News Archives: June, 2017

The Investment Company Institute released its latest weekly "Money Market Fund Assets" report, its latest monthly "Trends in Mutual Fund Investing" release, and its latest "Month-End Portfolio Holdings of Taxable Money Funds" update yesterday. The first two reports show that the slow, steady recovering in Prime money funds assets continues, while the third confirmed that `Repo continued to grow while Treasuries shrank in May. (See our June 12 News, "June Money Fund Portfolio Holdings: Repo Rises, Treasuries Drop Again.") We review these latest reports below.

ICI's latest weekly assets report shows an increase in overall assets and continued growth in Prime MMFs assets. Prime MMFs rose by $3.0 billion to $411.2 billion, their 8th increase in the past 10 weeks. Prime assets have risen by $16.8 billion over the past 10 weeks, or 4.2%, and year-to-date Prime assets have increased by $35 billion, or 9.3%.

ICI writes, "Total money market fund assets increased by $4.17 billion to $2.62 trillion for the week ended Wednesday, June 28, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $2.68 billion and prime funds increased by $2.04 billion. Tax-exempt money market funds decreased by $554 million." Total Government MMF assets, which include Treasury funds too, stand at $2.080 trillion (79.3% of all money funds), while Total Prime MMFs stand at $413.3 billion (15.8%). Tax Exempt MMFs total $128.6 billion, or 4.9%.

They explain, "Assets of retail money market funds decreased by $1.86 billion to $953.61 billion. Among retail funds, government money market fund assets decreased by $1.50 billion to $578.80 billion, prime money market fund assets increased by $241 million to $251.93 billion, and tax-exempt fund assets decreased by $600 million to $122.88 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 60.7% of all Retail MMFs.

ICI's release adds, "Assets of institutional money market funds increased by $6.03 billion to $1.67 trillion. Among institutional funds, government money market fund assets increased by $4.18 billion to $1.50 trillion, prime money market fund assets increased by $1.80 billion to $161.32 billion, and tax-exempt fund assets increased by $46 million to $5.71 billion." Institutional assets account for 63.6% of all MMF assets, with Government Inst assets making up 90.0% of all Institutional MMFs.

ICI's latest "Trends in Mutual Fund Investing - May 2017" shows a $12.6 billion increase in money market fund assets in May to $2.654 trillion. The decrease follows a $24.0 billion decrease in April, a $17.7 billion decrease in March, a $0.4 billion dollar increase in February, and a $46.6 billion increase in January. In the 12 months through May 31, money fund assets were down $55.8 billion, or -2.1%. (Month-to-date in June through 6/28/17, our Money Fund Intelligence Daily shows total assets down by $31.3.9 billion, but Prime MMFs are up by $7.5 billion.)

The monthly report states, "The combined assets of the nation's mutual funds increased by $220.08 billion, or 1.3 percent, to $17.36 trillion in May, 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 $25.53 billion in May, compared with an inflow of $15.00 billion in April.... Money market funds had an inflow of $11.92 billion in May, compared with an outflow of $23.47 billion in April. In May funds offered primarily to institutions had an inflow of $19.60 billion and funds offered primarily to individuals had an outflow of $7.68 billion. <b:>`_."

The latest "Trends" shows that both Taxable MMFs and Tax-Exempt MMFs gained assets last month. Taxable MMFs increased by $11.3 billion in May, after decreasing $21.9 billion in April and $17.5 billion in March, increasing $0.8 billion in February, and decreasing $46.8 billion in January. Tax-Exempt MMFs increased $1.5 billion in May, after decreasing $2.2 billion in April, $0.3 billion in March, and $0.3 billion in February. Over the past year through 5/31/17, Taxable MMF assets decreased by $23.5 billion while Tax-Exempt funds fell by $79.2 billion.

Money funds now represent 15.3% (down from 15.4% last month) of all mutual fund assets, while bond funds represent 22.3%, according to ICI. The total number of money market funds was down 1 to 417 in May, and down from 452 a year ago. (Taxable money funds have decreased from 318 to 317 and Tax-exempt money funds were unchanged at 100 over the last month.)

ICI's Portfolio Holdings showed another drop in Treasuries in May and a jump in Repo. Repo remained the largest portfolio segment, up $66.2 billion, or 8.0%, to $896.9 billion or 35.5% of holdings. Repo has increased by $337.0 billion over the past 12 months, or 60.2%. Treasury Bills & Securities remained in second place among composition segments, but they declined by $18.9 billion, or -2.8%, to $655.9 billion, or 26.0% of holdings. Treasury holdings rose by $147.1 billion, or 28.9%, over the past year. U.S. Government Agency Securities remained in third place, but were flat again (down $2.0 billion, or -0.3%) at $642.0 billion or 25.4% of holdings. Govt Agency holdings rose by $130.2 billion, or 25.4%, over the past 12 months.

Certificates of Deposit (CDs) stood in fourth place; they increased $1.8 billion, or 0.9%, to $191.7 billion (7.6% of assets). CDs held by money funds fell by $362.3 billion, or -65.4%, over 12 months. Commercial Paper remained in fifth place but increased $3.9B, or 3.3%, to $121.7 billion (4.8% of assets). CP has plummeted by $191.5 billion, or -61.1%, over one year. Notes (including Corporate and Bank) were up by $334 million, or 3.9%, to $8.9 billion (0.4% of assets), and Other holdings inched down to $23.6 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 273.1 thousand to 25.672 million, while the Number of Funds inched down by one to 317. Over the past 12 months, the number of accounts rose by 2.543 million and the number of funds declined by 6. The Average Maturity of Portfolios was 32 days in May, down 3 days from April. Over the past 12 months, WAMs of Taxable money funds have shortened by 3 days.

The Investment Company Institute released its "Worldwide Regulated Open-End Fund Assets and Flows First Quarter 2017" Tuesday. The latest data collection on mutual funds in other countries (as well as the U.S.) shows that money fund assets globally rose by $127.3 billion, or 2.5%, in Q1'17, though U.S. and Chinese money funds fell. MMF assets worldwide have increased by $161.5 billion, or 3.2%, the past 12 months. Japan, France and Korea showed the biggest asset increases in Q1'17, while Japan, Luxembourg, France and Brazil showed the largest increases over 12 months. China, the U.S., Belgium and Sweden posted the largest declines over the past year. We review the latest `Worldwide MMF totals below.

ICI's release says, "Worldwide regulated open-end fund assets increased 5.9 percent to $42.77 trillion at the end of the first quarter of 2017, excluding funds of funds.... The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations.... Bond fund assets increased by 5.5 percent to $9.35 trillion in the first quarter. Balanced/mixed fund assets increased by 5.9 percent to $5.65 trillion in the first quarter, while money market fund assets increased by 0.4 percent globally to $5.15 trillion."

It explains, "At the end of the first quarter of 2017, 43 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 12 percent of the worldwide total. By region, 52 percent of worldwide assets were in the Americas in the first quarter of 2017, 35 percent were in Europe, and 13 percent were in Africa and the Asia-Pacific regions."

The release adds, "Globally, bond funds posted an inflow of $268 billion in the first quarter of 2017, after recording an inflow of $94 billion in the fourth quarter. Inflows from balanced/mixed funds worldwide totaled $77 billion in the first quarter of 2017, compared with $36 billion of inflows in the fourth quarter of 2016. Money market funds worldwide experienced an inflow of $29 billion in the first quarter of 2017 after registering an inflow of $96 billion in the fourth quarter of 2016."

According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q1'17 with $2.664 trillion (or 51.7% of all global MMF assets). U.S. MMF assets decreased by $63.8 billion in Q1'17 and decreased by $27.8B in the 12 months through March 31, 2017. China remained in second place among countries overall, though assets fell again in the latest quarter and past year. China saw assets decline $31.5 billion (down 5.1%) in Q1 to $585.4 billion (11.4% of worldwide assets). Over the last 12 months through March 31, 2017, Chinese MMF assets have dropped $46.6 billion, or -7.4%.

Ireland remained third among these country rankings, ending Q1 with $516.0 billion (10.0% of worldwide assets). Dublin-based MMFs were up $11.9B for the quarter, or 2.4%, and up $5.7B, or 1.1%, over the last 12 months. France remained in fourth place with $404.8 billion (7.9% of worldwide assets). Assets here increased $40.8 billion, or 11.2%, in Q1, and were up $44.9 billion, or 12.5%, over one year. Luxembourg was in fifth place with $363.0B, or 7.0% of the total, up $10.4 billion in Q1 (2.9%) and up $50.0B (16.0%) over 12 months.

Japan saw assets skyrocket, rising by $107.3 billion to $107.9 billion, which moved them into sixth place. (We assume this is a reclassification of some sort, and will be looking into.) Korea, now the 7th ranked country, saw MMF assets rise $19.3 billion, or 22.2%, to $106.4 billion (2.1% of total) in Q1 and rise $13.0 billion (13.9%) for the year. Brazil declined to 8th place, but assets increased $14.7 billion, or 20.3%, to $86.8 billion (1.7% of total assets) in Q1. They've increased $16.0 billion (22.6%) over the previous 12 months.

ICI's statistics show Mexico in 9th place with $52.2B, or 1.0% of total, up $4.8B (10.2%) in Q1 and down $3.1B (-5.7%) for the year. India was in 10th place, increasing $3.0 billion, or 6.6%, to $48.4 billion (0.9% of total assets) in Q1 and increasing $12.3 billion (34.0%) over the previous 12 months. (See our recent News, "Money Fund Symposium a Wrap; Assets Down, Prime Up; Indian MMFs." Note also that ICI's data no longer includes money fund figures for Australia, but they would rank as the sixth largest market at $322 billion, their level of two years ago, if they were still included. Australia's MMF assets were shifted into the "Other" category two years ago.)

Taiwan ($27.2B, up $530M and down $2.4B over the quarter and year, respectively), South Africa ($22.4B, up $816M and up $3.7B), Chile ($22.1B, up $2.4B and up $6.0B), Switzerland ($18.8B, up $454M and down $1.4B), and Canada ($18.9B, up $710M and up $300M) ranked 11th through 15th, respectively. Sweden, the United Kingdom, Spain, Norway, and Poland round out the 20 largest countries with money market mutual funds. In what looks like another statistical anomaly, the UK also jumped in the latest rankings, rising $12.1 billion to $22.6 billion.

Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, or if you'd like to see our MFI International product. (Note: Visit our European Money Fund Symposium website to learn more about our upcoming conference in Paris, Sept. 25-26, where European and global money fund issues will be discussed in detail.)

A press release entitled, "BlackRock to Acquire Cachematrix," and subtitled, "Innovative Financial Technology to Enhance BlackRock's Risk and Cash Management Capabilities to Address Clients' Evolving Needs," explains, "BlackRock, Inc. has entered into a definitive agreement to acquire Cachematrix, a leading provider of financial technology which simplifies the cash management process for banks and their corporate clients in a streamlined, open-architecture platform. Cachematrix supports approximately $200 billion in client assets through relationships with many of the world's largest banks and asset managers." Online money market trading portals using Cachematrix software include those from Bank of America Merrill Lynch, Comerica, Fifth Third, HSBC, Huntington, PNC, SVB, UBS and Union Bank.

BlackRock's press release explains, "Cachematrix enables financial institutions to provide corporate clients with a portal for allocating cash to a variety of money market funds and direct cash instruments. Corporate clients are also able to seamlessly analyze, perform compliance checks and generate detailed reports for their cash investments on the Cachematrix platform."

It continues, "BlackRock is one of the most experienced and largest cash management providers in the world, managing approximately $390 billion in cash management assets for corporations, banks, foundations, insurance companies and public funds. The acquisition of Cachematrix builds on BlackRock's momentum in cash management, including the recent transfer of investment responsibility for more than $80 billion in cash management assets from Bank of America Global Capital Management to BlackRock. The Cachematrix acquisition is part of BlackRock's strategy to invest in scalable technology solutions that leverage its global platform for the benefit of clients and shareholders."

The release also says, "The acquisition will add a new dimension to BlackRock’s global liquidity management capabilities. BlackRock will ultimately develop a consolidated interface that combines Cachematrix's functionality, Aladdin's analytics and BlackRock's world class investment expertise, creating a unified client experience that simplifies the movement of cash off corporations' balance sheets and into more productive investment strategies. With this interface, BlackRock will seek to help existing bank clients augment their ability to serve their corporate cash clients' evolving needs and grow the firm's business to include new bank clients who are looking to expand into the corporate cash management space, with robust operational, analytical and investment capabilities."

Tom Callahan, Head of BlackRock's Global Cash Management Business, comments, "Regulatory changes in both the US and Europe have fundamentally changed the needs of cash investors. In addition to world class products, cash investors now require new tools to streamline liquidity management and better manage risk. Building on BlackRock's strength and scale in the cash management space and leadership position in technology and risk management, this transaction reinforces our commitment to adapt our business for clients' evolving needs, and to be the leading provider of comprehensive cash management solutions."

George Hagerman, Chairman and Founder of Cachematrix, tells us, "Joining forces with BlackRock will enhance our ability to deliver technology solutions that simplify cash management for banks and their corporate clients.... Together we will broaden our reach with best-in-class financial technology and world-class investment products to help clients address their liquidity needs."

The press release adds, "This strategic acquisition builds upon BlackRock's global cash management expertise and is an extension of BlackRock's business-to-business model of offering scalable risk management, technology, and advisory services to a broad range of institutions. BlackRock's partner firms are increasingly looking to technology to improve their ability to meet their clients' needs. BlackRock's platform of financial technology solutions includes Aladdin, iRetire, Aladdin Risk for Wealth Management and FutureAdvisor."

Finally, it says, "BlackRock has more than 40 years of experience managing cash through multiple interest rate cycles and varying market conditions, offering its clients a time-tested investment approach and a variety of solutions designed to meet the needs of today's cash investor. The transaction is not expected to be material to the Company's consolidated financial condition or results of operations and is subject to customary closing conditions. The transaction is expected to close in the third quarter of 2017. Terms were not disclosed."

Last week's Money Fund Symposium in Atlanta featured a number of industry heavyweights discussing a host of important topics. But the session, "Major Money Fund Issues 2017," which was moderated by Peter Crane and which featured Tracy Hopkins from Dreyfus BNY Mellon CIS, Pat O'Callaghan from Goldman Sachs A.M., and Jeff Weaver from Wells Fargo Funds, was one of the conference highlights. Crane first asked, "Give us your thoughts on how big corporates and big investors are looking at prime funds now. Are they still hesitant, are they dipping their toes into the water? That's the big question everyone's asking." (Crane Data subscribers and conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center.)

Hopkins comments, "As it relates to corporate investors, what we're kind of seeing and hearing is now is that we finally have some yield spread between products [and that] there is some new interest back into prime funds.... I think the movement from government funds back into prime funds is going to be slow. But now that there's about a 30 to 33 basis points spread, you're just gaining interest again, as we have started to see.... We are starting to see prime funds starting to take up in assets. Overall the prime MMF space is up about 9% YTD, and the institutional prime MMF space is up about 28%."

She continues, "So, we are starting to see customers getting a little bit more comfortable with how the funds are performing, now that all the operational nightmares and headaches have kind of been put to [rest] and the funds are operating smoothly. We are seeing that customers are probably most concerned about the stability of the NAV -- how it's performing over various interest rates cycles. I think what most people are noticing is that for the most part the NAV's don't move very much, and we kind of knew that."

Hopkins adds, "As an industry, we've always done mark to market against amortized cost, so we were pretty familiar with how funds perform with different interest rate cycles. So you know when you look at the fund's NAVs, they may have moved one or two basis points, maybe intra-month, so it's pretty stable. Now that there's [some] return, I think more customers will start eventually tiering their cash holdings away from government funds and dipping their toe back into prime funds."

Crane said to O'Callaghan, "[You've] made the comment that ... some investors are now more concerned about the floating NAV than the gates and fees. I guess that's good news, or is it? Tell us about that." He responded, "I think when you go back prior to October of last year, and clients were discussing the faults around utilizing prime funds ... the reality of it was you had a large number of clients who were going to leave to the prime phones for a number of reasons."

O'Callaghan explains, "One, they just didn't want to be there at the time of implementation. So they felt like they wanted to be out prior to October 14th. Then there were other concerns around investment policies. But in almost every meeting that we had with clients, consistently the fees and gates was an overwhelming factor in the conversations. Post October 14 of last year [though], most of our clients are talking about the elevated premiums that the prime funds are trading [from an] NAV perspective."

