News Archives: November, 2017

The Investment Company Institute released its monthly "Trends in Mutual Fund Investing" report late Wednesday. Their latest official numbers show a dip in money fund assets in October, following big increases in September and August. (Month-to-date in November, through 11/28, assets are up big again, increasing by $41.2 billion, according to Crane's Money Fund Intelligence Daily. We show Prime assets up $10.0 billion and Govt MMFs up $30.4 billion this month.) We review ICI's Trends and latest Portfolio Composition statistics, below.

ICI's "Trends in Mutual Fund Investing - October 2017" shows a $28.8 billion increase in money market fund assets in September to $2.748 trillion. This follows a $28.8 billion increase in Sept., a $71.8 billion increase in August, and a $13.6 billion increase in July. In the 12 months through October 31, money fund assets have increased by $73.9 billion, or 2.8%.

The monthly report states, "The combined assets of the nation's mutual funds increased by $218.63 billion, or 1.2 percent, to $18.31 trillion in October, according to the Investment Company Institute’s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."

It explains, "Bond funds had an inflow of $29.84 billion in October, compared with an inflow of $25.16 billion in September.... Money market funds had an outflow of $9.52 billion in October, compared with an inflow of $28.22 billion in September. In October funds offered primarily to institutions had an outflow of $9.23 billion and funds offered primarily to individuals had an outflow of $292 million."

The latest "Trends" shows that Taxable MMFs lost assets last month, while Tax Exempt MMFs gained. Taxable MMFs decreased by $9.4 billion in October, after increasing $30.1 billion in September, $73.5 billion in August and $11.9 billion in July (but decreasing $20.3 billion in June). Tax-Exempt MMFs increased $0.9 billion in October, after decreasing $1.3 billion in September and $1.7 billion in August. They increased $1.7 billion July, but decreased $0.6 billion in June. Over the past year through 10/31/17, Taxable MMF assets increased by $74.0 billion (2.0%) while Tax-Exempt funds were perfectly flat over the past year (0.0%).

Money funds now represent 17.6% (down from 17.9% the previous month) of all mutual fund assets, while bond funds represent 25.8%, according to ICI. The total number of money market funds decreased by 11 to 394 in October, down from 423 a year ago. (Taxable money funds fell by one to 311 and Tax-exempt money funds fell by 10 to 83 over the last month.)

ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed another jump in Treasuries in October. Repo remained the largest portfolio segment; it was flat (up $642 million, or 0.1%) at $910.2 billion or 34.9% of holdings. Repo has increased by $117.6 billion over the past 12 months, or 14.8%. (See our Nov. 13 News, "Nov. Money Fund Portfolio Holdings: Treasuries Jump Again, CDs Higher.")

Treasury Bills & Securities moved in second place among composition segments; they rose by $59.7 billion, or 9.2%, to $710.2 billion, or 27.2% of holdings. Treasury holdings have fallen by $54.1 billion, or -7.1%, over the past year. U.S. Government Agency Securities fell to third place; they fell by $3.9 billion, or -0.6%, to $662.4 billion, or 25.4% of holdings. Agency holdings have fallen by $2.2 billion, or -0.3%, over the past 12 months.

Certificates of Deposit (CDs) stood in fourth place; they increased $11.4 billion, or 5.6%, to $214.9 billion (8.2% of assets). CDs held by money funds have risen by $62.3 billion, or 40.9%, over 12 months. Commercial Paper remained in fifth place, increasing $6.3B, or 4.7%, to $139.6 billion (5.3% of assets). CP has increased by $31.6 billion, or 29.3%, over one year. Notes (including Corporate and Bank) were down by $57 million, or -0.7%, to $8.2 billion (0.3% of assets), and Other holdings decreased to $11.5 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 68.2 thousand to 26.706 million, while the Number of Funds declined by one to 311. Over the past 12 months, the number of accounts rose by 1.821 million and the number of funds decreased by 10. The Average Maturity of Portfolios was 30 days in October, down two days from September. Over the past 12 months, WAMs of Taxable money funds have shortened by 10 days.

We wrote a little bit this past August about the 10-year anniversary of the start of the Subprime Liquidity Crisis, which dramatically impacted the money markets and money fund business. (See our Aug. 11 News, "10 Years Ago: Subprime Crisis Starts," and our Aug. 8 Link of the Day, "10 Years Ago: Subprime Liquidity Crisis Began in Money Markets With ABCP Extensions.") Today, we again look back 10 years, to November 2007, which was one of the worst months of the whole financial crisis (next to Sept. 2008, when Lehman Brothers went bankrupt and the Reserve Fund "broke the buck"). Ten years ago today, we reported that the Florida Local Government Investment Pool halted redemptions, one of the low points of the first stage of the crisis. Earlier in November 2007, we wrote about enhanced cash and ultra-short bond fund troubles, SIV (structured investment vehicle) bailouts, and a number of events that made this month one of the most tumultuous ever for money funds. We review our old coverage below. (See the full November 2017 CraneData.com News Archives here. Note that Crane Data's News Archives are still available online from a decade ago, but that many of the hotlinks in stories we reference are no longer valid. These have been removed.)

In our Nov. 29, 2007 News, we wrote a piece entitled, "State Board Halts Redemptions in Florida Local Govt Investment Pool." It explains, "Following concerns about a handful of downgraded and defaulted SIV holdings and fed by a Bloomberg article, "Florida School Fund Rocked by $8 Billion Pullout," the Florida State Board of Administration today voted to halt redemptions in its Local Government Investment Pool. The pool had been drafting a bailout plan, but Florida Governor Charlie Crist and CFO Alex Sink decided to freeze withdrawals while crafting a possible bailout plan. Exeptions may be made for payrolls.... On an emergency call today, Executive Director Coleman Stipanovich said that $10 billion has fled the now $15 billion pool. The state board on Dec. 4 may seek "credit protections for the pool against the potential for default by approximately $1.5 billion in securities from four issuers: Axon Financial, KKR Atlantic, KKR Pacific, Ottimo Funding and Countrywide". The pool had said it will seek a AAAm (money market) rating and adopt more money fund-like investment policies in the future. But it likely faces eventual liquidation following today's decision. While some government investment pools invest like money market funds, the majority stray beyond money funds' strict Rule 2a-7 quality, maturity, and diversity guidelines."

Crane Data wrote in its Nov. 30, 2007 News, "Money Funds Seeing Inflows From Government Investment Pool Woes." We explained, "The flow of cash from lightly regulated and non-AAA rated local government investment pools into money market mutual funds has accelerated over the past week as Floridian and other cities and towns seek a safer haven for their cash balances. Investors in the frozen $15 billion Florida State Board of Administation's Local Government Investment Pool, which astonishingly attempted to stop its bleeding by halting redemptions ... are moving balances into money funds. The Palm Beach Post quotes County School District Treasurer Leanne Evan, "We are looking for a safe place to put taxpayer dollars." The South Florida Business Journal adds, "The county [Palm Beach] said it is investing incoming funds in money market accounts offered by AIM Investment and Federated Investors and is looking into other short-term investments." Florida's move and aggressive investing has already damaged the $300+ billion local government investment pool market. Fortunately, most other state pools are AAA rated and sport yields similar to money funds."

The chaos had spread earlier in November 2007, as we wrote in our Nov. 20, 2007 News, "More Stories on Enhanced Cash and Ultra-Short Bond Fund Troubles." We explained, "Today, two more stories describing woes with money fund competitors appeared -- Bloomberg writes "Federated Investors Bails Out Cash Fund After Losses" and Kiplinger's writes "Ultra-Short: Still Ultra-Safe? The Bloomberg piece describes two bailouts and one buck-breaking among the handful of 3c-7 "enhanced cash" funds, "private partnership[s] open only to accredited investors". Kiplinger's discusses "Two bond funds designed to beat money-market funds with little extra risk and sponsored by two of the industry's titans are sitting on stiff year-to-date losses, leaving shareholders shocked," saying that Fidelity Ultra-Short Bond Fund (FUSFX) has lost 4.3% and SSgA Yield Plus has lost 8.1% year-to-date. "[T]he damage to the Fidelity and SSga funds ... calls into question whether any ultra-short bond fund is a safe alternative to a money-market fund.... If you want total safety, you're better off going with a money fund," says Kiplinger's."

Our Nov. 16, 2007 News was entitled, "WSJ Says First American Funds Protecting Cheyne SIV Holdings." It told readers, "Today's Wall Street Journal features a story entitled, "More Money-Market Funds Hit Trouble", which says that U.S. Bancorp subsidiary First American Advisors' previously had "purchased all Ottimo Funding Trust secured liquidity notes held" by the First American Prime Obligations Fund. The company also entered into a credit agreement to protect its holdings in SIV Cheyne Finance LLC. CEO Richard Davis was quoted saying, "U.S. Bancorp would support all affected funds." ... The Journal also noted that RiverSource Cash Management "has a tiny percentage in the security." The piece adds, "[O]ther funds also were holding Cheyne-related holdings, although in small quantities.... Valic II Company fund, offered by a unit of American International Group Inc., held less than 1% of its $337 million in assets in one Cheyne security as of early September." The article emphasizes, "No money market fund has broken the buck in the recent turmoil."

Crane Data's Nov. 16, 2007 News was entitled, "What Me Worry? Investors Drive Money Fund Assets Beyond $3 Trillion." It said, "Institutional and retail investors continue to ignore a paranoid press, pushing money market mutual fund assets solidly above $3 trillion to a new record high. The Investment Company Institute reports that money fund assets increased by $24.74 billion to $3.025 trillion in the week ended Nov. 14. Institutions continue to fuel the surge, adding $17.23 billion to funds to hit a record $1.921 trillion. But retail investors also joined the party, adding $7.51 billion to funds to hit a record $1.105 trillion. Over the past 52 weeks, institutional assets have risen by an astounding $577 billion, or 42.9%, while retail assets have risen by a respectable $161 billion, or 17.0%. Investors continue to be unfazed by recent problems with structured investment vehicles (SIVs), by August's asset-backed commercial paper seizure, and by a handful of bailouts and small losses in enhanced cash funds. Quarterly tax outflows could temporarily halt the advance next week, but even greater concerns over investments with true subprime and mortgage exposure should keep pushing assets towards the safety of money funds."

We also wrote in our Nov. 15, 2007 News about "GE Enhanced Cash Redeeming Holdings at 96 Cents Says Barron's." This piece commented, "Barron's put out the article, "Mortgage Woes Damage a GE Bond Fund" late Wednesday, saying that GE Asset Management's $5.6 billion Enhanced Cash Trust is offering investors to "redeem their holdings at 96 cents on the dollar". Reuters initally incorrectly reported that this was a money market fund, but has since corrected its story. This is not a "money market fund", and no "2a-7" money funds have broken below $1.00 a share. GE, though, becomes the first "enhanced cash" fund to publicly "break the buck", though of course these funds never pledged to maintain stable NAVs. Crane Data estimates that these "3c-7" private placement "cash plus" and "enhanced cash" fund assets total $120 billion, down from $150 billion just weeks ago. GE says its other cash plus and money market funds are unaffected by the move. Federated recently reimbursed investors $4.9 million for losses in its enhanced fund and exited the sector, and Columbia's set aside $300 million to protect its mammoth Strategic Cash portfolio. See also Bloomberg's "GE Bond Fund Investors Cash Out After Losses From Subprime"."

Continuing backwards in time, our Nov. 14, 2007 News was about a "Barrage of Money Market Funds Buying Out or Shielding SIV Stories. It stated, "Numerous stories on money market funds taking action to protect or remove their troubled SIV holdings hit today, including a front page one in USA Today, "Money market funds at risk?" The article says Bank of America "set aside $600 million to cover potential losses in its [Columbia] money market funds [$300 million] and an institutional cash fund [$300 million]," which is "not technically a money fund". (We assume the latter is the mammoth $40 billion plus Columbia Strategic Cash, or 'StratCash', an "enhanced cash," "3c-7" private placement fund.) The article also clarifies that Legg Mason "set up a $238 million line of credit for two money funds" and "invested $100 million to buoy an offshore money fund."

Our news brief continues, "The New York Times, on page 1 of the Business section, writes "Investor Safe Haven Becomes a Concern." It reveals that Wachovia may end up suffering as little as $5 million damage on its bailout, and "perhaps nothing". (The Times' chart incorrectly labels a surge in money assets as retail, but this should be institutional.) Associated Press writes, "Money funds set aside cash for trouble but it's unlikely a fund will fail, observers say." AP's article says, "Peter Crane, president of Crane Data LLC, which tracks money market mutual funds, says he doesn't believe this will wind up hurting the average money market client." Finally, The Washington Times writes "Firms prop up money-market funds."

We wrote on Nov. 13, 2007, "Bank of America Discloses $600 Million Columbia Funds Bailout." Our website explained, "Bank of America will "spend $600 million supporting in-house money-market funds that are exposed to troubled financing entities called structured investment vehicles reports The Wall Street Journal. BoA's Columbia Funds are the 7th largest manager of money market mutual funds with over $150 billion in assets. Columbia joins a number of other fund complexes that have taken action purchasing or protecting structured investment vehicle-related commercial paper and medium-term notes, extendible ABCP and other esoteric mortgage-related securities whose value has come into question during the market's recent flight-from-complexity. See Bloomberg's "Bank of America, Legg Mason Prop Up Their Money Funds."

Crane Data's Nov. 12, 2007 News is entitled, "Legg Mason Discloses LOCs To Support SIVs in Citi Inst Money Funds." It explains, "A late Monday Bloomberg.com article says that Legg Mason has taken action to support its money market funds. Legg's Western Asset unit becomes the fourth money fund advisor to publicly disclose support over troubled securities -- Evergreen, Credit Suisse, and SEI have come forward to date. (Visit tomorrow to read about No. 5, SunTrust Bank's STI Classic funds.) Legg Mason's Nov. 9 10-Q quarterly filing says it manages $167 billion in liquidity assets with approximately 6% invested in ABCP issued by SIVs. "The investments have not affected the $1 per share net asset value of the funds and Legg Mason does not expect that they will, although no guarantees are given.... In November 2007, in order to support the [fund's] AAA/Aaa credit ratings, Legg Mason elected to procure letters of credit (LOCs) ... of approximately $238 million," says the filing. Legg Mason "has provided approximately $178 million in cash collateral" and "estimates that, unless the LOCs are terminated during the quarter without being drawn, it will incur a $4.7 million charge to its net earnings in the December 2007 quarter ... representing the net impact of decreases in the fair value of the underlying ABCP through the date hereof."

Also on Nov. 12, 2007, we posted "SEI Provides "Capital Support Agreement" to Funds for Cheyne." This piece commented, "SEI Corp. will announce its quarterly earnings at 9am this morning. A topic of discussion is sure to be a footnote in its recent 10-Q filing, "On Nov. 8, 2007, the Company provided a guarantee in the form of Capital Support Agreements with two mutual funds, the SEI Daily Income Trust Prime Obligation Fund and the SEI Daily Income Trust Money Market Fund." SEI Investments is advisor and Bank of America's Columbia Management is the subadvisor. "On October 30, 2007, S&P advised the Company that it would place any mutual fund that had an AAA rating by S&P and which owned any securities issued by Cheyne Finance LLC (Cheyne) on credit watch with negative implications unless the fund was provided credit support.... Investments constituted approximately 14.0 percent and 7.1 percent, respectively, of the Prime Fund's and MM Fund's aggregate net asset values." Janney Montgomery Scott analyst Tom McCrohan tells us that the $129 million guarantee covers 50% of the Cheyne holdings, which could potenially represent a $7.4 million loss given Friday's valuations. Other money funds holding Cheyne (and other SIVs) may also "guarantee" troubled holding via internal or third party backing instead of buying out the entire holding."

Our Nov. 10, 2007 News recaps the November 2007 MFI article, "Protecting the $1 NAV: Advisors Bail Out Funds." We wrote, "The November issue of our flagship Money Fund Intelligence discusses recent troubles within money market funds and describes fund advisors' actions to protect investors. No money market mutual funds have broken the buck, or fallen below the $1.00 a share level, nor are any likely to due to the August asset-backed commercial paper crisis and the October structured investment vehicle panic reprise. But a handful of advisors running a small number of funds with downgraded or defaulted securities have purchased and removed these securities from their money funds, and others have sought additional guarantees or protections. MFI writes, "We'd guess that perhaps 5 to 10 funds have purchased up to $10 billion in assets, and that more could be coming due to this week's continued SIV stresses."

