​156.​9B), Morgan Stanley ($​150.​3B), and Northern ($​129.​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.

The October issue of our Money Fund Intelligence and MFI XLS, with data as of 9/​30/​17, shows that yields were up slightly in September across our Taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 735), was up 1 bps to 0.​70% for the 7-​Day Yield (​annualized, net) Average, and the 30-​Day Yield was up 4 bps to 0.​70%. The MFA'​s Gross 7-​Day Yield increased 3 bps to 1.​14%, while the Gross 30-​Day Yield was up 6 bps to 1.​13%.

Our Crane 100 Money Fund Index shows an average 7-​Day (​Net) Yield of 0.​87% (​up one bps) and an average 30-​Day Yield of 0.​87% (​up 3 bps). The Crane 100 shows a Gross 7-​Day Yield of 1.​15% (​up 3 bps), and a Gross 30-​Day Yield of 1.​15% (​up 5 bps). For the 12 month return through 9/​30/​17, our Crane MF Average returned 0.​41% and our Crane 100 returned 0.​58%. The total number of funds, including taxable and tax-​exempt, decreased to 956, down 20 from last month. There are currently 735 taxable and 221 tax-​exempt money funds.

Our Prime Institutional MF Index (​7-​day) yielded 0.​97% (​unchanged) as of September, while the Crane Govt Inst Index was 0.​75% (​up 2 bp) and the Treasury Inst Index was 0.​76% (​up 1 bp). Thus, the spread between Prime funds and Treasury funds is 21 basis points, down 1 bp from last month, while the spread between Prime funds and Govt funds is 22 basis points, down 2 bps from last month. The Crane Prime Retail Index yielded 0.​78% (​unchanged), while the Govt Retail Index yielded 0.​43% (​down 1 bps) and the Treasury Retail Index was 0.​49% (​up 1 bps). The Crane Tax Exempt MF Index yield increased to 0.​43% (​up 5 bps).

Gross 7-​Day Yields for these indexes in September were: Prime Inst 1.​34% (​down 1 bps), Govt Inst 1.​06% (​unchanged), Treasury Inst 1.​05% (​down 2 bp), Prime Retail 1.​32% (​unchanged), Govt Retail 1.​06% (​down 2 bps), and Treasury Retail 1.​05% (​unchanged). The Crane Tax Exempt Index increased 5 basis points to 0.​93%. The Crane 100 MF Index returned on average 0.​07% for 1-​month, 0.​21% for 3-​month, 0.​49% for YTD, 0.​58% for 1-​year, 0.​26% for 3-​years (​annualized), 0.​16% for 5-​years, and 0.​45% for 10-​years. (Contact us if you'​d like to see our latest MFI XLS, Crane Indexes or Market Share report.)

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The October issue of our flagship Money Fund Intelligence newsletter was sent out to subscribers Friday morning. It features the articles: "Money Fund Reform One Year Later; Slow Recovery, Changes," which reviews the past year since radical reforms were implemented, "IMMFA'​s Lowe on European Money Fund Reforms, LVNAV," which excerpts from the IMMFA Secretary General'​s recent keynote speech, and, "Worldwide MMF Assets: China Surges, Ireland Up," which reviews MMF assets in different countries. We also updated our Money Fund Wisdom database with Sept. 30, 2017, statistics, and sent out our MFI XLS spreadsheet Friday a.​m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our October Money Fund Portfolio Holdings are scheduled to ship Tuesday, October 10, and our October Bond Fund Intelligence is scheduled to go out Friday, October 13.

MFI'​s "Money Fund Reforms" article says, "One year ago, regulatory changes dramatically transformed the money fund landscape. (​See our Oct. 14, 2016, News, "SEC'​s Money Fund Reforms Go Live; NAVs Float, Emergency Gates, Fees.") In addition to triggering a massive $​1.​2 trillion shift from Prime and Tax Exempt money funds into Government funds, a host of other changes were implemented. Given the major stresses, money funds have had a surprisingly good first year under the new regime, with a steady but gradual recovery of Prime funds. Below, we celebrate the first birthday of MMF Reforms, look back at flows over the past year, and examine the continued changes in the money fund arena."

The piece continues, "Though the months leading up to October 2016 saw dramatic asset shifts, the year since then has been remarkably calm. Very gradually rising rates, a slow, steady return of Prime assets, and the lack of any credit events to test the new 30% weekly liquidity thresholds and emergency gates and fees have allowed money fund managers much needed rest and revenue recuperation."