He tells us, "But they're not really showing any type of concern around the potential of gates and fees.... I think that a lot of it has to do with the buffers that portfolio management teams are building into their portfolios [keeping liquidity] above 30%. Obviously that 30% number is a very watched number. The fact that there are daily disclosures around liquidity levels now [is] giving investors a lot of comfort. But I think buffers well above 30% have clients not as concerned about the fees and gates, and more concerned about the potential of an NAV move."

Weaver adds, "We have seen assets creep back into our prime funds, largely in-line with the industry. Actually, our largest fund is up about 43% ... so a little more significant there. Our concerns certainly are on a scale standpoint. In order to get these clients back in, they need to be larger. But certainly clients are more interested in discussing not only floating NAV but also fees and gates, and I think that's an excellent point.... There [are] nice buffers -- most funds [are] at 40% liquidity, which certainly provides ... room. [T]hen also in the end, FNAV volatility has been quite [tame] and [NAVs have been] even increasing. [S]o there's some comfort level there. We just continue to talk to our clients and about how we are dealing with those ... and I think we'll continue to see a slow pace back into prime."

He also comments on "the whole [reform] process <b:>`_," "Getting ready for all the these different strikes, and all the different requirements, [involved] a massive amount of work, a massive amount of effort. It was very difficult, but the industry stayed together and did a great job. [O]ne of the biggest concerns coming into reform [involved] was there going to be enough government product to invest to handle the shift out of prime and into government? Certainly, in the end, there really was. We did have the luxury of overnight RRP, which was certainly necessary. But in the end, it wasn’t overwhelmingly the investment of choice except for at quarter-ends. Government supply certainly made the transition easier."

Hopkins says, "The massive asset shift from prime funds into government funds [means that] now you have funds that are much smaller.... Because of those [reform] costs, expenses have crept up a bit. Now I think we're in the process of re-growing those funds.... Whether they'll [ever] be the same size as they once were, I think time will tell. I think you'll get to a sizeable amount eventually again. But probably right now the toughest part for us is dealing with the fund size and growing those assets a bit, and again just working with clients on the education about the fees and gates and the floating NAV."

Finally, Crane asks, "Do you think investors understand gates and fees, or the floating NAV?" Hopkins responds, "I do think they understand the gates and fees. I'm not sure if they still recognize that funds prior to the last reforms did have a form of gates. So they're not necessarily a new topic. As Charlie [Cardona] used to say, they're better gates and fees than what we had in the past. So I think it's just getting comfortable around the remote possibility ... the main part of it is really for the shareholder protection. They're not there to bring people heartache. It's really there to protect your principal." Weaver adds, "Yeah I think they are beginning to understand. We're getting data, right? We're able to start seeing the fluctuation of the NAVs going forward. We're starting to get a better feel for that."

Thanks again to the 550 who attended Crane's Money Fund Symposium in Atlanta last week! Note that Crane Data subscribers and conference attendees may now access the recordings, Powerpoints and final binder via our "Content" page (at the bottom) and via the "Money Fund Symposium 2017 Download Center." Mark your calendars for next year's show in `Pittsburgh, June 25-27, 2018, and watch for coverage and comments in coming days and in the July Money Fund Intelligence. We also review recent news from Reich & Tang, which used to run money funds and now offers "innovative deposit and liquidity solutions to financial intermediaries." R&T recently announced a set of new hires, but it also just lost a lawsuit with Island Intellectual Property LLC and Double Rock Corporation (run by the Bent family, which formerly ran the Reserve Fund) involving payments over brokerage sweep patents.

A press release entitled, "Reich & Tang Overhauls DDM Trust Sales Team with 3 Industry Veterans," tells us, "Reich & Tang Deposit Networks, LLC ("Reich & Tang"), the leading provider of FDIC-insured solutions to banks, brokerages, and wealth managers, announced today that it has recently hired three industry veterans with an impending fourth to lead its sales efforts in the trust and wealth management space."

The new hires include: "David Carson, former National Sales Manager for liquidity products at JPMorgan Chase Asset Management and Morgan Stanley Investment Management, will lead Reich & Tang's efforts with the largest US banks (SIFIs) in the private wealth & trust space.... Stephen Brown, with over 30 years of experience in wealth management, including PNC Financial, Fifth Third Bank Investment Advisors, and ... Accutech Systems will serve as Director, Trust & Wealth Management servicing the Southeast, South Central and lower Midwest regions.... [and] Roger Maude."

President & CEO Michael Lydon says, "We are very excited about our new sales team focused on providing FDIC-insured turn-key solutions to trust and wealth managers. Reich & Tang has made significant investments in its Demand Deposit Marketplace program ("DDM") offering over the past 2 years resulting in up to $25 million in enhanced FDIC coverage, competitive returns, later cut-off times, customized bank monitoring for fiduciary clients, and seamless integration with most major trust accounting systems ... and we now have the right team in place to communicate the distinctive value DDM brings to investment professionals in meeting their customer needs for enhanced FDIC-insured solutions."

The release adds, "DDM is a daily, multi-million dollar FDIC sweep program that works similarly to a money market fund sweep, except investor cash is swept daily into FDIC insured accounts. "DDM has provided valuable balance sheet management services and high levels of FDIC insurance to scores of our community bank clients. Offering DDM to our trust & wealth management clients is a natural transition that provides another layer of service with multiple applications to both our bank clients and the clients they serve," concluded Lydon."

In related news, the Supreme Court of the State of New York recently issued a Decision and Order (Index No. 651702/2015) from Justice Shirley Weiner Kornreich involving "Plaintiffs: Island Intellectual Property LLC and Double Rock Corporation" and "Defendants: Reich & Tang Deposit Solutions, LLC, Reich & Tang Asset Management, LLC, and Michael Lydon."

The summary (which was forwarded to us and which we couldn't find online) says, "The Decision and Order at 2-3 & 20 of 241: denies the motion of the defendants (Reich & Tang and Lydon) to dismiss the fraud claim against them, denies the motion of the defendants (Reich & Tang and Lydon) to stay the case against them while related federal cases are pending in Delaware, grants the motion of the plaintiffs (Island and Double Rock) for partial summary judgment on liability on their claims for breach of contract and indemnification, denies the motion of the plaintiffs (Island and Double Rock) to compel the defendants to deposit royalty payments into the court, and grants the plaintiffs' motion to examine, through a third party accounting firm, Reich & Tang's books and records relating to its performance of its obligations."

It explains, "This case concerns the sale of plaintiffs' [cash management] business to defendants. A small percentage of the purchase price was paid, with the balance to be paid over time as an "earn-out" in the form of royalty payments under a patent license. It is undisputed that defendants refuse to pay plaintiffs the full amount of the earn-out. Their proffered excuse is the supposed invalidity of the business' patents. However, defendants do not dispute that, under the governing contracts discussed herein, payments may not be withheld unless and until all patents are declared invalid. That has not occurred."

The summary continues, "To date, it does not appear that any of the patents have been declared invalid. Nonetheless, relying on their belief that all of the [Island] patents will eventually be declared invalid under Alice Corp. Pty. Ltd. v CLS Bank lnt'l, 134 SCt 2347 (2014) [a U.S. Supreme Court decision that limits business method patents], defendants argue that their federal right under the Lear doctrine to withhold royalty payments for invalid patents preempts the contracts' provision to the contrary. See Lear v Adkins, 395 US 653 (1969) [a U.S. Supreme Court decision that allows a patent licensee to challenge the validity of a licensed patent]."

The document tells us, "Double Rock alleges that since: the value of its business far exceeded the [$15 million] upfront payment, Double Rock never would have agreed to sell for an upfront cash payment equal to only a fraction of that business' true value, had the purchaser, Reich & Tang, not also agreed to enter into an ancillary license agreement conveying payments equal to the balance of that business' value. In this case, Double Rock projected that the Amended License Agreement would yield approximately $92 million in royalty payments over the course of the license.... Suffice it to say that the amount of Royalty Payments [under the license agreement] is dependent on the success of the Business defendants purchased from plaintiffs. The Royalty Payments effectively function as an earn-out -- a typical feature of an asset purchase agreement where the purchase price correlates to the company's post-sale performance."

It adds, "[In the fraud claim against Reich & Tang and Lydon,] plaintiffs allege they were defrauded into selling their business, which managed billions of dollars, for a fraction of its value, based on a false promise to pay the royalties due under the [license agreement], which royalties were to reimburse plaintiffs for the real value of their business. According to plaintiffs, defendants never intended to make the royalty payments ... Ord. at 20 of 24 (granting the plaintiffs' motion for partial summary judgment on liability): To permit defendants [Reich & Tang] to keep the fruits of the Business without actually paying for it by virtue of a cynical invocation of Lear is surely contrary to both state and federal public policy."

The summary says, "Accordingly, partial summary judgment on liability is granted to plaintiffs on their first two causes of action [which claim that one Reich & Tang entity committed a breach of contract by withholding the royalty payments and that the other Reich & Tang entity is obligated to indemnify Double Rock for the breach] ... Ord. at 20-21 of 24 (denying the defendants' motion to dismiss the fraud claim): Turning now to plaintiffs' fraudulent inducement claim, the court finds it to be well-pleaded.... The allegations in the complaint [if proved will] permit a reasonable inference that defendants never intended to pay for the Business, but that their scheme was to acquire the Business for a small amount upfront and then withhold the rest of the royally payments based on the Lear doctrine. In other words, plaintiffs allege a material misrepresentation of fact made with scienter defendants then-present intention not to pay the bargained-for consideration."

Finally, the update comments, "Ord. at 23 of 24 (denying the motion to compel payment into the court and granting the motion for an accounting): Plaintiffs claim, and defendants do not meaningfully dispute, that defendants have taken steps to make themselves judgment proof. While this may or may not be true, it is settled law that the court may not order a defendant under CPLR 2701 to pay disputed funds "into court since the court may not direct such payment simply to provide security for satisfaction of a possible judgment.... Finally, plaintiffs seek an accounting under [the license agreement], which entitles Island to "the right ... to examine, through a third party accounting firm ... [Reich & Tang's] books of account and records relating to [Reich & Tang's] performance of its obligations under this Agreement." ... Plaintiffs' request for an accounting ... is granted."

Thanks to everyone who attended our 9th annual Crane's Money Fund Symposium in Atlanta this week! Our near-record event (550 attendees) at the Atlanta Hyatt Regency wraps up Friday morning with sessions entitled, "Strategists Speak '17: Rising Rates, Repo, Risks," "Treasury, Fed RRP & Agency Supply Update," "Pros & Cons of Ultra-Short Bond Funds," and "Money Fund Trading, Technology & Data." (Feel free to drop by and "crash" the last half-day if you're in town!) Subscribers and attendees may access the recordings and binder via our "Content" center and our "Money Fund Symposium 2017 Download Center" page (watch for the final version and recordings to be posted Monday), and mark your calendars for next year's show in Pittsburgh (June 25-27, 2018). Watch for coverage and comments from the sessions next week, and in our next Money Fund Intelligence. Thank you once again to our excellent speakers, our generous sponsors and all our attendees!

The Investment Company Institute released its latest weekly "Money Market Fund Assets report yesterday. The latest statistics show a big drop in overall assets but an increase in Prime MMFs assets. ICI's latest weekly figures show that Prime money market fund assets were up again, their 7th increase in the past 8 weeks. ICI says Prime assets increased by $3.0 billion to $411.2 billion. Year-to-date, Prime assets have increased by $33 billion, or 8.7%.

ICI writes, "Total money market fund assets decreased by $16.15 billion to $2.62 trillion for the week ended Wednesday, June 21, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $18.76 billion and prime funds increased by $3.02 billion. Tax-exempt money market funds decreased by $418 million." Total Government MMF assets, which include Treasury funds too, stand at $2.077 trillion (79.4% of all money funds), while Total Prime MMFs stand at $411.2 billion (15.7%). Tax Exempt MMFs total $129.1 billion, or 4.9%.

They explain, "Assets of retail money market funds decreased by $1.50 billion to $955.46 billion. Among retail funds, government money market fund assets decreased by $1.37 billion to $580.30 billion, prime money market fund assets increased by $328 million to $251.69 billion, and tax-exempt fund assets decreased by $464 million to $123.48 billion." Retail assets account for over a third of total assets, or 36.5%, and Government Retail assets make up 60.7% of all Retail MMFs.

ICI's release adds, "Assets of institutional money market funds decreased by $14.65 billion to $1.66 trillion. Among institutional funds, government money market fund assets decreased by $17.39 billion to $1.50 trillion, prime money market fund assets increased by $2.69 billion to $159.52 billion, and tax-exempt fund assets increased by $46 million to $5.66 billion." Institutional assets account for 63.5% of all MMF assets, with Government Inst assets making up 90.0% of all Institutional MMFs.

In other news, The Times of India writes "Paytm seeks RBI licence to start money market fund." The article says, "Paytm has applied for a licence to set up a money market mutual fund that will enable the company to expand its financial offerings to consumers."

It continues, "According to sources, Paytm has applied to the Reserve Bank of India (RBI) to start the fund in the coming months, a move that will enable the company to increase revenues from financial services. When contacted, Paytm declined to comment." (See our June 21 "Link of the Day," "Bloomberg on Indian Money Market Fund.")

The article explains, "The Alibaba and SoftBank-backed company had, last month, started its payments bank operations in the country and aims to garner 500 million customers by 2020. Paytm seems to be drawing inspiration from its investor, Alipay that set up Yu'e Bao in 2013 that allows Alipay customers to convert the money in their accounts into units of a money market fund, offering them higher interest rates. According to reports, Yu'e Bao had over $165 billion under management, making it one of the biggest money market funds in the world."

This month, Bond Fund Intelligence speaks with Warren Pierson and Sharon deGuzman, both Managing Directors and Senior Portfolio Managers at Milwaukee-based Baird Advisors. Parent company R.W. Baird & Co., which is privately held, was a regional brokerage firm that has grown into a global financial services company. We discuss the firm's Short Term Bond Fund and Ultra-Short Bond Fund, as well a number of topics in the bond fund marketplace. Our Q&A follows. (Note: This "profile" is reprinted from the June issue of BFI. Contact us if you'd like to see the full issue or if you'd like to see our new Bond Fund Portfolio Holdings "beta" product, which ships to subscribers Monday.)

BFI: Tell us about Baird. Pierson: As an employee-owned firm, philosophically, we try to keep it elegantly simple. It's about focus and alignment. We really focus on doing great work for our clients. If we do great work for our clients, the clients are happy, the business does well, the Baird shareholders or the employees do well, so it's really just about aligning our interests with those of the clients.... We found that with that focus, the growth of the business tends to take care of itself.

BFI: How long have you been running bond funds. Brown: Our group came to Baird in early 2000 [but] our first career was at the old Firstar Bank (now US Bank).... I joined this group in 1993, 7 years before we came over to Baird. But Mary Ellen Stanek, our CIO, Charlie Groeschell, and Gary Elfe, director of research emeritus, our founding partners, have worked together for over 30 years. Deguzman: I joined the group in 1994, so a year after Warren. We were at Firstar until 2000, and then moved over to Baird.

BFI: Tell us about your fund offerings? Pierson: It's a consistent process across the risk spectrum.... Starting on the short-end of the yield curve would be our Ultra-Short. We're talking about a half year duration, and then segueing into our Short-Term Bond Fund which goes to a 1- to 3-year benchmark (just shy of a 2-year duration), now the Bloomberg Barclays 1-3 Year Government Credit Index. A little further out, we have our Intermediate product, which is a 1- to 10- year product (about a 4-year duration).... Then, moving to our full market funds, our Aggregate fund, goes to the Aggregate index.... All of these funds ... are investment grade.

Our ultra-short we can do a little bit below investment grade, which is a 1% right now. Our Core Plus Fund, which tracks the Universal Index, also a 1- to 30-year index (5 and 3/4-year duration), can purchase up to 20% below investment grade. Across the risk spectrum, it's a very straightforward approach. Everything is dollar denominated; everything is in the cash market. There are no derivatives, no leverage, no foreign currencies. We joke with our clients and consultants that our bond funds behave like bonds because they're full of bonds.

We think our size is a huge advantage -- $53 billion is a fair amount of money, but as a bond manager that's still not very large. But it allows us to be very agile. The reason we don't use any derivatives or leverage ... is we don't have to. So, as we get into the process, it's very much bottom-up. We focus on risk-control, and really build portfolios bond by bond. We have top-down views on the market, interest rates, and the economy that kind of shape for us the risk environment that we're in. But I'd say those top down views are challenged on a day-by-day basis through the bottom-up security selection and research process.

