​

Federated Investors released its Second Quarter Earnings late last week and hosted its latest quarterly earnings call on Friday. (​See the Seeking Alpha transcript here.) The release says, "Money market assets were $​242.​1 billion at June 30, 2017, down $​12.​9 billion or 5 percent from $​255.​0 billion at June 30, 2016 and down $​3.​1 billion or 1 percent from $​245.​2 billion at March 31, 2017. Money market fund assets were $​173.​3 billion at June 30, 2017, down $​44.​8 billion or 21 percent from $​218.​1 billion at June 30, 2016 and down $​1.​9 billion or 1 percent from $​175.​2 billion at March 31, 2017. Since June 30, 2016 approximately $​25 billion in money market assets has transitioned from Federated funds to Federated separate accounts. Federated'​s money market separate account assets were $​68.​8 billion at June 30, 2017, up $​31.​9 billion or 86 percent from $​36.​9 billion at June 30, 2016 and down $​1.​2 billion or 2 percent from $​70.​0 billion at March 31, 2017."

Federated President & CEO Christopher Donahue comments, "Total assets and funds and separate accounts decreased by $​3 billion from Q1. Money market mutual fund assets decreased by about $​2 billion from Q1 and separate accounts were down $​1 billion, both reflecting seasonality around taxes. Our money market mutual fund of market share, which includes our sub advised funds at the end of the second quarter was 7.​4% compared to the prior quarter of 7.​5%. While money fund assets remain concentrated in government funds, we did see a slight uptick in prime money fund assets in the second quarter."

He explains, "We believe investors will begin to reconsider their options over time, including our newer private prime fund and collective prime fund, which preserve the use of amortized cost accounting and do not have the burden of redemption fees and gates. We also believe that a rising rate environment will be positive for money market funds and will encourage investors to shift cash from bank deposits. And looking at our most recent asset totals as of July 26, managed assets were approximately $​356 billion, including $​238 billion in money markets, $​66 billion in equity and $​52 billion in fixed income. Money market mutual fund assets were at $​169 billion on that date and have averaged $​171 billion so far in July."

CFO Thomas Donahue comments, "Revenue was down 5% compared to Q2 of last year, due to lower money market related revenues from lower assets and from the previously discussed change in a customer relationship, which occurred near the end of January. These decreases were partially offset by an increase in revenue due to lower money fund yield-​related waivers and higher equity in fixed income related revenues. Revenue was down slightly from the prior quarter reflecting a full quarter of the customer relationship change and lower money market assets, offset by decrease in money fund yield-​related waivers and an additional day in the quarter and higher revenue from equity assets."

He tells us, "​Operating expenses decreased 5% compared to Q2 of last year and decreased 4% from the prior quarter. The decrease from Q2 of 2016 was driven by lower money market assets and the impact of the customer relationship change, partially offset by higher distribution expense as money fund yield-​related waivers decreased. As we noted last quarter, the Q2 impact of money funds yield-​related waivers was immaterial based on current and expected yields, we expect the impact of the waivers on pretax income going forward to remain immaterial."

During the Q&​A, one analyst asked about "the pricing of money market funds" and competitive fee waivers. Thomas Donahue responded, "Overall, I don'​t think it'​s any more intense than it has been before. People take turns doing it, and one firm will do it for a while, then another firm will do it for a while. Some will stick to it longer. And we haven'​t seen ourselves lose any clients over this timeframe. We have seen the assets more or less level off. I think the decrease from during that quarter is the usual seasonality. And recall that ... clients like to diversify among the various people that are actually active in this field. That supplies a pretty good bottom for someone with our strategy and the strong relationships we have with the clients."

He says, "There'​s also another thing we'​re working on, I'​ve mentioned it here before, and that is HR 2319, which is a bill floating through Congress. You can put whatever percentage chance you want on a bill coming out of Congress. But this is a bill which would basically restore money market funds to the 2010 amendments, i.​e. restore prime funds with amortized cost, no fees and gages, and no natural person, which would enable the municipal funds to regain their once $​500 billion that they had."

He adds, "​And so that'​s another strategic way of getting at the same kind of question that you are looking at. Overall, in the money market fund area, the assets remain about the same as where they'​ve been. Yeah, they go up and down a little bit, but you'​ve still got $​2.​7 trillion in that area. And so what that tells you is that the clients love the utility of the product. Yes, $​1 trillion plus moved over to government, but it moved over into a vehicle that retain the utility that was love so much by these clients."

Christopher Donahue adds, "The first thing would be that, as rates increase, it was a big event to get all of the funds more or less ... above 100 basis points. Now ... one of the questions is, '​How big does a spread have to be in order to move people?' We don'​t think there'​s going to be a rate increase until December in any event, and then there will be one, so you can tell what that'​s going to do to the rates in fact."

He states, "​So the slow inexorable increase in rates will have a positive impact on this business. But it'​s very difficult for us to detect when people will switch back to prime if they don'​t have the utility of the product they want as against the given spread. Right now that spread is about 29 basis points or 30 basis points, and [​historically] it used to be 12 basis points to 15 points. People aren'​t moving back, and I think the reason is the utility of the product. Will it get higher? Will they move? Will they get more comfortable over time with the existing product structure? That remains to be seen."

Deborah Cunningham comments, "​I agree 100% that 30 basis points seems like a lot ... more than double what history has shown ... between prime and government. But that'​s when the two had a profile that were the same from a user shift standpoint and that'​s different now. So, if 30 basis points isn'​t enough, maybe it'​s 40 basis points? But what I really think is happening and what we'​re getting from a client feedback perspective on a day to day basis, is that they'​re putting a tiny bit of their cash in prime right now."

She adds, "So they used to have all of their cash in the prime sector. Now they'​ve got, let'​s say, 80% in the government sector, with 20% ... of new cash ... going into the prime sector, because it is higher spread [​and] it'​s not seeing much volatility. We'​re not getting the seasonal flows in and out of prime that have historically been larger than what we would see in our government funds instead that day to day cash that needed on a on a daily operational basis is staying in the government space."

Cunningham tells us, "I think the other place where we'​re starting to gain assets and certainly starting to gain a lot of interest specifically into the prime space is out of the bank deposit market. In a rising rate environment, which as Chris mentioned, we do believe will continue although with a slightly slower speed, we do think that the money funds make a whole lot more sense versus bank deposits that are kind of sticky.... When you look at the average deposit rates [​vs.] both government and prime money market funds, {​MMFs] are above them substantially now.... So I think it'​s again taking time. People have to have to get used to this product. But there are various reasons why it looks awfully attractive versus both the traditional government money fund product as well as other cash vehicles that are out there."

On why flows into Prime aren'​t stronger, Cunningham says, "I think the lot of it has to do with the 5'​o clock timing. With the floating net asset value, mark-​to-​market pricing that occurred, all funds basically ... cutoff ... at 3'​o clock. With many institutional clients, they need capacity to transact out at 5 o'​clock. So I believe that a good reason why a portion of them are key thing a substantial amount of their cash in that government space."

Christopher Donahue adds, "One of the other [​factors] is: are going to test this? They want to make absolutely sure that everything works. How does the four decimal places work? How do the other customers in the fund work? It'​s really hard to crawl in behind their brain to it figure out ... when are they going to break loose from their test mode into their all-​in mode? Well, they are to some modest, modest extent, but you can feel them struggling with their desire to get it and being conflicted by the lack of the utility in the way the products are constructed as against the government fund."

Finally, Cunningham adds, "I think one other fact to consider is the size of the prime fund at this point. The prime funds universe at its peak from an industry perspective was about $​1.​9 trillion, and there were I say at least 20 products that were over $​10 billion to $​20 billion in size. There are currently three in the market that are of that size. So, what used to be anything an easy trade for somebody a corporate treasure that had short term cast to say what $​1 billion in a single fund, now can'​t be done in a single fund. It has to be broken up into smaller and net several funds because of the smaller nature of those products."

​

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 report shows the biggest inflow into Government (​and overall) MMFs of the year, while the first two reports both show that the slow, steady recovering in Prime money funds assets continues. (​Money funds often see inflows in the second half of the year vs. outflows in the first half.) The third update confirms that Treasury holdings continue to shrink while other portfolio segments were mixed. (​See our July 13 News, "July Money Fund Portfolio Holdings: Repo Only Segment to Increase.") We review these releases below.

ICI'​s latest weekly assets report shows an increase in overall assets, a sharp rebound in Govt assets and continued growth in Prime MMFs. Prime MMFs rose by $​1.​7 billion to $​412.​9 billion, their 9th increase in the past 11 weeks. Prime assets have risen by $​18.​7 billion over the past 11 weeks, and year-​to-​date Prime assets have increased by $​37 billion, or almost 10%.

ICI writes, "Total money market fund assets increased by $​23.​28 billion to $​2.​64 trillion for the week ended Wednesday, July 26, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $​21.​79 billion and prime funds increased by $​1.​72 billion. Tax-​exempt money market funds decreased by $​226 million." Total Government MMF assets, which include Treasury funds too, stand at $​2.​088 trillion (​79.​1% of all money funds), while Total Prime MMFs stand at $​422.​6 billion (​16.​0%). Tax Exempt MMFs total $​129.​7 billion, or 4.​9%.

They explain, "Assets of retail money market funds decreased by $​1.​87 billion to $​955.​21 billion. Among retail funds, government money market fund assets decreased by $​1.​72 billion to $​578.​61 billion, prime money market fund assets increased by $​310 million to $​252.​99 billion, and tax-​exempt fund assets decreased by $​465 million to $​123.​61 billion." Retail assets account for over a third of total assets, or 36.​2%, and Government Retail assets make up 60.​6% of all Retail MMFs.

ICI'​s release adds, "Assets of institutional money market funds increased by $​25.​15 billion to $​1.​68 trillion. Among institutional funds, government money market fund assets increased by $​23.​50 billion to $​1.​51 trillion, prime money market fund assets increased by $​1.​41 billion to $​169.​62 billion, and tax-​exempt fund assets increased by $​239 million to $​6.​06 billion." Institutional assets account for 63.​8% of all MMF assets, with Government Inst assets making up 89.​6% of all Institutional MMFs.

ICI'​s latest "Trends in Mutual Fund Investing - June 2017" shows a $​20.​9 billion increase in money market fund assets in June to $​2.​633 trillion. The decrease follows a $​12.​6 billion increase in May, 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 June 30, money fund assets were down $​58.​8 billion, or -​2.​2%.

The monthly report states, "The combined assets of the nation'​s mutual funds increased by $​61.​29 billion, or 0.​4 percent, to $​17.​43 trillion in June, 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 $​19.​75 billion in June, compared with an inflow of $​25.​53 billion in May.... Money market funds had an outflow of $​22.​24 billion in June, compared with an inflow of $​11.​92 billion in May. In June funds offered primarily to institutions had an outflow of $​16.​35 billion and funds offered primarily to individuals had an outflow of $​5.​89 billion."

The latest "​Trends" shows that both Taxable MMFs and Tax-​Exempt MMFs lost assets last month. Taxable MMFs decreased by $​20.​3 billion in June, after increasing $​11.​3 billion in May, 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 decreased $​0.​6 billion in June, after increasing $​1.​5 billion in May, decreasing $​2.​2 billion in April, $​0.​3 billion in March, and $​0.​3 billion in February. Over the past year through 6/​30/​17, Taxable MMF assets increased by $​5.​6 billion while Tax-​Exempt funds fell by $​64.​3 billion.

Money funds now represent 15.​1% (​down from 15.​3% last month) of all mutual fund assets, while bond funds represent 22.​3%, according to ICI. The total number of money market funds was unchanged at 417 in June, and down from 444 a year ago. (​Taxable money funds were unchanged at 317 and Tax-​exempt money funds were unchanged at 100 over the last month.)

ICI'​s Portfolio Holdings showed another drop in Treasuries in June while other holdings were mixed. Repo remained the largest portfolio segment, down $​3.​2 billion, or 0.​4%, to $​893.​8 billion or 35.​7% of holdings. Repo has increased by $​252.​2 billion over the past 12 months, or 39.​3%. Treasury Bills & Securities remained in second place among composition segments, but they declined by $​31.​7 billion, or -​4.​8%, to $​624.​2 billion, or 24.​9% of holdings. Treasury holdings rose by $​105.​9 billion, or 20.​4%, over the past year. U.​S. Government Agency Securities remained in third place, but were flat again (​up $​1.​1 billion, or 0.​2%) at $​643.​0 billion or 25.​7% of holdings. Govt Agency holdings rose by $​77.​2 billion, or 13.​6%, over the past 12 months.

Certificates of Deposit (​CDs) stood in fourth place; they decreased $​11.​8 billion, or -​6.​1%, to $​179.​9 billion (​7.​2% of assets). CDs held by money funds fell by $​257.​1 billion, or -​58.​8%, over 12 months. Commercial Paper remained in fifth place but increased $​2.​9B, or 2.​4%, to $​124.​6 billion (​5.​0% of assets). CP has plummeted by $​147.​6 billion, or -​54.​2%, over one year. Notes (​including Corporate and Bank) were down by $​1.​7 billion, or -​18.​9%, to $​7.​2 billion (​0.​3% of assets), and Other holdings inched up to $​32.​4 billion.

The Number of Accounts Outstanding in ICI'​s series for taxable money funds increased by 88.​5 thousand to 25.​760 million, while the Number of Funds remained unchanged at 317. Over the past 12 months, the number of accounts rose by 2.​351 million and the number of funds declined by 5. The Average Maturity of Portfolios was 33 days in June, up one day from May. Over the past 12 months, WAMs of Taxable money funds have shortened by 3 days.

​

We noticed a couple of stories involving money fund competitors yesterday -- institutional bank deposits and brokerage sweeps. So we decided to excerpt from these, and to examine how FDIC insured sweep rates have been rising year-​to-​date. The Wall Street Journal writes "Meet the Bank Customers Pushing for a Better Deposit Deal," which tells us, "No longer happy with small returns, businesses are asking for higher interest rates on their deposit accounts -- and banks are acquiescing." We quote from this article, review brokerage sweep rate movements, and cite a press release from Total Bank Solutions below.

The Journal piece explains, "Consumers are giving banks a pass when it comes to shopping for higher interest rates on deposit accounts. Businesses, on the other hand, are becoming more demanding. With short-​term interest rates on the rise, corporate depositors are seeking bigger payouts for their deposits, and big banks have started capitulating. The reason: Small rate increases are often worth just pennies to many consumers, but they can translate into meaningful dollars on large corporate deposits of millions or even billions of dollars."

It continues, "The pressure from corporate depositors is pushing up banks' costs just as they are beginning to benefit from lending money in the U.​S. at higher rates.... Across the largest U.​S. banks, the average interest paid jumped by about a third in the second quarter to 0.​34% from 0.​26% a year ago, according to Autonomous Research -- the highest level in four years. Bankers said business depositors are behind the rise."

The article explains, "While demand for higher rates has been "​effectively at zero" from individual consumers, banks are grappling with "​hot money from corporates" that are more likely to decamp for higher rates elsewhere.... Companies' success in getting higher rates is based largely on the size of their cash hoard and the amount of other business they do with a bank. The higher the cash balances and fees a company pays, the more likely it is to get an increase, either from its current bank or from a new one."

It tells us, "The way we approach pricing these days is, we defend our turf," says Tayfun Tuzun, chief financial officer at Fifth Third Bancorp.... Mr. Tuzun said U.​S. banks are also being pressured by competition from overseas banks that want to build their deposits. Some are willing to pay 1.​25% or 1.​3%, he said, while a typical corporate deposit rate for a large account in the U.​S. currently is about 0.​9% to 1%. By contrast, the average retail savings rate was 0.​18% at large banks in the second quarter, according to analysts at Jefferies Group LLC."

The WSJ writes, "​For years after the financial crisis, rates were stuck at historic lows and loan demand remained tepid, so banks didn'​t care as much about gathering deposits.... But gathering deposits is starting to become more costly as the Fed moves short-​term rates higher. Deposit rates are tied to short-​term rates, but banks generally keep deposit rates low for as long as possible. More corporate customers say that day is now passing. "​A year ago, it was not worth the time it takes to make a phone call" and push for a higher rate, said Jeff Glenzer, vice president at the Association for Financial Professionals.... "The higher the rate becomes, the more attractive it is to worry about where the money sits.""

They add, "​Banks have responded to the new push by trying to attract or retain deposits without raising rates, specifically by offering expanded discounts, or "​earnings credits," on other fees instead. Most banks are already awash in more deposits than they need, causing some analysts to predict they'​ll be stingy on corporate deposit rates, especially with loan growth softening in recent months. Some deposits can also be costly to banks, in terms of capital reserved against them. "​We'​ll use pricing to start relationships," said Darren King, CFO of M&​T Bank Corp., based in Buffalo, N.​Y. "​But over time, relationships need to work for both us and the customer."