Our IMMFA Keynote piece reads, "This month, Money Fund Intelligence recaps the keynote session from our 5th Annual European Money Fund Symposium, which took place early last week on Paris, France. The segment, "IMMFA Update: The State of European CNAV MMFs," featured IMMFA Secretary General Jane Lowe. She told the record EMFS audience, "​I'​m going to say a little but about the scope of regulatory reform, and then move on to ... some of the cultural differences that I think trick people up if they come from one side of the pond or the other."

Lowe explains, "Rather than having what you'​ve got at the moment, which is a regulated product where all the investments controls are kind of backed up by what the rating agencies do, the IMMFA Code, etc., [​the new regulations] will be imbedded in law, common across Europe. [​This] is game changing in ways that you probably won'​​t notice at first but will [​grow] over time. In a way that the people in the U.​S. totally understand the SEC'​s [​Rule] 2a-​7, for example, they know what it is.... Even though the regulation has many bits in it that are difficult, not well done, etc., overall it will probably be pretty positive for the industry. That'​s my prediction. Also, I should mention that we have a Code that will not be needed once this reform comes into place, [​though a] reduced form may very well be needed."

She continues, "Looking at the CNAV [​industry], it has been pretty steady, even across the crisis. When you reach the period of negative yield, it is a little bit choppier on the Euro. The VNAV has had a much more dramatic set of changes, but also showing quite a steady picture. I think the drop off after the crisis, which you can see pretty clearly there, had to do with money funds that left the market. In Germany, there are relatively few money funds relative to pre-​crisis. [​On the other hand], the French money fund industry is a very big one and has shown very obvious growth.... Obviously with the Euro going into negative yield that sort of really dampened down activity. But it hasn'​t disappeared; it is in a modest upswing."

Our "Worldwide" update says, "The Investment Company Institute released its "​Worldwide Regulated Open-​End Fund Assets and Flows Second Quarter 2017" Wednesday. The latest data collection on mutual funds in other countries (​as well as the U.​S.) shows that money fund assets globally rose by $​172.​2 billion, or 3.​3%, in Q2'​17, led by a huge jump in Chinese money funds. U.​S. money funds fell while Irish MMFs rose. MMF assets worldwide have increased by $​333.​7 billion, or 6.​7%, the past 12 months."

The article continues, "China, Ireland and Luxembourg showed the biggest asset increases in Q2'​17, while China, Japan, Luxembourg, France and Ireland showed the largest increases over 12 months. The U.​S. and Belgium posted the largest declines over the past year. We review the latest Worldwide MMF totals below."

A sidebar, "Fed Z.​1: Securities Lending Bigger Than Corps in MMFs," explains, "The Federal Reserve'​s latest quarterly "​Z.​1 Financial Accounts of the United States" statistical survey (​formerly the "​Flow of Funds"), Second Quarter, 2017, shows that the Household Sector remains the largest investor segment in money market funds; assets here fell in Q2 after rising in Q1. The next largest segments, Funding Corporations (​primarily Securities Lending reinvestment money) and Nonfinancial Corporate Businesses, also saw assets decline in the second quarter."

Our October MFI XLS, with Sept. 30, 2017, data, shows total assets increased $​32.​0 billion in September to $​2.​929 trillion after increasing $​68 billion in August and $​32.​6 billion in July, but decreasing $​20.​2 billion in June. (Note that we added $​67.​3 billion in new funds in April.) Our broad Crane Money Fund Average 7-​Day Yield was up 1 basis point to 0.​70% during the month, while our Crane 100 Money Fund Index (​the 100 largest taxable funds) was also up 1 bp to 0.​87%.

On a Gross Yield Basis (​7-​Day) (​before expenses were taken out), the Crane MFA fell 1 bp to 1.​14% and the Crane 100 fell 2 bps to 1.​15%. Charged Expenses averaged 0.​44% and 0.​29% for the Crane MFA and Crane 100, respectively. The average WAM (​weighted average maturity) for the Crane MFA was 32 days (​down one day from last month) and for the Crane 100 was 31 days (​unchanged from last month). (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

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Today, we continue with excerpts from our recent European Money Fund Symposium. As we mentioned in yesterday'​s News, this year'​s event took place in Paris, France, so we took this opportunity to learn more about the French money market mutual fund marketplace. France is the fourth largest market in the world, and the second largest market in Europe (​behind Ireland), with $​399.​9 billion, or 7.​5% of worldwide assets, according to the ICI. Last week'​s event included the segment "French Money Funds Issues & Outlook," which featured Manuel Arrive of Fitch Ratings; Vanessa Robert of Moody'​s Investors Service; and, Mikael Pacot of Axa I.​M. and also Chairman of the Money Market Fund Working Group at the French industry association, AFG. Each gave a brief update on the status of the variable NAV-​dominated, and longer-​term French money market fund industry.