BFI: Did ultra-low yields drive launches? Pierson: In August of 2004, we launched our Short-Term fund, and it has grown at a pretty good clip. It's up to $4.5 billion.... We launched the Ultra-Short at the end of 2013, not because there was so much opportunity in short-term yields but largely because there wasn't a lot [of yield] in money markets. What we found is by having about a half year duration ... we were able to get a yield close to 1% [with money funds near 0%]. We've now got a good 3-year plus track record, and it’s getting a bit of traction. So, we're seeing pretty good growth in that product.

Deguzman: Hitting that 3-year mark was really helpful.... Most clients, whether corporations, or healthcare organizations or even endowments or foundations, are really looking for [a home for] money that they know they probably won't need in the next 6-12 months. So, they're looking for a nice yield without going out too far on the yield curve. It's been a good addition to the overall product lineup.... The [expense] ratio is 30 bps on Short [Term], and on Ultra-Short ... it will stay at 15 bps at least until April '18.

BFI: What are your big challenges? Pierson: I talked a little bit about supply, and because of our size it's a real advantage.... You look at some of our larger competitors who have AUM of half a trillion or more [and finding supply isn't so] easy to do. So, sourcing bonds isn't a challenge for us. In terms of our philosophy and process, the way that we strive to add consistency ... is by staying duration neutral. We're not trying to add value by guessing on the direction of interest rates.... So, we take a lot of that drama and volatility out of the market by remaining duration neutral, and then focus on adding some incremental relative value relative to benchmark.

The word "incremental" is pretty key. On our short-term fund it would be 15-40 basis points, for full market funds it would be 25-50 basis points. When we do that in a year, we're not the top dog, we're probably in the second quartile. But when you add that incremental return consistently and compound that consistency over the several years, that is when your results go up into the upper echelon into that top quartile or closer to the top decile.

BFI: What sectors are you buying. DeGuzman: If you look at the Short Fund or even Ultra-Short, we're investing in Treasuries primarily for liquidity. We can invest in Government Agencies [though they're] pretty expensive right now. We're investing in the investment grade credit market, industrials, financials, utilities, and then commercial mortgage-backed or asset-backed as well.... [We're] really looking at what's available in the marketplace and what makes the most sense on a risk-adjusted basis. We look at relative value opportunities across the sectors. A lot of times you'll see us looking at a single-A rated finance bond and comparing it to triple-A rated CMBS or ABS.... It depends on what we're being paid to take on those risks.

In the short end [and] ultra-short, we like the asset-backed market and are staying at the top of the capital structure. These securities are triple-A rated, and they are typically backed by consumer receivables, whether that's credit cards or auto receivables. Commercial mortgage-backeds are a little bit harder to find in that short-end space.

BFI: Tell us more about your investors? Pierson: We tend to attract investors, and largely institutional investors, that are looking for that consistency.... On the advisory side, we have a lot of relationships with financial advisors that have more of an asset allocation model with a long-term focus. We don't attract a lot of hot money.... We've got a very stable client base. Advisory firms, (e.g. Schwab or Fidelity), will [use] us more ... with their managed accounts, where we tend to get plugged in as sort of that core holding, whether it's on our Aggregate fund or the Short-Term fund.

What we've seen in our institutional base is investor allocations to core fixed income are probably about as low as they have ever been. That's because the low interest rate environment has endured and people are hungry for yield. So they've gone to other sectors, migrated to things like equities, high yield, bank loans or emerging market debt.... I think because those allocations to core fixed income are lower, investors are very particular that they're going to behave as the expect them to. It gets back to that consistency. I think that what we've found is that we've been growing a lot, taking market share.

BFI: Tell us about your outlook? Pierson: We would expect the Fed to be pushing short term rates a bit higher.... We view this more as a normalization of rates, just trying to get their back away from that zero wall. So, we think in June they will very likely raise 1/4 point. There's a good chance they will do it again sometime this year, but it's going to be data dependent. For the Ultra-Short in particular, while the 10-year Treasury yield is 28 basis points lower year-to-date ... when you look at the 6-month or the 1-year, those yields are up 44 and 32 basis points. So that's actually presented some good opportunity for our Ultra-Short. Our yields have gone up. We would expect over time for there to be on the gradual basis, continued upward pressure on short-term yields.... On the short end of the curve, we think there's probably good opportunities.

This month, our Money Fund Intelligence newsletter speaks with Linda Klingman, Vice President & Head of Taxable Money Market Strategies for Charles Schwab Investment Management. She reflects on Schwab's more than 25 years in the money fund business, and she comments on recent changes and challenges. Our interview follows. This interview is reprinted from the June issue of our flagship MFI newsletter; contact us at info@cranedata.com to request the full issue. (Note: We'd like to welcome attendees to Atlanta and to our 9th annual Money Fund Symposium, which takes place today through Friday at the Atlanta Hyatt Regency. Over 530 money fund professionals and cash investors will gather to discuss all things money market over the next several days. Watch for coverage of this event in coming days and in the next issue of MFI.)

MFI: Tell us about Schwab's history? Klingman: Charles Schwab Investment Management, or CSIM, has been offering money market funds since January of 1990, and we've been managing them in-house since 1991. In the past 26 years, we've grown to manage over $160 billion in assets, in AUM, and we're now the number 8-ranked money fund manager by assets. I personally, joined CSIM in December of 1990. At that time, we had two funds, the Schwab Money Market Fund and the Schwab Government Money Fund, which were sub-advised by Kemper.... It's my understanding that at a board meeting in May of 1990, Charles Schwab, or as we fondly refer to him as 'Chuck,' said to our then treasurer, 'We're managing our own corporate cash. Let's put a portfolio management team together and bring our money funds in-house.' That's when I joined CSIM to initiate that effort. A fun fact: I am the first CSIM employee."

MFI: What is your biggest priority? Klingman: Our biggest priority is always maintaining the stability of our fund NAVs and insuring liquidity for our shareholders. And this doesn't change regardless of market conditions, regulatory changes, or lineup changes. Last year, we did have several changes to our product lineup to respond to money fund reform. Two notable changes were both designed to ensure that we continue to provide compelling money market funds to a wide array of investor types. The first change was the creation of our Schwab Retirement Government Money Market Fund. This fund was designed specifically for retirement plans seeking government money fund exposure. The second change that we had was the launch of our Schwab Variable Share Price Money Fund. That fund was designed to provide investors that were deemed institutional by the new SEC rule, with prime money fund exposure with a variable NAV. Since then our product line has remained constant.

MFI: What are your big challenges? Klingman: One key challenge facing all money fund managers right now is positioning for uncertainty around the next Fed rate move. The Fed has proven that they can surprise the industry. So, we're determining how to position the funds in an environment where we believe the Fed wants to raise rates but inflation is mixed. Additionally global and political forces could keep the Fed on hold. That makes for a pretty interesting time in the market. Another challenging aspect that we face today, and in the years since the financial crisis, is a reduction in the supply of money fund eligible securities. Regulations which require money funds to maintain significant liquidity within 7 days, but also require issuers to rely less on wholesale funding has created a mismatch between issuers and investor needs. Additionally, several regions that money funds used to actively invest in before the crisis, such as Spain and Italy, are no longer eligible regions in which 2a-7 funds invest, further leading to reduced available supply.

MFI: Has everything been calm on the credit front lately? Klingman: The regulatory mandates put into place following the financial crisis have strengthened balance sheets and credit profiles. CSIM has a robust credit review process performed by a large team of very experienced credit analysts who review and approve all the credits in which we invest.

MFI: Tell us about your portfolio composition? Klingman: We continue to invest in the breadth of money market securities, such as certificates of deposits, commercial paper, both on a fixed and the variable rate basis, and also repurchase agreements. Something that we've invested in more recently in our taxable money funds is variable rate demand municipal securities. The relative value of these securities has provided a unique opportunity to add yield and liquidity to the portfolios. In years past, this wasn't something that we actively invested in but the dynamics in the current market has provided much more of an opportunity. CSIM has a significant municipal money fund presence with skilled portfolio managers and credit analysts that we closely partner with when investing in these securities.

MFI: Are money market issuers hanging in there? Klingman: We have definitely seen a reduction in money market supply as issuers term debt out the curve in response to regulatory requirements, but luckily they haven't abandoned the short end altogether. It's a tough environment for issuers and money funds alike as money funds are required to maintain significant liquidity within seven days, but it is costly for some issuers to issue and maintain maturities so short.

MFI: How's the new variable NAV fund? Klingman: We're pleased with the success of Schwab Variable Share Money Fund. In the 15 months since it launched, it's grown to over $800 million AUM. It's proven to be an important option for investors deemed institutional by the SEC, who can't access a constant NAV Prime fund.

MFI: Can you comment further on last year's MMF reforms? Klingman: We were in a unique position, in that the majority of our investor base is retail investors. While we did have some migration from our prime funds to our government funds, I don't think it was to the same degree as some of the other managers in the industry experienced. We were also able to work with our partners within Schwab to schedule when the shift in assets would take place, so that we on the portfolio manager side could plan our liquidity accordingly. Things went very smoothly. It was amazing to see an entire industry be transformed last year and how well it went. I think it's really a testament to all the hard work and planning by fund shops across the industry. Reform was a major undertaking requiring a lot of preparation to ensure a successful implementation. We took a very focused and coordinated effort across all of CSIM, as well as with our board to ensure they were informed and educated of the changes being implemented and their responsibilities.

MFI: Do you run ultra-short or offshore funds? Klingman: We don't manage any ultra-short bond funds or enhanced cash strategies and we don't have any separately managed accounts. We do manage an offshore money market fund. We manage the fund in line with our US money funds following the rules of 2a-7. It currently has about $2.2 billion in assets. On that front, we have European Money fund reform up next. So we're currently preparing for the changes that will bring. We'll be going through the same effort, partnering across Schwab to make sure that we address all aspects and we'll be educating our board on the changes reform will bring.

MFI: Can you comment on rising rates and moves in LIBOR? Klingman: The Fed has indicated another couple of rate increases are possible in 2017. I think the Fed would like to raise rates, and they'll be on track to do so as long as the economy and market permits. In regards to Libor, the significant steepening experienced last year was primarily driven by money fund reform. Money fund managers reduced weighted average maturities to extremely low levels as they increased liquidity in anticipation of a large migration of assets from prime to government. As assets shifted, demand declined substantially for securities in which prime funds invest, causing longer Libor rates to rise. Libor has subsequently flattened as prime investors are once again investing in the market.

MFI: What is your outlook for the coming year? Klingman: Money funds are still a very important asset class for CSIM. Our outlook for the current year and the future in money market funds is encouraging. Rates are rising gradually and money funds have found their footing. So, it's back to business. As we reflect on the past and look to the future, we recognize things will always change, but with change always comes an opportunity to rise to the occasion.

The Federal Reserve Bank of New York recently published a "Staff Report" entitled, "Investors' Appetite for Money-Like Assets: The Money Market Fund Industry after the 2014 Regulatory Reform." Written by Marco Cipriani, Gabriele La Spada, and Philip Mulder, the paper's Abstract says, "We document the reaction of money market fund (MMF) investors and portfolio managers to a new SEC regulation that came into effect in October 2016. This regulation forces all prime and municipal MMFs to adopt a system of redemption gates and fees and institutional prime and muni MMFs to also operate under a floating net asset value (NAV). First, we show that in anticipation of the new regulatory framework, investors flowed from prime and muni into government MMFs and especially toward the riskier type of government MMF, agency MMFs, consistent with their likely higher risk appetite profile. Second, the flows from prime and muni MMFs into government MMFs mostly occurred within fund families, supporting the hypothesis that the flows were due to the regulatory changes."

They explain, "This contrasts with past outflows from prime and muni MMFs into government MMFs, such as those seen during the 2008 crisis; in those cases, investors often left not only their prime and muni fund but also the fund family. We relate such differences in investors' behavior to their appetite for money-like assets, whose supply was impacted by the new regulation, as opposed to traditional flight-to-safety motives. Third, the outflow from prime and muni MMFs was stronger for institutional investors, consistent with the fact that these investors are more elastic to industry developments and have been subject to a stricter regulation than retail investors. Finally, as a result of the outflows from prime and muni funds, MMF credit to the private sector has been significantly reduced, whereas credit to government-sponsored enterprises (and in particular Federal Home Loan Banks) has increased substantially."

The report's "Introduction" tells us, "After the 2008 run on the money market fund (MMF) industry, academics and policy makers have spent much effort to try to understand the sources of fragility in the industry and make it more resilient. These efforts have led the SEC to approve a new regulation in July 2014, which came into effect in October 2016. U.S. money market funds are open-ended mutual funds that invest in money market instruments. MMFs are pivotal players in the financial markets: as of the end of 2014, they had roughly $3 trillion in assets under management and held approximately 35% of the global outstanding volume of commercial papers (see ICI, 2015)."

It continues, "In particular, they are a critical source of short-term financing for financial institutions: in May 2012, they provided roughly 35% of such funding, with 73% of prime MMF assets consisting of debt instruments issued by large global banks (see Hanson, Scharfstein, and Sunderam, 2015).... In contrast to other mutual funds, however, until the new SEC regulation came into effect in October 2016, all MMFs aimed to keep the NAV of their assets at $1 per share; they have done so by valuing assets at amortized cost and providing daily dividends as securities progress toward their maturity date."

The report claims, "Since their deposits are not insured by the government and are daily redeemable, this stable NAV feature makes MMFs susceptible to runs. If a fund "breaks the buck," i.e., its NAV drops below $1, investors will likely redeem their investment en masse (i.e., run on the fund) to preserve the value of their capital. This happened on September 16, 2008, when Reserve Primary Fund, the oldest MMF, broke the buck after writing off debt issued by Lehman Brothers."

The NY Fed paper states, "The interaction between risk-taking incentives and exposure to runs made MMFs a key ingredient of the recent financial crisis. Indeed, in September 2008, the run on Reserve Primary Fund quickly spread to other prime MMFs, triggering investors' redemptions of more than $300 billion within a few days after Lehman's default. This caused a severe shortage of short-term credit to the banking sector (see Kacperczyk and Schnabl, 2013). In the summer of 2011, a "slow-motion run" hit the prime MMF sector as fears about European sovereign debt problems mounted, causing redemptions of more than $170 billion in approximately two months and disrupting the ability of both European and non-European firms to raise financing in the money markets (see Chernenko and Sunderam, 2014)."

It explains, "MMFs are regulated under Rule 2a-7 of the Investment Company Act of 1940. This regulation restricts fund holdings to short-term, high-quality debt securities. For example, prime MMFs can only hold commercial papers that carry either the highest or second-highest rating from at least two of the nationally recognized credit rating agencies.... Also, the weighted average maturity of the portfolio was capped to 90 days. The MMF industry is divided in three main sectors based on funds' portfolio composition: 1) prime MMFs mainly invest in private unsecured and secured debt in addition to Treasuries and Agency debt; 2) muni MMFs mainly invest in municipal and local authorities debt; 3) government MMFs mainly invest in Treasuries and Agency debt and can only lend to the private sector through repurchase agreements (repos) collateralized by Treasuries or Agency debt. Government MMFs can be further divided in two subgroups: Treasury MMFs, which can only invest in Treasuries and repos collateralized by Treasuries; and Agency MMFs, which can also invest in Agency debt and repos collateralized by Agency debt. MMFs can also be divided into institutional and retail funds based on the profile of their investors."

Cipriani, La Spada and Mulder write, "On July 23, 2014, the SEC approved a new set of rules for MMFs (SEC Release No. IC-31166) focusing on the prime & muni segment of the industry. The main pillar of these rules is that from October 2016, institutional prime & muni MMFs must sell and redeem shares based on the current market-based value of the securities in their underlying portfolios. That is, they have to move away from a stable NAV to a floating NAV. The purpose of this regulatory change is to eliminate (or at least mitigate)the risk of runs by making investments in MMFs less money-like(and more similar to investments in traditional mutual funds). In addition, all prime & muni MMFs will have discretion to impose "gates" on redemptions or charge redemption fees of up to 2% in times of stress."