In related news, Crane Data has noticed that it'​s not just the institutional rates that are rising, even retail sweep rates that had been virtually zero for almost a decade are moving higher. Our weekly Brokerage Sweep Intelligence, which tracks FDIC-​insured and money fund "​sweep" rates at the largest brokerages, shows that sweep rates continue to move higher in July. For balances of $​100,​000, our Crane Brokerage Sweep Index has risen from 0.​01% at the start of the year to 0.​06% in the latest week.

Among the latest moves higher: Ameriprise Financial Services, which paid 0.​01% on an $​100,​000 balance in its Ameriprise Insured Money Market Account (​AIMMA), now pays 0.​05%. Fidelity which also was nailed to 0.​01% in its Cash Management Account, now pays 0.​14%. Merrill Lynch has moved sweep rates up to 0.​14% on its Bank Deposit Program/​RASP. Raymond James, which paid 0.​04% on an $​100,​000 balance in its Client Interest Program, now pays 0.​05%, and RW Baird now pays 0.​08%.

Schwab, which paid 0.​01% on an $​100,​000 balance in its Bank Sweep Feature, now pays 0.​05%, as do UBS and Wells Fargo. Morgan Stanley, which paid 0.​01% on an $​100,​000 balance in its Bank Deposit Program, now pays 0.​02%, while `​TD Ameritrade and E*​Trade remain at 0.​01%, where they were at the start of the year. Meanwhile, Crane Data'​s Money Fund Average has risen from 0.​26% on Dec. 31, 2016, to 0.​68% as of July 25, 2017.

Finally, a press release entitled, "Infovisa and Total Bank Solutions (​TBS) Collaborate to Provide Extended FDIC Insurance for Cash Sweeps." It explains, "Infovisa and Total Bank Solutions (​TBS) announced that they have agreed to offer the TBS Insured Deposit Program as a cash sweep option to the Infovisa client base. The Insured Deposit Program provides trust clients with the benefit of extended FDIC insurance, daily liquidity and the opportunity for improved returns. By accepting deposits, banks that participate in the program gain access to a diversified source of stable funding."

Michael Dinges, President and Chief Executive Officer at Infovisa, says, "The TBS Insured Deposit Program is an excellent cash management solution for our clients.... We have partnered with TBS because its platform offers competitive returns, robust integration, and is compliant with banking regulations. We are looking forward to a successful relationship." The release says, "Infovisa and TBS are currently jointly working on integration for the partnership, and plan to bring their first mutual client live in August 2017."

Kevin Bannerton, Partner at TBS, comments, "​We are very excited to be able to offer clients on the MAUI platform a compelling cash sweep alternative for investors.... We believe the combination of our proprietary sweep technology, risk analytics platform and strong program bank network represents an immediate and trusted solution to money market fund reform for Infovisa'​s clients. Working with Infovisa, our goal is to provide their clients with a fully integrated and seamless insured deposit sweep option."

​

Below, we review yet another session from Crane'​s Money Fund Symposium, which took place last month in Atlanta. This time, we excerpt from the segment, "Ratings Agency Roundtable: Criteria, Risks, NAVs" with Robert Callagy of Moody'​s Investors Service, Greg Fayvilevich of Fitch Ratings, and Guyna Johnson of S&​P Global Ratings. The session discussed the history and demand for ratings, recent changes in AAA standards, and a number of topics involving monitoring money market funds. (​Note: Crane Data subscribers and attendees may access the recordings, Powerpoints and full conference binder via our "Money Fund Symposium 2017 Download Center. Also, next conference event is Crane'​s European Money Fund Symposium, which will take place Sept. 25-​26 in Paris, France, and our next U.​S. Money Fund Symposium will take place in Pittsburgh, June 25-​27, 2018.)

When asked about the history of fund ratings, Fayvilevich says, "Fitch has been rating money funds since the mid 1990'​s, and not only money funds, but some ... other vehicles, primarily LGIPs. Ratings stability has been fairly high in the sector.... 'Why we are in this sector?' Clearly, there is investor interest in terms of investment policy guidelines, or ratings, and we are trying to come in and fill that space. [​We also want to] educate and provide investors with information about the space. They get information from the fund managers themselves, but generally fund managers will not comment about other [​managers]. We are in a position where we are able to give a bit more of an overview, and compare funds across managers.... That'​s something we have been very focused on, in terms of providing research and coverage."

S&​P'​s Johnson comments, "Over the years, we originally started rating money market funds, and subsequent to that we changed our definition to principal stability fund ratings (​PSFRs). The reason we made that change is because of the nomenclature of money market funds in the global industry. We wanted to make sure we were able to have a global opinion of how those funds were rated.... Over the years, we have seen more interest in SMAs, ETFs, and local government investment pools. The benefit of our criteria being global is that if you have a AAAm, and you are a local government investment pool, the definition and the metrics are the same for a European money market fund or a U.​S money market fund.... Although we have multiple ratings for money market funds, over the years there has been less demand for money market funds rated lower than triple-​A."

When asked, '​Who requests and who pays for the ratings?' Moody'​s Callagy answers, "The fund sponsors continue to request the ratings. They seek the ratings because they use those ratings to try to gather assets from institutional investors. As we heard from Greg, and earlier in the conference, institutional investors, whether in their investment policy statements or indentures, require that cash to invest in money market funds be invested in a fund that'​s rated by one or more rating agencies. So the demand continues to come from the fund sponsors. To Guyna'​s comment about it being a triple-​A industry, yes it is. We'​ve heard from corporate treasurers that they would like to see more distribution of ratings, but fund managers continue to manage their portfolios consistent with the guidelines and metrics we use for triple-​A fund ratings. Over time we may see that, but to date that continues to be a question mark.

On what kinds of investors require ratings, Callagy says, "Corporate treasurers have a lot of cash on their balance sheets. They are looking to invest that cash in money market funds, an obvious place, as a parking spot for that cash. Many structured finance transactions require within their documents ... that the cash has to be invested in a money market fund, and [​many] public finance transactions [​do too]. Insurance companies want better capital treatment, so they invest in a rated money market fund. Through the NAIC, they can get better capital treatment on that cash investment. So I think the biggest category of investors in money market funds tends to be corporates, but there are other demands from other types of investors."

Discussing the types of funds, Fayvilevich adds, "A vast majority of rated funds are institutional government money funds. The rest is mostly institutional prime, so the demand is certainly on the institutional side and not so much from the retail side. Retail investors, I think often times are being '​swept' into a money fund.... So that'​s where the demand is.... Despite the declining number of funds there'​s actually been an increase in the AUM of rated money funds, and it'​s been a fairly steady mix between prime and government, again mostly on the institutional side. Except for last year, where this flipped away from prime and into government, and that just has to do with the flows that we'​ve seen. Hopefully as money comes back into prime that mix rebalances to something a little bit more normal."

When asked about changes due to last year'​s Money Fund Reforms, Johnson tells us, "[​We didn'​t have to] re-​rate the portfolios, but we were in constant contact with the sponsors.... We needed to make sure we understood the flows that were coming in. I don'​t remember there being any material issues with funds as those assets were coming in, that they were going outside of the triple-​A metrics. We may have had a few cases where there were large outflows in a prime fund that were unexpected, and it caused the WAM to go outside of the 60 day maximum WAM under our criteria. But other than that it was very seamless from our standpoint."

Fayvilevich states, "​We get portfolio information on a regular basis. From my perspective, I think that the reform or pre-​reform period was also very smooth and fairly low risk from a metrics perspective. [​A]​s fund managers were shortening maturities and holding very high levels of liquidity, that fit very well in our matrix. Essentially, there were a number of prime funds that were 100% weekly liquidity coming into reform.... Our biggest concern was unexpected redemptions, and this continues to be an area we look at. But I think the industry handled that very well."

Callagy comments, "The ratings post-​crisis have been pretty stable. During the crisis, we obviously had big actions, specifically with the Reserve Fund breaking the buck and the suspended redemptions during that time.... But post-​crisis the ratings have been very stable. We didn'​t make any major changes to our methodology. Ahead of the reforms ... we didn'​t see anything from the regulations that required us to change that. Some of the changes that we did make were around our repo guidelines.... We relaxed some of our repo criteria.... Our banking colleges made some changes to their bank rating methodology.... Since our ratings take into consideration the credit quality of the instruments of a money market fund, we are now using some different inputs in our credit model."

Fayvilevich also says, "By policy we have to review the rating criteria at least once a year. There haven'​t been any major changes over the last couple of years, but we always find a couple of tweaks that we make. We try to keep the criteria [​relevant] to the market. Obviously markets evolve, so we feel that we need to make changes every once and a while. In the latest review a couple months ago, one of the changes we made, we changed our concentration around certain U.​S agencies. Obviously, the Federal Home Loan Bank has been essentially one of the largest issuers in the money markets ... so we added a little bit more of an allowance. `​Previously, in the last review, we made changes to our repo guidelines as well. We added some allowance for F-​2 repo within 7 days, that'​s something that wasn'​t allowed for Triple A money funds previously."

He continues, "​Again, we review criteria every year. So before reform, we put in a little bit more language describing how we view floating NAV versus constant NAV, and how we look at fees or gates. We did indicate that we look for a liquidity buffer above the 30% weekly threshold, which I think makes sense, and that'​s how fund managers operate anyway. I can give an example from the European side a couple years ago when we were heading into negative rate territory, we did put some clarification in our methodology explaining how we look at negative yields.... Those are the kind of changes we make on an annual basis."

Johnson adds, "​There are a couple things other rating agencies do that are a little bit different.... [​O]​ur PSFR criteria does not have a specific liquidity buffer, so we don'​t have scripted measures for that that coincide with SEC'​s rules. However ... we'​ll look at the top ten shareholders to see whether or not there is liquidity there, so it comes out in a different manner.... Our group is continually reviewing our criteria, there is a very formalized process when we decide to make a change. So a request for comment goes out [​and] we give the market a chance to formally provide us with their comments.... It'​s not like we'​re operating in a vacuum.... Our PSFR criteria was updated in 2011, and again in 2013, so right now we don'​t have any requests for comment. However, in the ultra-​short space, we do have a request for comment that'​s outstanding for our fund credit quality and fund volatility ratings, which is essentially a bond fund rating, where we can go as short as 18 months, up to 10 years."

When asked about their favorite risk measures, Fayvilevich tells us, "Liquidity is probably my favorite, or maybe least favorite measure to look at these days. We actually get a weekly report on liquidity for all funds we rate on a daily basis, and we monitor that very closely as compared to flows. We also get shareholder composition from all the fund managers. I think that'​s one thing in general the ratings agencies have a view of that the rest of the market doesn'​t.... Fund managers want to show investors that they'​re managing that weekly liquidity really well.... Because of investor'​s focus on this measure, that'​s what we'​re really focused on."

When asked about what information ratings agencies get, Callagy responds, "We get mostly what you get, maybe a little more information on investor concentration. But the challenge with the investor information we receive is generally it comes in anonymous form, so, it doesn'​t give you clarity around the granularity of the shareholder basis of these funds. One of the metrics we look at around liquidity is liquidity of the fund relative to its top three shareholders.... We try to make a dialogue with the fund managers to get their views on how they'​re managing their portfolios, and the environment and how that'​s dictating their investments or investment allocation."

He adds, "We get portfolio holdings on a monthly basis.... With respect to the Moody'​s rated funds, the Moody'​s bank team took action on Canadian banks as well as the Australian banks given the change in view of the operating environment those banks operated within. We had concerns in Australia and Canada about the housing market, the household sector, those rating actions put stress on the credit profiles of the money market funds that we rate because Canada was a decent size allocation for money market funds.... That'​s something from a current risk perspective we are watching. We don'​t think it'​s going to result in any rate changes at this point, but the reality is if you were double-​A rated banking systems, it does put pressure on Moody'​s fund ratings."

Finally, Johnson says, "With respect to monitoring, our money funds are monitored on a weekly basis. So the portfolio holdings are being uploaded to our proprietary system on a weekly basis and we are looking at by comparison to the fund credit quality ratings, those are uploaded to us and viewed on a monthly basis.... Our 2013 criteria, that'​s the most recent PSFR criteria, has a section in it called cure periods. And in those cure periods is where it'​s very clear as to if a particular metric has been either in active ... or passive breach. We have very specific guidelines as to what is going to happen, so how many days does a sponsor have to cure, or get the fund back to the triple-​A guidelines. Cure periods range from 5 business days to 10 business days to 20 business days they are categorized by the time of the cure period and how impactful the breach is. We do visit our clients annually."

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The U.​S. Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary late last week. It shows that total assets were down ($​23.​7 billion) in June, but Prime funds rose for the 6th month in a row. Prime MMFs gained $​4.​0 billion (​after gaining $​2.​5 billion in May and $​9.​8 billion in April). Government money funds decreased by $​26.​9 billion, while Tax Exempt MMFs lost $​0.​8 billion. Gross yields rose for Prime, Govt and Tax Exempt MMFs as the Fed hiked rates for the third time in 2 years in June. 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 decreased by $​23.​7 billion in June to $​2.​897 trillion. (​The SEC'​s series includes some private and internal funds not reported to ICI or other reporting agencies; note that Crane Data has been adding many of these to our collections.) Overall assets increased by $​3.​8 billion in May, decreased by $​12.​7 billion in April and $​1.​7 billion in March, and increased by $​14.​2 in February. Over the past 12 months through 6/​30/​17, total MMF assets have declined by $​95.​3 billion, or 3.​2%.

Of the $​2.​897 trillion in assets, $​615.​4 billion was in Prime funds, which increased by $​4.​0 billion in June. Prime MMFs increased $​2.​5 billion in May, $​9.​8 billion in April, $​12.​1 billion in March, $​24.​9 billion in February, and $​11.​7 billion in Jan. But they decreased $​15.​5 billion in December, increased $​3.​4 billion in Nov., and decreased by $​177.​4 billion in October. Prime funds represented 21.​2% of total assets at the end of June. They'​ve declined by $​663.​5 billion the past 12 months, or -​51.​9%, but they'​ve increased by $​65.​0 billion, or 11.​8%, YTD.

Government & Treasury funds totaled $​2.​149 billion, or 74.​2% of assets,, down $​26.​9 billion in June. They were down $​0.​4 billion in May, $​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, and $​148.​0 billion in October. Govt & Treas MMFs are up $​636.​7 billion over 12 months (​42.​1%). Tax Exempt Funds decreased $​0.​8 billion to $​133.​1 billion, or 4.​6% of all assets. The number of money funds is 410, down 1 fund from last month and down 54 from 6/​30/​16.

Yields were up again in June for Taxable MMFs. The Weighted Average Gross 7-​Day Yield for Prime Funds on June 30 was 1.​23%, up 14 basis point from the previous month, and more than double the 0.​57% of June 2016. Gross yields increased to 1.​00% for Government/​Treasury funds, up 0.​16% from the previous month and up 0.​57% since 6/​16. Tax Exempt Weighted Average Gross Yields increased 0.​09% in June to 0.​93%, and they'​ve doubled since 6/​30/​16.

The Weighted Average Net Prime Yield was 0.​86%, up 0.​12% from the previous month and up 0.​56% since 6/​16. The Weighted Average Prime Expense Ratio was 0.​19% in June (​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 up in June. The average Weighted Average Life, or WAL, was 64.​8 days (​up 4.​7 days from last month) for Prime funds, 87.​4 days (​up 3.​9 days) for Government/​Treasury funds, and 23.​1 days (​up 3.​5 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 30.​4 days (​up 1.​6 days from the previous month) for Prime funds, 33.​6 days (​up 1.​8 days) for Govt/​Treasury funds, and 20.​5 days (​up 3.​7 days) for Tax-​Exempt funds. Total Daily Liquidity for Prime funds was 35.​5% in June (​up 1.​1% from previous month). Total Weekly Liquidity was 50.​1% (​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 $​80.​4 billion, followed by the U.​S. with $​59.​3 billion. Japan was third with $​49.​4B, followed by France with $​45.​2 billion, Sweden ($​42.​8B), Australia/​New Zealand ($​38.​2B), the UK ($​23.​0B) and Germany ($​18.​8B). The Netherlands ($​16.​1B) and Switzerland ($​15.​5B) rounded out the top 10.