Finally, at the start of the month, our Nov. 2, 2007 News featured, "Credit Suisse Purchased Money Fund Securities Says Wall St. Journal." The update told us, "In the second confirmed instance of a fund advisor purchasing securities to protect its money market funds during the recent asset-backed commercial paper crisis, Credit Suisse said on its earnings call, "We took steps to reposition certain of our U.S. money-market funds and purchase securities from these funds" to "address liquidity concerns caused by the U.S. market's extreme conditions," reports The Wall Street Journal. Credit Suisse purchased ABCP, FRNs (floating rate notes) and "notes issued by collateralized-debt obligation vehicles and structured investment vehicles" from its CS Inst Prime MMF. The company booked unrealized "value reductions" totaling approximately $125 million and said it saw over $20 billion in money fund outflows, including "offshore" funds and "cash" separate accounts. It was the only money fund manager with substantial asset declines during the 3rd quarter."

A new SEC filing from J.P. Morgan Money Market Funds heralds the launch of J.P. Morgan Institutional Tax Free Money Market Fund, the second new Tax Exempt Institutional fund to announce this month. As we mentioned in our Nov. 7 Link of the Day, "Fidelity Files for Inst Muni MMF," Crane Data tracks just 11 Tax Exempt Institutional money fund portfolios (23 counting all share classes) run by just 10 managers totaling $10.1 billion. (Also, see our December 2015 Money Fund Intelligence article, "Tax Exempt MFs Hit; Will Any Go Inst?" for more.) Given the overall attrition in the Tax Exempt MMF space the past two years, new fund launches by the two largest money fund managers are an interesting development. We review the new filing below, and we also quote from a new New York Fed paper on "Safe Assets."

JP Morgan's N1-A explains, "The Fund aims to provide current income, while seeking to maintain liquidity and a low volatility of principal." Its "Main Investment Strategy" tells us, "Under normal conditions, the Fund invests primarily in municipal obligations, the interest on which is excluded from federal income taxes. As a fundamental policy, under normal circumstances, the Fund will invest at least 80% of the value of its Assets in municipal obligations.... `The Fund is a money market fund managed in the following manner: The Fund calculates its net asset value to four decimals (e.g., $1.0000) using market-based pricing and operates with a floating net asset value."

It continues, "The Fund's policies and procedures permit the Board to impose liquidity fees on redemptions and/or redemption gates in the event that the Fund's weekly liquid assets were to fall below a designated threshold. If the Fund's weekly liquid assets fall below 30% of its total assets, the Board, in its discretion, may impose liquidity fees of up to 2% of the value of the shares redeemed and/or gates on redemptions. In addition, if the Fund's weekly liquid assets fall below 10% of its total assets at the end of any business day, the Fund must impose a 1% liquidity fee on shareholder redemptions unless the Board determines that not doing so is in the best interests of the Fund."

Finally, the filing says, "You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time."

For more on recent trends in the Tax Exempt market, see our Oct. 25 News, "Schwab Simplifies MMF Lineup, Lowers Minimums; Federated Muni Exits," our Aug. 1 Link of the Day, "Dreyfus Liquidating AMT-​Free MMF," and our August MFI article, "Managers Flee from State Tax Exempt Money Funds.")

In other news, the Federal Reserve Bank of New York's Liberty Street Economics blog recently posted "What Makes A Safe Asset Safe?" They explain, "Over the last decade, the concept of 'safe assets' has received increasing attention, from regulators and private market participants, as well as researchers. This attention has led to the uncovering of some important details and nuances of what makes an asset 'safe' and why it matters. In this blog post, we provide a review of the different aspects of safe assets, discuss possible reasons why they may be beneficial for investors, and give concrete examples of what these assets are in practice."

The blog continues, "In an idealized setting, a safe asset is easy to define. It is an asset that pays off a fixed amount with absolute certainty at some future date.... Consider, for example, U.S. Treasury securities, which are considered to have absolute safety of repayment, making them the prototypical 'safe asset.' Among U.S. Treasuries, there are ones guaranteeing nominal repayment and ones indexed to inflation, thus guaranteeing repayment in real terms."

They note, "In practice, safe assets are those with a very high likelihood of repayment, and are easy to value and trade. These assets play an important role in the financial system. Because of their safety they provide advantages above and beyond their risk-adjusted return.... Importantly, their high likelihood of repayment makes them immune to asymmetric information about their ultimate payoff, which allows investors to value them with a high degree of certainty and makes them easy to exchange for other assets or goods. Each of these features implies that investors are willing to forgo yield in order to reap the additional benefits safe assets provide. As a result, safe assets typically trade at a premium, known in the academic literature as a 'convenience yield,' which reflects the nonpecuniary benefits investors receive for holding them."

The NY Fed blog explains, "Although there is considerable focus on the safe asset properties of short-term T-bills, longer-term U.S. Treasury notes are also an important safe asset. Even though longer-term Treasuries are exposed to interest rate risk, they have zero credit risk, can be seamlessly used as collateral, and naturally do not suffer from any informational asymmetries about their ultimate payoff. In addition, longer-term Treasuries have a unique benefit which differentiates them from T-bills and makes them particularly useful as a safe asset for investors with longer horizons: they tend to appreciate in times of aggregate market downturns.... This example suggests that short maturity of an asset is not necessary for its usefulness as a safe asset."

It adds, "Importantly, the additional premia embedded in T-bills and Treasury notes is good news for the United States. Their safe asset status implies that the U.S. Treasury can issue bonds at lower rates, reducing the government’s debt burden, and ultimately benefiting U.S. taxpayers."

Finally, the piece comments, "In this post, we explore the role safe assets play in financial markets by focusing on U.S. Treasury securities, safe assets produced by the public sector. In addition to the public sector, the private sector can also create safe assets. For example, many of the benefits ascribed to public safe assets are also attributed to private short-term debt of certain issuers. An important difference between public and private safe assets, however, is that the reliability of private safe assets can come into question. In a follow-up post, we will explore these issues in more detail, including the incentives financial firms have to produce private safe assets, and their potential to increase fragility in the financial system."

This month, BFI speaks with Vanguard Portfolio Manager Chris Wrazen, who runs Vanguard's Short-Term Bond Index Fund. He discusses a number of issues in the short-term bond and index fund marketplace, including supply, yields, flows, and the challenges in tracking bond indexes. Our Q&A follows. (Note: This "profile" is reprinted from the November issue of our Bond Fund Intelligence publication. 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. Also, let us know if you'd like to see the about-to-be-released preliminary agenda for our upcoming Bond Fund Symposium conference, which will be in Los Angeles, Calif., March 22-23, 2018.)

BFI: How long have you been running short-term bond and index funds? Wrazen: We launched Total Bond [Index] fund back in 1987, so we have about 30 years or so of experience with bond index funds. With respect to the front end, we launched Short Index in 1994, so about 23 years with the "maturity tranched" suite of funds out there.... I have been at Vanguard since 2004 and in fixed income since 2008.... The first five years or so, I was on the active side, focused on structured products. Then for the last five years, I have been on the index side.

BFI: Tell us about index funds in general. Wrazen: On the fixed income side, it's a little bit different than equities because you can't just go and buy a basket of securities to replicate the benchmark. The fixed income market is still primarily traded OTC, so a lot of it is still voice, over the phone. We do leverage some electronic trading platforms, but even so, the liquidity in the space is such that you couldn't just go out and buy the whole benchmark.

So anytime we have a subscription, we need to decide which securities we want to buy. Even though it's an index product, at the security level we are going to be putting on overweights and underweights. Granted they will be very small. But we do want to be very deliberate about those securities that we have small overweights and underweights in.

BFI: How's the fund been doing lately? Wrazen: Performance has been really strong, and tracking has been really tight. Year to date, we're within 2/10ths of a basis point of the benchmark for short index. We're outperforming the benchmark by a fraction of a basis point. But overall, the space has been doing pretty well.

Wrazen: Granted, rates have been very low. We've been averaging, over the past five years or so, one and a quarter percent 'ish', very much in line with the benchmark.... The slowly rising interest rate environment, I think, is the ideal environment for a short bond fund. You don't have a lot of duration, but you do want to see that incremental carry pickup over time as you're reinvesting coupons and maturities.... Flows have been really robust. Our Short-Term Bond Index Fund has grown to over $50 billion, and year-to-date we have seen about $4 billion.

BFI: Tell us about your other offerings. Wrazen: We have our Short-Term Bond Index, which is the one we have been talking about. But we also have a Short Corporate Index Fund as well. There's both a traditional share class and an ETF share class.... It is very similar to Short Term Bond Index, in that it is 1-5 year. But the difference is our Short-Term Bond Index is a government & credit fund; it is about 70% or so government or government-related securities and about 30% credit bonds. Our Short Term Corporate Bond is 100% credit.

Wrazen: If you just isolate that 30% or so in Short Term Bond Index that's corporate credit, and scale that up to the whole fund, that is pretty much what we get in the Short Term Corporate Fund. Because it's entirely corporate, it does have a higher yield.

BFI: What's your biggest challenge? Wrazen: The short-term funds are more challenging to manage because you do have that dynamic of legacy 10 year and 30 year bonds that are rolling down into the 5-year part of the curve. When that happens, sometimes you have these big chunky issues that [do not have] a whole lot of liquidity. But they are in the benchmark now, so it creates an underweight that we need to fill or find a way to proxy.... To the extent the liquidity is not there, we have to come up with proxies, or different ways that we can basically get a comparable risk exposure and continue to have the fund track.... The market has been supportive, with the new issue pipeline being so robust.

Wrazen: So we have been able to get a lot of risk on through the new issue market and haven't had a need to lean on secondary liquidity quite as much. That's been a little bit of a mitigating factor. If the new issue market were to shut down and we continued to have these kinds of flows, the secondary liquidity could be a bit of a challenge.

BFI: Tell us more about the strategies you use? Wrazen: Short Term Bond Index is a 'govt-credit' fund, so it invests in government and government related securities. It's Treasuries and also includes agencies as well. Between Treasuries and agencies, that makes up about 65%, about 60% 'govies' and about 5% agencies. The remaining 35% is investment grade credit, mostly corporate credit, which includes financials, industrials and utilities. But there is also an 8% slice of the fund that is 'non-corporate' credit as well.... It's a Bloomberg Barclays Index..... It's all investment grade, so it needs to have a composite rating of at least low triple-B. This specific product doesn't include mortgage-backed securities; it doesn't include ABS or CMBS.

BFI: Talk about the ETF version. Wrazen: It is actually a pretty sizeable ETF share class as well. I mentioned the fund has about $50 billion in assets. Around $20 billion or so of that is in the ETF share class.... To answer the question about how investors choose which one [fund or ETF], the ETF share class does have a lower expense ratio than the Investor shares of the traditional mutual fund. So if you are a long-term holder and you are just trying to get a lower cost, but you don't meet the criteria for the Admiral shares, you can look to the ETF share class. Some investors like the flexibility to be able to get in and out of the market throughout the day too. If you are going to invest in an ETF share class, I think you have to have a pretty good understanding of the premium-discount dynamic that is in play with ETFs.

BFI: Are you worried about big inflows? Wrazen: It has definitely been incredible, the amount of flows we have seen, and it really seems like it's not subsiding any time soon. It just continues month after month. To answer your question ... I'm less concerned about it. I don't think it's really performance chasing or anything like that. The market is relatively comfortable with the fact that even if interest rates go up, they're unlikely to go up drastically in a short amount of time.... I think it's more of a structural shift. You have this demographic, this aging population. There is always going to be demand for fixed income. If you are talking about a front-end product like the Short-Term Bond Index, I think it is always going to have demand as people use it as a cash proxy.

BFI: What kinds of investors are interested in this space? Wrazen: It's pretty much across the board. There is definitely retail demand and a big portion of Vanguard's investor base is retail. But we also have a very strong institutional presence. This includes anything from corporate treasury accounts to DB or DC assets. We just had an institution move over $1 billion dollars or so into short index within the past year... As they move their previous holdings from whatever institution they were with before, they are kind of 'mapping' them into our most similar offerings.

BFI: What about regulations? Wrazen: From a regulatory standpoint, I think most of the trends that we are seeing are very index friendly, [such as] all these rules coming out on transparency. You also have the 'fiduciary rule' still lingering out there. They are all regulations that are very supportive of index products. I think that is a major part of what is driving this structural shift toward indexing, just an overall alignment of the way money managers manage with the interests of investors, which again is a great trend for the market and a very supportive one for Vanguard and our index funds in particular.

In a recent Link of the Day, we mentioned a release entitled, "ESMA Publishes Final Report On Money Market Funds Rules." The report from the European Security Markets Authority reviews, "Technical advice, draft implementing technical standards and guidelines under the MMF Regulation." We review the full report in more detail below. (See too our `Nov. 15 News, "ESMA Readies Opinions on EU Money Fund Regs; New MFI Intl Holdings.")

ESMA's release says, "The European Securities and Markets Authority (ESMA) has published a final report on the Money Market Funds Regulation (MMFR). The final report contains final versions of the technical advice, draft implementing technical standards (ITS), and guidelines on stress test scenarios carried out by MMF managers under the MMFR. The key requirements relate to asset liquidity and credit quality, the establishment of a reporting template and stress test scenarios carried out by MMF managers."

It explains, "These represent the detailed rules required for the implementation of the new European Union regulatory framework aimed at ensuring the stability and integrity of money market funds. The key requirements under the different policy tools include: Technical Advice - the liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement [and] the criteria for the validation of the credit quality assessment methodologies and the criteria for quantification of the credit risk and the relative risk of default of an issuer and of the instrument in which the MMF invests, as well as the criteria to establish qualitative indicators on the issuer of the instrument."

The requirements also include: "The development of a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF, including on the characteristics, portfolio indicators, assets, and liabilities of the MMF. This information will be submitted to national competent authorities (NCAs) and then transmitted to ESMA [and] Guidelines on common reference parameters of the scenarios to be included in the stress tests that managers of MMFs are required to conduct. This takes into account such factors as hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF, movements of interest rates and exchange rates or levels of redemption."

The report summary explains, "Article 15(7) of Regulation (EU) 2017/1131 on money market funds ("MMF Regulation") empowers the Commission to adopt delegated acts specifying liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement. In a letter dated 20 January 2017 (see Annex II to this paper), ESMA was asked to provide technical advice to the European Commission."

It also states, "Article 22 of the MMF Regulation empowers the Commission to adopt a delegated act specifying ... the criteria for the validation of the credit quality assessment methodologies referred to in Article 17 of the MMF Regulation ... the meaning of the 'material change' that could have an impact on the existing assessment of the instrument and that would trigger a new credit quality assessment for a money market instrument ... the criteria for quantification of the credit risk and the relative risk of default of an issuer and of the instrument in which the MMF invests [and] the criteria to establish qualitative indicators on the issuer of the instrument. In its aforementioned letter of 20 January 2017, the Commission asked ESMA to provide technical advice on these topics."

The report also tells us, "Article 37 of the MMF Regulation (see Annex II to this paper for the full text of the relevant Articles) provides that ESMA shall develop draft implementing technical standards to establish a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF."

The summary concludes, "Article 28 of the MMF Regulation provides that ESMA shall develop guidelines with a view to establishing common reference parameters of the stress test scenarios to be included in the stress tests managers of MMFs are required to conduct. This final report contains the technical advice, implementing technical standards and guidelines on stress tests that ESMA has developed."

According to the report, "The technical advice and implementing technical standards (ITS) have been submitted to the European Commission – in the case of the technical standards, for endorsement. With respect to the ITS on the establishment of a reporting template and the timing of implementation of the corresponding database, ESMA confirms that managers would need to send their first quarterly reports mentioned in Article 37 to NCAs in October/November 2019 (and not in July 2018). In addition, there will be no requirement to retroactively provide historical data for any period prior to this starting date of the reporting. In terms of next steps, ESMA will now start working on the Guidelines and information technology (IT) guidance that will complement the information included in the ITS so that managers of MMFs have all the necessary information to fill in the reporting template they will send to the competent authority of their MMF, as specified in Article 37 of the MMF Regulation."

They note, "With respect to the Guidelines on stress tests, ESMA determined that in addition to those stress tests managers of MMFs will conduct ... managers of MMFs should also conduct common reference stress test scenarios. The results of these will need to be included in the abovementioned reporting template according to Article 37(4) of the MMF Regulation. The corresponding calibrations of these common reference stress test scenarios will be specified when ESMA first updates the Guidelines in a sufficiently timely manner that managers of MMFs receive the appropriate information on these fields in order to fill in the reporting template mentioned in Article 37 of the MMFR. The timing of publication of the update of the Guidelines on stress tests will be the same as the abovementioned Guidelines and IT guidance that will complement the information included in the ITS."