They continue, "The new regulation came into effect in October 2016. In this paper, we study the evolution of the MMF industry ahead of the implementation of the new regulation. We do so by studying MMF portfolio data from MMF regulatory filings with the SEC (form N-MFP). We find that from November 2015 to October 2016, there have been large outflows from prime & muni MMFs to government MMFs. Moreover, the outflows from prime & muni into government MMFs have occurred mostly within fund families: investors have switched from one MMF type to the other but have kept their investment in the same fund complex; this supports the hypothesis that the observed outflows from prime & muni into government MMFs are due to the regulatory changes."

The paper also says, "We also document that investors in prime & muni MMFs have mainly flowed toward the riskier segment of the government MMF sector: agency MMFs. This is consistent with the likely higher risk-appetite profile of investors coming from the prime & muni segment of the industry. Finally, the observed outflows from prime & muni MMFs are stronger for institutional investors, consistent with the fact that they are more elastic with respect to developments in the industry and have also been subject to a stricter version of the regulation. Section 2 describes the N-MFP form. Section 3 describes investors' flows within the MMF industry. Section 4 describes the changes in MMF portfolios after the new regulation by looking at private versus public investment. Section 5 describes the changes in MMF portfolios after the new regulation in terms of asset class composition. Section 6 concludes."

It adds, "The Form N-MFP is a publicly available regulatory filing that every MMF is required to submit to the SEC each month. Each filing contains information on a fund's balance sheet, share classes, security-level portfolio holdings, performance, and investor flows. Funds reports all of this information as of the end of the month and submit their filings to the SEC within the first five business days of the next month. The SEC makes all N-MFP submissions publicly available. The form was created in May 2010 along with a set of MMF reforms adopted in the immediate aftermath of the financial crisis. The first N-MFP filings were submitted in December 2010 and have continued every month since. Funds occasionally submit their forms late or make small corrections by amending filings from previous months."

The piece discusses, "The Response of MMF Investors to the New Regulation." It tells us, "This section studies the response of MMF investors to the 2014 SEC regulation. [T]he total net assets (TNA) of the whole MMF industry remain roughly constant at around $3 trillion. Within the industry, however, the relative size of the MMF categories changes dramatically. The TNA of prime & muni funds decrease by $1,315 billion (i.e., by approximately 65%), while the TNA of government funds increase by $1,191 billion (i.e., by more than 115%). As a result, the share of government funds in the MMF industry goes from 33.3% in January 2015 to 75.4% in February 2017. The bulk of these flows (about 60%) occurs between June and October 2016, that is, before the SEC regulation comes into effect. Indeed, the first major flow from prime & muni into government funds directly attributed to the new SEC regulations occurred in December 2015, when Fidelity converted $130 billion of its prime MMFs into government MMFs. From November 2016 to February 2017, after the adoption of the new SEC regulation, there has been a very modest net flow back into prime & muni funds."

Finally, the paper talks about, "Past Episodes of Outflows from Prime & Muni MMFs," and comments, "It is instructive to compare portfolio flows after the SEC regulation came into effect in October 2016 with what happened during two past episodes of turmoil in the MMF industry: the period around September 2008 after the Primary Reserve Fund broke the buck (the so-called "2008 MMF Run"), and the second half of 2011 at the height of the European debt crisis (the so-called "Silent Run"). Whereas portfolio flows over the 2015-2016 were the results of new regulation, both the 2008 MMF Run and the Silent Run were driven by investors' concerns over the safety of prime & muni MMFs (after Lehman's bankruptcy and after the European debt crisis respectively)."

The U.S. Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary late last week. It shows that total assets were up slightly ($3.8 billion) in May, with Prime funds rising for the 5th month in a row, gaining $2.5 billion (after gaining $9.8 billion in April and $12.1B in March). Tax Exempt MMFs gained $1.0 billion and Government funds gained $0.4 billion. Gross yields rose for both Prime and Govt MMFs ahead of this month's Fed hike. 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 recap below.

Money market fund assets increased by $3.8 billion in May to $2.921 trillion. (The SEC's series includes some private and internal funds not reported to ICI or other reporting agencies; note that Crane Data has adding many of these to our collections.) Overall assets decreased by $12.7 billion in April and $1.7 billion in March, increased by $14.2 in February, and decreased by $41.1 billion in January. Over the past 12 months through 5/31/17, total MMF assets have declined by $92.4 billion, or 3.1%.

Of the $2.921 trillion in assets, $611.4 billion was in Prime funds, which increased by $2.5 billion in May. Prime MMFs increased $9.8 billion in April, $12.1 billion in March, $24.9 billion in February and $11.7 billion in Jan. But they decreased $15.5 billion in December, increased $3.4 billion in Nov., decreased by $177.4 billion in October, and decreased $293.2 billion in Sept. Prime funds represented 20.9% of total assets at the end of May. They've declined by $792.0 billion the past 12 months, or -56.4%, but they've increased by $61.0 billion, or 11.1%, YTD.

Government & Treasury funds totaled $2.176 billion, or 74.5% of assets,, up $0.4 billion in May. They were down $19.9 billion in April, $14.5 billion in March, $10.1 billion in February, $53.8 billion in January and $10.2 billion in Dec. But Govt MMFs rose $56.4 billion in November, $148.0 billion in October, and $268.3 billion in Sept. Govt & Treas MMFs are up $783.6 billion over 12 months (56.3%). Tax Exempt Funds increased $1.0 billion to $133.9 billion, or 4.6% of all assets. The number of money funds is 411, down 1 fund from last month and down 55 from 5/31/16.

Yields were up again in May for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on May 31 was 1.09%, up 1 basis point from the previous month, and almost double the 0.56% of May 2016. Gross yields increased to 0.84% for Government/Treasury funds, up 0.04% from the previous month and up 0.45% since 5/16. Tax Exempt Weighted Average Gross Yields decreased 0.10% in May to 0.84%, and they've doubled since 5/31/16.

The Weighted Average Net Prime Yield was 0.87%, up 0.01% from the previous month and up 0.53% since 5/16. The Weighted Average Prime Expense Ratio was 0.22% in May (unchanged from the previous month). Prime expense ratios have remained flat over the past year. (Note: These averages are asset-weighted.)

WALs and WAMs were mixed in May. The average Weighted Average Life, or WAL, was 60.1 days (up 1.4 days from last month) for Prime funds, 83.5 days (down 2.7 days) for Government/Treasury funds, and 19.6 days (down 2.5 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 28.8 days (up 0.4 days from the previous month) for Prime funds, 31.8 days (down 3.4 days) for Govt/Treasury funds, and 16.8 days (down 2.7 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 34.4% in May (up 5.5% from previous month). Total Weekly Liquidity was 49.5% (up 0.6%) for Prime MMFs.

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $68.9 billion, followed by France with $63.2 billion. The U.S. was third with $57.1B, followed by Japan with $47.7 billion, Sweden ($42.6B), Australia/New Zealand ($37.4B), the UK ($26.2B) and Germany ($24.7B). The Netherlands ($21.4B) and Switzerland ($16.2B) rounded out the top 10.

The gainers among Prime MMF bank related securities for the month included: France (up $3.6 billion), the Netherlands (up $1.5B), Switzerland (up $1.4B), Sweden (up $880M), the UK (up $293M), China (up $245M), Belgium (up $137M), and Canada (up $14M).. The biggest drops came from the US (down $4.0B), Norway (down $2.3B), Australia/New Zealand (down $1.7B), Singapore (down $1.0B), Japan (down $652M), Germany (down $326M), and Spain (down $272M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $221.3B (up $5.0B from last month), while the Eurozone subset had $121.9 billion (up $4.7B). The Americas had $126.5 billion (down from $130.5B), while Asian and Pacific had $95.1 billion (up from $98.1B).

Of the $610.5 billion in Prime MMF Portfolios as of May 31, $257.7B (42.2%) was in CDs (down from $259.2B), $120.1B (19.7%) was in Government securities (including direct and repo), up from $105.5B, $94.6B (15.5%) was held in Non-Financial CP and Other Short Term Securities (down from $101.8B), $103.1B (16.9%) was in Financial Company CP (up from $103.0B), and $34.9B (5.7%) was in ABCP (down from $34.3B).

The Proportion of Non-Government Securities in All Taxable Funds was 18.6% at month-end, down from 19.2% the previous month. All MMF Repo with Federal Reserve increased to $243.6B in May from $173.8B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 35.0% were in maturities of 60 days and over (up from 33.1%), while 8.6% were in maturities of 180 days and over (up from 8.2%).

The Investment Company Institute released its latest weekly "Money Market Fund Assets report, as well as its latest monthly "Money Market Fund Holdings" summary (with data as of May 31, 2017), yesterday. The former shows a big drop in Government money fund assets ahead of the June 15 quarterly tax payment date, while the latter explains, "This release reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds." J.P. Morgan Securities also released its "Taxable money market fund holdings update: May 2017," which shows shortening and building of repo ahead of this week's Fed hike. We review all three of these new updates below. (See too our June 12 News, "June Money Fund Portfolio Holdings: Repo Rises, Treasuries Drop Again.")

ICI's latest weekly figures show that Prime money market fund assets were flat after rising in 6 of the past 7 weeks. ICI's "Money Market Fund Assets" report shows Prime assets fell by $0.15 billion to $408.2 billion. Year-to-date, Prime assets have increased by $30 billion, or 8.5%.

ICI writes, "Total money market fund assets decreased by $25.03 billion to $2.63 trillion for the week ended Wednesday, June 14, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $24.49 billion and prime funds decreased by $150 million. Tax-exempt money market funds decreased by $387 million." Total Government MMF assets, which include Treasury funds too, stand at $2.096 trillion (79.6% of all money funds), while Total Prime MMFs stand at $408.2 billion (15.5%). Tax Exempt MMFs total $129.6 billion, or 4.9%.

They explain, "Assets of retail money market funds decreased by $3.45 billion to $956.96 billion. Among retail funds, government money market fund assets decreased by $3.18 billion to $581.67 billion, prime money market fund assets decreased by $117 million to $251.36 billion, and tax-exempt fund assets decreased by $152 million to $123.94 billion." Retail assets account for over a third of total assets, or 36.3%, and Government Retail assets make up 60.8% of all Retail MMFs.

ICI's release adds, "Assets of institutional money market funds decreased by $21.58 billion to $1.68 trillion. Among institutional funds, government money market fund assets decreased by $21.31 billion to $1.51 trillion, prime money market fund assets decreased by $33 million to $156.83 billion, and tax-exempt fund assets decreased by $234 million to $5.61 billion." Institutional assets account for 63.7% of all MMF assets, with Government Inst assets making up 90.3% of all Institutional MMFs.

The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in May, prime money market funds held 27.8 percent of their portfolios in daily liquid assets and 43.4 percent in weekly liquid assets, while government money market funds held 57.7 percent of their portfolios in daily liquid assets and 74.8 percent in weekly liquid assets." Prime DLA rose from 25.2% last month and Prime WLA fell from 43.6% last month."

It continues, "At the end of May, prime funds had a weighted average maturity (WAM) of 32 days and a weighted average life (WAL) of 68 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 32 days and a WAL of 84 days." Prime WAMs were up one day from the prior month, WALs also rising by one day. Govt WAMs decreased by 3 days and WALs decreased by 3 days as well.

Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas rose from $160.48 billion in April to $161.62 billion in May. Government money market funds' holdings attributable to the Americas rose from $1,692.32 billion in April to $1,725.73 billion in May."

The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $161.6 billion, or 39.6%; Asia and Pacific at $80.0 billion, or 19.6%; Europe at $163.2 billion, or 40.0%; and, Other (including Supranational) at $3.1 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.725 trillion, or 80.8%; Asia and Pacific at $98.0 billion, or 4.6%; and Europe at $309.3 billion, or 14.5%."

J.P. Morgan's latest Holdings update, written by Alex Roever, Teresa Ho and John Iborg, comments, "The month of May was somewhat uneventful in the taxable money market fund space. Prime MMF bank allocations dropped by a modest $5bn during the month, due in large part to reductions in repo exposures in both traditional and non-traditional repo. Exposures to non-bank assets remained steady with the exception of agencies. Agency discount note/coupon holdings fell $3bn."

It adds, "By and large, asset allocations for prime funds have been stable YTD. The same is true for the government MMF complex. In anticipation of the June FOMC meeting, prime and government funds maintained short maturity profiles throughout the month. Prime funds and government funds pulled in their WAMs by 3 days and 4 days, respectively. Once past the Fed meeting, we expect WAMs to extend as funds redeploy cash into longer tenors. Month-over-month, prime MMF AuM rose $6bn or 1.5% while government fund AuM increased by $8bn or 0.4%. YTD, prime fund AuM is up $30bn."

Fitch Ratings posted a new video entitled, "A New Dawn for European Money Funds," which tells us that, "European money fund reforms, due to be signed into law imminently, will herald important changes for short-term investors." We discuss Fitch's update below, and we also review the latest statistics from our Money Fund Intelligence International and our MFII Portfolio Holdings data collection on European and "offshore" money funds. (Let us know if you'd like to see the latest copy of our MFI International or MFII Holdings.)

The New Dawn update says, "Fitch Ratings believes that these reforms will benefit investors by strengthening industry-wide risk limits and enhancing transparency. The reforms will introduce new fund types, as we explain in the video below, but for many investors we believe the new LVNAV fund type will be a workable alternative to existing money funds. We do not believe liquidity fees and redemption gates should be an area of investor concern in Europe."

In the video, "Fitch Ratings: Latest on European Money Fund Reform," Alastair Sewell comments, "After almost 4 years of debate, European Money Fund Reform is finally here. The reforms are significant and will change the landscape in Europe for short term investors. Once the reforms are effective, there will be four types of Money Funds available in Europe up from the current two. The existing standard or longer term money fund will be relatively unchanged. However, in the short-term money category there will now be three different varieties of funds post-reform."

Sewell explains, "Funds which invest the vast majority, that's over 99.5%, of their assets in public-debt such as sovereign issues will be able to continue transacting their constant net asset value per share. These funds will also be subject to potential liquidity fees and redemption gates if liquidity falls below pre-defined thresholds. Given the way the liquidity is calculated in these funds, we consider the imposition of a gate a remote possibility."

He continues, "The Low Volatility Net Asset Value, or LVNAV, Fund can provide its mark to market NAV close to its book value [and] transact at a constant unit value per share. However, if its mark to market NAV deviates by more than 20 basis points from its book value, then it will be forced to convert to a variable NAV Fund. The threshold is low, but in practical terms the variability we've seen in the mark to market NAVs in existing funds is extremely low and will be unlikely to breach this threshold. These funds will also be subject to potential fees and gates."

The video also states, "Lastly, the Short-Term VNAV Fund is our variable priced fund, although the actual variation in price is likely to be extremely low similar to LNAV funds. Unlike the previous fund types, however, this fund will not be subject to reform driven potential liquidity fees or redemption gates. Although standard liquidity measures available to all European Mutual Funds will still apply."

Finally, Sewell tells us, "We anticipate that the existing short-term CNAV funds, which have assets on the management of around 700 billion Euros, would see the most change. These funds are primarily domiciled in Ireland and Luxembourg. Standard money funds which are primarily domiciled in France will not face huge changes from the reforms, although they are likely to need to increase liquidity levels. `Our survey results from March this year show that LVNAV funds are investors preferred option, so we expect to see a substantial inflow to this fund category."

He adds, "The implementation clock is now ticking and we can expect to see a flurry of activity from fund providers as they began to position their post-reform product sets. There are two significant time horizon to be aware of: first, in 12 months' time all new funds will need to comply with the reforms; second, in 18 months' time all existing funds will need to comply with reform. This time horizon is substantially shorter than the 24 month implementation period in the US."

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 $54 billion year-to-date to $785 billion as of 6/13/17. U.S. Dollar (USD) funds (149) account for over half ($408 billion, or 52.0%) of the total, while Euro (EUR) money funds (93) total E95 billion and Pound Sterling (GBP) funds (104) total L212. USD funds are up $9 billion, YTD, while Euro funds are up E1 billion and GBP funds are up L22B. USD MMFs yield 0.81% (7-Day) on average (6/13/17), up 65 basis points from 12/31/16. EUR MMFs yield -0.49% on average, down 30 basis points YTD, while GBP MMFs yield 0.14%, down 14 bps YTD.