The gainers among Prime MMF bank related securities for the month included: Canada (​up $​11.​2 billion), Singapore (​up $​4.​3B), the U.​S. (​up $​2.​1B), Japan (​up $​1.​7B), Australia/​New Zealand (​up $​766M), Other (​up $​764M), and Sweden (​up $​203M).. The biggest drops came from France (​down $​17.​8B), Germany (​down $​6.​7B), Belgium (​down $​6.​4B), the Netherlands (​down $​5.​1B), Norway (​down $​4.​0B), the UK (​down $​3.​1B), Switzerland (​down $​679M), Spain (​down $​271M), and China (​down $​210M). For Prime MMF Holdings of Bank-​Related Securities by Major Region, Europe had $​178.​4B (​down $​43.​5B from last month), while the Eurozone subset had $​86.​7 billion (​down $​36.​0B). The Americas had $​140.​2 billion (​up from $​126.​9B), while Asian and Pacific had $​101.​9 billion (​up from $​95.​2B).

Of the $​615.​4 billion in Prime MMF Portfolios as of June 30, $​231.​7B (​38.​0%) was in CDs (​down from $​257.​7B), $​154.​71B (​25.​4%) was in Government securities (​including direct and repo), up from $​120.​1B, $​83.​5B (​13.​7%) was held in Non-​Financial CP and Other Short Term Securities (​down from $​94.​6B), $​101.​6B (​16.​7%) was in Financial Company CP (​down from $​103.​1B), and $​38.​0B (​6.​2%) was in ABCP (​up from $​34.​9B).

The Proportion of Non-​Government Securities in All Taxable Funds was 16.​8% at month-​end, down from 18.​0% the previous month. All MMF Repo with Federal Reserve increased to $​364.​4B in June from $​243.​6B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 39.​7% were in maturities of 60 days and over (​up from 35.​0%), while 8.​8% were in maturities of 180 days and over (​up from 8.​6%).

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In addition to its recent "2017 Liquidity Survey, the Association for Financial Professionals, an organization that represents corporate treasury management professionals, also recently published, "AFP Executive Guide to Investment Strategy and Policy." Underwritten by J.​P. Morgan Asset Management, the guide'​s Executive Summary explains, "With interest rates starting to rise and new regulations being applied, now is a good time to review treasury investment policy to ensure it will permit the company to respond as the market environment evolves. The guide recognizes that improved technology gives treasurers better visibility of cash and the ability to build more accurate cash position forecasts. In turn, this information enables treasurers to stratify cash into buckets, so that companies may be able to tolerate different levels of risk for each one."

It tells us, "This guide has been written to help treasury practitioners develop an investment policy that permits the adoption of an investment approach, which reflects the company'​s various different tolerances for risk. The guide is structured in two parts. The first part reviews the current market environment. It outlines the changes in the market, notably the prospect of rising interest rates and the nature of bank and money market reform, and assesses how these are affecting treasurers managing surplus cash. The second part has been designed to support the treasurer’​s decision-​making process when classifying cash and drafting a new investment policy, or reviewing an existing one."

On the "Market Environment," the AFP piece says, "The first part of the guide addresses the current market environment affecting treasurers with the responsibility for investing short-​term cash. First, as US interest rates start to rise, it highlights some of the risks associated with investing in a higher rate environment. Second, it identifies how reforms designed to strengthen the financial system are affecting corporate treasurers with surplus cash to invest."

They comment on the topic of "Asset management," "Funds following the SEC rule 2a-​7 and similar money market funds play a valuable role in providing liquidity to the money market. First, they provide an important source of short-​term funding to banks and other borrowers seeking to raise short-​term finance via commercial paper and Certificate of Deposit issuance. Second, because investments can be redeemed overnight, they offer a diversified location for the corporate deposit of working capital cash. Regulators have also recognized this critical role and, as with bank reform, are concerned about the impact on the wider economy should a future credit crisis result in a '​run' on a fund and possible market contagion. Regulators have responded by strengthening liquidity requirements of funds under their jurisdiction. Reforms to US 2a-​7 funds were introduced in October 2016. Similar reforms are being introduced in the European Union, likely within the next two years. The detail of the reforms is summarized below."

The Guide states, "In the US, the immediate effect of the reform was that investors moved cash out of variable net asset value prime funds and into constant net asset value government funds. The money market fund industry had expected USD 550 billion-​USD 800 billion in assets to move from prime to government MMFs between announcement of reform in 2014 and its implementation in October 2016. Figures released by the SEC show that there were USD 1.​7 trillion assets under management in prime funds in May 2014, when the reforms were announced, compared to USD 983 million in government funds. By the end of October 2016, these figures had changed to USD 562 million in prime funds and USD 2.​2 trillion in government funds. Including tax-​exempt funds, the total value of assets under management in all funds has remained about USD 3 trillion throughout this period."

It tells us, "The nature of this movement was anticipated for a number of reasons, not least the fact that many corporate treasury investment policies required the use of constant net asset value funds. Investors were also concerned about the potential imposition of a liquidity gate or fee. As a result, the spread between government and prime funds has widened to about 40 basis points, a significant level when the Fed'​s target interest rate is 0.​75-​1.​00%. Corporate treasury practitioners will need to review their policies to check whether investment in floating, or variable, net asset value funds is permitted and in which circumstances it should be in the future."

In a sidebar on Money Market Fund Reform, AFP writes, "While the money market fund reforms introduced in the US in October 2016 and agreed by the EU in May 2017 have the same objective, there are some significant differences between the two.... There are two central parts to US money market fund reform: The restriction of constant net asset valuation (​CNAV) to government and treasury money market funds. All other prime funds must report a variable net asset value (​VNAV). The imposition of liquidity fees and redemption gates. A money market fund board can impose a liquidity fee of up to 2% if weekly liquid assets fall below 30%. If weekly liquid assets fall below 10%, a board is required to impose a liquidity fee of 1%, unless it determines that it is not in the best interests of the fund to do so. A board can also chose to impose a redemption gate (​restrict redemptions from a fund) for any 10 out of 90 days if weekly liquid assets fall below 30%."

On European Union reform, they tell us, "The EU reforms were agreed in May 2017 and are likely to be introduced by the end of 2018. As with the US, there are two main elements to the reform: The introduction of a third category of fund, the low volatility net asset value (​LVNAV) fund, alongside existing CNAV and VNAV funds. As in the US, post-​reform, only government funds will be CNAV. The new LVNAV fund will be able to report a stable price, as long as the value does not move outside a 20 basis point collar. The LVNAV will be able to invest in similar assets to existing EU prime CNAV funds. Also as in the US, the EU reforms include the imposition of liquidity fees and redemption gates, although the application is slightly different, especially because they will apply to CNAV and LVNAV funds. The triggers for applying a gate or fee will be same as for US funds, although asset managers may choose between applying a gate or a fee or both.

The piece quotes our Peter G. Crane, President & Publisher, Crane Data, "When EU regulations come into force, probably at the end of 2018, there will be some slight and subtle differences in the regulations between the EU and the US. These will not make life easier for investors using funds in both places.... One of the biggest pieces of advice to cash investors is to stay calm and to keep your options open. The last thing investors want to do is to ban the use of an investment and then find they need it."

In "Part Two: Setting and Executing an Investment Policy," the Guide comments, "This changing environment is leading many treasury practitioners to review their cash management. There are two stages. First, practitioners can assess whether they can obtain better visibility and understanding of their cash to be able to stratify it effectively. Next, treasurers can review their investment policy. For companies with existing policies, it may not be necessary to draft a completely new policy. However, it is worthwhile reviewing the existing policy to ensure it remains relevant and will allow the practitioner sufficient flexibility to act appropriately in different potential scenarios."

It quotes John Donohue, Head of Global Liquidity at J.​P. Morgan Asset Management, "Cash segmentation allows you to maximize return while making sure you have the cash at hand that you need." The piece also quotes `​Ted Ufferfilge, Head of Global Short Term Fixed Income Product at J.​P. Morgan Asset Management, "From our recent PeerView survey more than 70% of respondents can forecast their cash flows out for a month or longer. Just under half can forecast out a quarter or longer. The better your cash flow forecasts, the more efficient you can be at segmenting cash.... At certain asset under management levels, it is not worth replicating a money market fund in a separately managed account."

The report also quotes Peter Crane, "​Since the reforms to US money market funds, asset managers have been required to disclose much more information about the instruments they use. Large investors need enough information to perform due diligence, but it is easy to get lost in the data. To paraphrase Ronald Reagan, look at yield, trust the market and then verify.... Increased disclosure requirements has not been extended to funds' investor bases. Understanding your fellow investors is important. How might they respond to a liquidity crisis?"

Finally, AFP'​s Guide concludes, "With interest rates starting to rise and new regulations being applied, now is a good time to review treasury investment policy. Improvements to treasury technology mean it is easier than ever before to achieve accurate visibility of cash, which in turn enables more effective cash position forecasting. Higher interest rates should mean treasurers should have greater opportunities to exploit, if they can stratify cash more effectively. A policy review should help a practitioner assess whether the policy is flexible enough to allow the company to take advantage of any such opportunities, as long as doing so reflects the company'​s tolerance for risk."

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This month, our Money Fund Intelligence newsletter quotes from our recent Money Fund Symposium keynote speech with Martin Flanagan, CEO & President of Atlanta-​based Invesco. We discussed a number of important topics in the asset management, money fund, and product development spheres. An edited transcript from the session follows. This interview is reprinted from the July issue of our flagship MFI newsletter; contact us at info@​cranedata.​com to request the full issue.

MFI: Tell us about your history? Flanagan: My family had been in the commodities business for many, many years ... so the markets and international business were always an interest.... I ended up at Templeton way back when, and I'​ve stayed [​in investment management] ever since. I think for all of us, it'​s a great industry. It'​s a dynamic industry, and it'​s just a fascinating time. I think the advice I would give is to continue doing what we do. We are fiduciaries to our clients. As long as we keep our clients first, we'​re all going to do well.... Atlanta is a phenomenal place.... It is a fantastic city, very dynamic, an incredible business community, arts, sports community, and very welcoming.... So, come on down.

MFI: What'​s the current state of asset management? Flanagan: It'​s an incredibly important industry. There is an absolute need for what we do.... It'​s a growing industry. But we all know it'​s going through dramatic changes right now. It has signs of a maturing industry and the competition that comes along with [​that].... The winners will probably look different in 5 years than they were 5-​10 years ago. But that said, I think it'​s a great industry.

Flanagan continues: You'​ve seen this big move into passive, and an extended period of time of [​this] low-​rate environment. So that'​s really caused a lot of firms to do self-​reflection.... I think if you look at it today and ask the question, '​What do you really need?' Clients are moving much more towards achieving outcomes, and this really [​calls for a] combination of active and passive alternatives, and this whole array of solutions. So to be a firm, you have to be broad, you have to be deep.... It is an environment that if you can'​t invest where the market is going right now or where the clients are going, it'​s been really difficult.... You need a suite of capabilities, you need to have deep relationships ... clients are wanting to work with fewer people.

MFI: What about the new Administration and regulatory relief? Flanagan: First of all, I think what is really important is good, thoughtful regulations that protects our clients and all of us.... My personal view is post the crisis ... over regulation and multiple layers of regulations ... has been just stifling [​and caused] unintended consequences.... So I think to step back and take a look at the regulations that are in place and [​to see where] we could create relief [​is a] good idea.... Just the notion of a slowdown of new regulations I think is really important. I don'​t see the elimination of a lot of regulation, but [​a reduction would be a] positive for us as an industry. Some of the regulations, I think some of us would say are not very helpful. If you could eliminate them, that would be a great thing. But I don'​t know if that'​s going to happen.

MFI: What about rising rates in general? Flanagan: We have some of the short duration funds and the ultra-​funds that are coming out. I think that [​this] is a pretty [​good space] to be right now. Not knowing, but sensing that rates are going to go up, things like bank loans are [​probably] very appropriate right now. [​Other] opportunities [​include] things like real estate and commodities.

MFI: What have been your keys to success in the money fund industry? Flanagan: Everybody [​here] is committed to the money market industry. There is an absolute need.... That has not changed. I think it has been hard for all of us with the regulations [​first] in the United Stated [​that has now] moved to different parts of the world. I think we all, collectively, are starting to get a handle on it, which is good. It has forced all of us to look more broadly at the capabilities that we offer, and I think that is not a bad thing. It was a nice to have just funds in the past. Now, that is not going to work. We have the notion of private accounts, SMAs, ETFs, these ultra-​shorts. So, the industry I think continues to be really quite thoughtful and deliberate in meeting those evolving needs.

He adds: These [​changes] are not limited to the States. We have some pending regulation in Europe, obviously. But again, it feels like all of us should be able to navigate it based on what'​s happened in the States. And there are opportunities in markets like China which is really quite fascinating. [​It'​s a] little nerve wracking [​due to the] the lack of regulation. [​But] I think for a lot of us that have global businesses, being able to follow our corporates around the world in different markets ... those are really good opportunities for us.

MFI: Tell us about your history in the money fund space? Flanagan: We as a firm recognized the client need and the importance of it, and we continue to evolve. As the firm became more global in nature, we built a global liquidity business off the back of it. If you'​re here today in this room, if you'​re in the liquidity business, it'​s a very different business than it was pre-​crisis. The costs have gone up, the demands have gone up, the capabilities have gone up.... If you look at the numbers ... there were 150 providers before the crisis, there are like 70 today. It'​s become concentrated because of the risk and the investments that you need to [​stay in the business]. Again, I think that it is a very good opportunity, but because of the regulatory environment the players have narrowed.

Flanagan states, My view is: I think we all thought we had it right before the crisis. [​But] I'​d say Round One of the money fund reform probably ... was enough. I think Round Two was a mistake. Just look at what'​s happened since it'​s been implemented. We have lost a trillion dollars on prime funds.... Yes, it strengthened the industry, and I think that is a healthy thing. But borrowing costs have gone up [​for] commercial paper ... and municipalities.... That'​s my personal view.

MFI: What was the toughest part of the reforms? Flanagan: You had to ask, 'Are we in or are we out?' If you were in, you knew you signed up for a lot of hard work.... What I admire about the industry is everybody here locked thumbs and asked, '​How do we do this? How do we get this right?' I think that is one of the strengths of this industry.... I personally found it much more difficult when we were going through the [​pre-]​reform periods because it was a moving target what the end game was.... I just found it hard from the standpoint of Round Two -- it was regulation with no purpose.

MFI: Do you think Government assets will return to prime? Flanagan: I think we all have the common wisdom that no time soon is that going to happen. What could really change is it might change at the retail level. If yields get attractive, and people understand what it means with fees and gates, and you could actually see some money going in there. Not an avalanche, but.... It'​s still too early.

MFI: What about global issues? Flanagan: I think European Regulations are [​sort of] the same thing ... [​reacting to] perceived risk in the market. I think the good news is they'​ve picked up some tips from here. There'​s a framework and it'​s somewhat different on the margins, but that'​s probably a good thing.... Brexit'​s another topic. So many of the funds are domiciled in Ireland, but it'​s unclear what the ultimate answer will be. You'​ll probably have to incorporate your funds back into the U.​K.... But this is not, I promise you, this is not the top [​concern] right now [​of European and U.​K. politicians], which is probably a good thing.

MFI: Any thoughts on money funds in China? Flanagan: We have a very strong local money fund business in China, and it'​s been something that our other team has gotten [​involved] much more recently. It was growing rapidly, and [​regulations maybe haven'​t kept pace]. If you apply regulations like the United States, you basically are not competitive. We try to strike the balance and engage with regulators, and that'​s what we'​ve done. So I so think that the regulation is going to start to move and be helpful.... But China for us is a very interesting market.

MFI: Any last thoughts? Flanagan: As much as [​the business] changed, it'​s not changed. It'​s a great opportunity [​for] I really think all of us who are working to meet the client'​s needs. Yes, it'​s more costly, yes it'​s more expensive. But the opportunity is there. It'​s no different than any other parts of our business, if we are thoughtful and understand what our clients want [​we'​ll do well]. So we want to do well, collectively, for our clients.

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Today, we review a number of issues involving European money market funds, pending regulations, and "​offshore" cash. We revisit the recently released AFP Liquidity Survey, and quote its section on Europe and the euro, we cite a new WSJ article, which discusses the massive pools of cash trapped outside the U.​S., and we also review our latest MFI International Money Fund Portfolio Holdings data. As we mentioned in our "Link of the Day" yesterday, Crane Data is preparing for its next European Money Fund Symposium, which will take place in Paris this Sept. 25-​26. (Note: Fitch will also host a Teleconference entitled, "European Money Fund Reform Finalised; What happens next?" this morning at 10:​00am EDT.)