Finally, the report adds, "ESMA received 18 responses to the consultation paper (CP) on ESMA's draft technical advice, ITS and guidelines on stress tests under the MMF Regulation. Responses were received from asset managers (and their associations), investor representatives, a public authority and an association of professionals investors. ESMA received significant feedback from stakeholders on the issue of share destruction (share cancellation). ESMA has sought the views of the legal services of the Commission on this issue, given that the practice raises issues of interpretation of the MMF Regulation. In light of the output of this legal assessment, ESMA will take appropriate follow-up actions, having regard to the nature of this issue and current market practices. The precise tool that ESMA will use will depend on the outcome of the Commission's legal assessment. However, these follow-up actions are likely to include, in particular, input to the Commission on the extent to which additional fields related to share cancellation would potentially need to be included in the reporting template under Article 37 of the MMF Regulation."

The U.S. Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary earlier this week. It shows that total money fund assets were down $9.5 billion in October to $3.025 trillion, but Prime funds increased for the 10th month in a row. Prime MMF assets rose by $1.0 billion (after gaining $22.8 billion in September, $16.8 billion in August, and $9.5 billion in July) to $665.5 billion. Government money funds decreased by $11.2 billion, while Tax Exempt MMFs rose by $0.7 billion. Gross yields inched higher for Prime, Government & Treasury MMFs, but were flat for Tax Exempt funds. 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 decreased by $9.5 billion in October, after increasing by $46.2 billion in September, and increasing $71.2 billion in August. MMFs increased by $19.9 billion in July, decreased by $23.7 in June, and increased by $3.8 billion in May. Over the past 12 months through 10/31/17, total MMF assets have increased by $110.1 billion, or 3.8%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, but Crane Data has added many of these funds to our collections. over the past year)

Of the $3.025 trillion in assets, $665.5 billion was in Prime funds, which increased by $1.0 billion in October. Prime MMFs increased by $22.8 billion in September, $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, and $24.9 billion in February. Prime funds represented 22.0% of total assets at the end of October. They've increased by $115.1 billion, or 20.9%, YTD. They've increased by $103.2 billion the past 12 months, or 18.3%, but have decreased by $1.125 trillion over the past 2 years.

Government & Treasury funds totaled $2.227 billion, or 73.6% of assets,. They were down $11.2 billion in October, their first decrease since June, but they were up $24.5 billion in September. Govt MMFs were also up $56.8 billion in August and $8.0 billion in July, down $26.9 in June, and up $0.4 billion in May. Govt & Treas MMFs are up $9.3 billion over 12 months (0.4%). Tax Exempt Funds increased $0.7B to $132.7 billion, or 4.4% of all assets. The number of money funds is 399, down by seven funds from last month and down 21 from 10/31/16.

Yields were up fractionally in October for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on October 31 was 1.29%, up one basis point from the previous month but up 0.71% from October 2016. Gross yields increased to 1.10% for Government/Treasury funds, up 0.02% from the previous month, and more than double the 0.42% of October 2016. Tax Exempt Weighted Average Gross Yields remained the same in October at 0.96%; they've increased by 27 bps since 10/31/16.

The Weighted Average Net Prime Yield was 1.09%, up 0.02% from the previous month and up 0.61% since 10/31/16. The Weighted Average Prime Expense Ratio was 0.20% in October (down one basis point from the previous month). Prime expense ratios are down by four bps over the past year. (Note: These averages are asset-weighted.)

WALs and WAMs were lower in October, down across all categories (except WAMs for Prime MMFs). The average Weighted Average Life, or WAL, was 62.3 days (up 0.4 days from last month) for Prime funds, 82.1 days (down 3.8 days) for Government/Treasury funds, and 26.1 days (down 2.1 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 26.8 days (down 0.9 days from the previous month) for Prime funds, 30.1 days (down 2.0 days) for Govt/Treasury funds, and 23.6 days (down 2.1 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 33.2% in October (down 2.2% from previous month). Total Weekly Liquidity was 50.9% (down 0.6%) for Prime MMFs.

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $78.5 billion, followed by France with $63.4 billion, the U.S. with $60.9 billion, Japan with $50.1B, then Sweden ($46.9B), Australia/New Zealand ($40.9B), the Netherlands ($34.7) and the UK ($31.3). Germany ($28.2B) and Switzerland ($16.7B) rounded out the top 10.

The gainers among Prime MMF bank related securities for the month included: the Netherlands (up $13.4B), France (up $8.9B), Belgium (up $8.0B), the U.S. (up $5.1B), Switzerland (up $1.7B), and the UK (up $1.6B). The biggest drops came from Canada (down $6.2B), Sweden (down $2.1B), Singapore (down $1.9B), Norway (down $1.8B), Germany (down $1.6B), Japan (down $1.6B), Aust/NZ (down $471 million), and China (down $435 million). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $247.7B (up $27.8B from last month), while the Eurozone subset had $141 billion (up $28.7B). The Americas had $140.0 billion (down $986 million), while Asian and Pacific had $103.3 billion (down $4.5B).

Of the $669.8 billion in Prime MMF Portfolios as of Oct. 31, $279.1B (41.7%) was in CDs (up from $263.1B), $137.3B (20.5%) was in Government securities (including direct and repo), down from $150.2B, $95.2B (14.2%) was held in Non-Financial CP and Other Short Term Securities (up from $93.9B), $119.3B (17.8%) was in Financial Company CP (up from $115.3B), and $38.9B (5.8%) was in ABCP (up from $38.1B).

The Proportion of Non-Government Securities in All Taxable Funds was 18.2% at month-end, up from 17.9% the previous month. All MMF Repo with Federal Reserve plunged to $164.4B in October from $298.5B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 37.1% were in maturities of 60 days and over (up from 36.1%), while 9.7% were in maturities of 180 days and over (up from 9.3%).

This month, Money Fund Intelligence speaks with Northern Trust Asset Management's Director of Short Duration Fixed Income Peter Yi, who has steadily returned to work following a car accident last year. He tells us about Northern's pioneering role in cash "segmentation," the gradual recovery of prime fund assets, and their views on differentiation in the ultra-short space. Our Q&A follows. (Note: This interview is reprinted from the November issue of our flagship MFI newsletter; contact us at info@cranedata.com to request the full issue.)

MFI: Tell us about Northern's history. Yi: Sure. As you know, Northern Trust Asset Management has had a long, successful history managing cash and liquidity products. We've been managing liquidity products since the 1970's, when our trust department created our first cash sweep vehicle. Not only do we have the experience, but we're also one of the largest cash managers, whether you simply look at money market mutual fund assets or if you look at it comprehensively with our nonregistered STIFs, separately managed accounts and security lending reinvestment collateral pools. This gives us a formidable presence in the liquidity business.

Northern Trust thinks of cash management as a core capability and a product that really caters to both our institutional asset servicing business and our retail wealth management clients. Right now, we are managing about $240 billion across all of our money market and short duration strategies. As you know, having experience and leadership are critical in the money market business. This has served us well in successfully navigating not only challenging credit and interest-rate environments, but the changing landscape driven by regulatory reform.

In terms of my history, I have been at Northern Trust Asset Management for more than 17 years. I have seen all the multidirectional excitement in the money market industry from its extreme lows to extreme highs. Certainly, it has evolved and it is going to continue to evolve.... We continue to have constructive conversations internally and externally with clients. We continue to spend a lot of time thinking about the next generation of cash management products.

MFI: On a personal note, welcome back! Yi: Thanks. It's great to be back to overseeing our 2a-7 money market mutual fund business, our STIFs, and our securities lending reinvestment, as well as our ultra-short fixed income. I still have purview over anything that is short duration. So we're back to business as usual.

MFI: What is your biggest priority now? Yi: Cash segmentation is definitely really important to us and an area where we've had great success. We were one of the first asset managers to create a cash segmentation framework and devise a "bucketing" strategy. Back in the early 2000's, we were thinking, 'How can we think about ways to optimize cash?' Today, not a whole lot has changed. We continue to spend a significant amount of time talking to clients. Our main objective is [understanding] their liquidity needs. A big strategic focus for us is our ultra-short product offerings. We have really been challenging our clients to rethink cash in a way that really truly optimizes their expectations for risk, liquidity, and return.

MFI: Are you done tweaking your funds? Yi: We still have the offerings we did before money market reform. We did do some consolidating of funds, just from a rationalization perspective, combining government funds. Our flagship fund is now our Treasury money market fund. Just given the simplicity of it being a government fund and not being subject to a variable NAV [and] not having any fees or gates restrictions, has enabled it to grow exponentially. But we still offer prime and municipal funds both on the retail and institutional side. And we share the observation that both prime and municipal money market funds are starting to gain much more traction today, one year after reform. Again, we're challenging our investors to rethink cash.

MFI: Can you talk about Prime flows? Yi: There's been a meaningful return to prime funds, but it's been slow. Investors are looking for a track record now. They're looking for stability in the NAV of a prime fund, and they're looking for an attractive yield spread over a government fund. From a net asset value perspective, time has really shown that they have been incredibly stable since October 2016. This is despite the fact that the Fed has been raising the Fed funds rate.... The other thing [is that] the spread has been widening. It ranges from 25 to 40 basis points. That seems to be the key level for some investors to jump back from a government fund to a prime fund.

MFI: What other challenges do you see? Yi: From a portfolio management perspective, there are challenges all the time in terms of sourcing the right type of investments. From a credit perspective, we're always managing and assessing risk in the marketplace. Managing credit risk has been the number one priority for our prime funds. The challenge is, we need to make sure that we find the right supply dynamics and get paid for taking on any type of credit risk. This dynamic has gotten better after the industry shifted into government funds and spreads widened. But we continue to be very focused on high quality issuers with short maturities.

MFI: What are you buying? Yi: The industry has been very resilient. It's still around $2.7 trillion despite all these changes. Like many predicted, the reality is assets have shifted to government funds in a very meaningful way. We like one-year Treasuries right now, just given our forecast for a shallower path for rate increases.... [W]e've been taking duration through these fixed rate securities. And even for our prime funds, we're maintaining a strong overweight to government securities and taking duration with one-year Treasuries.

MFI: What about fees and expenses? Yi: Fee waivers are not really a headline for us anymore. Today, they're public and they're immaterial. In terms of recouping some of the waivers we had in the past, we think that is extremely unlikely and it's not something we are pursuing. Having robust money market offerings -- that is what is really guiding our fee strategy. More likely than not, we're going to see fees actually go lower across the industry rather than higher.

MFI: Any final thoughts on reforms? Yi: It's nice to look forward, and say, 'We're done with reform for now and let's look to the future.' Last year's reforms were significant. We invested a lot of time and capital to ensure that we were fully prepared for all the changes. We think the money market industry continues to thrive. We're continuing to listen to our clients to fully address their liquidity needs. There has been chatter about trying to pull back on some of the reforms but we're not spending a whole lot of time thinking about that. We know there are a lot of other things that are much higher in priority on the legislative agenda. We spent a lot of time, and effort and money, and now it's time for us to market what we have and continue to grow the business, understanding that liquidity is valued in every market cycle.

MFI: Talk about ultra-short bond funds. Yi: We've been seeing much more demand for ultra-short fixed income.... Right now, we think it's in the investment wheelhouse for fixed income. We've seen corporate treasurers starting to reach out for a little more yield, and finding high credit quality products in the ultrashort space with a 50-75 basis point premium relative to a money market fund. Then you have core fixed income investors that are afraid of rising rates, moving down the yield curve.... So, our ultra-short fixed income products continue to resonate and do very, very well.

MFI: What about other cash pools? Yi: We do manage other liquidity products outside of our 2a-7 money market mutual funds business, like our STIF funds, as well as our securities lending reinvestment pools. They're managed [similar to] our registered money market mutual funds. Many of these funds were able to take advantage of recent wider credit spreads, they've been much more popular over the last year.

MFI: Any thoughts on the future? Yi: Money market reform has passed now. We're optimistic, we're excited, we're spending a lot of time thinking of the future. We're still doing wide-ranging analysis on how we think the money market industry is going to evolve. I personally spend a lot of time thinking about the next generation of cash management vehicles.... Here at Northern Trust Asset Management, we have a catchphrase, 'Liquidity is valued in every market cycle.' So despite money fund reform, we still think the industry is going to continue to survive and be highly valued."

The slow but steady recovery in Prime assets continues to be the most talked about money fund story of the second half of 2017. Most recently, Invesco, addressed the topic with a paper entitled, "Change Creates Opportunity in US Prime Institutional Money Market Funds," and Capital Advisors Group," discussed it in, "First Annual Checkup on Reformed Institutional Prime Funds." Invesco's piece tell us, "We believe disruption and change in the US money market fund industry has led to a renewed relative value opportunity in US prime institutional money market funds ('prime funds'). In the post-financial crisis era from 2009 to 2016, a seemingly unrelenting barrage of challenges bombarded the US money market fund industry: zero interest rate policy (ZIRP), industry consolidation, reform in 2010, reform in 2016 and a massive shift in assets out of prime into government money market funds. However, past is prologue, and two recent trends have led to attractive valuations in prime funds."

They say these trends include: "1. The US Federal Reserve's (Fed) removal of monetary policy accommodation has led to sharply higher yields on prime funds. 2. A shift of more than USD1 trillion in assets into US government money market funds ... and a resulting supply/demand imbalance in money market securities has led to attractive relative valuations of prime funds."

Invesco's Rob Corner explains, "Absolute levels of US prime money market yields have improved markedly on the heels of four Fed rate hikes since late 2015. These tightening moves have helped push up average prime fund yields to around 1%, after averaging only 0.04% under the Fed's zero interest rate policy from 2011 to 2015.... We believe yields on US money market funds could continue to increase in the months and years ahead if the Fed stays on its current path of removing monetary policy accommodation, based on a strong correlation between monetary policy rates and US money market fund yields."

He continues, "The average yield advantage of prime funds over government institutional money market funds has spiked in recent months, averaging a post-crisis high of 31 basis points so far in 2017. The primary driver of this relative value boost has been a change in investor preference in favor of government money market funds after the implementation of US money market fund reform in October 2016. Prime funds suffered significant outflows in 2016, largely due to investor concerns over new liquidity fees and redemption gate rules and, for the first time, transacting at a fluctuating net asset value (FNAV). The resulting supply/demand imbalance -- excess demand for government money market securities and reduced demand for prime money market securities like commercial paper and certificates of deposit -- resulted in higher relative yields on prime money market funds."

Invesco notes, "However, since reform was implemented, fears over fees and gates have been largely unrealized and fluctuations of NAVs on prime funds have been minimal, in our opinion. Moreover, we believe higher relative yield levels on prime funds versus government funds can potentially compensate institutional investors for the risk of transacting at a floating net asset value. Wider spread levels of prime funds can reduce the breakeven holding period required to offset each $0.0001 decline in net asset value."

The piece adds, "It seems investors have taken notice of these developments and have gradually returned to prime funds. Total assets in these funds jumped by 49% to USD183 billion as of Sept. 26, 2017, after falling to an almost 20-year low of USD123 billion on Nov. 8, 2016 immediately following US money market fund reform."

They conclude, "Looking ahead, we believe yields on prime funds could continue to increase in the months and years ahead if the Fed stays on its current path of removing of monetary policy accommodation. The relative value advantage of prime funds could also remain elevated if investor preference for government funds remains strong and supply/demand imbalances in the market for money market securities persist. Over the longer term, the relative spread could gradually adjust downward as investors take advantage of this renewed opportunity, but we expect it to remain relatively attractive in the near term."

In related news, Capital Advisors' latest report tells us, "In the year since the SEC instituted new rules governing money market mutual funds, institutional prime funds have recaptured some lost ground, although balances still lag government funds. Fund characteristics returned to pre-reform levels with wide dispersions and concentrated exposures to non-US financial issuers. Asset-backed instruments also increased. While prime fund yields benefitted from higher fed funds rates, the current prime-to government yield spread may be insufficient to bring back most investors."

They explain, "We think that structural changes have reduced prime funds' appeal to a subset of previous shareholders, with their main utility changed from overnight, stable value deposit equivalents to return-oriented reserve instruments. We are optimistic that prime assets will continue to grow, but are likely to be in the shadow of government funds for some time. Investors with slightly longer time horizons and tolerance for interest rate volatility may consider portfolios of separately managed securities as suitable alternatives."

The introduction says, "As the regulatory dust settled and the yield environment improved, there have been signs of awakened interest in institutional prime funds. In fact, group assets increased 45% between October 31, 2016 and October 31, 2017. The addition of approximately $56 billion outpaced the decline of $33 billion in institutional government funds over the same period. At the one-year anniversary of the SEC regulatory changeover, we take a metaphorical temperature on institutional prime funds and look for insight into their growth potential."