Crane's latest Money Fund Intelligence International Portfolio Holdings data (as of 5/31/17) shows that European-domiciled US Dollar MMFs, on average, consist of 17% in Treasury securities, 22% in Commercial Paper (CP), 24% in Certificates of Deposit (CDs), 19% in Other securities (primarily Time Deposits), 14% in Repurchase Agreements (Repo), and 4% in Government Agency securities. USD funds have on average 28.3% of their portfolios maturing Overnight, 15.5% maturing in 2-7 Days, 23.0% maturing in 8-30 Days, 10.8% maturing in 31-60 Days, 10.6% maturing in 61-90 Days, 9.0% maturing in 91-180 Days, and 2.8% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (28.8%), France (14.2%), Japan (9.2%), Canada (9.0%), Sweden (6.3%), the Netherlands (5.5%), Australia (5.1%), United Kingdom (4.3%), Germany (4.2%), China (2.7%), and Singapore (2.7%).

The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $82.4 billion (17.7% of total assets), BNP Paribas with $16.9B (3.6%), Credit Agricole with $14.8B (3.2%), Mitsubishi UFJ with $11.7B (2.5%), Toronto-Dominion Bank with $11.4B (2.5%), Wells Fargo with $9.3B (2.0%), Swedbank AB with $8.8B (1.9%), Skandinaviska Enskilda Banken AB with $8.6B (1.8%), Natixis with $7.8B (1.7%), RBC with $7.7B (1.7%), Sumitomo Mitsui Banking Co with $7.7B (1.7%), ING Bank with $7.7B (1.7%), Societe Generale with $7.6B (1.6%), DnB NOR Bank ASA with $7.3B (1.6%), Rabobank with $7.3B (1.6%), Bank of Montreal with $7.2B (1.6%), National Australia Bank Ltd with $6.9B (1.5%),`Commonwealth Bank of Australia <b:>`_ with $6.8B (1.5%), Mizuho Corporate Bank LTD with $6.8B (1.5%), and Credit Mutuel with $6.3B (1.4%).

Euro MMFs tracked by Crane Data contain, on average 38% in CP, 31% in CDs, 21% in Other (primarily Time Deposits), 7% in Repo, 1% in Treasury securities and 2% in Agency securities. EUR funds have on average 21.1% of their portfolios maturing Overnight, 8.9% maturing in 2-7 Days, 17.3% maturing in 8-30 Days, 18.2% maturing in 31-60 Days, 15.0% maturing in 61-90 Days, 16.1% maturing in 91-180 Days and 3.4% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (29.1%), Japan (13.4%), US (12.8%), Netherlands (8.0%), Sweden (7.5%), Belgium (6.8%), Germany (5.3%), Switzerland (4.1%), and the United Kingdom (2.6%).

The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E4.6B (4.7%), Credit Agricole with E3.9B (4.1%), Rabobank with E3.7B (3.8%), BPCE SA with E3.5B (3.7%), KBC Group NV with E3.5B (3.6%), Svenska Handelsbanken with E3.5B (3.6%), Proctor & Gamble with E3.3B (3.5%), Nordea Bank with E3.3B (3.5%), Credit Mutuel with E3.3B (3.5%), Societe Generale with E3.2B (3.3%), Mitsubishi UFJ Financial Group Inc with E2.7B (2.8%), Norinchukin Bank with E2.6B (2.7%), ING Bank with E2.5B (2.6%), Mizuho Corporate Bank Ltd with E2.5B (2.6%), and Sumitomo Mitsui Banking Co with E2.2B (2.3%).

The GBP funds tracked by MFI International contain, on average (as of 5/31/17): 43% in CDs, 24% in Other (Time Deposits), 21% in CP, 9% in Repo, 2% in Treasury, and 0% in Agency. Sterling funds have on average 21.9% of their portfolios maturing Overnight, 8.3% maturing in 2-7 Days, 14.2% maturing in 8-30 Days, 18.6% maturing in 31-60 Days, 16.5% maturing in 61-90 Days, 15.4% maturing in 91-180 Days, and 5.1% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (18.6%), Japan (15.4%), United Kingdom (14.8%), Germany (7.1%), Netherlands (6.7%), Sweden (5.7%), Australia (5.2%), US (4.9%), Canada (4.7%), and Belgium (2.8%).

The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L9.1B (5.3%), Credit Agricole with L7.0B (4.1%), Mitsubishi UFJ Financial Group Inc. with L6.0B (3.5%), BNP Paribas with L5.9B (3.4%), Sumitomo Mitsui Banking Co. with L5.5B (3.2%), Nordea Bank with L5.5B (3.2%), Credit Mutuel with L5.4B (3.2%), DZ Bank AG with L5.3B (3.1%), Rabobank with L5.2B (3.0%), Mizuho Corporate Bank Ltd. with L5.2B (3.0%), BPCE SA with L5.1B (3.0%), Standard Chartered Bank with L4.8B (2.8%), Sumitomo Mitsui Trust Bank with L4.4B (2.6%), Qatar National Bank with L4.3B (2.5%), Bank of America with L4.2B (2.5%), ING Bank with L4.1B (2.4%), Dexia Group with L3.5B (2.0%), Commonwealth Bank of Australia with L3.3B (1.9%), National Bank of Abu Dhabi with L3.3B (1.9%), and Svenska Handelsbanken with L3.3B (1.9%).

The June issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Wednesday, features the lead story, "Bond Fund Expenses Hit Record Lows in '16 Says ICI," which reviews a recent study on fund expenses. BFI also includes the "profile" article, "Baird's Pierson & deGuzman Keeping Short-Term Simple," an interview with Warren Pierson and Sharon deGuzman, Portfolio Managers at Milwaukee-based Baird Advisors. In addition, we recap the latest Bond Fund News, including the briefs on mixed yields in May, inflows, new ETFs, and high-yield funds. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the latest issue below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS data spreadsheet, and watch for our latest Bond Fund Portfolio Holdings "beta" product later this month.)

Our lead Bond Fund Intelligence story says, "The Investment Company Institute recently published a study on fund expenses entitled, "Trends in the Expenses and Fees of Funds, 2016." It says, "On average, expense ratios for long-term mutual funds have declined substantially over the past 20 years. In 1996, equity mutual fund expense ratios averaged 1.04 percent, falling to 0.63 percent in 2016. Bond mutual fund expense ratios averaged 0.84 percent in 1996 compared with 0.51 percent in 2016. Hybrid mutual fund expense ratios averaged 0.95 percent in 1996, falling to 0.74 percent in 2016."

They explain, "The report shows average bond fund expense ratios declining from 0.84% in 1996 to 0.75% in 2001, 0.67% in 2006, 0.62% in 2011, and a record low of 0.51% in 2016. ICI's expense charts source Morningstar and Lipper." ICI writes on bond funds, "In 2016, the asset-weighted average expense ratio for bond mutual funds fell 3 basis points to 0.51 percent (Figure 1), marking the seventh straight year that the expense ratios of bond mutual funds have either remained unchanged or have fallen."

The update continues, "In total, from 2009 to 2016, the average expense ratio of bond mutual funds fell 20 percent (13 basis points). The 2016 decline in part reflected a shift in demand away from world bond markets toward the US bond market. In 2016, world bond mutual funds saw net outflows of $40 billion. In contrast, investment grade bond mutual funds, which invest primarily in high-quality corporate bonds issued by US firms, experienced $84 billion in net inflows."

Our latest profile says, "This month, Bond Fund Intelligence profiles Warren Pierson and Sharon deGuzman, both Managing Directors and Senior Portfolio Managers at Milwaukee-based Baird Advisors. Parent company R.W. Baird & Co., employee-owned and privately held, was a regional brokerage firm that has grown into a global financial services company. We discuss the firm's Short Term Bond Fund and Ultra-Short Bond Fund, as well a number of topics in the bond fund marketplace. Our Q&A follows."

BFI says, "Tell us about Baird." Pierson responds, "As an employee-owned firm, philosophically, we try to keep it elegantly simple. It's about focus and alignment. We really focus on doing great work for our clients. If we do great work for our clients, the clients are happy, the business does well, the Baird shareholders or the employees do well, so it's really just about aligning our interests with those of the clients.... We found that with that focus, the growth of the business tends to take care of itself."

BFI then asks, "How long have you been running bond funds? Pierson responds, "Our group came to Baird in early 2000 [but] our first career was at the old Firstar Bank (now US Bank).... I joined this group in 1993, 7 years before we came over to Baird. But Mary Ellen Stanek, our CIO, Charlie Groeschell, and Gary Elfe, director of research emeritus, our founding partners, have worked together for over 30 years. Deguzman: I joined the group in 1994, so a year after Warren. We were at Firstar until 2000, and then moved over to Baird."

BFI continues, "It's a consistent process across the risk spectrum.... Starting on the short-end of the yield curve would be our Ultra-Short. We're talking about a half year duration, and then segueing into our Short-Term Bond Fund which goes to a 1- to 3-year benchmark (just shy of a 2-year duration), now the Bloomberg Barclays 1-3 Year Government Credit Index. A little further out, we have our Intermediate product, which is a 1- to 10- year product (about a 4-year duration)."

It adds, "Then, moving to our full market funds, our Aggregate fund, goes to the Aggregate index.... All of these funds ... are investment grade. Our ultra-short we can do a little bit below investment grade, which is a 1% right now. Our Core Plus Fund, which tracks the Universal Index, also a 1- to 30-year index (5 and 3/4-year duration), can purchase up to 20% below investment grade."

Our Bond Fund News brief on "Yields Mixed; Returns Up in May" explains, "Returns rose across all of the Crane BFI Indexes last month, and yields moved lower for longer-term funds but higher for shorter-term averages. The BFI Total Index averaged a 1-month return of 0.69% and gained 3.26% over 12 months. The BFI 100 had a return of 0.58% in May and rose 3.94% over 1 year. The BFI Conservative Ultra-Short Index returned 0.13% and was up 1.14% over 1-year; the BFI Ultra-Short Index had a 1-month return of 0.13% and 1.50% for 12 mos. Our BFI Short-Term Index returned 0.24% and 2.28% for the month and past year. The BFI High Yield Index increased 0.70% in May and is up 10.21% over 1 year."

The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") last week. Among the 4 tables it includes on money market mutual funds, the First Quarter, 2017 edition shows that the Household Sector remains the largest investor segment, as assets here rose again in Q1. The next largest segment, Nonfinancial Corporate Businesses, however, saw assets plummet in the first quarter, while Funding Corporations (primarily Securities Lending money) were flat. State & Local Governments, Private Pension Funds, Rest of World, and Nonfinancial Noncorporate Business were the next largest segments, and these all remained relatively flat in the latest quarter. Businesses and Life Insurance Companies showed decreases over the past 12 months, while Household holdings of MMFs and State & Local Retirement holdings increased over the past year. We review the latest Fed Z.1 numbers, and we also review a filing from Schwab Municipal Money Fund announcing the liquidation of Schwab's MA, NJ, and PA Muni Money Market Funds, below.

The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets decreasing by $64 billion, or -2.3%, in the first quarter to $2.664 trillion. Over the year through March 31, 2017, assets are down $95 billion, or -3.4%. The largest segment, the Household sector, totals $1.071 trillion, or 40.2% of assets. The Household Sector increased by $48 billion, or 4.7%, in the quarter, after increasing $51 billion in Q4'16 and decreasing $13 billion in Q3'16. Over the past 12 months through March 31, Household assets are up $35 billion, or 3.4%.

Nonfinancial Corporate Businesses were the second largest investor segment, according to the Fed's data series, with $479 billion, or 18.0% of the total. Business assets in money funds decreased $104 billion in the quarter, or -17.9%, and have declined by $96 billion over the past year, or -16.7%. Funding Corporations remained the third largest investor segment with $445 billion, or 16.7% of money fund shares. They remained unchanged in the latest quarter and decreased $36 billion over the previous 12 months.

The fourth largest segment, State and Local Governments held 6.9% of money fund assets ($184 billion) -- up $1 billion, or 0.3%, for the quarter, and up $5 billion, or 3.0%, for the year. Private Pension Funds, which held $156 billion (5.9%), remained in 5th place. Rest Of The World category was the sixth largest segment in market share among investor segments with 4.2%, or $111 billion, while Nonfin Noncorp Business held $99 billion (3.7%), State and Local Government Retirement Funds held $61 billion (2.3%), Life Insurance Companies held $43 billion (1.6%), and Property-Casualty Insurance held $16 billion (0.6%), according to the Fed's Z.1 breakout.

The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.655 trillion, or 62.1%. Debt securities includes: Open market paper ($109 billion, or 4.1%; we assume this is CP), Treasury securities ($741 billion, or 27.8%), Agency and GSE backed securities ($644 billion, or 24.2%), Municipal securities ($154 billion, or 5.8%), and Corporate and foreign bonds ($8 billion, or 0.3%).

Other large holdings positions in the Fed's series include Security repurchase agreements ($808 billion, or 30.3%) and Time and savings deposits ($179 billion, or 6.7%). Money funds also hold minor positions in Foreign deposits ($4 billion, or 0.1%), Miscellaneous assets ($4 billion, or 0.1%), and Checkable deposits and currency ($14 billion, 0.5%). Note: The Fed also recently added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $34 billion, down $1.5 billion in the quarter.

During Q1, Treasury Securities (down $56 billion), Agency- and GSE-Backed Securities (down $34 billion), Checkable Deposits and Currency (down $15 billion), and Municipal Securities (down $9 billion) showed decreases. Security Repurchase Agreements (up $8 billion), Time and Savings Deposits (up $33 billion), and Open Market Paper (up $6 billion).

Over the 12 months through 3/31/17, Time and Savings Deposits (down $314B), Open Market Paper (down $224B), and Municipal Securities (down $85B) all showed huge declines due to the massive shift from Prime and Tax-Exempt money funds to Government MMFs. Treasury Securities (up $195B), Agency- and GSE-Backed Securities (up $183B), and Security Repurchase Agreements (up $211B) all showed major gains over the 12 months through Q1'17.

In other news, a Prospectus Supplement filing for Schwab Municipal Money Funds, which includes Schwab Massachusetts Municipal Money Fund, Schwab New Jersey Municipal Money Fund, and Schwab Pennsylvania Municipal Money Fund, explains, "At a meeting held on June 6, 2017, the Board of Trustees of The Charles Schwab Family of Funds (the Trust) approved the liquidation of, and the related Plan of Liquidation for, each of the Schwab Massachusetts Municipal Money Fund, Schwab New Jersey Municipal Money Fund and Schwab Pennsylvania Municipal Money Fund (each, a Fund, and collectively, the Funds)."

It explains, "Accordingly, effective June 8, 2017 (the Closing Date), each Fund is closed to new investors. All existing investors may continue to make additional investments and receive dividends and/or distributions in the form of additional shares of each Fund through the Liquidation Date. Each Fund anticipates making a distribution of any taxable dividends and capital gains of the Fund prior to or on its liquidation.... Each Fund will distribute liquidation proceeds to its shareholders in one or more distributions."

The funds will be liquidated in mid-September, says the Schwab filing. It tells us, "Shareholders in a Fund, as of the Liquidation Date, will receive, as a liquidating distribution, an amount equal to $1.00 per share for each full share owned and a proportionate amount for each partial share owned. Shareholders in a Fund, as of the Liquidation Date, are expected to receive a second liquidation distribution on or about September 15, 2017, of an amount of any remaining Fund assets in excess of $1.00 per share equal to their remaining proportionate interest in the net assets of the Fund, after the Fund has paid or provided for all of its charges, taxes, expenses and liabilities."

It adds, "Effective June 8, 2017, through the Liquidation Date, each Fund's investment adviser will waive fees and reimburse the Fund for all operating expenses. As soon as practicable after the Closing Date, each Fund will wind up its business and affairs, and each Fund will cease investing its assets in accordance with its stated investment policies.... Shareholders should contact their tax advisors to discuss the potential tax consequences of the liquidation. Once the Funds have been liquidated, all references to the Funds will be deleted from the Prospectus and Statement of Additional Information." (For more on muni liquidations, see "Vanguard Liquidating OH Tax Exempt MMF and "March MFI Features Prime, T-E Liquidations.")

Crane Data released its June Money Fund Portfolio Holdings Friday, and our latest collection of taxable money market securities, with data as of May 31, 2017, shows yet another jump in Repo (and Time Deposits) and a sharp decline in Treasuries. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $59.8 billion to $2.692 trillion last month, after decreasing $3.2 billion in April, $11.8 billion in March and $18.1 billion in February. Repo remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were flat and remained in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.)