The 2017 AFP Survey comments on "Euro, European Reforms," "AFP members report that managing euro-​denominated balances has been challenging.... Some have ... reexamined their legal entity structures, and pooled cash or have done netting where allowed. Relying on bank relationships has become even more important -- and transitional for some -- in a negative rate environment as they have moved to new banks. Over half of survey respondents indicate that their organizations do not maintain cash balances in countries where yields on investment securities are negative. Of those that do have such investments, a majority of finance professionals reports their organizations are leveraging their bank relationships as much as possible to minimize the impact of negative yields. Forty-​five percent of organizations are choosing to invest in banks that do not charge for deposits or bank products."

It tells us, "​Larger organizations with annual revenue of at least $​1 billion and those that are publicly owned are more likely than smaller and privately held ones to leverage their bank relationships to minimize any impact from negative returns on their investments, as well as centralize balances in non-​EUR currencies. Other steps being taken by organizations to manage cash balances in countries where yields on investment securities are currently negative are: Repatriate cash due to our legal entity structure (​cited by 27 percent of respondents); Centralize balances in non-​EUR countries (​25 percent); and, Work with tax structure to move cash to different entities/​currencies (​24 percent)."

The AFP writes, "In 2008 the G20 group of countries agreed to reforms for money market funds. The European Commission proposed legislation in response in 2013. The culmination of this is new regulations on money market funds in Europe. The rules were expected to published in the summer of 2017, although full compliance will not take effect until the end of 2018. The Institutional Money Market Funds Association (​IMMFA) reports that tighter provisions will apply to all money market funds that are established, marketed or managed in the European Union. The revisions are somewhat similar to those in the U.​S., with slight variations."

They explain, "There will be three types of money market funds: Public debt constant NAV funds (​similar to government/​Treasury Funds in the U.​S.); Low volatility NAV funds (​stringent liquidity provisions similar to U.​S. prime funds); and, Variable NAV funds (​similar to U.​S. prime funds). Public debt and low volatility funds will have amortized cost accounting applied and mandatory gates and fees should the fund liquidity fall below 10 percent on a weekly basis. Variable NAV funds will have market or model accounting applied. Discretional gates and fees as determined by Collective Investment in Transferable Securities (​UCITS) provisions on fund redemptions will apply to all funds, and there will be further liquidity requirements for Constant Net Asset Value (​CNAV) funds."

AFP'​s update adds, "​It'​s important that companies talk to their fund providers to understand changes to their fund lineup. Nearly two-​thirds of finance professionals are unaware of the changes in the rules that will impact European MMFs. Only 15 percent are aware of these changes and planning for them. The remaining 20 percent, while aware of these changes, have no plans in place to deal with the new rules."

In related news, The Wall Street Journal discussed offshore cash yesterday in its piece, "The Morning Ledger: Tech Firms Help Buoy Offshore Cash To Fresh Record. They write, "Growing cash piles Apple Inc., Microsoft Corp. and Alphabet Inc. helped companies sock away another $​100 billion overseas, pushing the pile of money U.​S. corporations keep offshore to a new peak in 2016, writes CFO Journal'​s Tatyana Shumsky. Cash held by U.​S. non-​financial companies notched its largest increase, 9.​2%, to set a fresh record of $​1.​84 trillion at the end of 2016, according to a report from Moody'​s Investors Service. Moody'​s estimates that roughly 70% of total corporate cash, or a record $​1.​3 trillion, is held overseas."

The piece adds, "Offshore cash holdings continue to grow due to the disparity between U.​S. and foreign tax codes, said Moody'​s senior vice president Richard Lane. Finance chiefs who oversee companies with overseas profits must pay the difference between lower offshore tax rates and the higher U.​S. rate in order to bring the money home. "​Most CFOs are loathe to do that for good financial sense," Mr. Lane said."

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 $​50 billion year-​to-​date to $​781 billion as of 7/​18/​17. U.​S. Dollar (​USD) funds (​147) account for over half ($​416 billion, or 53.​3%) of the total, while Euro (​EUR) money funds (​93) total E91 billion and Pound Sterling (​GBP) funds (​104) total L205. USD funds are up $​17 billion, YTD, while Euro funds are down E3 billion and GBP funds are up L14B. USD MMFs yield 0.​96% (​7-​Day) on average (​7/​18/​17), up 80 basis points from 12/​31/​16. EUR MMFs yield -​0.​50% on average, down 31 basis points YTD, while GBP MMFs yield 0.​13%, down 15 bps YTD.

Crane'​s latest MFI International Money Fund Portfolio Holdings data (​as of 6/​30/​17) shows that European-​domiciled US Dollar MMFs, on average, consist of 17% in Treasury securities, 24% in Commercial Paper (​CP), 24% in Certificates of Deposit (​CDs), 17% in Other securities (​primarily Time Deposits), 15% in Repurchase Agreements (​Repo), and 3% in Government Agency securities. USD funds have on average 30.​6% of their portfolios maturing Overnight, 14.​2% maturing in 2-​7 Days, 21.​1% maturing in 8-​30 Days, 10.​7% maturing in 31-​60 Days, 8.​3% maturing in 61-​90 Days, 11.​5% maturing in 91-​180 Days, and 3.​5% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (​29.​7%), France (​11.​9%), Canada (​10.​7%), Japan (​10.​2%), Sweden (​5.​9%), Australia (​5.​6%), Germany (​4.​5%), the Netherlands (​4.​2%) and Singapore (​4.​1%), United Kingdom (​3.​8%), and China (​2.​7%).

The 20 Largest Issuers to "​offshore" USD money funds include: the US Treasury with $​77.​5 billion (​17.​6% of total assets), BNP Paribas with $​16.​1B (​3.​7%), Toronto-​Dominion Bank with $​12.​3B (​2.​8%), Mitsubishi UFJ with $​11.​0B (​2.​5%), RBC with $​10.​0B (​2.​3%), Svenska Handelsbanken with $​9.​7B (​2.​2%), Federal Reserve Bank of New York with $​9.​4B (​2.​1%), Sumitomo Mitsui Banking Co with $​8.​7B (​2.​0%), Wells Fargo with $​8.​6B (​1.​9%), Bank of Nova Scotia with $​8.​0B (​1.​8%), National Australia Bank Ltd with $​7.​6B (​1.​7%), Bank of Montreal with $​7.​1B (​1.​6%), Commonwealth Bank of Australia with $​7.​0B (​1.​6%), Societe Generale with $​7.​0B (​1.​6%), Credit Agricole with $​6.​8B (​1.​6%), DBS Bank Ltd with $​6.​6B (​1.​5%), Rabobank with $​6.​6B (​1.​5%), Oversea-​Chinese Banking Co. with $​6.​5B (​1.​5%), Sumitomo Mitsui Trust Bank with $​6.​0B (​1.​4%), and Mizuho Corporate Bank Ltd with $​5.​9B (​1.​3%).

Euro MMFs tracked by Crane Data contain, on average 37% in CP, 30% in CDs, 21% in Other (​primarily Time Deposits), 8% in Repo, 2% in Treasury securities and 2% in Agency securities. EUR funds have on average 23.​8% of their portfolios maturing Overnight, 10.​3% maturing in 2-​7 Days, 13.​4% maturing in 8-​30 Days, 17.​5% maturing in 31-​60 Days, 14.​4% maturing in 61-​90 Days, 15.​7% maturing in 91-​180 Days and 4.​9% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (​27.​2%), US (​13.​7%), Japan (​12.​8%), Sweden (​7.​6%), Netherlands (​7.​0%), Belgium (​6.​8%), Germany (​5.​9%), Switzerland (​5.​7%), and the United Kingdom (​2.​6%).

The 15 Largest Issuers to "​offshore" EUR money funds include: BNP Paribas with E5.​2B (​5.​5%), Svenska Handelsbanken with E4.​0B (​4.​2%), Rabobank with E3.​7B (​3.​9%), Credit Mutuel with E3.​3B (​3.​5%), Proctor & Gamble with E3.​5B (​3.​7%), Dexia Group with E3.​0B (​3.​2%), Credit Agricole with E3.​0B (​3.​1%), BPCE SA with E2.​8B (​2.​9%), Mitsubishi UFJ Financial Group Inc with E2.​7B (​2.​8%), KBC Group NV with E2.​7B (​2.​8%), Nordea Bank with E2.​6B (​2.​7%), Norinchukin Bank with E2.​5B (​2.​6%), Credit Suisse with E2.​5B (​2.​6%), Mizuho Corporate Bank Ltd with E2.​4B (​2.​5%), and Societe Generale with E2.​4B (​2.​5%).

The GBP funds tracked by MFI International contain, on average (​as of 6/​30/​17): 42% in CDs, 22% in Other (​Time Deposits), 22% in CP, 9% in Repo, 3% in Treasury, and 2% in Agency. Sterling funds have on average 23.​6% of their portfolios maturing Overnight, 7.​8% maturing in 2-​7 Days, 16.​0% maturing in 8-​30 Days, 17.​4% maturing in 31-​60 Days, 15.​6% maturing in 61-​90 Days, 14.​4% maturing in 91-​180 Days, and 5.​3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (​18.​4%), Japan (​15.​6%), United Kingdom (​15.​6%), Germany (​6.​7%), Netherlands (​6.​2%), Sweden (​6.​2%), US (​5.​9%), Australia (​5.​0%), Canada (​4.​6%), and Belgium (​2.​6%).

The 15 Largest Issuers to "​offshore" GBP money funds include: UK Treasury with L11.​3B (​6.​7%), BNP Paribas with L7.​0B (​4.​2%), Mitsubishi UFJ Financial Group Inc. with L6.​9B (​4.​1%), Sumitomo Mitsui Banking Co. with L6.​6B (​3.​9%), Nordea Bank with L6.​2B (​3.​7%), Credit Mutuel with L5.​7B (​3.​4%), DZ Bank AG with L5.​3B (​3.​1%), BPCE SA with L5.​1B (​3.​0%), Rabobank with L4.​8B (​2.​9%), Sumitomo Mitsui Trust Bank with L4.​7B (​2.​8%), Standard Chartered Bank with L4.​6B (​2.​7%), Credit Agricole with L4.​6B (​2.​7%), Bank of America with L4.​4B (​2.​6%), ING Bank with L3.​8B (​2.​3%), National Bank of Abu Dhabi with L3.​7B (​2.​2%), Dexia Group with L3.​6B (​2.​1%), Svenska Handelsbanken with L3.​5B (​2.​1%), Nationwide Building Society with L3.​4B (​2.​0%), Commonwealth Bank of Australia with L3.​1B (​1.​9%), and UBS AG with L3.​0B (​1.​8%).

​

The Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (​with data as of June 30, 2017) yesterday. This release reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (​WAM and WAL) for Prime and Government money market funds. The MMF Holdings release says, "The Investment Company Institute (​ICI) reports that, as of the final Friday in June, prime money market funds held 29.​6 percent of their portfolios in daily liquid assets and 43.​9 percent in weekly liquid assets, while government money market funds held 59.​5 percent of their portfolios in daily liquid assets and 74.​7 percent in weekly liquid assets." Prime DLA rose from 27.​8% last month as well with Prime WLA rose from 43.​4% last month. We review the ICI'​s latest Holdings update, along with J.​P. Morgan'​s Taxable money market fund holdings update, below.

ICI explains, "At the end of June, prime funds had a weighted average maturity (​WAM) of 33 days and a weighted average life (​WAL) of 72 days. Average WAMs and WALs are asset-​weighted. Government money market funds had a WAM of 34 days and a WAL of 88 days." Prime WAMs were up one day from the prior month, and WALs were up 4 days. Govt WAMs increased by 2 days as well with WALs increasing by 4 days.

Regarding Holdings By Region of Issuer, ICI'​s release tells us, "Prime money market funds' holdings attributable to the Americas rose from $​161.​62 billion in May to $​179.​16 billion in June. Government money market funds' holdings attributable to the Americas rose from $​1,​725.​73 billion in May to $​1,​761.​29 billion in June." (​See too Crane Data'​s July 13 News, "July Money Fund Portfolio Holdings: Repo Only Segment to Increase.")

The Prime Money Market Funds by Region of Issuer table shows Americas-​related holdings at $​179.​1 billion, or 43.​6%; Asia and Pacific at $​84.​9 billion, or 20.​7%; Europe at $​143.​6 billion, or 34.​9%; and, Other (​including Supranational) at $​3.​3 billion, or 0.​9%. The Government Money Market Funds by Region of Issuer table shows Americas at $​1.​761 trillion, or 84.​7%; Asia and Pacific at $​93.​3 billion, or 4.​5%; and Europe at $​224.​1 billion, or 10.​8%.

J.​P. Morgan'​s latest Holdings update tells us, "Total taxable money fund AuM finished June down $​22bn or -​1% month-​over-​month. Prime fund assets increased $​6bn, while government MMFs experienced $​28bn in outflows. Year-​to-​date, prime funds have steadily grown by a modest $​28bn. Conversely, government funds have lost $​128bn in assets under management. While this may seem drastic at first glance, government fund outflows during the first half of the year are very common, and 2017 is in line with the average historical trend."

It continues, "​Quarter-​end played out largely as expected. On June 30, certain banks sought to shrink their balance sheet for regulatory reporting reasons. To do so, they temporarily reduced their outstandings in short-​term wholesale funding via CD, time deposits and repo. This dynamic was reflected only subtly in prime fund allocations. Prime fund holdings of short-​term bank debt decreased slightly by $​7bn or -​2%, with CDs driving the decline.... Aside from banks and Fed RRP, allocations to other asset classes did not change dramatically.... On the other hand, cuts to repo were glaring in the holdings of government funds. Government fund dealer repo holdings sunk by $​105bn. To fill the void, they ramped up Fed RRP usage by $​89bn."

JPM writes, "Prime funds could benefit from a pickup in the maturity schedule during July. Activity in the CP/​CD market has snapped back to life post quarter-​end as a wall of maturities is coming come due.... Many issuers face heavy maturity schedules that they will need to refinance in the coming few weeks. We think demand from prime funds and other investors is sufficient to meet the supply, however credit spreads may need to widen modestly to facilitate the refinancing."

Finally, they add, "Holdings data suggests that prime fund demand for CP/​CD stabilized after its sharp drop amid MMF reform last year. Average CP/​CD outstandings during 2Q17 held steady or slightly ticked up across most issuers. Furthermore, it also appears as if dealers are even more willing to participate in repo.... Japanese and French banks increased their outstanding repo balances held by prime funds the most quarter-​over-​quarter."

In related news, the Treasury'​s OFR announced, "The U.​S. Office of Financial Research has updated the Money Market Fund Monitor with data as of June 30, 2017. The monitor can be found here: https://​www.​financialresearch.​gov/​money-​market-​funds/. The OFR MMF Monitor is designed to track the investment portfolios of money market funds by funds asset types, investments in different countries, counterparties, and other characteristics. Users can view trends and developments across the MMF industry. Data are downloadable and displayed in six interactive charts."

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The July issue of Crane Data'​s Bond Fund Intelligence, which was sent out to subscribers Monday, features the lead story, "Bond Fund Inflows Continue at Record Pace in H1'​17," which reviews the heavy inflows into bond funds in the first half of 2017. BFI also includes the "​profile" article, "Pros & Cons of Ultra-​Short BFs by Crane, Pope & Olsen," which quotes from a recent Money Fund Symposium session on ultra-​short bond funds. In addition, we recap the latest Bond Fund News, which includes briefs on higher yields in June, inflows, active bond funds, and corporate bonds. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the July 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" next week.)

Our lead Bond Fund Intelligence story says, "Inflows into bond funds in the first half of 2017 continue to run at a record pace. Based on the Investment Company Institute'​s numbers, bond funds (​and ETFs) have attracted over $​203 billion YTD. For the first six months of 2017, bond funds and bond ETFs have averaged inflows of over $​33.​9 billion, almost double the pace of last year'​s inflows. Bonds have yet to show a single month of outflows in 2017."

It explains, "ICI'​s monthly '​Trends in Mutual Fund Investing' shows bond fund assets rising by $​51.​3 billion to $​3.​868 trillion in May. Year-​to-​date, bond fund assets have risen by $​174 billion (​through 5/​31), and assets likely continued higher in June. During 2016, bond fund assets rose by $​235.​9 billion, or 6.​9%."

The last monthly ICI release says, "Bond funds had an inflow of $​25.​53 billion in May, compared with an inflow of $​15.​00 billion in April. Taxable bond funds had an inflow of $​23.​41 billion in May, versus an inflow of $​12.​55 billion in April. Municipal bond funds had an inflow of $​2.​13 billion in May, compared with an inflow of $​2.​45 billion in April."