The CAG report continues, "As widely reported, shareholder preferences and fund family decisions resulted in uneven asset losses among prime funds. While fund families continue to woo institutional investors back to prime, concentration among industry players and shareholder concentration within funds appear to have worsened.... Due to uneven asset outflows, however, the top five families' collective market share rose from 57% to 64% and 79% as a percentage of overall institutional prime during the same time period.... [R]educed fund sizes also limit shareholder participation by institutional cash investors with large balances, particularly those who intend not to exceed 5% of any fund. Shareholder level information, unfortunately, is not available to the public which continues to present challenges for investors attempting to ascertain shared liquidity risk."

It explains, "To gain a broader understanding of institutional prime fund performance over government funds, we look to Crane Data's money fund indices. [I]nstitutional prime funds in the Crane Data universe earned 0.97% on average as of September 30, while institutional government funds earned 0.76%, for a yield spread of 0.21%. The prime over government spread has been 0.20-0.25% since December 2016. Past surveys conducted by treasury management associations and securities firms suggested a wide range of 0.25-1.00% yield spread for investors considering prime funds to overcome the obstacles of floating NAVs and redemption restrictions. Is the current spread enticing enough, in absolute terms and relative to government funds and the RRP, for institutional cash investors to take a serious look? Answers to this question vary from organization to organization, but we have noticed an uptick in investor inquires in recent weeks. The year-to-date increases in institutional prime assets also corroborated some reawakened interest in prime funds."

Finally, Capital Advisors comments, "We think that, although institutional prime funds have made impressive strides recovering from last year’s reform impact, structural changes have reduced their appeal to a subset of previous shareholders. Floating NAVs, uncertainty related to fees and gates and sponsor and shareholder concentration have changed the funds’ utility from overnight, stable value deposit equivalents to return-oriented reserve instruments. The multi-NAV pricing and redemption model with some prime funds is still untested in a volatile, rapidly developing intra-day market. We are optimistic that institutional prime fund assets will continue to grow, as the SEC’s 2a-7 rules governing MMFs continue to offer cautiously interested investors better protection and safeguards than ultra-short bond funds and private liquidity funds. Their more specialized appeal, however, may limit their long-term growth potential relative to government funds."

The AFP, or Association for Financial Professionals, published a short article entitled, "Money Funds: The Legislative Push for a Stable NAV Continues," which discusses the long-shot legislation in Congress to roll back the floating NAV. They tell us, "In a hearing last week on legislative proposals to improve small businesses' and communities' access to capital, Rep. Keith Rothfus (R-Pa.) referenced a new letter by the Association for Financial Professionals in support of the Consumer Financial Choice and Capital Markets Protection Act (H.R. 2319). The bill would allow the net asset value (NAV) for prime and municipal money market funds to stabilize if the funds meet certain criteria." (See our Nov. 15 Link of the Day, "ignites on 'Undo' MMF Reform Bill," and our May 24 News, "Stable NAV Bill Re-Introduced in House; Amortized Cost for Inst Funds?" for more.)

The AFP brief explains, "H.R. 2319 has received support from more than 200 groups and community leaders, given the mass exodus out of prime and municipal funds. From July 2015 to July 2017, prime funds went from $1.73 trillion in investments to $0.62 trillion, while tax-exempt funds, a key funding source form municipalities, universities and hospitals, fell from $254 billion to $135 billion, according to Treasury Strategies." They quote Rothfus, "We know what happened; $1.2 trillion has moved out of the private mutual fund sector."

It continues, "Many of AFP's 16,000 members have long relied on prime and municipal for their short-term cash management needs. But once the Securities and Exchange Commission enacted its rule in October 2016, prohibiting money funds from offering a stable NAV to investors other than 'natural persons,' organizations began moving their cash out of prime and municipal funds into other investment vehicles that do not support adequately companies' capital access needs."

The update says, "AFP's members prefer money funds because they provide liquidity, principal preservation, diversification, built-in credit analysis, and ease of accounting. 'In addition, these funds are a key source of short-term financing for businesses to purchase seasonal inventory, pay suppliers, and fund payroll and other expenses when cash outflows are greater than inflows,' Jeff Glenzer, CTP, vice president and chief operating officer for AFP, wrote in the letter. 'Issuing short-term variable rate debt held by money market funds is preferable to secured bank loans for businesses because it provides more efficient and affordable short-term financing, and allows businesses to invest more in job creating activities'."

Finally, the AFP writes, "The implementation of the floating NAV has resulted in the capital pool available to business borrowers shrinking by about $160 billion since early 2016, while many companies are paying higher rates to alternative lenders. Meanwhile, municipal entities and non-government conduit borrowers like hospitals and universities have seen their borrowing costs increase from under 10 basis points to about 90 basis points in that time. Glenzer recommends that H.R. 2319 be enacted as soon as possible 'to reverse the long-term damage being done to the indispensable capital markets financing options provided by money market funds.'"

In other news, BlackRock published a piece on the website Seeking Alpha entitled, "Should DC Plans Give Money Market Funds Another Look?" It states, "Rising rates have drawn assets back into prime money market strategies. Can collective funds help DC plans capture money market exposure? A little more than a year ago, money market mutual fund reform took effect, adding redemption gates and liquidity fees to 40 Act money market mutual funds and, for institutional prime money market mutual funds, a floating net asset value (NAV) requirement.... At the time, money market yields in general were down to almost 0% and spreads between government and prime money market mutual funds were narrow."

BlackRock points out, "Not surprisingly, many investors decided there was not enough additional upside for managing the extra restrictions on prime money market mutual funds. For their part, many defined contribution plan sponsors also opted for money fund investment options less affected by the changes. But that may be changing."

They write, "Rates have begun to rise -- with more hikes expected in 2018 -- and that has made the difference between prime and government yields grow more significant.... Prime money market mutual funds have consistently yielded 30 basis points more than government money market mutual funds since the beginning of 2017."

BlackRock notes, "Interest in prime money market mutual funds has followed, with assets under management increasing more than 17% year-to-date. If this is the new normal for prime money market strategies, DC plan sponsors may no longer find themselves comfortable leaving potentially significant yield on the table for their participants seeking liquidity and stability."

The piece continues, "A prime money market option offered through a collective trust fund (CTF) may help plan sponsors continue to offer a stable NAV investment that may not require liquidity fees and redemption gates, which may help participants who seek to take advantage of the yield spread relative to government MMFs. As CTFs are primarily regulated by the Office of the Comptroller of the Currency (OCC) or state banking regulators, they are not subject to the Securities and Exchange Commission's (SEC) money market regulatory requirements."

It concludes, "Currently, 59% of DC plans offer a money market investment option, and 3.9% of all 401(K) plan assets are invested in money market mutual funds. Money market mutual funds, however are not the only option. Not long ago, implementations such as CTFs were found in only the largest DC plans. Today, these vehicles are widely held and adopted in DC plans. There are now more than 65% of plans offering CTFs on their investment lineups in 2017, up from 48% in 2012."

A press release entitled, "J.P. Morgan Global Liquidity Announces Intended Money Market Fund Changes in Response to New European Regulations," tells us, "J.P. Morgan Asset Management (JPMAM) today announced their intent to respond to the fund changes required by the incoming European Union Money Market Fund (MMF) Regulations. The new regulations will require providers to make a number of changes to their funds in terms of structure, composition, valuation, liquidity requirements and information reporting." J.P. Morgan Asset Management, the largest manager of money market funds in Europe with $178 billion and the second largest manager globally with $425 billion, is the first fund complex to announce plans to offer a full fund lineup under the pending new European money fund regulations. We review JPMAM's release and European MMF options, as well as ICI's new "Money Market Fund Holdings" update, below.

Jim Fuell, Head of Global Liquidity Sales, International, at J.P. Morgan Asset Management comments, "As a first mover in announcing our intent to offer our clients complete optionality under the recategorisation required by the new regulations, we're well positioned to continue to offer clients the benefits of short-term liquidity investing with a comprehensive range of products.... Our liquidity fund range investment options will evolve to allow us to provide choices to USD, GBP and EUR investors across all categories including public debt constant net asset value (CNAV), low volatility net asset value (LVNAV) and variable net asset value (VNAV) funds. These changes to the fund range will have no impact on the investment profile or philosophy of any of our funds."

The release explains, "Under the new rules, MMFs will be split into two types, with three structural options available to investors. The new regulations will also preserve Constant Net Asset Value (CNAV) for government funds and will create a new type of fund -- Low Volatility Net Asset Value (LVNAV)." (See our August 23 News, "Dillon Eustace Reviews European Money Market Reforms; Disclosures.")

Kerrie Mitchener-Nissen, Head of Product Development, International, adds, "Having successfully introduced wide-ranging reforms for MMFs in the US in October 2016, we are bringing a high level of experience, knowledge and skill to the program in Europe, and we are committed to making the transition to the new regime as smooth as possible for our investors."

The release also says, "While existing MMFs have until 21 January 2019 to comply with the new rules, J.P. Morgan Asset Management intends to be fully compliant well ahead of the implementation deadline in order to support its clients through the transition to the new regime, with fund changes at this time planned to go into effect in the fourth quarter of 2018."

An accompanying document, "Fund Range Options: European Money Market Fund Regulation," explains, "The new European Money Market Fund (MMF) Regulations will require providers to make a number of changes to their funds in terms of structure, composition, valuation, liquidity requirements and information reporting. As a result, clients investing in the short-term space will benefit from greater optionality. Under the new rules, MMFs will be split into two types, with three structural options available to investors. The new regulations will also preserve Constant Net Asset Value (CNAV) for government funds and will create a new type of fund -- Low Volatility Net Asset Value (LVNAV)."

It states, "While existing MMFs have until 21 January 2019 to comply with the new rules, J.P. Morgan Asset Management intends to be fully compliant ahead of the deadline in order to support its clients through the transition to the new regime."

The "Fund Range Options" document notes, "Under the new regulation, J.P. Morgan Asset Management's liquidity fund range will evolve. Below is a summary of the planned fund range options we intend to offer in the short-term space for USD, GBP and EUR investors." The "Planned fund range options" include: "Public Debt Constant Net Asset Value (CNAV) funds in USD (treasury and govt), GBP (gilt) and EUR (continuing to evaluate investor demand); Low Volatility Net Asset value (LVNAV) funds in USD, GBP and EUR (all credit); and Variable Net Asset Value (VNAV) funds in USD (treasury, govt and credit), GBP (gilt and credit) and EUR (credit).

Finally, Fuell adds, "Our MMFs range is well positioned to allow clients to capitalise on the opportunities represented by the new regulation.... As our clients continue to reap the benefits offered by MMFs, we are pleased to be able to offer them a comprehensive range of products to help them maximise the impact of their short-term cash."

In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of Oct. 31, 2017) Wednesday. 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. (See too Crane Data's Nov. 13 News, "Nov. Money Fund Portfolio Holdings: Treasuries Jump Again, CDs Higher.")

The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in October, prime money market funds held 23.7 percent of their portfolios in daily liquid assets and 43.3 percent in weekly liquid assets, while government money market funds held 57.4 percent of their portfolios in daily liquid assets and 77.3 percent in weekly liquid assets." Prime DLA decreased from 30.0% last month and Prime WLA decreased from 45.0% last month.

ICI explains, "At the end of October, prime funds had a weighted average maturity (WAM) of 30 days and a weighted average life (WAL) of 72 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 30 days and a WAL of 82 days." Prime WAMs remained the same from the prior month, and WALs were up one day. Govt WAMs decreased by 2 days and Govt WALs decreased by 4 days from last month.

Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas fell from $177.68 billion in September to $169.04 billion in October. Government money market funds' holdings attributable to the Americas fell from $1,781.12 billion in September to $1,720.51 billion in October."

The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $169.0 billion, or 37.9%; Asia and Pacific at $88.8 billion, or 19.9%; Europe at $184.1 billion, or 41.2%; and, Other (including Supranational) at $4.4 billion, or 1.0%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.721 trillion, or 77.8%; Asia and Pacific at $102.1 billion, or 4.6%; and Europe at $384.7 billion, or 17.4%.

The U.K.-based Investment Week published the article, "ESMA prepares stance on money market fund regulation." They tell us, "The European Securities and Markets Authority (ESMA) is preparing to issue its opinion on the future of Europe-wide money market fund regulation to the European Commission (EC). Speaking at the Irish Funds 5th Annual UK Symposium in London on Friday (10 November), Richard Stobo, head of investment management at the pan-European regulator said it was readying its recommendations to the EC, which would be based on an industry consultation held over the past year." (See our Aug. 24 News, "IMMFA, Irish Funds Comment on ESMA's EU Reforms Consultation Paper, our May 30 News, "ESMA Publishes Consultation on European MMF Regs; Fitch on European" for more.)

Investment Week writes, "Stobo said it would help form the EC's work to produce EU-wide legislation for money market funds, which are currently regulated at country level. ESMA's opinion had taken into account market responses to its May 2017 consultation paper on the products and aimed to bring about "sensible" regulatory convergence in the EU, he said." He comments, "It is now up to the EC to decide whether they want to take our opinion on board."

The piece explains, "ESMA's priority is ensuring the stability and integrity of money market funds, with key proposals including liquidity and credit quality requirements. Once the EC has reviewed the position of the watchdog it will create new rules, which will replace those of national regulators, such as the UK's Financial Conduct Authority (FCA)."

Finally, the publication adds, "Stobo also said work was being undertaken on publishing a Europe-wide report similar to the FCA's Asset Management Market Study, designed to improve price competition in the industry. He said ESMA's own study would approach the issue of price competition "slightly differently" to the FCA's approach, but he did not provide further details. Stobo added the regulator's research would 'begin with UCITS funds'."

In related news, Crane Data's MFI International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), up $101 billion year-to-date to $833 billion as of 11/13/17. U.S. Dollar (USD) funds (152) account for over half ($443 billion, or 53.2%) of the total, while Euro (EUR) money funds (93) total E96 billion and Pound Sterling (GBP) funds (106) total L209. USD funds are up $45 billion, YTD, while Euro funds are up E1 billion and GBP funds are up L19B. USD MMFs yield 1.01% (7-Day) on average (11/13/17), up 85 basis points from 12/31/16. EUR MMFs yield -0.52% on average, down 33 basis points YTD, while GBP MMFs yield 0.22%, down 6 bps YTD.

Crane's latest MFI International Money Fund Portfolio Holdings data (as of 10/31/17) shows that European-domiciled US Dollar MMFs, on average, consist of 17% in Treasury securities, 25% in Commercial Paper (CP), 21% in Certificates of Deposit (CDs), 19% in Other securities (primarily Time Deposits), 15% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 29.6% of their portfolios maturing Overnight, 13.5% maturing in 2-7 Days, 21.1% maturing in 8-30 Days, 11.3% maturing in 31-60 Days, 9.4% maturing in 61-90 Days, 11.6% maturing in 91-180 Days, and 3.1% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (25.9%), France (16.6%), Japan (9.9%), Canada (8.0%), Sweden (6.8%), The Netherlands (5.7%), Australia (5.4%), Germany (4.9%), United Kingdom (3.9%), Singapore (2.8%), Belgium (2.8%), and China (2.3%).

The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $83.2 billion (16.6% of total assets), BNP Paribas with $22.1B (4.4%), Societe Generale with $16.8B (3.4%), Credit Agricole with $14.5B (2.9%), Mitsubishi UFJ Financial Group Inc with $12.7B (2.5%), Toronto-Dominion Bank with $12.2B (2.4%), Natixis with $9.8B (2.0%), ING Bank with $9.0B (1.8%), Svenska Handelsbanken with $8.6B (1.7%), Wells Fargo with $8.6B (1.7%), Mizuho Corporate Bank Ltd with $8.4B (1.7%), Swedbank AB with $8.4B (1.7%), Sumitomo Mitsui Trust Bank with $8.1B (1.6%), RBC with $7.7B (1.5%), National Australia Bank Ltd with $7.6B (1.5), Nordea Bank with $7.6B (1.5%), DnB NOR Bank ASA with $7.3B (1.5%), Skandinaviska Enskilda Banken AB with $7.2B (1.4%), Rabobank with $7.1B (1.4%), and Commonwealth Bank of Australia with $6.8B (1.3%).

Euro MMFs tracked by Crane Data contain, on average 43% in CP, 25% in CDs, 21% in Other (primarily Time Deposits), 9% in Repo, 1% in Treasuries and 1% in Agency securities. EUR funds have on average 22.0% of their portfolios maturing Overnight, 10.5% maturing in 2-7 Days, 16.6% maturing in 8-30 Days, 12.8% maturing in 31-60 Days, 15.2% maturing in 61-90 Days, 19.4% maturing in 91-180 Days and 3.5% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (29.5%), Japan (14.1%), US (12.2%), Sweden (7.8%), The Netherlands (7.8%), Belgium (6.9%), Switzerland (5.3%), Germany (4.4%), and the United Kingdom (2.5%).