Among all taxable money funds, Repurchase Agreements (repo) rose $83.7 billion (9.8%) to $942.0 billion, or 35.0% of holdings, after rising $24.6 billion in April, $41.6 billion in March, and $3.3 billion in February. Treasury securities fell $27.5 billion (-3.9%) to $672.9 billion, or 25.0% of holdings, after falling $53.5 billion in April, $1.6 billion in March, and $29.3 billion in February. Government Agency Debt decreased $1.4 billion (-0.2%) to $630.3 billion, or 23.4% of all holdings, after rising $4.0 billion in April, decreasing $49.3 billion in March and $10.7 billion in February. Repo, Treasuries and Agencies total $2.245 trillion and still represent a massive 83.4% of all taxable holdings.

CDs remained unchanged and CP decreased slightly last month, while Other (Time Deposits) securities increased. Certificates of Deposit (CDs) were unchanged (0.00%) at $180.3 billion, or 6.7% of taxable assets, after increasing $8.1 billion in April, decreasing $3.3 billion in March, and rising $5.5 billion in February. Commercial Paper (CP) was down $0.9 billion (-0.5%) to $159.2 billion, or 5.9% of holdings (after increasing $10.4 billion in April, declining $1.3 billion in March, and rising $10.4 billion in February). Other holdings, primarily Time Deposits, rose $9.9 billion (13.2%) to $84.9 billion, or 3.2% of holdings. VRDNs held by taxable funds decreased by $4.0 billion (-15.4%) to $21.9 billion (0.8% of assets).

Prime money fund assets tracked by Crane Data rose to $578 billion (up from $548 billion last month), or 21.5% (up from 20.8%) of taxable money fund holdings' total of $2.692 trillion. Among Prime money funds, CDs represent just under a third of holdings at 31.2% (down from 32.9% a month ago), followed by Commercial Paper at 27.5% (down from 29.2%). The CP totals are comprised of: Financial Company CP, which makes up 17.1% of total holdings, Asset-Backed CP, which accounts for 5.8%, and Non-Financial Company CP, which makes up 4.6%. Prime funds also hold 1.7% in US Govt Agency Debt, 6.0% in US Treasury Debt, 10.1% in US Treasury Repo, 2.5% in Other Instruments, 11.9% in Non-Negotiable Time Deposits, 5.0% in Other Repo, 2.0% in US Government Agency Repo, and 2.1% in VRDNs.

Government money fund portfolios totaled $1.477 trillion (54.9% of all MMF assets), down from $1.481 trillion in April, while Treasury money fund assets totaled another $637 billion (23.7%), up from $603 billion the prior month. Government money fund portfolios were made up of 42.0% US Govt Agency Debt, 17.9% US Government Agency Repo, 13.7% US Treasury debt, and 25.6% in US Treasury Repo. Treasury money funds were comprised of 68.5% US Treasury debt, 31.2% in US Treasury Repo, and 0.3% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.114 trillion, or 78.5% of all taxable money fund assets, down from 79.2% last month.

European-affiliated holdings increased $15.7 billion in May to $535.5 billion among all taxable funds (and including repos); their share of holdings increased to 19.9% from 19.8% the previous month. Eurozone-affiliated holdings increased $9.5 billion to $353.1 billion in May; they account for 13.1% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $1.6 billion to $199.9 billion (7.4% of the total). Americas related holdings increased $42 billion to $1.956 trillion and now represent 72.7% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $88.0 billion, or 16.1%, to $635.2 billion, or 23.6% of assets; US Government Agency Repurchase Agreements (down $2.3 billion to $277.7 billion, or 10.3% of total holdings), and Other Repurchase Agreements ($29.1 billion, or 1.1% of holdings, down $2.0 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $0.7 billion to $98.9 billion, or 3.7% of assets), Asset Backed Commercial Paper (up $0.6 billion to $33.7 billion, or 1.3%), and Non-Financial Company Commercial Paper (down $0.7 billion to $26.7 billion, or 1.0%).

The 20 largest Issuers to taxable money market funds as of May 31, 2017, include: the US Treasury ($672.9 billion, or 25.0%), Federal Home Loan Bank ($478.9B, 17.8%), Federal Reserve Bank of New York ($241.8B, 9.0%), BNP Paribas ($101.7B, 3.8%), Federal Farm Credit Bank ($64.2B, 2.4%), Credit Agricole ($62.8B, 2.3%), RBC ($59.8B, 2.2%), Federal Home Loan Mortgage Co. ($52.7B, 2.0%), Nomura ($50.8B, 1.9%), Wells Fargo ($50.0B, 1.9%), HSBC ($45.6B, 1.7%), Societe Generale ($43.3B, 1.7%), Mitsubishi UFJ Financial Group Inc. ($42.3B, 1.6%), Bank of America ($37.1B, 1.4%), Bank of Montreal ($34.7B, 1.4%), JP Morgan ($34.5B, 1.3%), Federal National Mortgage Association ($33.2B, 1.2%), Citi ($31.6B, 1.2%), Toronto-Dominion Bank ($31.5B, 1.2%), and Bank of Nova Scotia ($31.2B, 1.2%).

In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($241.8B, 25.7%), BNP Paribas ($89.1B, 9.5%), Nomura ($50.8B, 5.4%), RBC ($47.4B, 5.0%), Credit Agricole ($47.1B, 5.0%), HSBC ($40.3B, 4.3%), Wells Fargo ($39.4B, 4.2%), Societe Generale ($36.5B, 3.9%), Bank of America ($32.1B, 3.4%), and JP Morgan ($27.8B, 2.9%).

The 10 largest Fed Repo positions among MMFs on 5/31 include: Fidelity Cash Central Fund ($19.0B), Northern Trust Trs MMkt ($16.5B), Fidelity Inv MM: Govt Port ($14.9B), Fidelity Govt Cash Reserves ($14.2B), Fidelity Sec Lending Cash Central ($11.8B), Morgan Stanley Inst Lq Gvt Sec ($11.6B), Fidelity Govt Money Market ($10.5B), BlackRock Lq FedFund ($10.0B), Vanguard Market Liquidity Fund ($9.3B), and Fidelity Inv MM: Treasury Port ($8.4B).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($18.5B, 5.0%), Credit Agricole ($15.6B, 4.2%), Toronto-Dominion Bank ($13.9B, 3.7%), BNP Paribas ($12.6B, 3.4%), RBC ($12.4B, 3.3%), Bank of Montreal ($12.3B, 3.3%), Svenska Handelsbanken ($12.3B, 3.3%), DnB NOR Bank ASA ($10.8B, 2.9%), Swedbank AB ($10.7B, 2.9%), and Wells Fargo ($10.6B, 2.8%).

The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($13.3B, 7.5%), Toronto-Dominion Bank ($12.3B, 6.9%), Bank of Montreal ($11.9B, 6.6%), Wells Fargo ($10.3B, 5.7%), Sumitomo Mitsui Banking Co ($9.1B, 5.1%), RBC ($8.3B, 4.7%), Sumitomo Mitsui Trust Bank ($6.7B, 3.7%), Citi ($6.6B, 3.7%), Landesbank Baden-Wurttemberg ($6.5B, 3.6%), and UBS AG ($6.5B, 3.6%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($7.8B, 5.5%), Bank of Nova Scotia ($6.8B, 4.8%), Credit Agricole ($6.6B, 4.7%), Societe Generale ($6.5B, 4.6%), JP Morgan ($6.1B, 4.4%), National Australia Bank Ltd ($6.0B, 4.2%), Westpac Banking Co ($5.9B, 4.2%), Canadian Imperial Bank of Commerce ($5.7B, 4.1%), BNP Paribas ($4.7B, 3.3%), and Swedbank AB ($4.6B, 3.2%).

The largest increases among Issuers include: Federal Reserve Bank of New York (up $80.6B to $241.8B), HSBC (up $11.7B to $45.6B), Nomura (up $7.3B to $50.8B), Federal Home Loan Bank (up $5.8B to $478.9B), Bank of Montreal (up $4.1B to $34.7B), Toronto-Dominion Bank (up $3.8B to $31.5B), Credit Agricole (up $2.9B to $62.8B), Skandinaviska Enskilda Banken AB (up $2.6B to $12.3B), and ING Bank (up $2.2B to $23.2B).

The largest decreases among Issuers of money market securities (including Repo) in May were shown by: US Treasury (down $27.5B to $672.9B), Societe Generale (down $7.7 to $43.3B), Mizuho Corporate Bank Ltd (down $5.7B to $17.6B), Barclays PLC (down $5.0B to $29.7B), Credit Suisse (down $3.3B to $23.1B), Goldman Sachs (down $3.2B to $20.2B), Federal Home Loan Mortgage Co (down $3.1B to $52.7B), Svenska Handelsbanken (down $2.4B to $10.6B), Citi (down $2.4B to $31.6B), and Deutsche Bank AG (down $2.0B to $15.8B.

The United States remained the largest segment of country-affiliations; it represents 65.8% of holdings, or $1.772 trillion. France (9.4%, $251.9B) remained in second place ahead of Canada (6.8%, $183.3B) in 3rd. Japan (5.6%, $151.8B) stayed in fourth, while the United Kingdom (3.5%, $95.3B) remained in fifth place. Germany (1.7%, $45.9B) was in sixth place, while The Netherlands (1.6%, $42.7B) moved ahead of Sweden (1.6%, $42.0B) and Australia (1.4%, $38.0B). Switzerland (1.2%, $31.1B) 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 May 31, 2017, Taxable money funds held 35.8% (up from 31.2%) of their assets in securities maturing Overnight, and another 14.7% maturing in 2-7 days (down from 17.0%). Thus, 50.5% in total matures in 1-7 days. Another 21.2% matures in 8-30 days, while 8.3% matures in 31-60 days. Note that over three-quarters, or 80.0% of securities, mature in 60 days or less (down slightly from last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 8.3% of taxable securities, while 9.3% matures in 91-180 days, and just 2.4% matures beyond 180 days.

The slow but steady return of assets into Prime money market funds finally caught the attention of someone in the media world. The Wall Street Journal's CFO Journal blog featured the article, "Prime Money Funds Show Signs of Life," yesterday, saying, "Corporate treasurers are returning to so-called prime money-market funds, which invest in short-term corporate debt. Cash is trickling back into the funds after they lost more than a trillion dollars last year, because new rules made them less attractive as repositories for corporate cash." We quote from the CFO Journal piece below, and we also review the latest asset flow figures, which show that Prime assets have resumed their gradual but relentless climb higher in 2017.

The Journal's Vipal Monga, who covers "Corporate Cash," writes, "Assets under management at prime funds totaled $405.9 billion at the end of May, a 6% increase from Jan. 18, according to the Investment Company Institute, a trade group. Meanwhile, money managed by funds that invest in government and agency debt totaled $1.54 trillion, a 2.3% decrease. 'Prime funds have formed a solid base, said Peter Crane, president of Crane Data LLC, which tracks the funds."

He explains, "Prime funds used to be one of the preferred investment vehicles for short-term cash. But a series of reforms by the Securities and Exchange Commission made them less popular with treasurers.... Treasurers who like to protect their principal at all costs, and who don’t want to lose access to their money, consequently sought other places to park their cash. According to SEC statistics, prime fund assets under management dropped $1.02 trillion in 2016."

The piece continues, "Only 37% of money-fund investors are invested in prime funds, according to a survey of 134 U.S. chief investment officers, treasurers and other cash managers conducted between January and March by J.P. Morgan Asset Management. But of those who moved money out of prime into government funds in reaction to the reforms, half said they would move money back. Money managers are becoming more comfortable with the new rules, said John Tobin, global head of liquidity portfolio management at J.P. Morgan Asset Management." (See our June 6 News, "JPMAM Investment PeerView Survey Says Money Funds Gain on Deposits.")

Finally, the CFO Journal article adds, "No money funds have yet lowered their share prices below $1 and none have had to impose gates and fees, he noted. Crane Data's numbers show that prime funds yields are roughly 21 basis points more than government, making them more attractive for cash managers. Mr. Tobin said the results suggest more money will seep into the funds. Many companies still need to finalize new investment guidelines that will allow them to put money in the new funds, he said. Once they do, the amounts flowing into prime funds could grow."

The latest weekly figures show that Prime money market fund assets rose after dipping last week (the dip followed five straight weeks of gains). ICI's "Money Market Fund Assets" report shows Prime assets rose by $2.4 billion to $408.3 billion. Year-to-date, Prime assets have increased by $30 billion, or 8.5%. (Note: Crane Data's totals show Prime assets increasing by $121.3 billion, or 26.3%, to $581.7 billion, YTD. But our figures have been inflated by the addition of a number of internal money funds to our collections. See our Jan. 5, 2017 News, "Internal and Private Money Funds Revealed.")

ICI writes, "Total money market fund assets increased by $5.47 billion to $2.66 trillion for the week ended Wednesday, June 7, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $2.21 billion and prime funds increased by $2.41 billion. Tax-exempt money market funds increased by $848 million." Total Government MMF assets, which include Treasury funds too, stand at $2.121 trillion (79.8% of all money funds), while Total Prime MMFs stand at $408.3 billion (15.4%). Tax Exempt MMFs total $129.9 billion, or 4.9%.

They explain, "Assets of retail money market funds increased by $2.41 billion to $960.42 billion. Among retail funds, government money market fund assets increased by $1.05 billion to $584.85 billion, prime money market fund assets increased by $726 million to $251.47 billion, and tax-exempt fund assets increased by $626 million to $124.09 billion." Retail assets account for over a third of total assets, or 36.1%, and Government Retail assets make up 60.9% of all Retail MMFs.

Finally, ICI's release adds, "Assets of institutional money market funds increased by $3.07 billion to $1.70 trillion. Among institutional funds, government money market fund assets increased by $1.16 billion to $1.54 trillion, prime money market fund assets increased by $1.69 billion to $156.86 billion, and tax-exempt fund assets increased by $221 million to $5.85 billion." Institutional assets account for 63.9% of all MMF assets, with Government Inst assets making up 90.4% of all Institutional MMFs.

Crane Data's latest Money Fund Market Share rankings show assets in U.S. money fund complexes were up moderately in May, as assets increased $20.3 billion, or 0.7%. Overall assets have increased by $58.4 billion, or 2.1%, over the past 3 months, but they would be down slightly had we not added $67 billion in new funds in April. They've increased by $197.7 billion, or 7.5% over the past 12 months through May 31, but again note that assets would be down had our numbers not been inflated by the addition of a number of funds. (Crane Data added 3 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 weren't aware of prior to disclosures of the SEC's Form N-MFP.) The biggest gainers in May were Wells Fargo, whose MMFs rose by $8.3 billion, or 9.3%, JP Morgan, whose MMFs rose by $8.3 billion, or 3.3%, Invesco, whose MMFs rose by $5.6 billion, or 10.2%, and BlackRock, whose MMFs rose by $5.3 billion.

Morgan Stanley, First American, Deutsche and HSBC also saw assets increase in May, rising by $3.9B, $1.8B, $1.5B, and $1.3B, respectively. The biggest declines were seen by SSgA, Goldman Sachs, Fidelity, Western 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 moved higher again.

Over the past year through May 31, 2017, Vanguard (up $91.0B), Fidelity (up $83.3B), T. Rowe Price (up $23.4B), and JP Morgan (up $21.1B) were the largest gainers, but JP Morgan (up $20.4B, or 8.8%) and Dreyfus (up $10.7B, or 7.2%) would have been the largest gainers had we adjusted for recently added internal fund assets. These were followed by Prudential (up $13.7B, or 2177.9%), which was also inflated by the addition of a new fund, Dreyfus (up $11.2B, or 7.6%) and BlackRock (up $6.3B, or 2.5%).

` T Rowe Price, Fidelity, Prudential, Vanguard, and BlackRock had the largest money fund asset increases over the past 3 months <b:>`_, rising by $22.5B, $20.2B, $13.7B, $13.0B and $10.4B, respectively. The biggest decliners over 12 months include: Federated (down $18.9B, or -9.3%), SSgA (down $17.4B, or -18.6), Goldman Sachs (down $17.1B, or -9.0%), Western (down $14.0B, or -31.3%), Wells Fargo (down $10.3B, or -9.5%), and Deutsche (down $6.1B, or -25.9%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $529.3 billion, or 18.7% of all assets (up $2.0 billion in May, up $20.2 billion over 3 mos., and up $83.3B over 12 months). Vanguard is second with $275.2 billion, or 9.7% market share <b:>`_ (down $406M, up $13.0B, an up $90.7B), while BlackRock is third with $258.5 billion, or 9.2% market share <b:>`_ (up $5.3B, up $10.4B, and up $6.3B for the past 1-month, 3-mos. and 12-mos., respectively). JP Morgan ranked fourth with $258.5 billion, or 9.2% of assets (up $8.3B, up $5.1B, and up $21.1B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $183.1 billion, or 6.5% of assets (down $234M, down $2.8B, and down $18.9B).