The update continues, "ICI'​s latest weekly '​Combined Estimated Long-​Term Fund Flows and ETF Net Issuance,' which show data as of the week ended July 5, says, '`​Bond funds had estimated inflows of $​5.​82 billion for the week, compared to estimated inflows of $​5.​40 billion during the previous week. Taxable bond funds saw estimated inflows of $​6.​07 billion, and municipal bond funds had estimated outflows of $​250 million.'"

Our latest profile says, "Last month at Crane Data'​s Money Fund Symposium conference in Atlanta, a session entitled, '​Pros & Cons of Ultra-​Short Bond Funds' featured our Peter Crane, along with Fidelity'​s Kerry Pope and Northern Trust'​s Morten Olsen. The three discuss the growing use of ultra-​short bond funds by institutional cash investors. We quote from this session below."

Crane explains, "Ultra-​short bond funds have been one of the great hopes [​in the near '​cash' space.... The good news about the space is that after several years of a lot of launches and a lot of pushing from providers, there is a [​now] awareness." He continues, "​Big corporate investors who'​ve been targeted now know about ultra-​short bond funds [​as an] alternative to prime money funds, and as an alternative to get more yield. The other good news is, they'​re starting to gain critical mass."

Pope tells us, "​We had the benefits of the 2007-​2008 enhanced cash product [​experience and problems] when we were creating these new ultra-​short products. They'​re different for a couple of reasons. Pope continues, "​One is that we'​re focused on ... volatility, and [​not] simply providing a higher rate return rather than a money market fund. They'​re not holding a tremendous amount of structured product mortgage securities in these types of products."

He continues, "The client base that we'​re selling to is: 1) a more stable client base, primarily because we'​ve explained to people the use of this type of a product is not for operating cash, it'​s for strategic liquidity, liquidity that has some level of dormancy around it.... As opposed to back in the day, when they were selling enhanced cash products, those products were designed to compete directly with money market funds."

Pope adds, "​They were sold as operating cash equivalents. They were highly rated [​but] most of the product ... was structured product.... We all know what happens in times of stress with structured products, there'​s no liquidity.... Before they were certainly mis-​marketed, mis-​sold and poorly managed."

He continues, "​So part of the lessons learned is that what we'​re now selling are basically products that you used to buy as money market products. These are basically the old 2a-​7 money market products, but because of rate reform, money market funds have become shorter in duration and more conservative. We used to manage to a $​1.​00 NAV very protectively back when we had 90 day weighted average maturities or 120 day weighted average maturities in the money market space. What we'​re really looking to recreate is that conservative profile."

Our Bond Fund News brief on "Yields Higher; Returns Mixed in June" eplains, "Yields rose across all of the Crane BFI Indexes last month, but returns were lower for several major sectors. The BFI Total Index averaged a 1-​month return of -​0.​03% and gained 2.​01% over 12 months. The BFI 100 had a return of 0.​00% in June and rose 2.​65% over 1 year. The BFI Conservative Ultra-​Short Index returned 0.​10% and was up 1.​14% over 1-​year; the BFI Ultra-​Short Index had a 1-​month return of 0.​11% and 1.​49% for 12 mos. Our BFI Short-​Term Index returned 0.​00% and 1.​60% for the month and past year. The BFI High Yield Index increased 0.​01% in June and is up 9.​63% over 1 year."

​

Last week, we excerpted from the Association for Financial Professionals' latest "2017 AFP Liquidity Survey Highlights and press release. (​See our July 12 Link of the Day and our July 14 News, "AFP Liquidity Survey Shows Money Funds Up, Bank Deposits Inch Down.") Today, we quote more from the full report (​which is available only to AFP Members). We discussed cash holdings and investment policies Friday, but the AFP also writes, "At nearly half (​47 percent) of organizations, investment policies call out and/​or separate cash holdings used for day-​to-​day liquidity from the rest of the company'​s cash and short-​term investment holdings. This includes a policy stipulating the amount of cash holdings that are set aside for day-​to-​day liquidity versus other uses.... This is higher than the 41 percent of companies that had policies that call out/​separate cash holdings last year."

The survey tells us, "Eighty-​three percent of corporate practitioners report that their organizations' investment policies require money funds to be rated. The stipulations regarding ratings are fairly stringent: 36 percent of companies require that at least one rating agency assign a AAA rating and 27 percent mandate that money market funds earn AAA ratings from at least two agencies. Investment policies at larger organizations and publicly owned companies are more likely than those at other companies to require funds to be rated."

On cash investments, it explains (​we quoted the first half of this Friday too), "The overall majority of organizations continues to allocate most of their short-​term portfolio -- an average of 76 percent in 2017 -- in three safe and liquid investment vehicles: bank deposits, money market funds (​MMFs) and Treasury securities. MMFs currently account for 21 percent of organizations' short-​term investment portfolios, a larger share than the 17 percent reported in the 2016 survey. Organizations are investing 14 percent of their short-​term investments in government/​Treasury money market mutual funds, again a larger share than the nine percent and six percent reported in 2016 and 2015, respectively. The primary reason for this change in allocation is the recent money market reform that became effective in October 2016. As noted in the introduction, the massive outflows from prime funds were primarily into government funds. Larger organizations with at least $​1 billion in annual revenue and those that are publicly owned continue to allocate more of their short-​term investments to MMFs than do other companies."

The AFP comments, "Those organizations with cash and short-​term investment holdings outside of the United States manage those cash and holdings similarly as how they manage their domestic balances: most of their cash is held in short-​term investments maintained in banks, money market funds and government securities. Seventy-​one percent of non-​U.​S. cash holdings are maintained in bank-​type investments (​including certificates of deposits, time deposits, etc.). Another eight percent of cash holdings are held in money market mutual funds and government securities."

They continue, "As noted above, banks are the dominant repositories for organizations' cash and short-​term investment holdings. Finance professionals continue to seek the safest option for cash and investment holdings, a result of the prevailing uncertainty and volatility in the current business environment, and the lack of investment opportunities that generate yield. Finance professionals consider a number of factors when deciding where to place their organizations' cash and short-​term investments. The top two determinants are perhaps self-​evident: the overall relationship with a bank (​cited by 92 percent of survey respondents) and the credit quality of the bank (​69 percent). This is similar to the 90 percent and 67 percent reported for each of the factors in the 2016 survey report. Other important factors organizations consider when selecting a bank are: Compelling rates offered on deposits (​cited by 44 percent of respondents); Simplicity of working with the bank (​35 percent); and, Earnings credit rates (​ECR) (​34 percent)."

The survey says, "​Organizations rely on various bank instruments for their cash and short-​term investments which, as noted previously, currently account for more than half the typical organization'​s portfolio. The most commonly used bank products are time deposits; 54 percent of finance professionals report that their organizations use time deposits. That percentage is slightly lower than the 57 percent reported in 2016. Forty-​three percent of respondents report using structured bank deposit products (​e.​g., money market demand accounts, or MMDA products), and that percentage is a significant increase from last year'​s figure of 23 percent. Non-​interest-​bearing deposit accounts are being used by 39 percent of organizations, a decrease from the 42 percent reported in 2016."

It tells us, "As long as the rank order of investment objectives remains (​1) safety, (​2) liquidity and (​3) yield, corporate treasurers will continue to be indifferent to their bank exposure provided they value their bank relationships. It'​s interesting to note that the use of MMDA-​type products increased the most since the 2016 survey was conducted, suggesting this is a key area where new players have positioned themselves in the marketplace with compelling products. The use of demand deposit accounts (​DDAs) declined, most likely due to the lag time for interest rate increases to impact DDAs. Depending on how the earnings credit rate (​ECR) is calculated by an organization'​s bank, there will likely be a delay before any benefit from interest rate increases is realized. Time deposits typically see the impact from interest rate increases sooner -- which is likely why the overall allocation to time deposits did not change that much from the previous survey."

AFP also writes, "Finance professionals report their organizations continue to place most of their short-​term investment portfolios into instruments with very short maturities. On average, 69 percent of all short-​term investment holdings are in vehicles with maturities of one month or less -- a result unchanged from the 2016 survey, but a three-​percentage-​point decrease from 2015. Another 15 percent of short-​term investments are held in vehicles with maturities between 31 and 90 days. Larger organizations with annual revenue of at least $​1 billion manage their cash in instruments with shorter maturity horizons than do smaller organizations with annual revenue less than $​1 billion."

They state, "​Banks support organizations in their cash and short-​term investment strategies by providing them with information on economic indicators and trends, the direction of the bond market, yield-​curve changes and credit ratings information. In the current business environment which is mired with uncertainty and volatility, finance professionals are more likely to seek this type of support from their banking partners. The survey results bear this out: the vast majority (​87 percent) of finance professionals identifies banks as resources their organizations use to access cash and short-​term investment holdings information. Other information resources include: Investment research from brokers/​investment banks (​cited by 43 percent of respondents); Credit rating agencies (​31 percent); Money market portals (​28 percent); and, Money market funds (​25 percent)." The survey also said 43% utilized "Data feeds from other sources.

The 2017 Liquidity Survey continues, "AFP asked survey participants what would be the necessary spread between government funds and prime funds to incentivize organizations to stay invested or return to investing in prime funds. Forty percent of finance professionals indicate that regardless of the spread, their organizations would not invest in prime funds. This is a 10-​percentage-​point larger share than those who held this view last year when the question addressed intended actions. It also suggests that their decisions are final since the SEC changes have been implemented. One-​third of respondents reports that their organizations would invest in prime funds if the spread were at least 50 basis points or more. An additional 18 percent would invest if the spread were at least 15 bps."

It tells us, "​Finance professionals anticipate other changes in their organizations' investment policies as their companies plan for changes resulting from SEC money market fund reform. Nearly a third of respondents (​31 percent) are considering separately managed accounts in response to the new regulations, 21 percent are planning to extend maturities and 26 percent cite ultrashort funds as a strategy they will implement in response to the implementation of the rules. Other changes organizations are considering as a result of the new SEC rules are: 2a-​7 like funds with stable NAV (​cited by 26 percent of survey respondents); ETFs bond or cash strategies (​16 percent); and Doing direct repo transactions (​14 percent)."

It adds, "For the past three years, adding separately managed accounts to investment policies has been the most common change organizations are making as a result of money fund reform. Using separately managed accounts underscores the importance of having a defined investment policy with specific investment parameters for permitted asset classes, credit quality, duration and maturity to enable asset managers to effectively manage these accounts consistent with each organization'​s investment profile rather than by a broad investor base governed by each fund'​s specific investment parameters. The costs associated with this type of product and the economies of scale needed to support the asset levels often makes the option cost-​prohibitive for some organizations."

The report also comments, "In light of money fund reform and increased regulations, the number of new product ideas from the money fund marketplace has been somewhat limited. One area of innovation is in repo and bank collateral products. Bank collateral products are similar to MMDA/​FDIC-​insured products and several are new to the market. Based on the results this year there has been limited traction on these products since they continue to have to "​prove" themselves to companies that are often prudently skeptical and need to see more of a track record. In terms direct repo programs, only large publicly held companies with significant balances typically enter into those arrangements or those that have the administrative and legal capacity to warrant using the products."

Finally, the report concludes, "Three key themes have come in the wake of SEC reform during this transition period: historically low Federal Funds rates, money market fund reform in tandem with other banking regulations (​Basel III, Dodd-​Frank, Bank Secrecy/​Anti Money Laundering, and FATCA, to name a few), and banks changing their own risk profiles to address regulators' concerns regarding client risk. The result is a money market fund industry with a more risk-​averse mentality that starved financial innovation that companies could have used to invest their operating cash. Instead, more money flowed into bank products, creating more demand for deposits when banks were risk-​profiling their customers as a result of regulatory mandates. This created an imbalance in the market, less innovation, and companies relied on earnings credit rates to subsidize their bank fees and gave up interest income in the process. As yields have increased for the first time in seven years, there is more differentiation in yields, but money fund yields have not kept pace with the rise in rates due to the fees they are recapturing."

The AFP adds, "Finance professionals anticipate other changes in their organizations' investment policies in the next 12 months as their companies deal with the effects of SEC money market fund reform. Twenty percent of survey respondents indicate they will implement changes in defining counterparty risk limits for bank deposits, and 20 percent also plan to make changes with cash segmentation with specific policy parameters for each bucket of cash. Other changes survey respondents anticipate in their investment policies over the next 12 months are: Adding separately managed accounts (​cited by 18 percent of survey respondents); Maturity changes (​16 percent); Buying direct commercial paper (​14 percent); Spread duration risk (​13 percent); and Ultra-​short bond fund strategies/​funds (​13 percent)."

​

We wrote earlier this week that the Association for Financial Professionals released its "2017 AFP Liquidity Survey and quoted from the AFP'​s press release. (​See our July 12 Link of the Day.) Today, we quote from the "Report of Survey Highlights," which is available to the public. It says, "[​T]​reasury and finance professionals remain cautiously optimistic. Safety is still of the utmost importance to them. Despite encouraging signs from the Federal Reserve -- particularly the Federal Open Market Committee’​s decisions to gradually raise short-​term interest rates -- organizations' investment policies are still not focused on yield. Indeed, a general feeling of apprehension is reflected in companies' heavy reliance on bank deposits as their investment vehicles of choice: 53 percent of all corporate cash holdings are still maintained at banks. That is slightly lower than the 55 percent reported last year."

It explains, "With the final stage of money fund reform implementation in October of 2016, investor sentiment was leaning towards stable NAV -- net asset value -- money market funds. As a result, the market saw a massive shift of balances from prime funds to government or Treasury-​backed funds. Floating NAVs, along with gates and fees, did not sit well with corporate treasurers who needed to provide preservation of principal and liquidity in an environment where yield is not a priority."

The summary tells us, "To examine current and emerging trends in organizations' cash and short-​term investment holdings, investment policies and strategies, the Association for Financial Professionals (​AFP) conducted its 12th annual Liquidity Survey in April 2017. The survey generated 683 responses which are the basis of this report. Results from this survey will provide treasury and finance professionals with critical benchmarks on short-​term investment holdings and strategies. AFP thanks State Street Global Advisors (​SSGA) for underwriting the 2017 AFP Liquidity Survey."

AFP writes, "​Seventy-​two percent of organizations have a written investment policy that dictates their short-​term investment strategy.... Safety of principal continues to be paramount: two-​thirds (​67 percent) of survey respondents indicate that safety is the most important short-​term investment objective for their organizations.... Thirty percent of survey respondents indicate their organizations' most important cash investment policy objective is liquidity.... Yield continues to be ranked a distant third as the most important objective of an organization'​s cash investment policy. Only three percent of finance professionals cite return as the most important investment objective. The prevailing low-​yield environment remains a headwind for any organization whose primary cash or short-​term investment objective is return."

The AFP comments, "​The overall majority of organizations continues to allocate most of their short-​term portfolio -- an average of 76 percent in 2017 -- in three safe and liquid investment vehicles: bank deposits, money market funds (​MMFs) and Treasury securities. MMFs currently account for 21 percent of organizations' short-​term investment portfolios, a larger share than the 17 percent reported in the 2016 survey. Deposit accounts are being used by 39 percent of organizations, a decrease from the 42 percent reported in 2016."

On the SEC'​s MMF Reforms, they say, "​In response to the 2007-​2008 financial crisis, the Securities and Exchange Commission (​SEC) adopted in 2010 a first series of amendments to its rules on money market funds that were designed to make money market funds more resilient.... On July 23, 2014, the Commission adopted more fundamental structural changes to money market fund regulations. Those reforms required prime institutional money market funds to "​float their net asset value (​NAV)" (​i.​e., no longer maintain a stable price) and provide non-​government money market fund boards with new tools -- liquidity fees and redemption gates -- to address runs. These changes took effect on October 14, 2016."

AFP writes, "As one result of these changes, the money market fund industry saw a tremendous shift in asset balances flowing from prime/​floating NAV funds to government/​stable NAV products.... Many companies discontinued investing in prime funds -- with no plans to resume. Others are taking a wait and see approach, provided they are comfortable with the accounting and have the staff to support the administrative task of credit/​diversification monitoring."

They tell us, "As a result of the SEC reforms, 41 percent of survey respondents indicate that their companies do not plan to invest in prime funds. Twenty-​three percent report they would consider investing in prime funds if the NAV doesn'​t move very much, and 20 percent indicate they would consider investing in prime funds if the spread between prime funds and other investments becomes significant. Seventeen percent do not plan to make any changes in how their organizations invest in prime MMFs. A significant spread between prime funds and other short-​term investments will more likely impact the decision to resume investing in prime funds among larger organizations and those that are publicly owned than among other companies."