The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.8B (6.2%), Credit Agricole with E4.0B (4.3%), Rabobank with E3.7B (3.9%), Svenska Handelsbanken with E3.6B (3.8%), KBC Group NV with E3.4B (3.6%), Nordea Bank with E3.4B (3.6%), Credit Mutuel with E3.1B (3.3%), Societe Generale with E3.0B (3.2%), Mizuho Corporate Bank Ltd with E2.9B (3.1%), Mitsubishi UFJ Financial Group Inc with E2.9B (3.1%), Sumitomo Mitsui Banking Co with E2.9B (3.1%), BPCE SA with E2.6B (2.8%), Agence Central de Organismes de Securite Sociale with E2.6B (2.8%), Dexia Group with E2.5B (2.7%), and UBS AG with E2.5B (2.6%).

The GBP funds tracked by MFI International contain, on average (as of 10/31/17): 42% in CDs, 23% in Other (Time Deposits), 21% in CP, 11% in Repo, 3% in Treasury, and 0% in Agency. Sterling funds have on average 26.3% of their portfolios maturing Overnight, 12.3% maturing in 2-7 Days, 19.4% maturing in 8-30 Days, 10.8% maturing in 31-60 Days, 13.3% maturing in 61-90 Days, 14.7% maturing in 91-180 Days, and 3.2% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: Japan (19.2%), France (19.0%), United Kingdom (13.8%), The Netherlands (8.0%), Germany (6.5%), US (5.3%), Canada (5.0%), Sweden (4.9%), Australia (3.0%), and China (2.9%).

The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L10.5B (6.4%), Sumitomo Mitsui Banking Co. with L7.9B (4.9%), Mitsubishi UFJ Financial Group Inc. with L7.5B (4.6%), BPCE SA with L6.7B (4.1%), Credit Agricole with L6.5B (4.0%), BNP Paribas with L6.2B (3.8%), Mizuho Corporate Bank Ltd with L6.2B (3.8%), Rabobank with L5.9B (3.6%), Sumitomo Mitsui Trust Bank with L5.0B (3.1%), Bank of America with L4.9B (3.0%), Credit Mutuel with L4.9B (3.0%), Nordea Bank with L4.6B (2.8%), ING Bank with L4.6B (2.8%), DZ Bank AG with L3.8B (2.3%), Toronto Dominion Bank with L3.5B (2.2%).

The November issue of our Bond Fund Intelligence newsletter was sent to subscribers Tuesday morning. It features the lead story, "Bond Funds & EFTs Break $4.5 Trillion; $350B inflows YTD," which reviews bond flows and EFT asset growth in the last month and quarter, and the fund "profile" piece, "Vanguard's Chris Wrazen: Short-Term Bond Index," which discusses how bond index funds are different than stock index funds. BFI also recaps the latest Bond Fund News, including the briefs: Yields & Returns Dip in October. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the November 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. Watch for our next Bond Fund Portfolio Holdings data too early next week.)

Our lead "Bond Funds & EFTs Break $4.5 Trillion; $350B Inflows YTD" story says, "Bond fund inflows and asset growth accelerated in the latest month and quarter, continuing to run at a near-record pace. Based on the Investment Company Institute's numbers, bond funds (and bond ETFs) have increased by $451 billion YTD (through 9/30) and they've seen an additional $49.3 billion in inflows through 11/1. Bond ETFs continue to grow more rapidly- up 25.3% in 2017 vs. 9.4% for traditional bond funds."

It continues, "Discussing the sizeable ETF inflows, The Financial Times writes, 'Record Flows for Exchange-Traded Funds That Track Bond Fund Markets.' They tell us, 'Exchange-traded funds (ETFs) that track fixed-income benchmarks have attracted nearly $130 billion so far this year, surpassing the record-breaking 2016, when almost $117 billion poured into bond ETFs, according to Morningstar data. Interest is spreading beyond the most popular bond ETFs to other, more niche, debt products.'"

Our lead article continues, "ICI's monthly "Trends in Mutual Fund Investing" shows bond fund assets rising by $18.9 billion to $3.993 trillion in September. Over the past year, bond fund assets have risen by $254.2 billion, or 14.7%. Year-to-date, bond fund assets have risen by $343 billion (through 9/30)."

It quotes ICI's release, "Bond funds had an inflow of $25.16 billion in September, compared with an inflow of $20.34 billion in August. Taxable bond funds had an inflow of $22.46 billion in September, versus an inflow of $16.50 billion in August. Municipal bond funds had an inflow of $2.70 billion in September, compared with an inflow of $3.84 billion in August."

Our "profile" interview says, "This month, BFI speaks with Vanguard Portfolio Manager Chris Wrazen, who runs Vanguard's Short-Term Bond Index Fund. He discusses a number of issues in the short-term bond and index fund marketplace, including supply, yields, flows, and other challenges in tracking bond indexes. Our Q&A follows."

BFI asks, "How long have you been running short-term bond and index funds?" Wrazen tells us, "We launched Total Bond Index fund back in 1987, so we have about 30 years or so of experience with bond index funds. With respect to the front end, we launched Short Index in 1994, so we have about 23 years with the 'maturity tranched' suite of funds out there.... I have been at Vanguard since 2004 and in fixed income since 2008.... The first five years or so, I was on the active side, focused on structured products. Then for the last five years, I have been on the index side."

BFI also says, "Tell us about index funds in general." Wrazen responds, "On the fixed income side, it's a little bit different than equities because you can't just go and buy a basket of securities to replicate the benchmark. The fixed income market is still primarily traded OTC, so a lot of it is still voice, over the phone. We do leverage some electronic trading platforms, but even so, the liquidity in the space is such that you couldn’t just go out and buy the whole benchmark."

Wrazen continues, "So anytime we have a subscription, we need to decide which securities we want to buy. Even though it's an index product, at the security level we are going to be putting on overweights and underweights. Granted they will be very small. But we do want to be very deliberate about those securities that we have small overweights and small underweights in."

Our Bond Fund News includes a brief entitled, "Yields Move Sharply Higher in Oct. Yields jumped and returns were higher across most of the Crane BFI Indexes last month. The BFI Total Index averaged a 1-month return of 0.12% and a gain of 2.45% over 12 months. The BFI 100 returned 0.14% in October and 2.81% over 1 year. The BFI Conservative Ultra-Short Index returned 0.12% over 1 month and 1.42% over 1-year; the BFI Ultra-Short Index averaged 0.11% in October and 1.49% over 12 mos. Our BFI Short-Term Index returned 0.07% and 1.61% for the month and past year. The BFI High Yield Index increased 0.36% in Oct. and 6.97% over 1 year."

The new issue also includes a News brief entitled, "Morningstar Writes '4 Bond-Fund Basics Worth Knowing.'" These include: "Your Benchmark is Worthless; Your Manager Knows It;" "Risk Is Back;" and, "Fees Are Important - No, Seriously." They explain, "After the financial crisis, it became conventional wisdom that runaway rising interest rates would be right around the corner but notwithstanding a few nasty spikes, rates have mostly ground lower and lower.... Every dollar you pay in fees is a dollar you don't get in returns, and at today's yields the same expense ratio eats up more of your income than it used to.... [T]he only way to consistently beat high fees is to take on more risk."

Finally, the November issue of BFI includes the sidebar, "MStar on Muni Indexing." It says, "Morningstar's "Fund Spy" recently wrote "Indexing Comes to Muni-Ville." They tell us, "In August 2017, Vanguard Tax-Exempt Bond Index (VTEAX) turned two years old. The fund remains the market's only municipal open-end bond index mutual fund. Although still in its youth, the fund's assets had grown to $1.8 billion as of Sept. 30, 2017. As one of the cheapest funds in the muni national intermediate Morningstar Category at a mere 9 basis points, this fund has fared well relative to peers."

Crane Data released its November Money Fund Portfolio Holdings late last week, and our most recent collection of taxable money market securities, with data as of Oct. 31, 2017, shows another jump in Treasuries and an increase in CDs, though most other segments were flat. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $77.7 billion to $2.837 trillion last month, after increasing $8.5 billion in September, $58.6 billion in August and $61.5 billion in July. Repo remained the largest portfolio segment, while Treasuries remained in the No. 2 spot, followed by 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 our latest Money Fund Portfolio Holdings reports.)

Among all taxable money funds, Repurchase Agreements (repo) decreased $3.9 billion (-0.4%) to $955.6 billion, or 33.7% of holdings, after decreasing $4.4 billion in September, increasing $65.1 billion in August, and falling $55.6 billion in July. Treasury securities rose $66.0 billion (9.8%) to $739.3 billion, or 26.1% of holdings, after rising $27.8 billion in September, and falling $32.7 billion in August. Government Agency Debt decreased $2.2 billion (-0.3%) to $664.8 billion, or 23.4% of all holdings, after rising $1.2 billion in September, and falling $11.2 billion in August. Repo, Treasuries and Agencies total $2.360 trillion, representing a massive 83.2% of all taxable holdings.

CDs jumped while CP and Other (mainly Time Deposits) securities increased slightly. Certificates of Deposits (CDs) increased $14.1 billion (8.3%) to $184.6 billion, or 6.5% of taxable assets, after decreasing $7.3 billion in September and increasing $3.4 billion in August, Commercial Paper (CP) was up $3.3 billion (1.8%) to $181.8 billion, or 6.4% of holdings (after decreasing $4.4 in September and increasing $16.2 billion in August. Other holdings, primarily Time Deposits, rose by $1.9 billion (1.9%) to $102.7 billion, or 3.6% of holdings. VRDNs held by taxable funds decreased by $1.4 billion (-14.2%) to $8.4 billion (0.3% of assets).

Prime money fund assets tracked by Crane Data increased to $632 billion (up from $625 billion last month), or 22.3% (down from 22.7%) of taxable money fund holdings' total of $2.837 trillion. Among Prime money funds, CDs represent just under a third of holdings at 29.2% (up from 27.3% a month ago), followed by Commercial Paper at 28.7% (up from 28.6%). The CP totals are comprised of: Financial Company CP, which makes up 17.8% of total holdings, Asset-Backed CP, which accounts for 6.0%, and Non-Financial Company CP, which makes up 4.9%. Prime funds also hold 3.4% in US Govt Agency Debt, 7.5% in US Treasury Debt, 8.1% in US Treasury Repo, 2.4% in Other Instruments, 13.4% in Non-Negotiable Time Deposits, 7.5% in Other Repo, 1.3% in US Government Agency Repo, and 1.0% in VRDNs.

Government money fund portfolios totaled $1.541 trillion (54.3% of all MMF assets), up from $1.498 trillion in September, while Treasury money fund assets totaled another $664 billion (23.4%), up from $636 billion the prior month. Government money fund portfolios were made up of 41.8% US Govt Agency Debt, 19.9% US Government Agency Repo, 15.1% US Treasury debt, and 23.1% in US Treasury Repo. Treasury money funds were comprised of 69.1% US Treasury debt, 30.8% in US Treasury Repo, and 0.0% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.205 trillion, or 77.7% of all taxable money fund assets, up from 77.3% last month.

European-affiliated holdings increased $142.3 billion in October to $633.3 billion among all taxable funds (and including repos); their share of holdings increased to 22.3% from 17.8% the previous month. Eurozone-affiliated holdings increased $108.0 billion to $433.2 billion in October; they account for 15.3% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $4.8 billion to $214.8 billion (7.6% of the total). Americas related holdings decreased $67 billion to $1.988 trillion and now represent 70.1% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $16.5 billion, or -2.6%, to $612.2 billion, or 21.6% of assets; US Government Agency Repurchase Agreements (up $10.9 billion to $314.4 billion, or 11.1% of total holdings), and Other Repurchase Agreements ($29.1 billion, or 1.0% of holdings, up $1.7 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $1.8 billion to $112.8 billion, or 4.0% of assets), Asset Backed Commercial Paper (down $0.0 billion to $38.1 billion, or 1.3%), and Non-Financial Company Commercial Paper (up $1.5 billion to $31.0 billion, or 1.1%).

The 20 largest Issuers to taxable money market funds as of Oct. 31, 2017, include: the US Treasury ($739.3 billion, or 26.1%), Federal Home Loan Bank ($523.9B, 18.5%), Federal Reserve Bank of New York ($162.2B, 5.7%), BNP Paribas ($138.3B, 4.9%), Credit Agricole ($70.1B, 2.5%), RBC ($68.0B, 2.4%), Federal Farm Credit Bank ($66.3B, 2.3%), Wells Fargo ($61.7B, 2.2%), Barclays PLC ($53.8B, 1.9%), Societe Generale ($48.1B, 1.7%), Federal National Mortgage Association ($46.3B, 1.6%), Nomura ($44.4B, 1.6%), Mitsubishi UFJ Financial Group Inc ($39.0B, 1.4%), ING Bank ($36.3B, $1.3%), Bank of America ($35.3B, 1.2%), Natixis ($34.0B, 1.2%), Bank of Nova Scotia ($33.9B, 1.2%), Toronto-Dominion Bank ($33.1B, 1.2%), HSBC ($33.0B, 1.2%), and Citi ( $27.0B, 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 ($162.2B, 17.0%), BNP Paribas ($125.0B, 13.1%), Credit Agricole ($53.7B, 5.6%), RBC ($51.2B, 5.4%), Wells Fargo ($49.0B, 5.1%), Nomura ($44.4B, 4.6%), Barclays PLC ($43.6B, 4.6%), Societe Generale ($43.5B, 4.6%), Bank of America ($29.6B, 3.1%), and HSBC ($27.4B, 2.9%).

The 10 largest Fed Repo positions among MMFs on 10/31 include: JP Morgan US Govt ($20.0B in Fed Repo), Fidelity Cash Central Fund ($16.6B), Northern Trust Trs MMkt ($16.3B), Fidelity Sec Lending Cash Central ($10.8B), Vanguard Market Liquidity Fund ($9.2B), Goldman Sachs FS Gvt ($8.0B), Goldman Sachs FS Treas Sol ($5.3B), Northern Inst Govt Select ($5.2B), BlackRock Lq T-Fund ($5.0B), and Wells Fargo Govt MMkt ($4.9B).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($16.8B, 4.1%), Credit Agricole ($16.4, 4.0%), Toronto-Dominion Bank ($15.0B, 3.7%), Mitsubishi UFJ Financial Group Inc. ($14.6B, 3.6%), BNP Paribas ($13.4B, 3.3%), Skandinaviska Enskilda Banken AB ($12.8B, 3.1%), Wells Fargo ($12.6B, 3.1%), Bank of Montreal ($12.4, 3.0%), Swedbank AB ($12.0, 2.9%), and Bank of Nova Scotia ($11.8B, 2.9%).

The 10 largest CD issuers include: Wells Fargo ($12.6, 6.8%B), Bank of Montreal ($12.0B, 6.5%), Toronto-Dominion Bank ($11.2B, 6.1%), RBC ($10.7, 5.8%), Sumitomo Mitsui Banking Co ($10.3B, 5.6%),Mitsubishi UFJ Financial Group Inc ($9.9B, 5.4%), Mizuho Corporate Bank Ltd ($8.5B, 4.6%), KBC Group NV ($8.4B, 4.6%), Canadian Imperial Bank of Commerce ($7.2B, 3.9%), and Sumitomo Mitsui Trust Bank ($7.0 B, 3.8%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($8.3B, 5.3%), Westpac Banking Co ($7.7B, 4.9%), Bank Nederlandse Gemeenten ($6.9B, 4.4%), BNP Paribas ($6.8B, 4.3%), JP Morgan ($6.6B, 4.2%), Bank of Nova Scotia ($5.7B, 3.6%), RBC ($5.4B, 3.5%), UBS AG ($5.4B, 3.4%), National Australia Bank Ltd ($5.4B, 3.4%), and Toyota ($5.3B, 3.4%).

The largest increases among Issuers include: US Treasury (up $66.0B to $739.3B), Credit Agricole (up $37.7B to $70.1B), Barclays PLC (up $24.5B to $53.8B), BNP Paribas (up $22.7B to $138.3B), Natixis(up $12.8 B to $34.0), Credit Suisse (up $12.1B to $21.5B), ING Bank (up $11.2B to $36.3B), Societe Generale (up $9.9B to $48.1B), Wells Fargo (up $7.2B to $61.7), and Deutsche Bank (up $6.4B to $21.3).