Goldman Sachs was in sixth place with $172.7 billion, or 6.1% of assets (down $2.9B, down $8.7B, and down $17.1B), while Dreyfus was in seventh place with $158.6 billion, or 5.6% (down $1.5B, up $6.2B, and up $11.1B). Schwab ($155.1B, or 5.5%) was in eighth place, followed by Morgan Stanley in ninth place ($117.8B, or 4.2%) and ` Wells Fargo in tenth place <b:>`_ ($97.4B, or 3.4%).

The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($94.0B, or 3.3%), SSGA ($76.1B, or 2.7%), Invesco ($60.6B, or 2.1%), First American ($47.8B, or 1.7%), UBS ($40.2B, or 1.4%), T Rowe Price ($38.5B, or 1.4%), Western ($30.7B, or 1.1%), DFA ($27.4B, or 1.0%), Franklin ($22.1B, or 0.8%), and Deutsche ($17.5B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except Wells Fargo moved ahead of Northern and Deutsche moved ahead of American Funds. 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 for JPMorgan moving ahead of Vanguard and BlackRock, BlackRock moving ahead of Vanguard, Goldman Sachs moving ahead of Federated, and Northern and SSgA moving ahead of Wells Fargo.

Looking at our Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families include: Fidelity ($540.0 billion), JP Morgan ($421.7B), BlackRock ($387.9B), Vanguard ($275.2B), and Goldman Sachs ($268.7B). Federated ($191.7B) was sixth and Dreyfus/BNY Mellon ($182.7B) was seventh, followed by Schwab ($155.1B), Morgan Stanley ($151.7B), and Northern ($110.0B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.

The June issue of our Money Fund Intelligence and MFI XLS, with data as of 5/31/17, shows that yields moved higher again in May across our Taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 751), was up 3 bps to 0.49% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 2 bps to 0.46%. The MFA's Gross 7-Day Yield increased 4 bps to 0.92%, while the Gross 30-Day Yield was up 3 bps to 0.90%.

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.68% (up 3 bps) and an average 30-Day Yield of 0.67% (up 4 bps). The Crane 100 shows a Gross 7-Day Yield of 0.96% (up 3 bps), and a Gross 30-Day Yield of 0.95% (up 4 bps). For the 12 month return through 5/31/17, our Crane MF Average returned 0.24% and our Crane 100 returned 0.39%. The total number of funds, including taxable and tax-exempt, increased to 997, up 5 from last month. There are currently 751 taxable and 246 tax-exempt money funds.

Our Prime Institutional MF Index (7-day) yielded 0.75% (up 2 bps) as of May 31, while the Crane Govt Inst Index was 0.54% (up 4 bps) and the Treasury Inst Index was 0.53% (up 6 bps). Thus, the spread between Prime funds and Treasury funds is 22 basis points, down 4 bps from last month, while the spread between Prime funds and Govt funds is 21 basis points, down 2 bps from last month. The Crane Prime Retail Index yielded 0.57% (up 1 bps), while the Govt Retail Index yielded 0.22% (up 3 bps) and the Treasury Retil Index was 0.28% (up 5 bps). The Crane Tax Exempt MF Index yield decreased to 0.32% (down 8 bps).

Gross 7-Day Yields for these indexes in May were: Prime Inst 1.13% (up 3 bps), Govt Inst 0.83% (up 4 bps), Treasury Inst 0.83% (up 6 bps), Prime Retail 1.11% (unch.), Govt Retail 0.83% (up 5 bps), and Treasury Retail 0.82% (up 5 bps). The Crane Tax Exempt Index decreased 6 basis points to 0.86%. The Crane 100 MF Index returned on average 0.06% for 1-month, 0.15% for 3-month, 0.23% for YTD, 0.39% for 1-year, 0.19% for 3-years (annualized), 0.12% for 5-years, and 0.60% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)

The June issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Wednesday morning, features the articles: "Europe Okays, Prepares for Money Fund Reforms; China," which talks about pending money fund reforms passed by the European Union, "Schwab's Klingman on Rates, Reforms; Rising to Occasion," which "profiles" Charles Schwab Investment Management Vice President & Head of Taxable Money Market Strategies Linda Klingman, and, "MMF Expenses Move Higher as Fee Waiver Unwind Ends," which reviews an ICI study on falling fee waivers. We have also updated our Money Fund Wisdom database with May 31, 2017, statistics, and sent out our MFI XLS spreadsheet Friday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our June Money Fund Portfolio Holdings are scheduled to ship Friday, June 9, and our June Bond Fund Intelligence is scheduled to go out Wednesday, June 14.

MFI's "European MMF Reform" article says, "While all is relatively calm in the U.S. money market fund space, the same can't be said for money funds outside of the U.S. Big changes are coming to money funds overseas as the European Union formally approved reforms. The pending EU regulations will impact funds domiciled in Ireland, France and Luxembourg when they go into effect at the end of 2018. We review the latest on European reforms, and we look at changes in the world's second largest money fund market, China, below."

The piece continues, "S&P Global Ratings explains the changes in a paper entitled, "EU Money Market Reform: The Wait Is Finally Over." They write, "[T]he EU finally has its own MMF legislation, approved by the European Council on May 16, 2017. This third and final step in a very lengthy regulatory process, will see the "Regulation of the European Parliament and of the Council on Money Market Funds" come into force."

Our Schwab profile reads, "This month, we speak with Charles Schwab Investment Management Vice President & Head of Taxable Money Market Strategies, Linda Klingman. She reflects on Schwab's more than 25 years in the money fund business, and she comments on recent changes and challenges. Our interview follows."

MFI says, "Tell us about Schwab's history. Klingman comments, "Charles Schwab Investment Management, or CSIM, has been offering money market funds since January of 1990, and we've been managing them in-house since 1991. In the past 26 years, we've grown to manage over $160 billion in assets, in AUM, and we're now the number 8-ranked money fund manager by assets."

She explains, "I personally, joined CSIM in December of 1990. At that time, we had two funds, the Schwab Money Market Fund and the Schwab Government Money Fund, which were sub-advised by Kemper. It's my understanding that at a board meeting in May of 1990, Charles Schwab, or as we fondly refer to him as 'Chuck,' said to our then treasurer, 'We're managing our own corporate cash. Let's put a portfolio management team together and bring our money funds in-house.' That's when I joined CSIM to initiate that effort. A fun fact: I am the first CSIM employee."

We also ask, "What is your biggest priority?" Klingman answers, "Our biggest priority is always maintaining the stability of our fund NAVs and insuring liquidity for our shareholders. And this doesn't change regardless of market conditions, regulatory changes, or lineup changes. Last year, we did have several changes to our product lineup to respond to money fund reform. Two notable changes were both designed to ensure that we continue to provide compelling money market funds to a wide array of investor types."

She adds, "The first change was the creation of our Schwab Retirement Government Money Market Fund. This fund was designed specifically for retirement plans seeking government money fund exposure. The second change that we had was the launch of our Schwab Variable Share Price money fund. That fund was designed to provide investors that were deemed institutional by the new SEC rule, with prime money fund exposure with a variable NAV. Since then our product line has remained constant."

Our "Expense" update explains, "The Investment Company Institute recently published a study on fund expenses entitled, "Trends in the Expenses and Fees of Funds, 2016." It says, "The average expense ratios for money market funds rose 5 basis points in 2016 to 0.​18 percent. This was indirectly related to the Federal Reserve raising short-​term interest rates in December 2015, which prompted fund advisers to begin paring expense waivers that most money market funds offered during the period of near-​zero short-​term interest rates that had prevailed in the post–​financial crisis era."

It continues, "The report shows average money fund expense ratios declining from 0.52% in 1996 to 0.46% in 2001, 0.40% in 2006, 0.21% in 2011, and a record low of 0.13% in 2014 and 2015. ICI's expense charts source Morningstar and Lipper. (​See Crane Data's Money Fund Intelligence XLS for our expense series."

In a sidebar, we discuss, "Local AFPs: Prime Debate," saying, "In recent weeks, AFP's regional Treasury conferences have featured a host of talks on cash investing and money market mutual funds. A main theme was whether investors will return to Prime money funds, and which alternatives to Prime are gaining traction. We highlight some quotes below."

Our June MFI XLS, with May 31, 2017, data, shows total assets increased $20.3 billion in May to $2.825 trillion after increasing $68.9 billion in April, decreasing $25.2 billion in March, and increasing $51.5 billion in February. (Note that we added $67.3 billion in new funds in April.) Our broad Crane Money Fund Average 7-Day Yield was up 3 bps to 0.49% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 3 bps to 0.68% (7-day).

On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 0.04% to 0.92% and the Crane 100 rose 3 bps to 0.96%. Charged Expenses averaged 0.43% and 0.28% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 29 days (down 3 days from last month) and for the Crane 100 was 30 days (down 3 days from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

J.P. Morgan Global Liquidity released its "2017 Investment PeerView survey and report, which is subtitled, "Industry insights: See how your cash strategy compares. The introduction, from Global Head of Sales Paula Stibbe, says, "I am pleased to introduce the 2017 J.P. Morgan Global Liquidity Investment PeerView survey results report.... As investors continue to navigate shifting interest rate environments globally and face new regulatory pressures -- recently implemented Securities and Exchange Commission (SEC) money market fund reform in the U.S. and approaching reform in Europe -- the PeerView findings will help them better understand their cash investment decisions through a comparison with those of their peers."

The study's "Executive summary" tells us, "In the early months of 2017, J.P. Morgan surveyed respondents at an important juncture, as investors faced unfolding or approaching changes in the regulatory, interest rate, economic and political arenas. As our survey reports, on all fronts investors are reassessing their short-term fixed income investment portfolios, looking for the strategies and solutions that can best help them navigate the changing environment."

It continues, "In the U.S., new SEC rules governing money market funds (MMFs) took effect in October 2016, following a two-year transition period. After they considered new regulations on floating NAV (FNAV), liquidity fees and gates, many cash investors decided to transition assets from prime to government funds. But as they become more comfortable with the new parameters of prime funds, and ponder their excess yield, many investors are rethinking the relative attractiveness of prime vs. government MMFs. In Europe, where money market fund reform is slated to take effect in late 2018 or early 2019, investors will evaluate a range of new MMF structures. Finally, Basel III regulations, which redefine global standards for bank capital, liquidity and leverage, will continue to drive non-operating deposits off bank balance sheets."

JPMAM's survey says of its Key findings: "Investment in money market funds [is] still strong. Based on the market outlook for next year, over 60% of respondents will continue with the same allocation to money market funds, while 22% will increase their allocations to stable NAV funds and 20% to floating NAV funds. Money market funds and bank obligations account for the majority of cash balance allocation. Nearly 40% of respondents cited money market funds as their chosen vehicle for money moved off a bank balance sheet -- by far the most popular placement."

Other key findings include: "Regulatory pressures.... In Europe, 44% of respondents said they need more time and/or information before they decide on their preferred money market fund structure.... Among those considering new structures, 43% ranked risk of gating or a liquidity fee as the most important factor in their decision-making process; and, Investment policy changes.... Notably, 48% of respondent policies now permit FNAV funds, up from 32% in 2015. Nearly a third of respondents are looking to add FNAV funds to their list of allowable investments."

They also cite as key: "Shifting rate environment, [and the] search for yield. In a still-low rate environment, investors continue to search for yield and reassess their appetite for risk. Nearly two-thirds of respondents said they would select money market funds for their cash investments if bank deposit rates lag.... [and a] Keener need for cash segmentation.... Many respondents have determined that they need to consider new investment solutions, including floating NAV funds and more customized portfolios."

On the topic of "Moving back into prime funds," JPM says, "Only 37% of U.S.-based respondents are currently invested in a prime money market fund, down from 63% in 2015. A majority transitioned assets to a government money market fund in the wake of new SEC 2a-7 rules. Fifty percent of U.S. investors who transitioned assets from a prime to a government MMF cited comfort level with floating NAV and gates/fees as the primary factor in reconsidering prime. Among respondents who transitioned assets out of prime MMFs, nearly half would consider moving back if prime offered an excess yield of between 15 basis points and 50 basis points."

The study tells us, "Stable NAV money market funds continue to be the most permissible investment, followed by bank obligations, U.S. Treasuries, floating NAV MMFs, commercial paper and U.S. government agency securities. Insurance companies tend to allow more investments to be permissible compared with other industries. The vast majority of respondents prefer rated money market funds over non-rated funds, which are permitted by only 6% of survey participants' investment policies."

It adds, "Since our last survey, globally we saw a more than 50% increase in the percentage of investment policies that permit FNAV MMFs, up from 32% to 48%. Historically, Europe had the largest percentage of firms permitting FNAV MMFs, but in the wake of the implementation of U.S. MMF reform in October 2016 -- new SEC rules require institutional prime and municipal money market funds to float their market-based NAV -- 52% of Americas respondents permit FNAV MMFs, up 80% from the 2015 survey."

Reporting on the survey, The Wall Street Journal's CFO Journal posted the blog, "Treasurers Weigh Investment Changes Amid European Money-Market Fund Reform." They explain, "The majority of European companies will consider changing their investment policies in response to new money-market fund rules and other regulatory changes, according to a survey by J.P. Morgan Chase & Co. Nearly 60%, or 75 of the 129 European companies J.P. Morgan surveyed, said the new rules could result in changes to where they keep their cash.... Globally, J.P. Morgan surveyed a total of 378 companies, with assets under management totaling $1.2 trillion."

The article continues, "The Council of the European Union, one of the EU's main decision-making bodies, in May approved reforms that impose stricter liquidity requirements and limit redemptions on money-market funds. The new rules are expected to go into effect by the end of 2018 or in early 2019. "Corporate treasurers are reevaluating their cash-decision making," said Jim Fuell, head of J.P. Morgan's global liquidity sales unit.... Around E1.2 trillion ($1.35 trillion) is currently invested in European money-market funds, according to the Institutional Money Market Funds Association."

The piece also comments, "Corporate treasurers and investment managers at 44% of the companies surveyed said they needed more time before making changes to their investments. Meanwhile, 43% of companies said mandatory liquidity fees and redemption hurdles would be the most important factor in their decision making process. A new category of funds, so called low-volatility net asset value funds, will likely attract significant amounts of corporate cash, Mr. Fuell said, as they are the most akin to the constant net asset value funds that are available now."

Finally, CFO Journal adds, "The changes in Europe are expected to be less dramatic than the reforms that came into effect in the U.S. in October 2016 because the liquidity fees and redemption hurdles apply to all money-market funds in Europe. The U.S. rules triggered a rush of cash from prime funds -- money-market funds that invest primarily in corporate debt securities -- into U.S. treasury and government funds, which are not subject to liquidity fees and redemption hurdles."

Chinese money fund Yu'e Bao, the largest money fund in the world at approximately $166 billion, will implement a maximum amount of about $40,000 on accounts, we learned from a Reuters article entitled, "Ant Financial's Yu'e Bao to cap personal accounts." It explains, "Yu'e Bao, a money market fund under China's Ant Financial, will impose a cap on individual accounts at 250,000 yuan ($36,475), amid tightening regulatory oversight of China's financial markets. The cap, which comes into effect from May 27, will apply to new investments but not existing accounts, Tianhong Asset Management Co Ltd, which is majority owned by Ant Financial and manages the fund, said in a statement on its website." We review this, as well as an article in today's Wall Street Journal, "Chinese Banks Face Up to Funding Squeeze," and a study from the Reserve Bank of Australia.

The first piece, posted by Business Insider, tells us, "Set up in 2013, Yu'e Bao, which translates literally as "leftover treasure", had 1.14 trillion yuan ($166.27 billion) of funds under management at the end of the first quarter, making it one of the biggest money market funds in the world. Ant Financial, which confirmed the cap, is the payment affiliate of Alibaba Group Holding Ltd."

Reuters writes, "The move comes as China looks to curtail financial risks amid growing concerns over high levels of debt. Moody's downgraded China's credit ratings this week for the first time in nearly 30 years, saying it expected the financial strength of the economy would erode in coming years as growth slows and debt continues to rise.... Chinese regulators have issued a flurry of measures to clamp down on the shadow banking sector in recent months, while the central bank has raised short-term interest rates."