AFP'​s summary concludes, "The management of corporate cash and short-​term investments in 2017 is relatively stable compared to that in 2016. However, there are numerous macroeconomic and regulatory shifts MAC that could alter the picture in the near future. The majority of cash continues to be maintained in bank deposits, and there are few signs that organizations' reliance on bank deposits as their primary investment vehicles will change, at least in the near future. Safety continues to be the top priority for finance professionals when mapping out organizations’ investment policies. This, combined with the lower yield generated from other opportunities, is one reason banks remain a more attractive option."

They explain, "The regulatory changes implemented last October by the SEC requiring prime institutional money market funds to float their NAV seems to be continuing to discourage greater investments in prime funds. Finance professionals appear to be taking a "​wait and see" approach, and want to ensure that the NAV doesn'​t move much, or are working to understand the mechanics of a fund and its underlying securities.... Also a factor is when and how many times the Federal Reserve will increase interest rates. Whether those increases will generate sufficient yield to pique the interest of corporate investors and encourage them to shift to vehicles outside of those traditionally thought to be ultra-​safe is yet to be seen."

Finally, they write, "It is difficult to predict what short-​term cash and investment allocations will look like a year from now. Treasury and finance professionals will weigh their decisions based on the economic and business climate. The uncertain and volatile environment in which they have been operating of late appears to be the new normal, and therefore more challenging for them when making decisions on managing their organizations' investments."

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Crane Data released its July Money Fund Portfolio Holdings Wednesday, and our latest collection of taxable money market securities, with data as of June 30, 2017, shows yet another increase in Repo but declines in all other composition segments. Money market securities held by Taxable U.​S. money funds overall (​tracked by Crane Data) decreased by $​60.​8 billion to $​2.​631 trillion last month, after increasing $​59.​8 billion in May, decreasing $​3.​2 billion in April, and decreasing $​11.​8 billion in March. Repo remained the largest portfolio segment, followed by Treasuries and Agencies. CDs decreased 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 $​12.​4 billion (​1.​3%) to $​954.​4 billion, or 36.​3% of holdings, after rising $​83.​7 billion in May, $​24.​6 billion in April, and $​41.​6 billion in March. Treasury securities fell $​31.​4 billion (-​4.​7%) to $​641.​6 billion, or 24.​4% of holdings, after falling $​27.​5 billion in May, $​53.​5 billion in April, and $​1.​6 billion in March. Government Agency Debt decreased $​1.​7 billion (-​0.​3%) to $​628.​6 billion, or 23.​9% of all holdings, after decreasing $​1.​4 billion in May, rising $​4.​0 billion in April, and decreasing again $​49.​3 billion in March. Repo, Treasuries and Agencies total $​2.​224 trillion and still represent a massive 84.​6% of all taxable holdings.

CDs and CPs decreased slightly last month, along with Other (​Time Deposits) securities. Certificates of Deposit (​CDs) decreased $​19.​5 billion (-​10.​8%) to $​160.​8 billion, or 6.​1% of taxable assets, after remaining unchanged in May, increasing $​8.​1 billion in April, and decreasing $​3.​3 billion in March. Commercial Paper (​CP) was down $​0.​5 billion (-​0.​3%) to $​158.​8 billion, or 6.​0% of holdings (​after decreasing $​0.​9 billion in May, increasing $​10.​4 billion in April, and declining $​1.​3 billion in March). Other holdings, primarily Time Deposits, declined $​11.​8 billion (-​13.​9%) to $​73.​1 billion, or 2.​8% of holdings. VRDNs held by taxable funds decreased by $​8.​3 billion (-​37.​7%) to $​13.​6 billion (​0.​5% of assets).

Prime money fund assets tracked by Crane Data decreased to $​575 billion (​down from $​578 billion last month), or 21.​3% (​down from 21.​5%) of taxable money fund holdings' total of $​2.​692 trillion. Among Prime money funds, CDs represent just under a third of holdings at 28.​0% (​down from 31.​2% a month ago), followed by Commercial Paper at 27.​6% (​up from 27.​5%). The CP totals are comprised of: Financial Company CP, which makes up 16.​9% of total holdings, Asset-​Backed CP, which accounts for 6.​5%, and Non-​Financial Company CP, which makes up 4.​2%. Prime funds also hold 1.​7% in US Govt Agency Debt, 6.​8% in US Treasury Debt, 14.​3% in US Treasury Repo, 0.​4% in Other Instruments, 10.​3% in Non-​Negotiable Time Deposits, 5.​0% in Other Repo, 2.​5% in US Government Agency Repo, and 1.​5% in VRDNs.

Government money fund portfolios totaled $​1.​451 trillion (​53.​9% of all MMF assets), down from $​1.​477 trillion in May, while Treasury money fund assets totaled another $​605 billion (​22.​4%), down from $​637 billion the prior month. Government money fund portfolios were made up of 42.​6% US Govt Agency Debt, 16.​7% US Government Agency Repo, 13.​0% US Treasury debt, and 27.​2% in US Treasury Repo. Treasury money funds were comprised of 68.​4% US Treasury debt, 31.​5% in US Treasury Repo, and 0.​1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $​2.​056 trillion, or 76.​3% of all taxable money fund assets, down from 78.​5% last month.

European-​affiliated holdings decreased $​13.​0 billion in June to $​405.​5 billion among all taxable funds (​and including repos); their share of holdings decreased to 15.​4% from 19.​9% the previous month. Eurozone-​affiliated holdings decreased $​10.​1 billion to $​252.​3 billion in June; they account for 9.​6% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $​2.​1 billion to $​202.​0 billion (​7.​7% of the total). Americas related holdings increased $​66 billion to $​2.​022 trillion and now represent 76.​8% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $​31.​7 billion, or 5.​0%, to $​666.​9 billion, or 25.​3% of assets; US Government Agency Repurchase Agreements (​down $​21.​2 billion to $​256.​5 billion, or 9.​7% of total holdings), and Other Repurchase Agreements ($​31.​0 billion, or 1.​2% of holdings, up $​1.​9 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​1.​8 billion to $​97.​0 billion, or 3.​7% of assets), Asset Backed Commercial Paper (​up $​3.​7 billion to $​37.​4 billion, or 1.​4%), and Non-​Financial Company Commercial Paper (​down $​2.​3 billion to $​24.​3 billion, or 0.​9%).

The 20 largest Issuers to taxable money market funds as of June 30, 2017, include: the US Treasury ($​641.​6 billion, or 25.​4%), Federal Home Loan Bank ($​480.​8B, 19.​0%), Federal Reserve Bank of New York ($​357.​6B, 14.​1%), BNP Paribas ($​91.​1B, 3.​6%), RBC ($​65.​6B, 2.​6%), Federal Farm Credit Bank ($​64.​0B, 2.​5%), Federal Home Loan Mortgage Co. ($​53.​8B, 2.​1%), Wells Fargo ($​50.​9B, 2.​0%), Nomura ($​50.​7B, 2.​0%), HSBC ($​46.​9B, 1.​9%), Bank of America ($​39.​0B, 1.​5%), Mitsubishi UFJ Financial Group Inc. ($​38.​4B, 1.​5%), Citi ($​32.​4B, 1.​3%), Bank of Nova Scotia ($​32.​1B, 1.​3%), Bank of Montreal ($​31.​8B, 1.​3%), Toronto-​Dominion Bank ($​30.​6B, 1.​2%), Societe Generale ($​29.​2B, 1.​2%), Federal National Mortgage Association ($​28.​1B, 1.​1%), JP Morgan ($​23.​8B, 0.​9%), and ING Bank ($​23.​0B, 0.​9%).

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 ($​357.​6B, 37.​5%), BNP Paribas ($​79.​2B, 8.​3%), Nomura ($​50.​7B, 5.​3%), RBC ($​50.​5B, 5.​3%), HSBC ($​41.​7B, 4.​4%), Wells Fargo ($​41.​0B, 4.​3%), Bank of America ($​33.​8B, 3.​5%), Societe Generale ($​23.​5B, 2.​5%), Citi ($​22.​0B, 2.​3%), and Mitsubishi UFJ Financial Group Inc ($​21.​5B, 2.​2%).

The 10 largest Fed Repo positions among MMFs on 6/​30 include: Fidelity Cash Central Fund ($​23.​9B), JP Morgan US Govt ($​22.​0B), Federated Gvt Oblg ($​17.​0B), Fidelity Sec Lending Cash Central ($​16.​8B), Vanguard Market Liquidity Fund ($​16.​7B), Northern Trust Trs MMkt ($​16.​5B), Fidelity Inv MM: Govt Port ($​15.​8B), Dreyfus Govt Cash Mngt ($​15.​0B), Vanguard Prime MMkt Fund ($​14.​2B), and Goldman Sachs FS Gvt ($​13.​1B).

The 10 largest issuers of "​credit" -- CDs, CP and Other securities (​including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($​17.​0B, 4.​9%), Svenska Handelsbanken ($​15.​5B, 4.​5%), RBC ($​15.​1B, 4.​4%), Bank of Montreal ($​14.​0B, 4.​1%), Toronto-​Dominion Bank ($​13.​8B, 4.​0%), Bank of Nova Scotia ($​12.​5B, 3.​6%), Sumitomo Mitsui Banking Co ($​12.​0B, 3.​5%), BNP Paribas ($​11.​9B, 3.​4%), Nordea Bank ($​11.​5B, 3.​3%), and Canadian Imperial Bank of Commerce ($​11.​2B, 3.​3%).

The 10 largest CD issuers include: Bank of Montreal ($​13.​2B, 8.​3%), Toronto-​Dominion Bank ($​13.​0B, 8.​1%), Mitsubishi UFJ Financial Group Inc ($​12.​5B, 7.​8%), Sumitomo Mitsui Banking Co ($​10.​8B, 6.​7%), RBC ($​9.​4B, 5.​9%), Wells Fargo ($​9.​3B, 5.​8%), Citi ($​7.​8B, 4.​9%), Svenska Handelsbanken ($​7.​3B, 4.​6%), Sumitomo Mitsui Trust Bank ($​5.​8B, 3.​7%) and Mizuho Corporate Bank Ltd ($​5.​3B, 3.​3%).

The 10 largest CP issuers (​we include affiliated ABCP programs) include: Bank of Nova Scotia ($​7.​6B, 5.​5%), Commonwealth Bank of Australia ($​7.​0B, 5.​0%), Westpac Banking Co ($​6.​8B, 4.​8%), JP Morgan ($​6.​2B, 4.​5%), Canadian Imperial Bank of Commerce ($​6.​1B, 4.​3%), National Australia Bank Ltd ($​5.​8B, 4.​1%), Societe Generale ($​5.​3B, 3.​8%), BNP Paribas ($​4.​8B, 3.​5%), RBC ($​4.​8B, 3.​4%) and Credit Agricole ($​4.​7B, 3.​3%).

The largest increases among Issuers include: Federal Reserve Bank of New York (​up $​115.​8B to $​357.​6B), RBC (​up $​5.​8B to $​65.​6B), Sumitomo Mitsui Banking Co (​up $​4.​9B to $​22.​5B), Svenska Handelsbanken (​up $​4.​9B to $​15.​5B), Canadian Imperial Bank of Commerce (​up $​3.​7B to $​20.​4B), Nordea Bank (​up $​3.​4B to $​11.​5B), Bank of America (​up $​1.​9B to $​39.​0B), Federal Home Loan Bank (​up $​1.​9B to $​480.​8B), UBS AG (​up $​1.​4B to $​8.​1B) and HSBC (​up $​1.​3B to $​46.​9B).

The largest decreases among Issuers of money market securities (​including Repo) in June were shown by: Credit Agricole (​down $​40.​4B to $​22.​4B), US Treasury (​down $​31.​4 to $​641.​6B), Barclays PLC (​down $​15.​5B to $​14.​2B), Credit Suisse (​down $​14.​4B to $​8.​7B), Societe Generale (​down $​14.​0B to $​29.​2B), JP Morgan (​down $​10.​8B to $​23.​8B), BNP Paribas (​down $​10.​6B to $​91.​1B), Natixis (​down $​9.​9B to $​19.​6B), Goldman Sachs (​down $​6.​1B to $​14.​2B), and Skandinaviska Enskilda Banken AB (​down $​6.​0B to $​6.​3B.

The United States remained the largest segment of country-​affiliations; it represents 69.​7% of holdings, or $​1.​833 trillion. Canada (​7.​2%, $​189.​6B) moved up to second place ahead of France (​6.​5%, $​171.​1B) in 3rd. Japan (​5.​7%, $​149.​2B) stayed in fourth, while the United Kingdom (​3.​1%, $​82.​1B) remained in fifth place. Sweden (​1.​6%, $​41.​8B) moved into sixth place ahead of The Netherlands (​1.​5%, $​40.​3B), Australia (​1.​5%, $​38.​7B) and Germany (​1.​3%, $​34.​6B). Switzerland (​0.​7%, $​19.​0B) 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 June 30, 2017, Taxable money funds held 36.​5% (​up from 35.​8%) of their assets in securities maturing Overnight, and another 13.​5% maturing in 2-​7 days (​down from 14.​7%). Thus, 50.​0% in total matures in 1-​7 days. Another 17.​7% matures in 8-​30 days, while 10.​3% matures in 31-​60 days. Note that over three-​quarters, or 78.​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 10.​6% of taxable securities, while 9.​5% matures in 91-​180 days, and just 2.​0% matures beyond 181 days.

​

Crane Data'​s latest Money Fund Market Share rankings show assets in U.​S. money fund complexes were mixed in June, as overall assets fell by $​15.​0 billion, or -​0.​5%. Total assets have increased by $​45.​3 billion, or 1.​6%, 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 $​188.​3 billion, or 7.​2% over the past 12 months through June 30, 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 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 June were Dreyfus, whose MMFs rose by $​9.​9 billion, or 6.​3%, SSgA, whose MMFs rose by $​4.​5 billion, or 5.​9%, First American, whose MMFs rose by $​1.​9 billion, or 4.​1%, and Morgan Stanley, whose MMFs rose by $​1.​8 billion, or 1.​6%.

Northern, T Rowe Price, and Federated also saw assets increase in June, rising by $​626M, $​264M, and $​140M, respectively. The biggest declines were seen by JP Morgan, Goldman Sachs, Wells Fargo, HSBC and Fidelity. (​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 June 30, 2017, Vanguard (​up $​89.​7B), Fidelity (​up $​77.​7B), JP Morgan (​up $​26.​5B), and T Rowe Price (​up $​22.​0B) were the largest gainers, but JP Morgan (​up $​25.​5B, or 11.​8%) and Dreyfus (​up $​12.​6B, or 8.​1%) would have been the largest gainers had we adjusted for recently added internal fund assets. These were followed by Prudential (​up $​13.​2B, or 2077.​3%), which was also inflated by the addition of a new fund, Dreyfus (​up $​12.​6B, or 8.​1%), and BlackRock (​up $​12.​0B, or 4.​9%).

T Rowe Price, BlackRock, Fidelity, Prudential, and Dreyfus had the largest money fund asset increases over the past 3 months, rising by $​20.​6B, $​18.​0B, $​14.​8B, $​13.​3B and $​10.​6B, respectively. The biggest decliners over 12 months include: Federated (​down $​25.​1B, or -​12.​1%), Goldman Sachs (​down $​24.​1B, or -​12.​7), Western (​down $​14.​5B, or -​33.​2%), Wells Fargo (​down $​14.​4B, or -​13.​4%), Morgan Stanley (​down $​13.​7B, or -​10.​7%), and SSgA (​down $​11.​9B, or -​12.​9%).

Our latest domestic U.​S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $​525.​8 billion, or 18.​8% of all assets. It was up $​2.​4 billion in June, up $​14.​8 billion over 3 mos., and up $​77.​7B over 12 months. Vanguard is second with $​275.​4 billion, or 9.​8% market share (​down $​75M, up $​5.​7B, an up $​89.​7B), while BlackRock is third with $​256.​2 billion, or 9.​1% market share (​down $​2.​3B, up $​18.​0B, and up $​12.​0B for the past 1-​month, 3-​mos. and 12-​mos., respectively). JP Morgan ranked fourth with $​251.​1 billion, or 9.​0% of assets (​down $​7.​6B, down $​3.​1B, and up $​26.​5B for the past 1-​month, 3-​mos. and 12-​mos., respectively), while Federated was ranked fifth with $​183.​2 billion, or 6.​5% of assets (​up $​140M, down $​3.​0B, and down $​25.​1B).