Arrive commented, "​Let'​s start with AUM [​and] a few statistics, easy to remember. French money market funds represent roughly a third of the total universe of European-​domiciled MMFs, two-​thirds of the VNAV market, and three-​quarters of the Standard MMF market. They account for about 60% of Euro-​denominated, European money market funds.... So that gives a market structure in France that is very different from the other two largest markets. France is and has always been a VNAV market, whereas Luxembourg and Ireland are more CNAV, shorter-​term markets."

He explained, "There are other differentiating factors of French money market funds. First, they are all variable net asset value (​VNAV) funds, that means the underlying assets are mark to market where possible. That also means that they won'​t be impacted as much by the European reforms as other jurisdictions. There are no CNAV funds to be converted in France.... Also, the French asset managers have experience valuing short term assets that some CNAV asset managers do not have. Secondly, the French funds offer same day settlement. Thirdly, they use a wide array of instruments and strategies. For example, derivatives. They use ... asset swaps and interest rate swaps to manage duration of their funds [​and may] hedge exposure to a currency.... Lastly, the French funds are primarily sold to domestic retail clients, which is very different from Luxemburg and Irish funds which are primarily sold to institutional investors."

The Fitch Senior Director told us, "What has pushed investors from short term to standard has been the search for yield since 2015 in Europe.... [​T]​he shift has been more pronounced [​in French funds]. This also earlier, in 2012 and not 2015.... It doesn'​t come as a surprise that of the top ten European managers, there are four French managers, with Amundi consolidating its leadership.... [​I]​t is clear French standard MMFs have [​now] entered negative [​yield] territory. Their returns are negative since June 2016.... Standard funds have outperformed short term, which themselves have outperformed our universe of triple-​A rated MMFs."

He also briefly mentioned short-​term bond funds, saying, "​They are attractive and appealing ... because they offer a ... low duration ... and are attractive to investors concerned about rising interest rates.... France has a market share that is 40%, 40% of short term bond funds domiciled in Europe are actually domiciled in France. [​They have] now overtaken short term MMFs in assets."

Arrive concluded and summarized, "French VNAV money market funds have a significant market share in Europe.... There has been a shift from short term to standard MMFs.... Standard money market funds have outperformed short term due to higher credit and market risk. We would expect higher liquidity in short term and standard MMFs post reform, which will put more pressure on yields that entered negative territory in January 2012. These funds have also been increasingly competing with short term bond funds."

In the second segment, Moody'​s Vanessa Robert commented, "Money market funds continue to survive despite negative yields and regulation.... I will speak about the structure and risk profile of money market funds, and the upcoming impact on French money market funds.... [​T]​he French asset management industry has been growing at a slow but steady pace. It currently stands at E1.​3 trillion. French money funds [​are] the largest asset class in France. It has been like that for years. The money funds have been growing in France at 1.​5% growth during the first 6 months of the year and they currently stand at 350 billion Euros. They are growing but at a rate lower than the industry. They are holding ground here. Their market share is 27% in Europe. While Irish funds have a market share of 37%."

She said, "There are major differences between French and Irish and Luxembourg funds on the other hand.... [​T]​he level of non-​Euro investors in French funds is 1%, which is a major difference with Irish funds, where 50% are not in the Euro area.... Another key difference is that French funds are almost exclusively limited in Euros, while Irish and Luxembourg funds are mostly dominated in US dollars, sterling and to a lesser extent, euros. The last key difference is on the asset front. French funds are extremely exposed to French banks. Only 20% of their assets are exposed to non-​European investors.... The bottom line: French funds are extremely domestically-​oriented not only on the asset but on the liability, or the investor, side."

Robert explained, "In France, it'​s is all about VNAV. In the VNAV sector, most of the assets are invested in standard money market funds. We can see the growing share of money market funds that currently stands at 84% of the French sector. That means that French short-​term money market funds continue to exist, but they only represent 16% of the industry compared to 60% back in 2011. The explanation is very simple -- it'​s all about yield. We can see that even standard money market funds are now in negative territory. But the yield differential has pushed investors towards standard money market funds. And investors have been keen to do so because in France, both type of funds, both the short term and standard money market funds, are eligible to be '​cash'. It'​s not a big deal for them to elect investment in standard money market funds."