The largest decreases among Issuers of money market securities (including Repo) in October were shown by: Federal Reserve Bank of New York (down $132.1B to $162.2B), Bank of Montreal (down $10.4B to $22.4B), Federal National Mortgage Association (down $5.0B to $22.8B), Svenska Handelsbanken (down $4.4B to $8.9B), Fixed Income Clearing Co (down $3.2B to 12.5B), Canadian Imperial Bank of Commerce (down $2.5B to $23.8B), Skandinaviska Enskilda Banken AB (down $2.5B to $12.8B), Federal Home Loan Mortgage Co (down $1.8B to $46.3B), Sumitomo Mitsui Trust Bank (down $1.7B to $7.5B), and DnB NOR Bank ASA (down $1.6B to $9.2B).

The United States remained the largest segment of country-affiliations; it represents 63.4% of holdings, or $1.798 trillion. France (10.7%, $303.1B) remained in second place ahead of Canada (6.7%, $189.3B) in third. Japan (5.6%, $159.3B) stayed in fourth, while the United Kingdom (3.9%, $110.7B) remained in fifth place. The Netherlands (2.3%, $66.2B) remained in sixth place ahead of Germany (1.7%, $49.0B), while Sweden (1.6%, $45.7B) remained ahead of Australia (1.5%, $43.4B). Switzerland (1.2%, $32.5B) 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 Oct. 31, 2017, Taxable money funds held 32.2% (down from 35.3%) of their assets in securities maturing Overnight, and another 16.1% maturing in 2-7 days (up from 15.1%). Thus, 48.3% in total matures in 1-7 days. Another 23.8% matures in 8-30 days, while 10.6% matures in 31-60 days. Note that over three-quarters, or 82.7% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 8.2% of taxable securities, while 7.1% matures in 91-180 days, and just 2.0% matures beyond 181 days.

Federal Reserve Bank of New York President William Dudley, who recently announced his retirement in 2018 spoke recently on "Lessons from the Financial Crisis." He says, "As we mark the tenth anniversary of the onset of the financial crisis, I would like to focus on some of the lessons we should draw from that harrowing experience, and the implications of those lessons for regulatory policy going forward.... The evolution of the financial crisis illustrates a number of key issues, including the potential hazards of financial innovation, the procyclicality of the financial system, and the importance of confidence in sustaining effective financial intermediation."

Dudley continues, "Once the housing bust got underway, stress on the financial system increased sharply as asset prices fell and bank earnings plunged. In the spring of 2008, such pressures led to a forced sale of Bear Stearns to JPMorgan Chase. Later in the year, the government placed Fannie Mae and Freddie Mac into conservatorship. In September, Lehman Brothers failed. And, a day later, AIG was rescued in order to protect the rest of the financial system against further losses and even broader contagion. With confidence in financial markets and financial intermediaries badly frayed, the Federal Reserve and the U.S. government intervened and provided a range of liquidity backstops, debt guarantees, and capital infusions to forestall a complete collapse of the financial system and the economy."

He explains, "The bust exposed many structural flaws in the financial system that exacerbated its instability. Without being exhaustive, these included the instability of the tri-party repo system, which supported the nation's short-term funding markets; the risks of runs in the money market mutual fund industry; and the risk of contagion caused by the huge volume of outstanding bilateral (non-centrally cleared) over-the-counter (OTC) derivative obligations between the major financial intermediaries."

Dudley tells us, "The tri-party repo system was centered on two of the major U.S. banks. The system matched investors and borrowers each day -- with the investors lending cash, secured by Treasuries and other collateral, to the major securities firms. But, the system was unstable. In times of stress, clearing banks could be faced with very large single-firm exposures -- of potentially hundreds of billions of dollars. Not surprisingly, when such counterparties became troubled, the clearing banks were less willing to take on these large intraday exposures. As a result, repo investors, who were primarily worried about getting repaid each morning, were motivated to simply withdraw from the market. As short-term investors withdrew funding, the liquidity buffer of the troubled securities firm was quickly exhausted, particularly as other counterparties to that firm demanded additional collateral to secure their own exposures."

He notes, "Structural weaknesses in the money market mutual fund industry -- which was a major source of short-term wholesale funding to the securities industry and various non-bank financial corporations -- also exacerbated the crisis. When Lehman Brothers failed, the value of its outstanding short-term obligations collapsed. The Reserve Primary Fund 'broke the buck,' and investors rushed to withdraw their funds from prime institutional money market mutual funds in a modern version of a classic 'bank run.' The funds generally did not have sufficient cash available to meet these runs because they offered overnight liquidity at par value against a portfolio of assets with weighted average maturities that were considerably longer."

Dudley states that we can take three critical lessons away from the financial crisis. He says, "First, financial institutions must be robust to stress. In particular, they need to have enough capital to be considered solvent even after sustaining significant losses, so that they can maintain the market access needed to recapitalize.... Second, when we identify potential sources of instability that could amplify shocks, we need to make structural changes to the financial system to reduce or eliminate them. For example, the financial crisis made it clear that changes were needed in how tri-party repo transactions were unwound each day, net asset values were calculated for prime money market mutual funds, and OTC derivative obligations were cleared, settled, and risk-managed. Third, there should be a viable and predictable resolution regime."

He also comments, "We have also made significant progress in addressing many of the structural weaknesses uncovered by the financial crisis. Money market reform has made the prime money market mutual fund industry smaller and safer. The elimination of the net asset value convention for institutional prime money market mutual funds has made these funds smaller and less prone to runs during times of crisis. The tri-party repo system has been made more stable as intraday exposures of the large clearing banks have been dramatically reduced. This means that they have less reason to back away from a firm if it were to become troubled. And, firms are much less reliant on short-term wholesale funding."

Dudley continues, "The Federal Reserve's lack of authority to lend to a major securities dealer that gets into difficulty is another outstanding issue. The Dodd-Frank Act narrowed the Federal Reserve's authority under Section 13(3) of the Federal Reserve Act. No longer can the Federal Reserve lend to an individual securities firm or non-bank financial intermediary. Such authority may not be as necessary now that the Federal Deposit Insurance Corporation (FDIC) has the power to lend under Title II of the Dodd-Frank Act and firms are required to have sufficient resources to support their resolution plans. But, I would prefer having such a tool available in extremis given the potential need to buy time for coordination and critical decision-making. I think it is important to ensure that one can 'get to the weekend'."

Finally, he adds, "In conclusion, as we reflect on potential changes to the U.S. regulatory regime, we should not lose sight of the horrific damage caused by the financial crisis, including the worst recession of our lifetimes and millions of people losing their jobs and homes. We had a woefully inadequate regulatory regime in place, and while it is much better now, there is still work to do. We should finish the job as quickly as possible, and we should do no harm as we adjust our regulatory regime to make it more efficient."

The release on Dudley's pending retirement tells us, "The Federal Reserve Bank of New York today announced that William C. Dudley, president and chief executive officer, intends to retire from his position in mid-2018 to ensure that a successor is in place well before the end of his term. Mr. Dudley's term ends in January of 2019 when he reaches the 10 year policy-limit in the role. Mr. Dudley joined the New York Fed in 2007 as executive vice president and head of the Markets Group, where he also managed the System Open Market Account for the Federal Open Market Committee (FOMC). He was named the 10th president and CEO of the New York Fed on January 27, 2009, taking over the remainder of his predecessor's term."

Today, we review two recent updates from Fitch Ratings, as well as three briefs from Moody's Investors Service. Fitch's "2018 Outlook: Global Money Market Funds" discusses liquidity, flows back into Prime MMFs and European regulatory reforms, while their "Prime Funds Growing Despite Narrowing Spreads" release also focuses on Prime flows. Meanwhile, Moody's released updates entitled: "Q3 2017 Update: US prime funds gain momentum against backdrop of stability," "Sterling: Sharp decline in assets, market risk exposure rises," and "Euro: Assets under management fall, liquidity rises." We excerpt briefly from all of these new pieces below.

Fitch's "2018 Outlook" says, "Liquidity will remain a key focus for investors in 2018 with fund managers in the U.S. continuing to conservatively manage their portfolios to avoid triggering liquidity fees or redemption gates, likely targeting roughly 40% weekly liquidity. European funds will build liquidity as European money fund reform approaches and funds begin to transition. Fitch Ratings' expectation of funds' maintenance of appropriately high liquidity supports our Stable Outlook.... Requirements to hold higher levels of weekly liquidity invariably led to a commensurate reduction in fund yields. Managers will face pressures to appropriately balance liquidity with the search for higher yields."

It notes, "Fitch expects recent modest movement back into prime funds to continue, although the pace will be hindered by the small size of the funds that remain. Fund managers will continue to offer prime funds as higher yielding alternatives to government money funds to attract investors back into the space.... A silver lining of the U.S. shift from prime to government funds is the markedly improved supply-demand dynamics for the remaining assets in prime funds. Conversely, government money funds are in a more difficult position, given the significant inflows they experienced. One bright spot is the high capacity of the Fed's reverse repo program."

The report continues, "The main risk European money fund reforms pose to ratings is from unexpected disruption during the transition process. However, we expect fund managers to take steps to mitigate risks, including strengthening liquidity during the transition. The new rules will not change our approach to rating money funds and therefore should not directly affect ratings unless funds' underlying credit, market or liquidity risks increase."

Regaring Chinese money funds, Fitch says, "We expect the impact of the new regulations on Fitch-rated Chinese money funds to be limited. Consistent with Fitch's money fund rating criteria in China, 'AAAmmf(chn)' rated funds already operate with significantly higher credit quality, more liquidity and lower maturities than most unrated funds.... Chinese money fund AUM grew 20% over the year to mid-2017 to approximately USD800 billion. This makes China the second largest individual money fund domicile globally. The Chinese money fund sector is concentrated with the largest fund (Yu'eBao)."

Fitch also released an update on "Prime Funds Growing." It says, "A year after reforms caused over $1 trillion to flee the space, U.S. prime money funds continue to show slow but steady growth -- even as spreads between prime and government fund yields narrowed from their March 2017 highs. Net yield spreads between prime and government funds fell to 0.26% in September from 0.33% in March but Fitch Ratings expects growth to continue despite investor concerns about NAV stability and fees/gates and the small size of many funds. On Sept. 29, prime fund assets were $440 billion, up 19% over last November."

The piece adds, "The return to prime funds contrasts with some other gauges of investor sentiment. In a recent AFP survey, 43% of investors said they would require a yield spread greater than 0.50% to consider returning to the funds, while another 40% said no amount of spread would justify a return to prime funds given their new features. Institutional prime funds have exhibited NAV stability since moving to a floating NAV, which should partly mitigate investors' principal preservation concerns. Since the reforms, 96% of observations of daily changes in institutional prime fund NAVs have shown no movement and 4% showed NAV moved up or down by 1 basis point (bp). In a few cases NAV moved by 3 bps or more in one day."

Moody's first Q3 update says, "Assets of the surveyed group of US prime money market funds increased $18.9 billion during the quarter, up 24.8% sequentially. As expected, the yield spread between US prime and government funds remained range-bound and was 26 basis points at quarter end. The stable yield spread indicates that higher asset levels are less a function of incremental yield over government funds, and more so due to growing investor confidence in variable net asset value (VNAV) prime funds.... US prime fund flows have now been positive for five consecutive months, with year-to-date inflows of $31.2 billion. We expect this trend to continue given the seasonality of corporate cash balances and our positive yield outlook for Q4."

It continues, "The average stressed net asset value of the surveyed group reached 0.9930 at the end of September, reflecting stronger portfolio credit quality at quarter end relative to prior periods. Approximately 65.9% of assets managed by the surveyed group were rated Aa and higher, up 4.7% sequentially. This indicates a reversal of a trend which saw US prime fund managers take on additional market risk following the implementation of amended Rule 2a-7 last October. The modest reduction in market risk exposure was also a function of rising liquidity, a trend which we expect will continue into Q4.... Repo exposure for the surveyed group increased to 25.5% during the quarter, reflecting strong supply. CD exposure declined to 22.9% as fixed rate issuance was limited."

Moody's second article states, "Sterling prime funds' assets under management fell to a 12-month low of L147.2 billion in Q3. The decline reflected large outflows of L20.2 billion (or 12.1% of assets) amid persistently low yields. Despite these outflows, net redemptions from sterling prime rated funds exceeded 10% of total assets only once (0.1% frequency) during Q3. The frequency of such redemptions will be closely watched when new European Union (EU) money market fund regulations take effect next year. Under the new rules, the directors of new low volatility net asset value (LVNAV) funds will have the option of introducing fees and gates if a net redemption above 10% coincides with a weekly fall in liquidity to below 30%."

Moody's third brief says, "Euro prime money market funds' (MMFs) Q3 assets under management (AUM) fell to a 12-month low of EUR60.4 billion. The decline reflected large outflows of EUR4 billion (6.2% of assets), amid persistently negative yields. On 26 October 2017, the European Central Bank (ECB) left its main interest rates unchanged.... While the yields of euro-denominated CNAV funds stood at record lows at the end of Q3 (-49 basis points, 1 basis point lower than in Q2), the pace of the decline in yields has slowed."

Finally, they note, "Net redemptions from euro prime rated funds exceeded 10% of total assets only twice (0.4% frequency) in Q3. The frequency of such redemptions will be closely watched going forward as the board of directors of the new low volatility net asset value (LVNAV) funds will have the option under the new EU regulation of introducing fees and gates if a net redemption above 10% coincides with a weekly fall in liquidity to below 30%."

Crane Data's latest Money Fund Market Share rankings show assets in U.S. money fund complexes were mixed in October, as overall assets decreased by $2.4 billion, or 0.1%. Total assets have increased by $112.9 billion, or 4.0%, over the past 3 months. They've increased by $327.4 billion, or 12.5%, over the past 12 months through October 31, 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 October were Wells Fargo, whose MMFs rose by $6.3 billion, or 6.2%, JP Morgan, whose MMFs rose by $5.4 billion, or 2.2%, and HSBC, whose MMFs rose by $2.0 billion, or 16.4%.

Northern, Vanguard, Oppenheimer and Invesco also saw assets increase in October, rising by $1.5B, $1.4B, $1.2B, and $1.1B, respectively. Declines among the 25 largest managers were seen by Morgan Stanley, SSGA, Fidelity, Federated and Dreyfus. (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 October.

Over the past year through Oct. 31, 2017, Fidelity (up $112.9B, or 25.4%), Vanguard (up $86.9B, or 43.8%), Dreyfus (up $37.2B, or 26.1%), and T Rowe Price (up $23.4B, or 153.3%) were the largest gainers. (All of these families' totals but Dreyfus' were inflated by the addition of new funds earlier this year.) These 1-year gainers were followed by BlackRock (up $20.6B, or 8.1%), Prudential (up $15.0B, or 2465.2%), Columbia (up $13.1B, or 876.6%), Northern (up $10.3B, or 11.1%) and Invesco (up $7.6B, or 13.2%).

Fidelity, BlackRock, Wells Fargo, and Vanguard had the largest money fund asset increases over the past 3 months, rising by $20.2B, $14.2B, $14.1B, and $11.5B, respectively. The biggest decliners over 12 months include: Morgan Stanley (down $16.5B, or -13.2%), Goldman Sachs (down $11.2B, or -6.2%), Western (down $6.6B, or -20.2%), SSGA (down $4.0B, or -4.7%), and Federated (down $1.7B, or -0.9%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $557.4 billion, or 19.0% of all assets. It was down $3.4 billion in Oct., up $20.1 billion over 3 mos., and up $112.9B over 12 months. Vanguard is second with $285.2 billion, or 9.7% market share (up $1.4B, up $11.5B, and up $86.9B for the past 1-month, 3-mos. and 12-mos., respectively), while BlackRock is third with $274.5 billion, or 9.3% market share (up $730M, up $14.2B, and up $20.6B). JP Morgan ranked fourth with $252.0 billion, or 8.6% of assets (up $5.4B, up $8.7B, and up $6.4B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $190.7 billion, or 6.5% of assets (down $2.3B, up $11.7B, and down $1.7B).

Dreyfus was in sixth place with $179.5 billion, or 6.1% of assets (down $1.5B, up $3.8B, and up $37.2B), while Goldman Sachs was in seventh place with $169.4 billion, or 5.8% (down $660M, up $5.9B, and down $11.2B). Schwab ($156.9B, or 5.3%) was in eighth place, followed by Morgan Stanley in ninth place ($108.2B, or 3.7%) and Wells Fargo in tenth place ($107.4B, or 3.7%).