Dreyfus was in sixth place with $​168.​3 billion, or 6.​0% of assets (​up $​9.​9B, up $​10.​6B, and up $​12.​6B), while Goldman Sachs was in seventh place with $​165.​8 billion, or 5.​9% (​down $​6.​9B, down $​10.​8B, and down $​24.​1B). Schwab ($​153.​9B, or 5.​5%) was in eighth place, followed by Morgan Stanley in ninth place ($​114.​2B, or 4.​1%) and Northern in tenth place ($​94.​5B, or 3.​4%).

The eleventh through twentieth largest U.​S. money fund managers (​in order) include: Wells Fargo ($​93.​3B, or 3.​3%), SSGA ($​80.​6B, or 2.​9%), Invesco ($​59.​1B, or 2.​1%), First American ($​49.​6B, or 1.​8%), UBS ($​39.​1B, or 1.​4%), T Rowe Price ($​36.​8B, or 1.​3%), Western ($​29.​2B, or 1.​0%), DFA ($​27.​8B, or 1.​0%), Franklin ($​21.​3B, or 0.​8%), and Deutsche ($​17.​4B, or 0.​6%). The 11th through 20th ranked managers are the same as last month, except Northern moved back ahead of Wells Fargo, and Dreyfus moved ahead of Goldman. Crane Data currently tracks 66 U.​S. MMF managers, the same number as last month.

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

Looking at our Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (​domestic U.​S.) and our MFI International ("​offshore"), the largest money market fund families include: Fidelity ($​536.​1 billion), JP Morgan ($​407.​8B), BlackRock ($​380.​1B), Vanguard ($​275.​4B), and Goldman Sachs ($​259.​7B). Dreyfus/​BNY Mellon ($​192.​8B) was sixth and Federated ($​192.​1B) was in seventh, followed by Schwab ($​153.​9B), Morgan Stanley ($​148.​0B), and Northern ($​110.​2B), 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 July issue of our Money Fund Intelligence and MFI XLS, with data as of 6/​30/​17, shows that yields moved higher again in June 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 13 bps to 0.​62% for the 7-​Day Yield (​annualized, net) Average, and the 30-​Day Yield was up 9 bps to 0.​55%. The MFA'​s Gross 7-​Day Yield increased 13 bps to 1.​06%, while the Gross 30-​Day Yield was up 9 bps to 0.​99%.

Our Crane 100 Money Fund Index shows an average 7-​Day (​Net) Yield of 0.​81% (​up 13 bps) and an average 30-​Day Yield of 0.​74% (​up 7 bps). The Crane 100 shows a Gross 7-​Day Yield of 1.​09% (​up 13 bps), and a Gross 30-​Day Yield of 1.​02% (​up 7 bps). For the 12 month return through 6/​30/​17, our Crane MF Average returned 0.​50% and our Crane 100 returned 0.​57%. The total number of funds, including taxable and tax-​exempt, increased to 996, down 1 from last month. There are currently 751 taxable and 245 tax-​exempt money funds.

Our Prime Institutional MF Index (​7-​day) yielded 0.​90% (​up 15 bps) as of June 30, while the Crane Govt Inst Index was 0.​69% (​up 15 bps) and the Treasury Inst Index was 0.​67% (​up 14 bps). Thus, the spread between Prime funds and Treasury funds is 23 basis points, up 1 bp from last month, while the spread between Prime funds and Govt funds is 21 basis points, the same as last month. The Crane Prime Retail Index yielded 0.​70% (​up 3 bps), while the Govt Retail Index yielded 0.​33% (​up 10 bps) and the Treasury Retil Index was 0.​41% (​up 13 bps). The Crane Tax Exempt MF Index yield decreased to 0.​41% (​up 9 bps).

Gross 7-​Day Yields for these indexes in June were: Prime Inst 1.​26% (​up 13 bps), Govt Inst 0.​99% (​up 15 bps), Treasury Inst 0.​97% (​up 14 bps), Prime Retail 1.​24% (​up 3 bps), Govt Retail 0.​93% (​up 8 bps), and Treasury Retail 0.​98% (​up 15 bps). The Crane Tax Exempt Index increased 7 basis points to 0.​91%. The Crane 100 MF Index returned on average 0.​06% for 1-​month, 0.​16% for 3-​month, 0.​28% for YTD, 0.​42% for 1-​year, 0.​18% for 3-​years (​annualized), 0.​12% for 5-​years, and 0.​56% for 10-​years. (Contact us if you'​d like to see our latest MFI XLS, Crane Indexes or Market Share report.)

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The Wall Street Journal writes, "Cash Creeps Back Into an Unloved Corner of the Money Markets," which discusses the return of cash into Prime money market funds. The article says, "​Money has started to flow back into short-​term funds that investors raced to get out of last fall. U.​S. prime money market funds, which invest in short-​term corporate IOUs, had $​611.​5 billion in assets at the end of May, up 12% from the end of last year, according to the latest data from the Office of Financial Research and the Securities and Exchange Commission. That'​s a significant turnabout after the assets in such funds more than halved over the course of 2016."

It explains, "U.​S. money market funds had to adopt new post-​crisis regulations last October, meant to safe-​guard them after a prominent money-​market fund "​broke the buck" during the financial crisis and set off panic across the markets. The new rules set barriers to pulling money from prime funds during times of market upheaval, reducing the draw for some investors who need to be able to jump in and out of them."

The Journal tells us, "The retail and institutional money in prime funds is well below the more than $​1.​5 trillion that used to sit in them before investors pulled money in anticipation of the new rules. But the uptick suggests investors, lured by yields that in some cases top 1%, have renewed interest in such funds."

The piece quotes our Peter Crane, "​president and publisher of Crane Data, which tracks money market funds," "They are about to get a tailwind." The piece explains, "He noted that investors usually pull out of money funds in the first half of each year and gain it back in the second half, potentially accelerating inflows to prime funds in the final six months of the year." (​Year-​to-​date, money funds are down by $​103 billion, or -​3.​8% in 2017, according to ICI'​s weekly data series.)

The WSJ piece continues, "​Investors who pulled money from prime funds last year often put it into government money market funds, which invest in short-​term government debt and typically do not have to adhere to the new rules. But the assets in government funds has ticked down 2.​1% this year through May to $​2.​2 trillion, the data show. Those assets are still up by more than half from a year ago, but the recent flows suggest investors are done indiscriminately moving money from prime funds into government funds en masse."

The update contains two charts. One is entitled, "Money Moseys Back," and subtitled, "After massive outflows last year ahead of new regulations, investors are putting some money back into prime money market funds." It shows the steep decline and gradual rebound in Prime assets year-​to-​date. The shows the inverse with Government fund assets spiking in 2016, and declining slightly in 2017.

It says, "Despite the new rules, 55% of market professionals and investors indicated they are interested in increasing their exposure to funds with floating NAVs, particularly with the higher yields offered in that corner of the money market, according to a Bank of New York Mellon Corp. survey. By some measures, prime funds now offer 0.​29 percentage more in yield that government funds."

The Journal adds, "Once that spread reaches 0.​35 percentage point, 38% of respondents said they would consider allocating more money to prime funds. And once it hits 0.​45 percentage point, another 28% said they’​d consider moving more money into the space." (​See our July 7 News, "Dreyfus MF Symposium Survey Says Prime Inflows Should Accelerate," for more on Dreyfus' recent survey.)

Finally, they quote Tracy Hopkins, chief operating officer of BNY Mellon cash investment strategies, "As investors become accustomed to the new rules following money market reform, we are already seeing a gradual reallocation of institutional cash back from government to prime, a trend we don'​t see reversing anytime soon."

Our July Money Fund Intelligence, which was sent to subscribers yesterday, commented in the brief, "Slow, Steady Prime Asset Rebound Continues," "Both ICI'​s latest weekly '​Money Market Fund Assets' report and Crane Data'​s monthly MFI XLS show the Prime recovery continues. (​ICI shows Prime up $​2.​2 billion to $​415.​5 billion, the 9th increase in 11 weeks. MFI shows Prime up $​8.​2B in June to $​598B.)

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The July issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Monday morning, features the articles: "Prime, Alternates, Business as Usual Hot Topics in Atlanta," which quotes highlights from our recent Money Fund Symposium conference in Atlanta, "Invesco'​s Flanagan Keynotes Money Fund Symposium," which reviews the Keynote speech from Invesco CEO & President Martin Flanagan, and, "Worldwide MMF Assets Up: US, China Drop; India Rising?" which reviews ICI'​s latest quarterly global statistics. We have also updated our Money Fund Wisdom database with June 30, 2017, statistics, and sent out our MFI XLS spreadsheet Monday a.​m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our July Money Fund Portfolio Holdings are scheduled to ship Wednesday, July 12, and our July Bond Fund Intelligence is scheduled to go out Monday, July 17.

MFI'​s "Prime, Alternates, Business as Usual" article says, "​Our recent Money Fund Symposium in Atlanta, which attracted 550 money fund and money market professionals last month, featured a number of industry heavyweights discussing a host of important topics. The biggest questions this year included: Will Prime survive and recover? Will higher rates and the lack of further change return money funds to business as usual? And, will alternatives such as private funds or ultra-​short bond funds take root and begin to attract significant amounts of assets? We quote from a number of sessions and speakers on these issues below."

The piece continues, "​First we take some comments from the session, "Major Money Fund Issues 2017," moderated by Peter Crane and featuring Tracy Hopkins from Dreyfus BNY Mellon CIS, Pat O’​Callaghan from Goldman Sachs A.​M., and Jeff Weaver from Wells Fargo Funds. Hopkins comments, "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.... We are starting to see prime funds starting to take in assets. Overall the prime MMF space is up about 9% YTD, and the institutional prime MMF space is up about 28%."

Flanagan'​s speech reads, "Crane'​s Money Fund Symposium 2017 opened with a Q&​A with Martin Flanagan, CEO & President of Atlanta-​based Invesco, one of the largest pure asset managers in the world. Flanagan'​s keynote, entitled, "The Elevation of Money Market Funds," discussed a number of important topics in the asset management, money fund, and product development spheres. An edited transcript from the session follows."

Crane says, "Tell us about your history. Flanagan responds, "​My family had been in the commodities business for many, many years ... so the markets and international business were always an interest.... I ended up at Templeton way back when, and I'​ve stayed [​in investment management] ever since. I think for all of us, it'​s a great industry. It'​s a dynamic industry, and it'​s just a fascinating time. I think the advice I would give is to continue doing what we do. We are fiduciaries to our clients. As long as we keep our clients first, we'​re all going to do well.... Atlanta is a phenomenal place.... It is a fantastic city, very dynamic, an incredible business community, arts, sports community, and very welcoming.... So, come on down."

Crane also asks, "What'​s the current state of asset management?" He tells us, "​It'​s an incredibly important industry. There is an absolute need for what we do.... It'​s a growing industry. But we all know it'​s going through dramatic changes right now. It has signs of a maturing industry and the competition that comes along with [​that].... The winners will probably look different in 5 years than they were 5-​10 years ago. But that said, I think it'​s a great industry."

Flanagan continues, "You'​ve seen this big move into passive, and an extended period of time of [​this] low-​rate environment. So that'​s really caused a lot of firms to do self-​reflection.... I think if you look at it today and ask the question, '​What do you really need?' Clients are moving much more towards achieving outcomes, and this really [​calls for a] combination of active and passive alternatives, and this whole array of solutions. So to be a firm, you have to be broad, you have to be deep.... It is an environment that if you can'​t invest where the market is going right now or where the clients are going, it'​s been really difficult.... You need a suite of capabilities, you need to have deep relationships ... clients are wanting to work with fewer people."

Our "Worldwide" update explains, "The Investment Company Institute released its "​Worldwide Regulated Open-​​End Fund Assets and Flows First Quarter 2017" recently. 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."

It continues, "Money market fund assets increased by 0.​4 percent globally to $​5.​15 trillion.... Money market fund assets represented 12 percent of the worldwide total.... 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."

In a sidebar, we discuss, "Dreyfus' Survey on Prime," and write, "​A release entitled, "Prime Money Market Inflows Expected to Accelerate, Finds Dreyfus Survey," says, "Widening spreads are luring more capital back to higher yielding prime funds, according to a survey of more than 100 money market professionals and investors conducted by BNY Mellon Cash Investment Strategies (​​CIS), a division of The Dreyfus Corporation."

Our July MFI XLS, with June 30, 2017, data, shows total assets decreased $​15.​0 billion in June to $​2.​801 trillion after increasing $​20.​3 billion in May and $​68.​9 billion in April, but decreasing $​25.​2 billion in March. (Note that we added $​67.​3 billion in new funds in April.) Our broad Crane Money Fund Average 7-​Day Yield was up 13 bps to 0.​62% for the month, while our Crane 100 Money Fund Index (​the 100 largest taxable funds) was up 13 bps to 0.​81% (​7-​day).

On a Gross Yield Basis (​7-​Day) (​before expenses were taken out), the Crane MFA rose 0.​13% to 1.​06% and the Crane 100 rose 13 bps to 1.​09%. Charged Expenses averaged 0.​43% and 0.​29% for the Crane MFA and Crane 100, respectively. The average WAM (​weighted average maturity) for the Crane MFA was 31 days (​up 2 days from last month) and for the Crane 100 was 32 days (​up 2 days from last month). (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

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A press release entitled, "Prime Money Market Inflows Expected to Accelerate, Finds Dreyfus Survey," which was released early to Crane Data, examines the likelihood that institutional investors' will return to Prime money market funds in the coming months. Subtitled, "Widening spreads prompting investor demand for '​riskier' assets," it says, "While U.​S. money market reforms, which went into effect in October 2016, resulted in massive asset flows from prime to government funds, widening spreads are luring more capital back to higher yielding prime funds, according to a survey of more than 100 money market professionals and investors conducted by BNY Mellon Cash Investment Strategies (​CIS), a division of The Dreyfus Corporation."

The update explains, "Conducted at Crane'​s Money Fund Symposium in Atlanta on June 21 and 22, 2017, the survey found that 38 percent of respondents would consider allocating more assets to prime funds once spreads reach 35 basis points (​bps) relative to government funds. As spreads have widened to 29 bps, it may not be long until conditions become attractive enough to lure more investors from government funds to prime funds."

Tracy Hopkins, Chief Operating Officer of BNY Mellon CIS, comments, "As investors become accustomed to the new rules following money market reform, we are already seeing a gradual reallocation of institutional cash back from government to prime, a trend we don'​t see reversing anytime soon. Although it is likely prime money market funds may not reach pre-​reform highs as spreads widen, we expect assets to continue to flow from government to prime funds."

The release tells us, "More than half of respondents are waiting for spreads to widen further before committing more capital to prime funds, with 28 percent holding out for at least 45 bps and 28 percent waiting until spreads reach 55 bps. For 6 percent of respondents, 25 bps is the magic number they require to put more cash to work in prime funds."

Regarding "Rising Rates and Floating NAVs," Dreyfus' release states, "​Aside from widening spreads, the actions of the Fed are also being closely watched by money market professionals and investors alike. Nearly 7 in 10 (​68 percent) expect cash allocations to money market funds to increase as interest rates rise, while only 5 percent expect to see cash move into other investment vehicles in a rising rate environment. The remainder (​27 percent) do not expect rising rates to impact cash allocation to money market funds."

Hopkins states, "​As with any investment portfolio, diversification can be a key to managing potential risk, even in a low-​risk asset class such as money markets. While rising rates bode well for money market funds, it is our view that investors should look to diversify their cash holdings across prime, government and municipal funds. We believe each asset class provides attractive opportunities that can only be captured through a diversified investment approach."

The release adds, "​Among the reforms put in place in money market funds, was the requirement that institutional prime and municipal money market funds transact at a market-​based NAV, rounded to four decimal places (​e.​g. USD 1.​0000). The result is that small fluctuations above or below the $​1.​00 can be a challenge in that not all investors are permitted or able to invest in such products due to compliance and technological restrictions, despite the potential for higher yields. However, investor demand for such products is strong, with 55 percent indicating they are interested in increasing their exposure to floating NAV funds."

Finally, it says, "Established in 1951, Dreyfus is among the pioneers of U.​S. mutual fund investing with $​300 billion in assets under management (​as of March 31, 2017). As part of BNY Mellon Investment Management, Dreyfus enables U.​S. retail investors to access mutual funds through BNY Mellon'​s globally diversified investment boutiques, with investment solutions spanning global, international and domestic equity, fixed income, alternatives, retirement and cash investment strategies."

Crane Data subscribers and Money Fund Symposium conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center." (​See also our June 27 News, "Major Money Fund Issues 2017 Features Hopkins, O'​Callaghan, Weaver," which features Dreyfus' Tracy Hopkins.)