She also commented, "​A few words on the risk profile. The shift of allocation towards standard money market funds comes with additional risk, especially in terms of maturity. Standard money market funds can invest in securities with maturities between 1-​2 years and they are doing so.... French money funds tried as much as they could to avoid negative yield, but at some point they could not avoid this.... Another striking feature is that 10% of the assets of the assets held by French funds are in invested in other funds. And this is really a French specificity that helped them generate liquidity.... [​Regarding] liquidity, CNAV funds tend to be more liquid both on the weekly and overnight liquidity basis."

Robert added, "French funds are losing ground compared to their Irish counterparts. But they continue to draw [​interest] despite negative yields. The French market remains significant. If we look at regulation, this will not change the risk of the profile of French funds, as opposed to CNAV funds that will cease to exist and will have to go through a complete product transformation. Now they key question is whether France, which is the oldest money market fund in Europe, will seize the opportunity of this new regulation and capitalize on its VNAV expertise and leading sector of VNAV funds in Europe to attract and grow its market share.... For French funds, it is all about yield, liquidity, and safety. This is the exact opposite of the order of the Anglo-​Saxon community."

Finally, Axa'​s Pacot told us, "​We manage VNAV money market funds, mainly euro.... A lot has been said already by Manual and Vanessa about the French money market fund landscape. I will focus more on the challenges that money market firms have to face, mainly the negative yield environment.... Total European MMF market accounts for E1,​158 billion of which E360 billion of assets are domiciled in France (​99.​7% denominated in Euros). E514 billion of the total European MMF market are denominated in Euros.... Because they represent the bulk of the Euro denominated MMFs AUM, French MMF are the most exposed to the current Euro short term rates environment."

​

Our 5th Annual European Money Fund Symposium took place early last week in Paris, France, with a record audience of 125 attendees. Crane Data President Peter Crane, who served as the moderator and host, comments on the conference, "Our European event had alternated between Dublin and London the past 4 years, but we decided to try Paris this year. We were thrilled with the results." The conference featured two days of discussions on the European money market fund industry, with pending reform regulations and negative yields again receiving a lot of attention. Below, we recap the keynote session, "IMMFA Update: The State of European CNAV MMFs," which featured IMMFA Secretary General Jane Lowe. (Note: Watch for more excerpts and recaps of our European event in coming days, and in the October issue of our Money Fund Intelligence, which ships on Friday.)

Lowe says, "I'​m going to say a little bit about the scope of regulatory reform, and then move on to ... some of the cultural differences that I think trick people up if they come from one side of the pond or the other.... The first thing is, the new regulation in Europe it does introduce a completely new reality for money funds. So, at one level, everybody is just struggling with the changes required operationally and the timing. It changes how your funds look. From an investor perspective once you are through the regulatory change period, it becomes part of your selling strategy or selling point."

She explains, "Rather than having what you'​ve got at the moment, which is a regulated product where all the investments controls are kind of backed up by what the rating agencies do, the IMMFA Code, etc., it will be imbedded in law, common across Europe, which is game changing in ways that you probably won'​t notice at first but will change over time. In a way that the people in the US totally understand the SEC'​s [​Rule] 2a-​7, for example, they know what it is and that will happen here. Even though the regulation has many bits in it that are difficult, not well done, etc., overall it will probably be pretty positive for the industry. That'​s my prediction. Also, I should mention that we have a Code that will not be needed once this reform comes into place, [​though a] reduced form of code may very well be needed."

Lowe continues, "Looking at the CNAV [​industry], it has been pretty steady, even including across the crisis. When you reach the period of negative yield, it is a little bit choppier on the Euro. The VNAV has had a much more dramatic set of changes, but also showing quite a steady picture. I think the drop off after the crisis, which you can see pretty clearly there, had to do with money funds that I think left the market. I think in Germany there are relatively few money funds relative to pre-​crisis. Whereas, the French money fund industry is a very big one and has shown very obvious growth.... Obviously with the Euro going into negative yield that sort of really dampened down activity. But it hasn'​t disappeared, and it is in a modest upswing. And I would say a very fair face to take things forward on after the regulation, because if this industry has done as well without a regulation on its own it is very likely to continue for the future."