The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($102.9B, or 3.5%), SSGA ($81.5B, or 2.8%), Invesco ($65.4B, or 2.2%), First American ($48.9B, or 1.7%), UBS ($43.3B, or 1.5%), T Rowe Price ($38.7B, or 1.3%), DFA ($26.8B, or 0.9%), Western ($26.0B, or 0.9%), Franklin ($24.1B, or 0.8%), and Deutsche ($22.7B, or 0.8%). The 11th through 20th ranked managers are the same as last month, except Wells Fargo moved ahead of Northern, DFA moved ahead of Western, and Franklin moved ahead of Deutsche. 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 Northern moves ahead 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 ($566.5 billion), JP Morgan ($428.5B), BlackRock ($408.0B), Vanguard ($285.2B), and Goldman Sachs ($271.1B). Dreyfus/BNY Mellon ($204.7B) was sixth and Federated ($200.0B) was in seventh, followed by Schwab ($156.9B), Morgan Stanley ($142.2B), and Northern ($131.9B), 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 10/31/17, shows that yields were up slightly in October across our Taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 756), was up 2 bps to 0.72% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 1 bps to 0.71%. The MFA's Gross 7-Day Yield increased 2 bps to 1.16%, while the Gross 30-Day Yield was up 2 bps to 1.15%.

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.90% (up 2 bps) and an average 30-Day Yield of 0.89% (up 1 bp). The Crane 100 shows a Gross 7-Day Yield of 1.17% (up 2 bps), and a Gross 30-Day Yield of 1.16% (up 1 bps). For the 12 month return through 10/31/17, our Crane MF Average returned 0.45% and our Crane 100 returned 0.61%. The total number of funds, including taxable and tax-exempt, increased to 958, up 2 from last month. There are currently 756 taxable and 202 tax-exempt money funds.

Our Prime Institutional MF Index (7-day) yielded 0.98% (up 1 bps) as of October, while the Crane Govt Inst Index was 0.76% (up 1 bp) and the Treasury Inst Index was 0.79% (up 3 bps). Thus, the spread between Prime funds and Treasury funds is 19 basis points, down 2 bp from last month, while the spread between Prime funds and Govt funds is 22 basis points, unchanged from last month. The Crane Prime Retail Index yielded 0.78% (unchanged), while the Govt Retail Index yielded 0.46% (up 3 bps) and the Treasury Retail Index was 0.52% (up 3 bps). The Crane Tax Exempt MF Index yield increased to 0.47% (up 4 bps).

Gross 7-Day Yields for these indexes in October were: Prime Inst 1.34% (unchanged), Govt Inst 1.08% (up 1 bps), Treasury Inst 1.08% (up 3 bp), Prime Retail 1.33% (up 1 bp), Govt Retail 1.08% (up 1 bp), and Treasury Retail 1.08% (up 2 bps). The Crane Tax Exempt Index increased 2 basis points to 0.97%. The Crane 100 MF Index returned on average 0.07% for 1-month, 0.21% for 3-month, 0.56% for YTD, 0.61% for 1-year, 0.28% for 3-years (annualized), 0.17% for 5-years, and 0.42% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)

The November issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Tuesday morning, features the articles: "Money Funds Coming Back; Starting Hard Sell on Prime," which reviews the growing recovery of money funds; "Northern Trust AM's Peter Yi Talks Prime, Segmentation," which interviews Northern's Director of Short Duration Fixed Income; and, "MMFs Pressure Deposits; Banks, Brokers Raising Rates," which reviews the nascent shift in assets from banks back to money market funds. We've also updated our Money Fund Wisdom database with Oct. 31, 2017, statistics, and sent out our MFI XLS spreadsheet Tuesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our November Money Fund Portfolio Holdings are scheduled to ship Thursday, November 9, and our November Bond Fund Intelligence is scheduled to go out Tuesday, November 14.

MFI's "Money Funds Coming Back" article says, "The gradual recovery in money market assets, rates and revenues continues, and appears to be poised to accelerate in the coming months. Prime money funds continue to build back their base, and asset managers are stepping up their push to get investors to reconsider moving some of their cash out of Government MMFs. Yields breaking over 1.0% along with noticeable spreads also appear to be drawing assets from the banking sector (see article below). While Barron's may be premature in saying that "Money-Market Funds Are Back" recently, the comeback is certainly real and appears to have legs."

MFI continues, "The Barron's piece discusses money fund yields moving over 1% and compares them with the dismal yields on brokerage sweep accounts. (See our Oct. 17 News.) 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."

Our Profile reads, "This month, Money Fund Intelligence again speaks with Northern Trust Asset Management's Director of Short Duration Fixed Income Peter Yi, who has steadily returned to work following a car accident last year. He tells us about Northern's pioneering role in cash "segmentation," the gradual recovery of prime fund assets and their views on differentiation in the ultra-short space."

MFI first asks about Northern's history, and Yi answers, "Sure. As you know, Northern Trust Asset Management has had a long, successful history managing cash and liquidity products. We've been managing liquidity products since the 1970's, when our trust department created our first cash sweep vehicle. Not only do we have the experience, but we're also one of the largest cash managers, whether you simply look at money market mutual fund assets or if you look at it comprehensively with our non-registered STIFs, separately managed accounts and security lending reinvestment collateral pools. This gives us a formidable presence in the liquidity business."

He continues, "Northern Trust thinks of cash management as a core capability and a product that really caters to both our institutional asset servicing business and our retail wealth management clients. Right now, we are managing about $240 billion across all of our money market and short duration strategies. As you know, having experience and leadership are critical in the money market business. This has served us well in successfully navigating not only challenging credit and interest-rate environments, but the changing landscape driven by regulatory reform."

Our "MMFs Pressure Deposits" article says, "While the data is still tentative, anecdotal and other evidence is growing that a shift in assets from banks back to money market funds is starting in earnest. Money fund assets grew faster in the third quarter than they have in years, and deposit totals are beginning to decline. Brokerage sweep rates and bank deposit rates are grudgingly moving higher as reports of high-end investors shifting cash appear in the popular press."

MFI continues, "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. (See our Oct. 12 News, "Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage.")

A sidebar, "ICD Gets Cash;​ AFP Sessions," explains, "At last month's AFP Annual Conference, "portals" and "prime" were the big topics of discussion among cash professionals. Online trading portal ICD published a new white paper, and announced an outside investment. Their release, explains, "Institutional Cash Distributors (ICD) ... 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." (See our Oct. 16 News, "ICD Releases Treasury Options Paper, Announces Parthenon Investment.")"

Our November MFI XLS, with Oct. 31, 2017, data, shows total assets decreased $2.2 billion in October to $2.941 trillion after increasing $32.0 billion in September and $68 billion in August, but decreasing $32.6 billion in July. Our broad Crane Money Fund Average 7-Day Yield was up 1 basis points to 0.71% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 3 bps to 0.90%.

On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 2 bps to 1.16% and the Crane 100 rose 2 bps to 1.17%. Charged Expenses averaged 0.45% and 0.28% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 30 days (down two days from last month) and for the Crane 100 was 31 days (down one from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

First American Funds posted a recent "Quarterly Portfolio Manager Commentary." It tells us, "One year post-reform, the First American Institutional Prime Obligations Fund remains a much smaller fund in a much smaller universe. However, shareholders are adjusting well to the new money market landscape and the First American Institutional Prime Obligations Fund has found a solid shareholder base. With comfort around the fund's base size, management was able to invest accordingly, seeking to best take advantage of the investment environment." We review this, as well as a recent Federated webinar, below.

First American explains, "The fund continued to ladder fixed-rate securities in the 60- to 90-day range and six- to nine-month floating-rate instruments. The fund was able to benefit from elevated London Interbank Offered Rate (LIBOR) levels relative to Repo and Treasury/agency products to achieve higher yields. However, the reform-influenced demand dislocations that widened credit spreads early in the year have dissipated, as issuers found the necessary funding outlets. This tempered the ability of prime assets to outperform other assets classes by the wide margins experienced early in the year."

They write, "However, by the end of the third quarter, three-month LIBOR rose to 1.334% and one-month LIBOR rose to 1.232% in response to expected Fed tightening. As the quarter progressed with the credit environment stable and the impacts of money market fund reform behind us, our main investment objective was to continue to enhance portfolio yield while judiciously extending the portfolio weighted average maturity (WAM) and weighted average life (WAL) in ways that minimized potential net asset value (NAV) volatility based on our credit, economic and interest rate outlook."

The quarterly continues, "As we expected, government funds continued to hold the majority of cash that migrated as a result of money market fund reform. Yield compression in agency products persisted as basic supply and demand dynamics impacted prices. The Fed's Reverse Repo Program (RRP) remained an important outlet for the influx of cash and a mechanism for rate control. We continued the purchase of Treasury and agency securities with maturities as long as two years.... We also capitalized on opportunities to purchase floating-rate securities, maturing well into 2019. We believe that floating-rate securities will perform well.... We will seek to add value and continue to employ this strategy as the market and portfolio metrics allow."

First American's update also says, "Municipal market conditions including heavy reinvestment needs from bond coupons and maturities, a relatively flat yield curve and rich valuations encouraged short term bond funds and separately managed accounts to become bigger players in the variable-rate demand note (VRDN) market. This additional demand from non-traditional VRDN buyers suppressed SIFMA resets for the majority of the period. Note issuance increased significantly later in the quarter with several large municipalities accessing the market. While these notes offered incrementally higher yields, portfolio management was reluctant to extend the fund's WAM as we expect VRDN's to outperform over a longer time horizon."

It adds, "In the coming quarters, we anticipate yields on non-government debt to remain elevated relative to government securities but suspect the term premiums available during reform are gone. Even with some of the yield benefits fading, we believe both the institutional and retail prime obligations funds remain attractive short-term investment options for investors seeking higher yields on cash positions while still assuming minimal credit risk. Yields in the agency and Treasury space will remain influenced by Fed policy as well as the strong demand from investors in this space. We will continue to seek opportunities -- in all asset classes -- that arise from market volatility based on domestic and global economic data and Fed rate expectations."

In other news, Federated Investors hosted its latest "Quarterly Money Market Outlook Webcast" last week. Senior VP Brian Ronayne reviews recent money fund growth then asks, "What is the engine driving this impressive asset growth in the government and prime sectors? To answer that question, you need to look no further than the competitive net yields on prime, government, and tax-free funds compared to their main competition ... banks. [T]here [is]currently more than $10 trillion sitting in MMDA accounts in banks. A substantial portion ... sits in bank deposit products with uncompetitive yields when compared to money market mutual funds. Even for those banks that recently bumped up their deposit rates, many of these same deposit products lag anywhere from 30-40 bps on institutional accounts. In some wealth management accounts, the difference is more than a full percent."

He continues, "Money market funds have clearly proven to be resilient. It is undeniable that investors love their simplicity, convenience, transparency, professional management, and competitive rates of return. Now we recognize of course that there are currently billions of dollars sitting in bank deposits or government money funds that have once been comfortably invested in prime funds prior to money market fund reform. Yet because of specific aspects of the new rules, notably floating asset values or the potential imposition of a fear gate on redemptions, these dollars will not likely return to 2a-7 institutional prime funds. It is for these types of institutional accounts that Federated has created a prime private liquidity fund. Is it a private placement fund exclusively for qualified institutional buyers and credited investors with a $5 million investment minimum."

Ronanye adds, "In addition to all of this, investors and cash managers around the globe face many uncertainties including the Federal Reserve's many moving parts -- a new chairman, rising interest rates, balance sheet tapering -- as well as the government's debt ceiling shenanigans, numerous disasters around the globe, international concerns in North Korea, and China's recent downgrade. `I think one can make an argument that now is the appropriate time to have your cash professionally managed."

Federated Money Market CIO Deborah Cunningham comments, "Let's move now and talk about how investors are making these decisions on where to put their next investable dollar, whether it's with government, whether it's with prime, whether it's with muni, or whether it's with a bank deposit product. The answer at this point [depends] to the large degree on the spread. How much spread is enough to take into consideration ... the floating NAV and the potential for impositions of gates and fees?"

She says, "We are also seeing interest in various alternative products. Separate account mandates are ones that have been picking up of late, basically active cash, low duration strategies. These are all being explored, and basically go along with the idea of 'cash bucketing,' whereby the investor base is looking to divide their cash and liquidity needs into ... operating type cash versus strategic cash, and taking that strategic cash and placing it into securities or products that ultimately have a little bit more volatility associated with them but a substantial amount of return also in incremental value, adding incremental value to their portfolio."

On "Private funds," she explains, "We began the Federated Private Prime Liquidity Fund back in September of last year.... It is a $1.00 NAV. We use amortized cost for pricing [out to] two digits, so we round to the penny, not to the basis point. It has had no hiccups in the pricing [and it is] open to five o'clock.... It's grown steadily quarter to quarter, and is currently over $500 million.... I'm confident that we are well on our way to $1 billion at this point. The funds weighted average maturity target of 40-50 days is in line with our other 2a-7 products.... The seven-day net yield on that product is increasing, it is currently at a 1.23%, and there is an expense ratio of 15 basis points."

She was asked about money fund portals, and responds, "From a portal market standpoint, we definitely have [seen] increased use over the course of the last ten years or so by a lot of different types of investors, and the portals are important tools for those investors in the provision of information. Some of the most sought-after statistics at this point -- daily and weekly liquidity because those are the potential triggers for gates and fees, information on yields, information on weighted average maturity, information on assets sizes, etc. -- many investors gather that information through their portal usage. And in fact, they are doing that in a way where they can set their own filters. I only want to look at funds that are over X billion dollars in size. I only want to look at funds that have it least 32% or whatever it is in weekly liquidity.... I think that makes the ability for fund and flow changes to occur in a quicker fashion, and that allows potentially a little bit more competition in the market place."

Finally, Cunningham tells us, "The bank deposit market is $10 trillion or so in size. I could see a substantial portion ... starting to move slowly.... I think there is a potential for money market funds to exceed their all-time highs [$3.9 trillion] ... as long as we continue in what is a well telegraphed and slow march to slightly higher rates of the marketplace."

Two new updates shed light on two of the most obscure corners of the money markets, the repo or repurchase agreement market, and the securities lending cash reinvestment arena. Bank of America Merrill Lynch's Mark Cabana writes on the former, while J.P. Morgan Securities' Alex Roever writes on the latter. BofAML's latest "U.S. Rates Watch" brief, entitled, "MMF repo update: increased availability driven by overseas sources," reviews the surprisingly strong supply picture in the repo market, while JPM's latest "Short Term Market Outlook and Strategy" contains a "Securities Lenders Update." We excerpt from both briefs below.

BofA's Cabana tells us, "Each month the Office of Financial Research (OFR) releases data on money market fund (MMF) repo activity. We view this data as a good proxy for overall government securities repo activity, and use it to highlight trends and developments in the tri-party repo space with detail at the counterparty and fund level. The OFR measure of total repo ex-Fed is $681bn for Treasury and $295bn for Agency, which compares to FRBNY aggregate tri-party repo activity of $965bn for Treasury and $562bn for Agency MBS. If we include the Fed, the OFR data captures about 2/3 of total tri-party repo activity."

He explains, "OFR data shows overall repo activity contracting in 2013 with the proposal of supplementary leverage ratio (SLR) rules, bottoming in early 2015 with required public disclosure of SLR, and growing over the past 2 years. Treasury MMF repo has more than doubled since the start of 2016, from $310bn to $681bn, largely driven by increased flows into government funds through 2a-7 reform and greater repo availability from non-US counterparties. Inconsistent SLR application globally has led to variation in repo activity around quarter end, especially from euro area firms who report SLRs as a snapshot on the last day of the quarter."

The brief says, "Aggregate US GSIB repo activity has generally been stable since SLR began being phased in during 2015. However, since the end of 2016 repo activity has begun to vary around quarter end dates. The exact catalyst for quarter-end contraction is not clear, especially since US SLR is reported as a daily average. Two possible explanations may be (1) the annual GSIB surcharge which incentivizes firms to shrink balance sheets by the year-end snapshot date (2) internal firm requirements that seek to net down balance sheet on key reporting dates. According to OFR data there are varying degrees of quarter end contraction amongst US GSIBs, but is most concentrated at JP Morgan which accounts on average for nearly half of the swings since the end of 2016."

Cabana writes, "Since 2015, US repo activity by EU providers has seen an upward trend, with large swings in availability on quarter-end dates. Despite new rules on intermediate holding companies we do not expect European banks to contract their repo activity next year and believe repo activity at these firms will continue to grow. BNP remains the largest EU MMF repo counterparty in the US market and the largest overall MMF repo counterparty, comprising 15% of total MMF repo activity ex-Fed based on current data."