The article adds, "Following its launch, Yu'e Bao initially had a cap of one million yuan, but this was removed at some point, leaving it with no maximum or minimum limit on accounts. It has around 325 million investors, the vast majority of which are individuals. An Ant Financial spokeswoman told Reuters the decision was made by Tianhong and said that it was related to the fund's product placement, targeting smaller individual investments."

The Journal's piece tells us, "Much of the money pulled out of conventional deposits is being invested in the rapidly multiplying population of investment funds, which offer higher rates. Yu'e Bao, run by Alibaba-backed Ant Financial, has become one of the world's biggest money-market funds -- with $165 billion under management—offering investors a 7-day annualized rate of over 4%."

It adds, "Ironically, it and other funds are achieving such returns by investing in financing tools issued by banks. When China liberalized deposit rates in 2015, banks started churning out new investment products, including so-called negotiable certificates of deposit. Issuance of these short-term products in April totaled $180 billion, up 60% from a year earlier. Their relatively high rates -- up to 4% or 5% -- have made them attractive to money-market funds like Yu'e Bao."

In related news, the Reserve Bank of Australia recently wrote a piece entitled, "The Rise of Chinese Money Market Funds, which discusses the rise of Yu'e Bao and money funds in China. Kate McLoughlin and Jessica Meredith write, "Money market funds (MMFs) pool funds in an investment vehicle to invest in short-term, highly rated securities. The MMF sector in China has grown rapidly over the past few years and is now the world's second largest by assets, though it is small compared with China's domestic bank deposits."

They explain, "This growth has been driven by investors attracted by high yields relative to bank deposits and technological developments that allow Chinese MMFs to offer a convenient cash management service. Chinese MMFs differ from similar products in many other countries: they tend to be more leveraged, and they offer more liquidity and maturity transformation. Nonetheless, recent regulatory reforms to address vulnerabilities have taken a similar direction to reforms globally."

The Australian Reserve Bank study continues, "MMFs have become increasingly important to China's financial markets over the past few years. Since January 2013, their combined net asset value (NAV) -- the value of a fund's assets minus its debt liabilities -- has grown by nearly eight times to around CNY3.6trillion and the number of MMFs has more than quadrupled to around 295. By comparison, banking system deposits have only grown by around 1.6 times over the same period. Nonetheless, the value of MMFs' net assets has been broadly stable since late 2015, possibly because investors were shifting into wealth management products (WMPs) in response to the low returns paid on MMFs relative to WMPs."

It explains, "Products marketed as MMFs pool funds in an investment vehicle, with investors in MMFs receiving units (or shares) in this vehicle. MMFs invest largely in short-term, highly rated securities and are generally considered to be low-risk and low-return products with high liquidity. In this regard, MMFs serve as important intermediaries between short-term borrowers (such as governments and corporations that issue highly rated securities) and lenders (retail and institutional investors) who are seeking low-risk and liquid short-term investments."

Finally, the piece adds, "The emergence of MMFs in China has occurred in the context of the rapid evolution of the broader market for investment products. Other products that have grown rapidly include WMPs, non-MMF mutual funds and products offered by insurance companies and securities firms.... This article provides some background on Chinese MMFs before discussing who invests in these funds and potential reasons for their rapid growth. It then outlines MMFs' asset allocations and their importance to Chinese short-term funding markets, before assessing potential vulnerabilities."

Note: Crane's Money Fund Symposium, which takes place June 21-23 in Atlanta, includes the session, "MMFs in Ireland, France & China, which features Reyer Kooy of IMMFA, Alastair Sewell of Fitch Ratings, and Jonathan Curry of HSBC Global A.M.

Federated Investors' posted its latest "Month in Cash commentary, written by Global CIO for Money Markets Deborah Cunningham, which discusses how floating NAV money funds have mostly been well over the 4-digit, $1.0000 level to date. The company's CEO also presented to an investor conference and briefly discussed a number of money fund issues, including rising rates' impact on MMFs, private funds, and consolidation. We quote from both of these updates below, and we also review the latest on Prime money fund assets.

Cunningham writes "When $1 isn't equal to $1," explaining, "As money market reform neared last year, many investors voiced concern about the possibility that the floating net asset value (NAV) of institutional prime and tax-free money funds could slip below $1, or more specifically below the new $1.0000 reporting standard. Unlike stable NAV products, these institutional fund shares could lose actual value. It was a legitimate worry, of course. But it turns out that since the recent reforms, floating NAVs across the money market fund industry largely have been fractionally above $1 (most coming in the fourth decimal place). That has led to a common question: Are we required to manage our funds to pull these FNAVs down to $1.0000? The answer is simply no."

She explains, "The confusion is understandable. For decades the tenet of money funds has been that shares remain at a dollar, with managers permitted to round by the penny to stay there. There is no such restriction for institutional prime and municipal money funds. Their floating NAVs can end each trading day higher or lower than $1.0000, increasing or decreasing total return."

Cunningham continues, "So, we don't set out to exceed a dollar; it is just a function of how we manage. We make decisions based on our fundamental research about the credit of the issuers, our economic outlook and our predictions for Federal Reserve policy. That can result in NAV appreciation or depreciation. But we don't consider the former a positive or the latter a negative -- just the result of what value the market is providing at that time. That being said, it would take a major market moving event to pull the currently elevated NAVs down significantly. Movement either way likely will be gradual."

She tells us, "Why have floating NAVs risen in the first place? Usually when interest rates rise, prices go down. We think it's been due to a combination of the dramatic appreciation of floating-rate securities in late 2016 and early 2017, and enlarged spreads between government and prime securities -- both a result of the reforms. The spread contraction that followed was exacerbated by a mismatch between supply and demand in the money markets. Balancing that, yields on fixed-rate securities increased as the Fed has tightened in recent months, but not as much as we have seen historically. It will be intriguing to see if this continues as policymakers appear set to raise the target rate again in June to a range of 1% to 1.25%."

Finally, she adds, "For the time being, the short end of the yield curve has flattened to the point that it is not worth the maturity risk to invest out any distance. We pulled in the target weighted average maturity (WAM) of our government money funds by five days, bringing it in line with our municipal funds' WAM of 30-40 days, and kept the target WAM of 35-45 days for our prime products."

Federated President and CEO J. Christopher Donahue presented Thursday at Keefe, Bruyette & Woods' "Mortgage Finance and Asset Management Conference." (See the press release, "Federated Investors, Inc.'s CEO to Present at Keefe, Bruyette & Woods Conference.) Donahue commented, "People have been, for so long, at zero or nothing [yields].... They got kind of used to that. It's taken awhile for institutional investors to look at the impact of the October changes, which basically put fees and gates and a variable NAV on institutional prime and muni money funds. They're looking at it, saying 'What [do] these numbers look like? How many zeros or nine do you have after the decimal point? ... They're just taking their time. `What will help them a lot are the two rate rises we think are baked in the cake in June and September."

Higher rates, he explains, "That will actually pay people for keeping their money short. In the meantime, you've had a rigorous consolidation in the money fund business. Unfortunately, one of the inexorable effects of increased regulation is oligopolization.... We're one ... of the larger players in that space. In terms of the people and the product, you have a product in a money market fund that since '08 has been trashed by regulators, [etc.], and the underlying efficacy has been re-proven day after day.... So people want a dollar-in, dollar-out, net asset value."

Donahue adds, "P.S. There's a coalition that's been put together, basically representing municipal issuers.... There's been a bill dropped in the Senate and in the House that restores institutional prime and muni money funds to the way they were before the 2010 amendments, i.e., removing the variable net asset value and removing fees and gates. Because remember the 2010 amendments were put in to enhance the resiliency of money funds. The 2014-2016 were designed to kill ... or destroy money funds.... So we're just saying cut the regulations off there. So that's another one that has a reasonable shot ... because it is bipartisan, it stands alone, [and] it does not attack Dodd-Frank.... It's right down the middle of the plate."

He adds, "The other thing that we've done is create a lot of new products. We've got a collective fund and we've got a private fund, and those things have about $600 and $700 million.... They are poised for growth, but it takes a while ... to make that grow. So we're very optimistic about the domestic money fund business."

In other news, Prime money market fund assets dipped after rising for five weeks in a row. ICI's latest "Money Market Fund Assets" report shows Prime assets fell by $0.92 billion to $405.9 billion. Our Money Fund Intelligence Daily shows Prime MMFs up by $9.3 billion in May (through 5/31/17) to $534.5 billion, their fifth monthly increase in a row. (Our collection includes a number of internal money funds not tracked by ICI, so our Prime totals are much higher.)

ICI writes, "Total money market fund assets increased by $5.01 billion to $2.65 trillion for the week ended Wednesday, May 31, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $6.45 billion and prime funds decreased by $924 million. Tax-exempt money market funds decreased by $518 million." Total Government MMF assets, which include Treasury funds too, stand at $2.119 trillion (79.8% of all money funds), while Total Prime MMFs stand at $405.9 billion (15.3%). Tax Exempt MMFs total $129.1 billion, or 4.9%.

They explain, "Assets of retail money market funds decreased by $3.59 billion to $958.01 billion. Among retail funds, government money market fund assets decreased by $3.15 billion to $583.80 billion, prime money market fund assets decreased by $290 million to $250.75 billion, and tax-exempt fund assets decreased by $150 million to $123.47 billion." Retail assets account for over a third of total assets, or 36.1%, and Government Retail assets make up 60.9% of all Retail MMFs.

Finally, ICI's release adds, "Assets of institutional money market funds increased by $8.60 billion to $1.70 trillion. Among institutional funds, government money market fund assets increased by $9.60 billion to $1.53 trillion, prime money market fund assets decreased by $634 million to $155.17 billion, and tax-exempt fund assets decreased by $369 million to $5.63 billion." Institutional assets account for 63.9% of all MMF assets, with Government Inst assets making up 90.5% of all Institutional MMFs.

S&P Global Ratings published the paper, "EU Money Market Reform: The Wait Is Finally Over," which discusses the pending money market fund reforms in Europe. Written by Andrew Paranthoiene, Francoise Nichols, and Joseph Giarratano, it says, "After years of contested debates about the pros and cons of regulation for European money market funds (MMFs) and 10 years after the start of the global financial crisis, the EU finally has its own MMF legislation, approved by the European Council on May 16, 2017. This third and final step in a very lengthy regulatory process, will see the "Regulation of the European Parliament and of the Council on Money Market Funds" come into force." (See our May 30 News, "ESMA Publishes Consultation on European MMF Regs; Fitch on European," our May 18 News, "More on Passage of European Money Fund Reform; Impact on Corporates," and our May 17 Link of the Day, "Law360 on EU Money Fund Rules.")

The new paper explains, "S&P Global Ratings rates European domiciled MMFs mostly denominated in U.S. dollars, British pound sterling, and euros, collectively totaling approximately E630 billion in assets under management as of March 2017. In this article, we provide our views on the newly published EU MMF reform and what it means for those MMFs that we rate. We also offer our view on the future of the industry, particularly how the reform provides sound policies and practices for MMFs to follow, and the effects of the explicit nature of the reforms on the industry."

S&P's "Overview" tells us, "In our view, the increased transparency, enhanced liquidity, and investor protection outlined in the new regulations are positive developments for the industry. Notably, we anticipate that the introduction of new rules in Europe will not affect European domiciled MMFs assessed under our PSFR criteria. The explicit nature of the reforms will likely create a pool of homogenous MMFs, which could then result in further fund mergers reducing competition in the marketplace."

They write, "With regulatory uncertainty now out of the way, the E1.2 trillion EU MMF industry, from its more humble beginnings in France in the 1980s, can finally move forward. In recent years, and since the first EU MMF reform proposal in 2013, the industry has been treading water due to political inaction and significant lobbying and campaigning efforts from opposing sides. For more than 40 years prior to these regulatory changes, numerous countries such as France, Spain, Italy, Germany, Luxembourg, Ireland, and the U.K. each maintained their own guidelines for MMFs."

Paranthoiene says, "In 2009, the Committee of European Securities Regulators (now known as the European Securities and Markets Authority or ESMA) proposed guidelines and two common definitions of MMFs. Some viewed these proposals as positive developments for the EU MMF industry because they clarified how the market should operate, considering the philosophical differences between a U.S.-styled MMF offering a constant net asset value (CNAV) and the continental (French) style MMF offering a variable net asset value (VNAV). However, the guidelines failed to create a minimum level playing field for MMFs in the EU, since more than half of the EU countries did not apply the guidelines."

Regarding the "Key Aspects Of The Reform," S&P comments, "The new regulation provides investors with a degree of optionality for investing their short-dated cash, by offering two types of MMFs: Short-term MMFs with the objective of offering money market rate returns, while ensuring the highest possible level of safety for the investors; and Standard MMFs with the objective of offering returns slightly higher than money market returns, and they therefore invest in assets that have an extended maturity."

They continue, "In addition, the regulation introduces three new structural options, within the short-term MMF category: Public debt CNAV: A MMF that seeks to maintain an unchanging net asset value (NAV) per unit or share and invests 99.5% of its assets in government debt instruments, reverse repos collateralized with government debt, and cash. Low volatility net asset value (LVNAV): A MMF permitted to maintain a constant dealing NAV, provided that certain criteria are met, including that the fund's market NAV does not deviate from the dealing NAV by more than 20 basis points. Variable NAV: A MMF that prices its assets using market pricing and therefore offers a fluctuating NAV."

In addition to diversity, credit quality, valuation and maturity guidelines, the new rules also include liquidity guidelines. S&P says, "The new EU MMF reform contains newly introduced metrics for MMFs to observe daily and weekly liquidity amounts. The introduction of such metrics is consistent with other global regulators who have also introduced such measures.... Both public debt CNAV and LVNAV MMFs need to maintain at least 10% of their investments in overnight investments and 30% in a weekly allocation. Short-term VNAVs are required to maintain these amounts at 7.5% and 15%, respectively."

The report states, "The final European MMF regulations include a ban on external support. External support is defined as cash injections, asset purchase at an inflated price or with the purpose to provide liquidity, the issuance of an implicit or explicit guarantee, or any action to maintain the liquidity profile of the NAV.... Under the regulation, know your client (KYC) is one of the key aspects a MMF needs to incorporate as part of its risk management practices.... To provide that liquidity to its shareholders, a MMF should have a solid understanding of the investor's redemption pattern."

S&P says, "We support the efforts made to introduce regulation that focuses on increasing the safety and liquidity of the EU MMF industry. In our view, the increased transparency, enhanced liquidity, and investor protection outlined in the new regulations are positive developments for the industry. Notably, we anticipate that the introduction of new rules in Europe will not affect European domiciled MMFs assessed under our PSFR criteria. We believe the steps taken since reform was first announced in 2013 have resulted in an improved and more focused legislative framework that placates both sides of the political and industry debate, namely CNAV advocates (supporting U.S.-style MMFs) and VNAV advocates, generally found in continental Europe (i.e., French-styled MMFs)."

They tell us, "We expect fund providers will favor the LVNAV product amongst the rated universe of funds. Unlike what occurred with the U.S. reform in 2016, it's likely there will be very little investor appetite for the public debt CNAV funds, considering that such funds are not exempt from the application of fees and gates. We don't estimate many existing VNAV funds switching to LVNAV structures as their underlying investors are already cognizant with the mechanics of investing in VNAV MMFs. As investors digest the changes and asset managers engage with their stakeholders, it's quite possible that certain asset managers could offer all three types of "short-term MMFs," but such a product offering could be subject to challenges relating to a fund's critical mass."

S&P continues, "Some of the positive market reception on the final regulations revolved around the exclusion of most of the contentious issues originally proposed from the final reform, notably the 3% capital buffer, a ban on MMF ratings, the mandatory conversion to VNAV, and the removal of asset-backed commercial paper (ABCP) as an eligible asset. Certain aspects of the final regulations were consistent with the original proposal, such as the WAM/WAL limits, while certain aspects were slightly adjusted (for example, credit research requirements and liquidity requirements from the original 2013 proposal). The daily and weekly portfolio liquidity requirements will now apply to both "short-term" and "standard" MMFs, where there were no such requirements under ESMA guidelines."

Finally, they add, "In our view, the new EU MMF reform provides sound policies and practices for MMFs to follow into the future, especially considering their systemic importance and important funding role to local economies. The explicit nature of the reforms will create a pool of homogenous MMFs, which could then result in further fund mergers reducing competition in the marketplace--a fairly common activity since 2009. Worryingly though, a reduced marketplace only increases the size of the remaining funds and their heightened systemic importance within the EU capital markets."