She tells the Paris audience, "The other thing I would mention is that in Europe there are two types of money market funds. That has actually been the case since 2010 when the European Security regulators set up a set of guidelines.... The big centers of money market fund domiciles, France, Luxembourg, and Ireland, cover the CNAV and the VNAV. You can see how heavily represented they are.... That is split between standard and short-​term money market funds.... [​In] Ireland and Luxembourg, there is still this huge bulk of constant funds, whereas in France, which is much more of a domestic market, you see a very large number of [​VNAV, standard] money market funds."

Lowe states, "​I'​ll move on to regulatory reform.... Well, it'​s been a marathon. I think everybody can agree with that. We are at the finishing line. We are not through it yet but we have reached that point. For those of you who don'​t spend too much time with European institutions, it has taken so long because there are 28 countries involved, actually only about 16 that really get involved in the negotiations.... It was particularly difficult for this regulation because it has been categorized as '​shadow banking.' And that meant that banking regulators were a bit overinvolved in the early stages ... but it got better as process went along.... Between now and July 2018, quite a lot of work has to completed."

She says, "The deadlines on the secondary legislation are not hard.... But the process can go in several different ways depending on what decisions are made. It is quite difficult to predict the actual timing, because if it all goes smoothly it will be one date.... [​The regulation] was published on the 30th of June came into effect on the 20th of July this year. [​The date] existing funds [​are] mostly concerned about is January 2019.... If you are setting up new funds, they will have to be compliant with the new authorization process. [​There is] a lot of focus on product structure and some focus on the liquid assets requirements.... There'​s also a ban on sponsor support."

Lowe tells us, "The product range is pretty recognizable, old to new. There is not a direct carry across, but any investor would find it quite easy to follow which is helpful. Requirements for the constant NAV ... have had a lot more scrutiny, but actually most of it is recognizable. It has reduced limits, quite a lot of that came through the credit rating anyway. So, it has just kind of crossed over into the legislative field. And, as mentioned, we still have secondary legislation to go, which is ongoing at the moment."

On mapping the old to new types of funds, she comments, "At the top you have the government funds, and the bottom are the standard funds. Both of those are pretty much a no brainer. In the middle you have prime CNAV, and VNAV. And the clear successive product to the CNAV fund is the LVNAV. But actually, its not to say VNAV will go to CNAV, and it'​s also not to say that some CNAV wouldn'​t go into LVNAV. It does vary quite a bit from the U.​S. reforms, where the new product range looked quite different from the old. [​This] no doubt caused but more trouble for investors."

The IMMFA leader states, "There is also a 5-​year [​LVNAV] review clause. It'​s not the sunset clause that was originally in place for the LVNAV product. But on the other hand, it is still there. And with the UK out of the EU, it could slightly change the time limits of how its approached. Generally speaking, with a review clause, it is rare [​that they] overturn what is already in place. We are fairly optimistic that the [​regulators] will review the products, and that nothing [​will have] gone wrong in the meantime. These are the various challenges that have been faced."

She adds, "Just to remind everyone that the European funds were already being regulated under something called UCITS.... UCITS are very similar to [​US Investment Company] '​40-​Act' funds ... the U.​S. were very specific about dealing with money market mutual funds.... This never really happened in Europe, so the framework remained was set up for bond funds, which was not appropriate.... This is why IMMFA set up its code, and it'​s also why the credit rating agencies became so involved with the funds, because without that you didn'​t have the framework."

Lowe told the Paris crowd, "What this new regulation does is '​levels up' the EU funds. [​It'​s] not quite same regulation.... There are these obvious differences and less obvious ones. One is to do with how they go about it. Thousands and thousands of words in the U.​S. ... whereas in the EU it is quite '​waffle-​ly'. Some of it is vague. You have to do a purposeful reading.... The other thing is there are multiple countries, multiple currencies and multiple governments."

She continues, "We don'​t expect the same things to happen here [​that happened in the US with the huge shift to Govt MMFs]. There are reasons for that. They have to do with the fact that the investors come from a different place and have slightly different expectations. People in the US wanted to avoid fees and gates. But here you don'​t have the same set of choices. The only choice in the U.​S. was to move into Government funds. But here the only way to avoid fees and gates is to move into a VNAV, that some people may choose to do. But if you actually want to keep CNAV pricing, whether you are in a government fund or LVNAV, you are going to have to expect fees and gates. In the CNAV funds, people already have mechanism to put fees and gates in, they are just not mandatory.... The only other thing is in the future they [​gates and fees] will be mandatory ... when you are below 10% liquid assets.... I just make the point that the set of options will be quite different."