Finally, BofAML comments, "Repo provided by Japanese firms in the US market has been increasing since the start of 2016. Treasury repo has grown from $10.5 to $50.5bn and 46% of this growth has come from the current largest repo provider, Nomura. Since the start of 2015, repo provided by Canadian firms has also been increasing with Treasury repo growing from $12.5 to $68bn. Over 30% of this growth has come from the largest current Canadian repo provider, RBC. Other repo providers, Harvard, MetLife and Prudential, saw an increase in activity over 2015 and 2016, but plateaued in recent months at around $9.5bn. Sponsored MMF repo activity with the Fixed Income Clearing Corporation has also grown."

Regarding Securities Lending, JP Morgan's Roever explains, "Balances of cash reinvestment portfolios at securities lenders increased in the first half of this year, breaking away from the steady decline in assets under management over the past several years. Indeed, based on the most recent RMA (Risk Management Association) data, balances at securities lenders grew 13% during 1H17, from a post-crisis low of $582bn as of 4Q16 to $658bn as of 2Q17. The jump in balances was surprising, particularly in the context of a regulatory regime that seems to continue to favor securities as collateral."

He continues, "Furthermore, the increase year-to-date seems to suggest not only more cash collateral transactions but also more securities lending activity in general. A closer look at the amount of collateral lent over the course of this year shows an increase in the amount of US Treasuries and Corporates as well as European equities lent into the market. While the jump in equity lending transactions tends to be seasonal in nature with activity increasing during the second quarter of each year, the amount of US Treasuries lending transactions is the highest it has been since 2014."

The update says, "Anecdotally, we have heard that the increased activity has been driven by dealers being less constrained by their balance sheets as well as some smaller dealers entering the market. As dealers are getting more efficient in managing their balance sheets, they are able to take on larger GC flows, by borrowing GC collateral from securities lenders and lending it out in the tri-party market. The dealers earn the spread in between."

Roever writes, "On the portfolio management side, there has also been a notable shift in investment allocations. Recall that the implementation of MMF reform in 2H16 significantly weakened prime MMFs' demand for longer tenors, particularly in the 6m to 1y part of the curve. As that took place, yields cheapened so much such that it drew substantial interest from the non 2a-7 community, including securities lenders, as buyers of short-term bank debt. The RMA data shows evidence of this. A percentage of their floating rate instruments, the amount of floating rate CP increased from 9% in 4Q15 to 12% in 4Q16. And while floater spreads have narrowed this year, securities lenders continue to be a large supporter of this space, holding 18% of their floating rate instruments in CP as of 2Q17. By the same token, we've also seen a corresponding increase in the allocation of money market instruments that mature inside of 397 days."

Finally, he says, "Somewhat interestingly, there's also been an increase in the amount of fixed rate instruments held in the portfolios. YTD, the amount of fixed rate instruments rose from 10% in 4Q16 to 15% in 2Q17. Based on the holdings, it appears this came at the expense of repo and the "other" category as allocations to these sectors fell 3% and 2% YTD respectively. It's unclear what exactly prompted this shift. Our only guess is that it may be yield driven as the yield on fixed rate instruments (using Libor as a proxy) was substantially higher than repo during the first half of this year). Taken together, the uptick in cash reinvestment portfolio balances continues to underscore the amount of cash in the front-end of the fixed income markets. As dealers continue to optimize their balance sheets, we suspect securities lenders' demand for short duration products will remain, which all else equal will likely keep a lid on yields in short duration products even in a rising rate environment."

The U.S. Treasury's Office of Financial Research just published a study, entitled, "The Intersection of U.S. Money Market Mutual Fund Reforms, Bank Liqudity Requirements, and the Federal Home Loan Bank System." Coauthored by the Federal Reserve Bank of Boston's Kenechukwu Anadu and OFR's Viktoria Baklanova, the paper examines potential risks from money funds' massive holdings of Government securities and FHLB Debt. Its Summary says, "The most recent changes to money market fund regulations have had a strong impact on the money fund industry. In the months leading up to the compliance date of the core provisions of the amended regulations, assets in prime money market funds declined significantly, while those in government funds increased contemporaneously. This reallocation from prime to government funds has contributed to the latter's increased demand for debt issued by the U.S. government and government-sponsored enterprises."

The paper explains, "The Federal Home Loan Bank (FHLBank) System played a key role in meeting this heightened demand for U.S. government-related assets with increased issuance of short-term debt. The FHLBank System uses the funding obtained from money market funds to provide general liquidity to its members, including the largest U.S. banks. Large U.S. banks' increased borrowings from the FHLBank System are motivated, in large part, by other post-crisis regulations, specifically the liquidity coverage ratio (LCR). The intersection of money market mutual fund reforms and the LCR have contributed to the FHLBanks' increased reliance on short-term funding to finance relatively longer-term assets, primarily collateralized loans to its largest members."

It tells us, "This funding model could be vulnerable to 'runs' and impact financial markets and financial institutions in ways that are difficult to predict. While a funding run seems unlikely, it is often the violation of commonly held conventions that tend to pose financial stability risks. Indeed, runs on leveraged financial intermediaries engaged in maturity transformation have produced systemic risks issues in the past and are worthy of investigation and continuous monitoring."

The OFR report's "Introduction and Background" says, "The run on prime money market funds contributed to strains in the U.S. dollar short-term funding markets during the most recent financial crisis. In mid-September 2008, the Reserve Primary Fund, a large prime fund, announced that it could no longer maintain a stable $1.00 transaction price (an event known colloquially as "breaking-the-buck") due to its exposure to Lehman debt. Following this announcement, investors redeemed hundreds of billions of dollars from prime funds, which were invested substantially in short-term corporate debt (e.g., commercial paper (CP) and certificates of deposit (CDs). Simultaneously, investments in government funds increased in a broad-based flight-to-quality."

It adds, "While the Reserve Primary Fund was the only money market fund to "break-the-buck" and, thus, pass through principal losses to its shareholders in 2008, other prime funds were just as vulnerable and could have met a similar fate absent support actions by their sponsors. Unprecedented official sector action stemmed the run from prime money market funds and, in effect, stabilized the short-term funding markets. These emergency actions included the Treasury Department's share price guarantee program for eligible money market funds and the Federal Reserve's liquidity facility for asset-backed commercial paper held by money market funds."

The OFR report continues, "Since the Reserve Primary Fund's failure, the Securities and Exchange Commission (SEC) has adopted two rounds of reforms, one in 2010 and the other in 2014. The reforms were intended to strengthen liquidity and credit risk management practices, enhance reporting requirements, and address run risk in money market funds, among other things. The two main components of the 2014 amendments were a requirement that institutional prime and tax-exempt funds transact at a floating net asset value (NAV), from the then-stable NAV structure, and granting the board of a non-government fund the ability to impose liquidity fees and redemption gates if it breaches certain liquidity thresholds; government funds may opt-in if previously disclosed. In its 2014 adopting release, the SEC noted, among other things, that the floating NAV requirement is intended to reduce the first mover advantage inherent in a stable transaction price, and fees and gates are intended to directly address runs on funds."

It states, "In the months leading to the October 14, 2016 compliance deadline for the floating NAV and fees and gates requirements, significant assets migrated from prime and tax-exempt money market funds, which are statutorily subject to those provisions, into government funds, which are not. One key factor to facilitating this shift is the FHLBank System, which met government funds' increased demand for eligible securities with increased issuance of short-term debt. Available data shows that the largest U.S. banks are the largest borrowers from the FHLBanks. Some of this increase in large U.S. banks' borrowing from the FHLBank System is attributable to the liquidity coverage ratio (LCR) requirement."

Anadu and Baklanova tell us, "The LCR, for regulatory purposes, treats short-term funding obtained from FHLBanks more favorably than funding obtained from the private markets (e.g., commercial paper). The LCR is a driver for banks to increase their holdings in HQLA, which are potentially purchased through advances from the FHLBanks. This increased demand for funding from the largest U.S. banks has, in turn, provided an incentive for the FHLBank System to increase its issuance of short-term debt; while money fund reforms have, in turn, increased the demand for FHLBank debt from government money funds. The result is the FHLBank System is increasingly using its balance sheet to intermediate the supply of cash from government money market funds and demand for funding from large U.S. banks."

They write, "Reforms have had a profound impact on the composition of money market funds, but only a transitory, thus far, effect on the broader money markets. In the nine months leading to October 14, 2016, assets in prime funds declined by over $1 trillion (or 64 percent) to $562 billion, while those in government funds increased by a similar magnitude. This shift was driven primarily by money fund investors' preference for stable NAV funds that are not subject to liquidity fees and redemption gates. This asset migration continued right up to the mid-October 2016 compliance deadline, but has since stabilized. Prime money fund assets are in excess of $642 billion as of month-end August 2017."

OFR's report comments, "FHLBank debt held by money market funds has increased rapidly since 2014.... Indeed, money market funds held about $546 billion in debt issued by the FHLBanks or 19 percent of $2.9 trillion in total money fund assets as of month-end July 2017. That total was up from $268 billion in January 2014, or around 9 percent of the total money fund assets at that time. This swift increase in government money funds' holdings of FHLBank debt roughly coincides with U.S. banks' increased borrowing from the FHLBank System. It appears the growth was fueled by the intersection of two regulatory reforms -- money market fund reforms, adopted in 2014 and fully implemented in 2016, and U.S. LCR, finalized in 2014 and phased in from 2015 through 2017."

It continues, "One concern is the FHLBanks' increased reliance on short-term funding could be vulnerable to rollover risks if cash investors' risk appetite for GSE debt were to unexpectedly change. As GSEs, FHLBanks are perceived as enjoying an implicit guarantee from the U.S. government. However, any uncertainty about this GSE status, for example due to changes in the regulatory or legislative environment, could challenge the FHLBanks' ability to rollover their debt. Moreover, an implicit guarantee does not necessarily mean that the U.S. government will step in if the FHLBank System were to experience material distress. The FHFA, the primary regulatory of the FHLBank System, has expressed concerns with the FHLBank System's increased issuance of short-term funding, citing potential safety and soundness issues that may emanate from rollover risk, including in periods when interest rates are rising."

They conclude, "The liquidity coverage ratio generated demand from large U.S. banks for substantial amounts of new advances to meet their regulatory requirements. Separately, money market fund reforms have prompted a significant shift in assets from prime money market funds into government funds. FHLBanks have met this increased demand for advances to members and short-term government securities with increased issuance of short-term and floating-rate debt eligible for investments by money market funds. Analysis of regulatory filings by FHLBanks finds that this increased funding is largely used to subsidize regulatory liquidity requirements to the largest U.S. banks. The FHLBanks are increasingly serving as a link between money market funds and the largest U.S. banks, and this link may generate new unintended vulnerabilities to the U.S. financial system."

Finally, the OFR paper adds, "Although a low probability event, potential risks channels include a run on FHLBanks' liabilities due to uncertainties about their GSE status, operational issues that limit the FHLBanks' ability to rollover its debt, or other events that cause a rapid shift in investors' preferences. The prospect of such an event warrants close monitoring, as it could impact the broader financial markets in ways that are difficult to predict. The FHFA is aware of the increased maturity mismatched and is taking steps to reduce the system's reliance on short-term funding, including its plan to issue proposed liquidity risk management rules by year-end."

The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" report Tuesday. Their latest official numbers confirm another jump in overall assets in September following a huge increase in August. (Month-to-date in October, through 10/30, assets have increased by $5.8 billion, according to Crane's Money Fund Intelligence Daily. We show Prime assets up $13.2 billion and Govt MMFs down $8.9 billion this month.) We review ICI's Trends and latest Portfolio Composition statistics, as well as our latest Weekly Money Fund Portfolio Holdings collection, below.

ICI's "Trends in Mutual Fund Investing - September 2017" shows a $28.8 billion increase in money market fund assets in September to $2.748 trillion. This follows a $71.8 billion increase in August, a $13.6 billion increase in July, a $20.9 billion decrease in June, and a $12.6 billion increase in May. In the 12 months through September 30, money fund assets were up $76.2 billion, or 2.9%.

The monthly report states, "The combined assets of the nation's mutual funds increased by $270.61 billion, or 1.5 percent, to $18.10 trillion in September, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."

It explains, "Bond funds had an inflow of $25.16 billion in September, compared with an inflow of $20.34 billion in August.... Money market funds had an inflow of $28.22 billion in September, compared with an inflow of $70.67 billion in August. In September funds offered primarily to institutions had an inflow of $26.68 billion and funds offered primarily to individuals had an inflow of $1.55 billion."

The latest "Trends" shows that Taxable MMFs gained assets last month, while Tax Exempt MMFs declined. Taxable MMFs increased by $30.1 billion in September, after increasing $73.5 billion in August and $11.9 billion in July, but decreasing $20.3 billion in June. Tax-Exempt MMFs decreased $1.3 billion in September, after decreasing $1.7 billion in August, increasing $1.7 billion July, and decreasing $0.6 billion in June. Over the past year through 9/30/17, Taxable MMF assets increased by $77.5 billion (3.0%) while Tax-Exempt funds fell by $1.3 billion (-1.0%).

Money funds now represent 15.2% (the same percentage as last month) of all mutual fund assets, while bond funds represent 22.1%, according to ICI. The total number of money market funds decreased by 5 to 405 in September, down from 417 a year ago. (Taxable money funds fell by two to 312 and Tax-exempt money funds fell by 3 to 93 over the last month.)

ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed a jump in Treasuries and drop in Repo and "credit" (CP and CDs) in September. Repo remained the largest portfolio segment, down $21.6 billion, or -2.3%, to $909.5 billion or 34.7% of holdings. Repo has increased by $54.1 billion over the past 12 months, or 6.3%. (See our Oct. 11 News, "Oct. Money Fund Portfolio Holdings: Treasuries Rebound, FICC Grows.")

U.S. Government Agency Securities remained in second place among composition segments; they rose by $2.1 billion, or 0.3%, to $666.2 billion, or 25.4% of holdings. U.S. Government Agency holdings have risen by $22.5 billion, or 3.5%, over the past year. Treasury Bills & Securities remained in third place; they rose by $28.3 billion, or 4.5%, to $650.5 billion, or 24.8% of holdings. Treasuries holdings have risen by $15.3 billion, or 2.4%, over the past 12 months.

Certificates of Deposit (CDs) stood in fourth place; they decreased $4.5 billion, or -2.1%, to $203.5 billion (7.8% of assets). CDs held by money funds have risen by $8.8 billion, or 4.5%, over 12 months. Commercial Paper remained in fifth place, decreasing $9.4B, or -6.6%, to $133.2 billion (5.1% of assets). CP has increased by $20.4 billion, or 18.1%, over one year. Notes (including Corporate and Bank) were up by $722 million, or 9.5%, to $8.3 billion (0.3% of assets), and Other holdings increased to $13.3 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 458.7 thousand to 26.638 million, while the Number of Funds declined by two to 312. Over the past 12 months, the number of accounts rose by 2.191 million and the number of funds increased by 1. The Average Maturity of Portfolios was 32 days in September, the same level as August. Over the past 12 months, WAMs of Taxable money funds have shortened by 6 days.

In related news, Crane Data publishing its latest Weekly Money Fund Portfolio Holdings statistics and summary yesterday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of Oct. 27) includes Holdings information from 70 money funds (down from 90 last week, which included a number of funds that report twice a month instead of weekly), representing $1.360 trillion of the $2.943 (46.2%) 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 $538.2 billion, or 39.6%, Treasury debt totaling $403.6 billion or 29.7%, and Government Agency securities totaling $275.9 billion, or 20.3%. Commercial Paper (CP) totaled $39.5 billion, or 2.9%, and Certificates of Deposit (CDs) totaled $42.1 billion, or 3.1%. A total of $36.0 billion or 2.7%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $25.0 billion, or 1.8%.

The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $403.6 billion, Federal Home Loan Bank with $212.5 billion, BNP Paribas with $85.8 billion, Credit Agricole with $41.1 billion, the Federal Reserve Bank of New York with $35.5 billion, Nomura with $34.3 billion, Federal Farm Credit Bank with $33.4 billion, Societe Generale with $31.9 billion, Wells Fargo with $28.5 billion, and RBC with $27.6 billion.

The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($137.9B), Fidelity Inv MM: Govt Port ($99.7B), Goldman Sachs FS Govt ($90.5B), BlackRock Lq FedFund ($82.0B), Dreyfus Govt Cash Mgmt ($74.3B), Wells Fargo Govt MMkt ($70.0B), Blackrock Lq T-Fund ($57.3B), State Street Inst US Govt ($49.3B), Goldman Sachs FS Trs Instruments ($47.4B), and Morgan Stanley Inst Liq Govt ($47.3B).