Lowe concludes, "We'​ve got the reform legislation, so everybody can start to plan. It doesn'​t help that the secondary legislation is still outstanding, but I don'​t think that should prevent planning. That'​s for both firms and investors, although investors usually come in very late. I think it'​s fair to say that LVNAV is the lead product, the lead solution to replace the existing CNAV. But there may be some who go a different route, and this is clearly an option.... The other thing that is probably worth mentioning is that I think the regulators will struggle a bit too. They have got quite a lot of requirements imposed on them in terms of collecting information and going through an authorization process."

Finally, she adds, "This statutory regulation will definitely give comfort to investors. It has in every other field, so there'​s no reason why it wouldn'​t here. We are committed to maintaining standards in the industry. We have had a Code for a long time that has been a huge focus of the organization. I just don'​t see the code continuing in its present form, because much of what is in it is going into regulation.... That is not to say there may not be gaps in the legislation that we can'​t choose to fill as an industry group. Money market funds are part of the solution.... So, I think it offers a lot of opportunity on both ends of the spectrum. Both the funding and investor end. I'​m sure all of you will step up to that. The only outstanding issue is cash and cash equivalents. It'​s a pretty big issue for investors. The SEC, for everyone in the US, wrote it into the rules. It'​d be nice if that happened here. But it is much less likely because [​that isn'​t] what has happened in the past.... That will eventually be something between the investor and the auditor."

​

Federated Investors writes in latest "Month in Cash," "Pay attention to what the Fed does, not says." The article, written by Money Market CIO Deborah Cunningham, explains, "​Last month, Fed Chair Janet Yellen put on her academic mortarboard and delivered a history lesson. Last week, she traded it for a Sherlock Holmes houndstooth hat for "​The Case of the Missing Inflation": "​The shortfall in inflation is a mystery," she said in a speech in Ohio." We excerpt from her latest piece, and also review a blog on Tri-​Party repo from the NY Fed, below.

Cunningham'​s update explains, "​She and other economists may be frustrated that things aren'​t following their equations, but they seem to be pretty comfortable that inflation is either at or near enough to their target to keep tightening. In any case, cash managers tend to look at what Federal Reserve policymakers do, not what they say. With four rate hikes in the last two years, and a fifth likely coming in December, it would seem the Federal Open Market Committee (​FOMC) participants think they won'​t need a sleuth with a magnifying glass to find rising prices and wages."

She explains, "If we needed another clue to their thinking, the Fed officially announced that in October -- today, actually -- it will begin to pare its massive balance sheet, a sign that extraordinary accommodation is coming to an end. All cash managers and nearly everyone else in the industry expected this move -- it was just a matter of when it would happen -- so there wasn'​t a negative market reaction. We can'​t help but wondering if Yellen factored in her legacy with the start of tapering. With this, she will get credit for reversing nearly all of the post-​recession monetary policies. But it also was just time to start normalization."

Federated'​s piece says, "Meanwhile, the Fed'​s economic projections released at the last policy meeting suggest another 25 basis-​point hike is on the table this year. We have thought so for some time now, and the market has returned to that opinion after doubting it recently. There will be some noise, both from the aftermath of the destructive hurricanes and the postponed debate over the federal budget and debt ceiling, but that shouldn'​t make a major difference. We already have seen more value come back into the yield curve: a slight steepening that has made 3- and 6-​month fixed-​rate paper attractive along with floaters."

It adds, "We have therefore kept the weighted average maturity (​WAM) of our products at last month'​s ranges: 40-​50 days for prime and 30-​40 days for government and municipal funds, with most lying in the middle of these target ranges. Industry-​wide, prime products tend to more responsive than bank deposits to rising rates because they trade the London interbank offered rate (​Libor), which historically responds to Fed hikes quicker. It is important to remember that money market funds provide a market rate, not an administrative one chosen by a bank or similar institution."

In other news, the Federal Reserve Bank of New York'​s Liberty Street Economics blog features the brief, "Excess Funding Capacity in Tri-​Party Repo." They write, "Security dealers sometimes enter into tri-​party repo contracts to fund one class of securities with the expectation they will wind up settling the contract with higher quality securities. This strategy is costly to dealers because they could have borrowed funds at lower rates had they agreed to use the higher-​quality securities at the outset. So why do dealers do this? Why obtain or arrange excess funding for the initial asset class? In this post, we discuss possible rationales for an excess funding strategy and measure the extent of excess funding capacity in the tri-​party repo market. In a second post, we examine the maturities of repos used to generate excess funding capacity and estimate the costs of this strategy."

They explain, "A repo is effectively a collateralized loan, structured as a paired sale and future repurchase of securities at specified terms. The difference between the future and current price of the securities determines an implied interest rate, which is typically used to price the repo. The interest or repo rates are typically lower the higher the quality (​in terms of risk and liquidity) of the securities posted as collateral (​for example, see the tri-​party repo rates posted by the Bank of New York Mellon). This feature makes generating excess funding capacity costly, because dealers negotiate a repo rate based on lower-​quality collateral, but end up allocating higher-​quality securities."

The piece tells us, "Another important feature of repos is the haircut, which represents the additional collateral available to the lender to cover losses in the event of a counterparty default. Unlike with rates, the haircut for a given trade will depend on the quality of the eligible securities allocated at settlement; if a dealer posts better-​than-​necessary collateral to a repo, the required haircut declines accordingly but the negotiated interest rate on the cash does not change."

It explains, "A dealer might maintain excess funding capacity for two reasons. First, it may be difficult to find investors willing to provide funding against certain asset classes. When such an investor is found, the dealer might negotiate more funding than necessary to ensure funding in the future. Second, a dealer may want excess capacity as a buffer in times of crisis when investors may reduce the amount of funding they are willing to provide against particular asset classes. Having excess capacity gives a dealer time to find other investors or to de-​lever. In fact, some dealers consider excess funding capacity in their internal stress tests."

The blog states, "Using confidential, daily data covering March 2017, we compute dealers' excess funding capacity in tri-​party repo, where U.​S. dealers obtain a large part of their secured funding.... Our data reveal both the lowest-​quality asset class from which securities can be used to fulfill the obligations of a repo and the asset class of the securities actually allocated at settlement. We define excess funding capacity to be the amount of a repo backed by higher-​than-​necessary quality collateral."

Finally, the NY Fed says in its "Takeaways," "In the tri-​party repo market, we find that dealers seek excess funding capacity, especially for agency MBS and equities securities. This fact suggests that dealers value the option of having funding available for such asset classes in the future. In our next post, we examine the repos generating excess funding capacity in more detail and estimate how much this strategy costs dealers."

​

Following the conclusion of our European Money Fund Symposium last week in Paris (​and our Money Fund Symposium this past summer in Atlanta), Crane Data is now preparing for its next event, our "basic training" event, Money Fund University. Our 8th annual MFU will return to the Boston Hyatt Regency in Boston, Mass., January 18-​19, 2018. Crane'​s Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market regulations, money fund alternatives, offshore markets, and other recent industry trends. The affordable ($​500) educational conference (​see the preliminary agenda here or e-​mail us to request our brochure) features a faculty of the money fund industry'​s top lawyers, strategists, and portfolio managers. (Note: Watch for a recap of our recent European Money Fund Symposium in our next MFI newsletter, which ships Friday. Crane Data would also like invite those attending this month'​s Association for Financial Professionals annual conference in San Diego to stop by Booth #​1101 to say "Hello.")

Money Fund University offers attendees a 2-​day course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our next Boston event, we will also take a look at pending European money market fund regulations, and we'​ll again add a mini "Bond Fund University" segment on ultra-​short bond funds and money fund alternatives. Registration for MFU is $​500.

The morning of Day One of the 2018 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data; The Federal Reserve & Money Markets with Mark Cabana, MD, Bank of America Merrill Lynch; Interest Rate Basics & Money Fund Math with Cabana and Phil Giles, Adjunct Professor at Columbia University and, Ratings, Monitoring & Performance with Greg Fayvilevich, Director, Fitch Ratings, Michael Masih, Associate Director, Standard & Poor'​s Global Ratings Services.

Day One'​s afternoon agenda includes: Instruments of the Money Markets Intro with Teresa Ho, Vice President, J.​P. Morgan Securities; Repurchase Agreements with Teresa Ho and Tyler Williams, Associate, J.​P. Morgan Securities; Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager; Federated Investors; Tax-​Exempt Securities & VRDNs with John Vetter, Municipal Structured Analyst, Fidelity Investments; Commercial Paper & ABCP with Jean-​Luc Sinniger, Director, Citi Global Markets; CDs, TDs & Bank Debt with Vanessa Hubbard, Vice President, Wells Fargo Securities; and, Credit Analysis & Portfolio Management with Sean Lussier, VP/​Senior Portfolio Manager, and Peter Hajjar, Global Head of Credit Research, State Street Global Advisors.

Day Two'​s agenda includes: Money Fund Regulations: 2a-​7 Basics & History with Jack Murphy, Partner, Dechert LLP, and Joan Swirsky, Of Counsel, Stradley Ronon; European MMF Reforms & Offshore Funds with John Hunt, Partner, Sullivan & Worcester LLP, and Crane Data'​s Peter Crane; and, Bond Fund University: Ultra-​Short Bond Funds & SMAs with Peter Crane. The conference ends with its annual MFU "​Graduation" ceremony (​where diplomas are given to attendees).

New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "​cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane'​s Money Fund University is just $​500, exhibit space is $​2,​000, and sponsorship opportunities are $​3K, $​4K, and $​5K. A block of rooms has been reserved at the Hyatt Regency Boston.

We'​d like to thank our past and pending MFU sponsors -- INTL FCStone, Fitch Ratings, Dreyfus/​BNY Mellon CIS, BlackRock, J.​P. Morgan Asset Management, S&​P Global Ratings, Dechert LLP, Fidelity, Federated, SSGA, First American Funds/​US Bank, and J.​M. Lummis -- for their support, and we look forward to seeing you in Boston in January. E-​mail Pete Crane (​pete@​cranedata.​com) for the latest brochure or visit www.​moneyfunduniversity.​com to register or for more details.

Crane Data is also preparing the preliminary agendas for its next Bond Fund Symposium (March 22-​23, 2018, at the Los Angeles Intercontinental), and our "​big show," Money Fund Symposium, which will be held June 25-​27, 2018, at the Pittsburgh Westin. We'​re also finalizing the location for next year'​s European Money Fund Symposium, which will likely be Sept. 21-​22, 2018 at the London Tower Bridge Hilton.

In other news, money market mutual fund distributors and corporate cash managers are also making preparations for AFP 2017, the Association for Financial Professionals' gathering of Treasury Managers, which takes place this year in San Diego, Oct. 15-​17. AFP is the largest gathering of corporate treasurers in the country, attracting over 5,​000 treasury management professionals, as well as a number of large banks and institutional money fund managers.

Sessions involving money funds and cash investing include: Perspectives on Liquidity Investing, which features Scott Wachs from Morgan Stanley, Kimberly Kelly-​Lippert from American Honda Motor Company, Chris Ginieczki from NVIDIA Corporation, and Karen Mercer from AARP. Its description says, "​Post-​SEC money market fund reform, institutional cash investors have encountered challenges in investing and diversifying their cash holdings in the short-​term space. Join this expert panel as they provide a background on market dynamics and share their perspectives on liquidity investing and provide best practices to support your investment practices, manage changes in market liquidity, select the right investment products and cope with a volatile regulatory environment."

Another session is entitled, "Disruption: Turning Change into Opportunity in Liquidity Management Practices," which features Jason Granet of Goldman Sachs Asset Management, Geoffrey Nolan of Qualcomm, and Rene Bustamante of FedEx Corporation. A third session, "Trapped Cash and Other Pitfalls of Managing Global Balances," involves Tom Wolfe from Marriott Vacations Worldwide Corporation, Sanford Pallotta from Rockefeller Group International, Inc., and Josh Ormond from J.​P.​Morgan. Yet another session, "When Cash Comes at a Cost: Efficient Methods for Managing Global Cash in Today'​s Regulatory Regime," includes: Geoffrey Nolan of Qualcomm, Jamie Cortas of Dell, and Beccy Milchem of BlackRock.

Finally, the last cash session, "The Return of Returns: Transforming your Investment Strategy for a Nonzero Interest-​Rate World," features Dana Laidhold of The Carlyle Group, Zeke Loretto of eBay Inc., and Garret Sloan of Wells Fargo Securities, LLC. The description says, "Since 2008, the decision to "​sit in cash" has had little impact on the performance of treasury portfolios. But the long, cold winter of zero interest rates has begun to thaw. To capitalize on these changes, treasury teams need to: 1) develop a new investment strategy for a shifting interest-​rate environment, 2) have a clear picture of the company'​s liquidity position, and 3) communicate investment strategies effectively with senior leaders. Hear from the treasurer of The Carlyle Group and eBay'​s head of global investments as they discuss developing their post-​2008 investment policies and strategies, optimizing the treasury investment function for a non-​ZIRP world, and best practices for building world-​class treasury investment programs." We hope to see you in San Diego!

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