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Today, we go back to the well and quote from two more sessions from Crane'​s Money Fund Symposium, which was held last month in Atlanta. This time, we feature the end of Day Two, which included the segments: "MMFs in Ireland, France & China" with Reyer Kooy of IMMFA, Alastair Sewell of Fitch Ratings and Jonathan Curry of HSBC Global A.​M., and "Brokerage & Corporate Sweep Options & Issues," with Ted Hamilton of Promontory Interfi​nancial Network, Jeff Avers of SunTrust Bank and Sunil Kothapalli of Wells Fargo Advisors. The former session discussed pending European money fund reforms and new products in detail, while the latter reviewed developments in FDIC insured brokerage and corporate sweep accounts. (Crane Data subscribers and conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center.)

Fitch'​s Sewell tells us, "​A few statistics on the rest of the world. First of all, there'​s roughly $​5 trillion (​US) worth of money funds assets globally, of which about $​2 trillion of that total is in money market funds outside of the US.... In 2011 ... the US accounted for 60% of the total share of the money fund assets.... In 2016 ... that share falls down to 57% largely ... driven by developments in China. When you look at the world you can see that the reform calendar is somewhat out of synch. There'​s different jurisdictions in different stages of their regulatory development for the money market funds."

He continues, "​You look at the US and see [​that we] are almost complete. Whereas, you look to Europe, and there, the reform process [​has] been going for some time. Let'​s just say we'​ve had [​some] pretty significant [​developments] just recently. Then in China ... there'​s another round of reform on the way at the moment. Chinas has been developing very rapidly, continues to develop, and some of the reforms in China [​will] start to bring closer ... to international norms."

Kooy comments, "Money Market Fund Reform in Europe will be completely different [​than] what you have experienced in the United States. We'​re briefly going to look through a timetable and look at some of the constructs that we can expect as we start to work towards implementation.... [​Previous reforms defined] short term money market funds and standard money market funds, ensuring that only funds that stuck to those definitions were allowed to call themselves money market funds. This was really useful because ... up to that point there were quite a lot of different products around Europe that called themselves MMFs."

He says, "After the credit crisis, the G20 and the Financial Stability Board decided that it was necessary for money market funds to be better regulated. This is one of the things the US and now Europe has gone through: a lot of regulations, 3 layers of regulations. So I just want to spend a few moments on the timeline here.... [​With] European MMF reform, it'​s been very much a marathon.... It started with European Commission.... Sometime after that [​in] 2015, the second step [​was] the European Parliament made their comments and ultimately ... their own version ... which improved a little bit on the initial European Commission paper."

Kooy explains, "​In 2016 ... these 3 policies then came together which is called a '​trilogue'.... We'​ve been waiting for these policies to go through technical standards, amendments, legal fees and translations, and the House now says it'​s been finalized. We'​re actually waiting for the very final [​version]. Existing money market funds need to compliant with the new rules in 18 months from that point, which is going to be the first month of 2019, and new MMF funds 12 months from that date.... What has been decided? Well you'​ll see here that ... the natural continuation where MMF has been to date and where things go in the future."

He states, "CNAV Prime funds will actually have a choice; they can go into low volatility NAV construct (​LVNAV) ... or maybe go to a short term VNAV construct, and they'​ll have an optionality on that.... To reflect on the 4 types on MMFs, maybe just look at some of the rules.... Short term money market funds ... will have to apply consistent rules, like WAM, WAL, maximum final maturity [​and] stay quite consistent with the rules today.... As I mentioned all of these funds are going to be aligned to the new construct by Q1 of 2019."

Kooy adds, "The industry worked very hard to educate, to consult, and try to influence the lawmakers in their decision making.... I think we did that with some success.... The 3% capital buffer against the entire fund [​is gone]; we have now progressed. When the LVNAV construct was first released its concept was subject to a 5 year sunset clause, there was a discussion around the fact that public CNAV funds needed to invest 80% into paper, [​and] there was a discussion on short implementation time frames when the European commission first started writing their suggestions." (​Note: Kooy and Sewell will also speak at our European Money Fund Symposium, which will be held Sept. 25-​26 in Paris, France.)

During the session on Brokerage Sweeps, Hamilton says of "Deposit sweeps on the retail side," "​What we do [​is] fairly common, a program sweeps cash balances out of a brokerage account into a series of banks, gets FDIC insurance, the customer gets a MM like rate and FDIC insured deposits, and the brokerage company takes a fee. We finance banks that way. Typically 25 to 40 banks." He estimates that the 10 largest deposit sweep programs in market [​total] $​1 trillion dollars.

He continues, "Broker banks are dealing with Basel III, broker dealers are dealing with '​DOL' rules and SEC fiduciary rules, bank capacity and pricing, and banks are looking for funding again. Deposit pricing is improving, rates are going up too, [​and it'​s] all happening ... as a result of rates going up and spreads widening, broker dealers, after 25 basis points by the Fed, are dealing with how much to pay out in interest to customers through these programs because they control this.... One of the things we'​ve been doing with broker dealers is creating new products to make sure we can comply with these new rules."

Hamilton states on the "DOL Rule and new rules," "Because of the new administration we are not 100% sure these rules are going to stick around, but a lot of the broker dealers have had to change they ways they deal with the ERISA accounts ... and we'​ve been working with them.... We are [​also] introducing a Yankee sweep program [​which] we created for high net worth individuals, corporations and institutions. We put together this sweep program or this program where you are able to drop a ticket to invest in this. It'​s a synthetic MMF, made up of Yankee banks.

He adds, "[​In] summary, retail demand for sweep options continues to grow, banks are better off than they were years ago, they'​re making more loans, demand for funding is increasing, spreads therefore are increasing as well, [​and] short term rates are headed up. Broker dealers are changing their sweep programs to comply with MM reform rules. The new DOL and SEC fiduciary, the banks have changed a lot of their deposit taking to comply with these rules and Basil 3, new products help broker dealers and the banks to take advantage of the new opportunities is that are going in regulatory reform."

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Below, we briefly quote from another Money Fund Symposium session, "Corporate Investment and Issuance Issues," which featured Treasury Strategies' Tony Carfang and the AFP'​s Tom Hunt. Carfang discussed the pending House bill to turn back the floating NAV (​see our May 24 News, "Stable NAV Bill Re-​​Introduced in House; Amortized Cost for Inst Funds?"), while Hunt gave a preview of the upcoming AFP Liquidity Survey (​which will be released next week). We also quote from Federated'​s latest monthly, and a Wells update on repo below. (​Note again: Crane Data subscribers and conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center.)

Carfang tells us, "As we talked to our clients the jury is still out on whether or not these instruments [​prime MMFs] have a future at least from stand point of corporate treasurers. There are two bills in Congress to get rid of the fluctuating asset value and the liquidity fees ... Senate bill 1117 and House bill 2319. Both bills [​have bipartisan sponsors], in the Senate 2 Republicans and ... in the House ... there'​s some movement."

He adds, "Testifying ... on these bills, it was interesting [​that] both Democrats and Republicans agreed that ... no one expected $​1.​2 trillion dollars to leave prime and tax-​exempt funds. Everybody agreed that this was not the intended outcome.... The $​1.​2 trillion dollars that left and went into government funds, more than a third of that was recycled back into the housing industry. Which the regulators thought was like the cause of the problem in the first place."

Hunt comments, "What I'​d like to show you today is some of those highlights from our pending [​AFP Liquidity] survey that officially comes out on July 12. This is our eleventh year that we'​ve been doing this, and we are happy to say that State Street is the underwriter for this and helps make it possible.... One of the things that we ... asked now that money fund reform is here [​is] '​What are your plans to come back to [​prime]?' I think what this slide shows is there'​s a lot of opportunity still."

He continues, "​Certainly, 41% [​of respondents] would say, 'Yes, we'​re definitely not coming back to prime.' Really the focus of our survey is on operating cash.... But the way I see it is [​that] there'​s opportunity, because ... the spread between prime and [​other investments is] significant. It can [​attract] 20% ... so that wasn'​t even contemplated before. Then 18% say prime funds would be more attractive if the gates and fees were removed.... As investors, the corporate side that definitely moved into governments are now taking another look."

Hunt adds, "I think [​also that] ultrashort bond funds might have some opportunity.... [​Another] thing that we did measure in [​the latest survey] was the ETFs.... Certainly, there'​s a market that'​s interested in those, and understanding how those are impacted from an accounting standpoint. Then the larger players would stay with those doing direct repo or repo transactions. So I think the gap has widened from going into separately matched accounts and has brought different opportunities. But looking at this chart from an investment manager'​s standpoint, there'​s going to be some good conversations ahead in months to come."

In other news, Federated Investors writes in its latest "Month in Cash: The waiting game," "With three Fed rate hikes in six months and U.​S. money market reforms almost nine months behind us, the money markets in many ways are starting to approach normalcy. Daily prime fund net yields are back above 1%, with government and tax-​free fund yields not lagging by much. This rise is likely to continue over the course of this year and next as the conversation on monetary policy isn'​t whether more rate increases are coming, only how many and how fast."

Global Money Markets CIO Deborah Cunningham explains, "But the prime money markets still find themselves to some extent playing a waiting game. While fund assets industrywide are up about $​30 billion year-​to-​date, a significant increase on a relative basis, on an absolute basis, they'​re still well short of their pre-​reform levels. Fund rates continue to move up with each Fed increase while bank rates remain sticky, giving prime funds a widening yield advantage."

She tells us, "We know there'​s plenty of supply out there. At its industry conference in June, Crane Data estimated there currently is $​9 trillion of short-​term deposits in the marketplace. We would expect some of that to eventually work its way over to prime funds. The holdup, from what our clients are telling us, is the '​herd mentality' among institutions. Until one makes the move, no one is making the move to shift significant sums back into prime funds, which for the most part are the same instruments where they once parked their cash. Indeed, as we noted last month, new floating net asset values (​NAV) on prime and tax-​free funds are hovering very close to the industry'​s historical $​1 NAV standard to the thousandth decimal place."

Federated adds, "As far as the money markets are concerned, one plus to the [​Fed'​s] balance sheet-​reduction plan is the bulk of reissuance in the marketplace likely will come in the form of Treasury bills. That'​s the path of least resistance for the Fed, in part because there is so much government supply -- capacity, if you will. This should have a favorable, i.​e., upward impact, on short-​term yields, which is where we are focused. For now, we are holding the average weighted maturity (​WAM) range at 30 to 40 days for government money funds and 35 to 45 days for prime money funds. If we do buy anything longer-​dated—​12-​to 13-​month maturities -- it tends to be in floating-​rate securities."

Finally, Wells Fargo Securities' "​Daily Short Stuff" by Garret Sloan comments, "Quarter-​end has come and gone and the dynamic last Friday was one of very strong demand at the Fed RRP. A total of 79 issuers tapped the facility for $​398 billion in volume. That is up from the previous day'​s auction of $​269 billion and the June average volume of $​192 billion. Relative to previous quarter-​ends, volume was also quite elevated."

He explains, "The $​398 billion in total activity represented the fourth-​highest volume on record, and the second-​highest non-​year-​end volume, coming in slightly behind the $​412 billion we saw on September 30, 2016, just prior to final money market fund reform implementation. The high quarter-​end volume likely resulted from a sharp pull back by foreign repo counterparties that are more attuned to the vagaries of calendar-​based balance-​sheet adjustments."

Finally, Wells adds, "The European banks have been the most dramatic in their pullback from the repo markets at specific calendar-​driven dates, and this quarter-​end appears to be no different. We will know more once we obtain portfolio information from portfolio holdings data, but anecdotal evidence suggests that the European banks were especially parsimonious this quarter-​end, and we believe this may be a sign of things to come."

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We'​re transcribed another session from our recent Money Fund Symposium, which was held last month in Atlanta. Today, we excerpt from the opening day'​s "Private Money Funds, SMAs and ETFs" session, which featured Alex Roever from J.​P. Morgan Securities, Deborah Cunningham of Federated Investors, and Rich Mejzak of BlackRock. Their session discusses the world of "​Alt-​Cash," options fund providers have launched in the hopes of becoming a possible successor to Prime money funds. Watch for quotes from Symposium'​s keynote with Invesco'​s CEO Martin Flanagan in the pending Money Fund Intelligence and watch for more coverage in coming days. (Crane Data subscribers and conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center.)

Roever asks in his intro, "What are some of the new developments in the wake of money market reform? We are going to talk about some of those products today, although, some of them aren'​t really substitutes for money funds.... They are complementary products in some ways. We are going to talk a little bit about private money funds, ETFs, and SMAs.... I don'​t have much data on private money funds, but on ETFs, short term funds, and SMAs I have a little more. [​See Roever'​s slides here.] Looking at other asset classes, moving further down the table, the [​short-​term bond] mutual fund and ETF space is somewhere just north of ... half a trillion dollars. [​T]​he big space is short term credit, where most of the money is. Sec lending is still running somewhere in the order of about $​550-​600 billion dollars.... [​You have] government investment pools, and separately managed liquidity accounts is a sector we know is at least $​250 billion.... But [​it'​s] not a very transparent sector, so it is hard to see flows going in and out."

He continues, "Back to the fund space for a minute, just to talk a little bit about market structure. `​On the top we have ultra-​short bond fund sizes, and on the bottom here we have short term bond fund sizes, split into open ends [​and] ETFs. ETFs get a lot of focus these days, they are sort of the hot product across fixed income and a lot of other sectors. Even though there are some relatively large ones they still are small relative to the open end business. In both cases though, market structure is such that there is a lot of concentration.... I think particularly in the case of the short-​term funds, there are a lot of very small competitors."

Roever explains, "​We try to differentiate a little more in our work around the fund space trying to figure out investment styles. So ... in the case of both ultra-​short and short-​term in the SMA and fund space, we find that the investment strategies fall into similar buckets. So we often talk about the strategies being 2a-​7 like. So they may be SMAs run like a money market fund, but they are separately managed. They don'​t have the pool of liquidity, but very similar instruments. Ultra short would be a little bit longer.... Then, within the risk spectrum, we find things break out into government, what we would call a conservative credit portfolio, [​and then we] would include down to general investment grade, sort of expanding the triple B. And multi-​sector would include more securitized products, and may well have more credit exposure in it.... The big category in the fund space is the credit product in the open end space."

Cunningham comments, "We have been in the ultra-​short and short term bond business for quite some time, our core competency as a firm from a longer term fluctuating NAV mutual fund business has always been in that space. So, we have strategies that encompass all of the things.... We have them on the corporate side, on the municipal side; we have the government space, and we span the gambit to ultra-​short to sort of short-​intermediate.... So, out to the 7 year time frame on the yield curve."

She tell us, "We have recently ... started a private fund that mirrors identically the old 2a-​7 prime fund. We'​ve also started a collective fund, so both of those being pretty much identical in product type to the 2a-​7 funds.... We definitely are in that separate account space from a liquidity products perspective, as well as short term and ultra-​short type separate accounts. [​We'​ve] found that business to be one that'​s grown, although to a large degree not as much as we would have expected. There has been a lot more conversation around it than ... real growth in the assets under management of that category."

Cunningham says, "Where we have seen a lot of growth from an alternative perspective has been offshore, [​and] in 2a-​7 like products like state and local government pools.... So I think those are businesses which are currently growing pretty substantially, and I think as long as interest rates continue on a path that'​s level to moderately up on a regular basis, that will continue to be the case."

Mejzak explains, "​I think about three years [​prior to] prime money fund reform, when the interest rate environment was zero. We knew ... there would need to be some option other than a prime money market fund. We went out and launched three products from our cash desk.... We launched an ETF, and we launched two different short-​duration bond funds, one with a 90-​day WAM and one with a 180-​day WAM. They struggled. We saw very little traction with those early on.... Offering a 50 or 75 basis point return ... to an investor that was finding 2, 3, 4 percent returns [​in longer-​term bond funds was] very frustrating. The conclusion we came to was that maybe being money market guys, we saw the shades of gray, but perhaps the broader market did not."

He states, "We have since consolidated our offerings ... in the short duration space, where we'​ve locked in the 180 day WAM product. On the separate accounts side, I think [​we saw] the same thing. That represents a significant part of our business, and I'​m not sure it'​s grown meaningfully since reform. We manage externally about $​400 billion in money fund assets, and about $​75B of that is SMAs. We run an additional $​40B and change that is just outside money funds, run by our short duration team in New York. But I think [​we saw] the same kind of themes there -- interest was driven by wanting more return when rates were zero, and now it'​s about finding an alternative instead of finding a prime money market fund."

Roever also queries, "What is the marketing cycle like for these products, and who do you primarily market to?" Cunningham answers, "There is a broad market from an underlying client perspective, but ultimately, the marketing cycle is a very long one. You mentioned, Alex, that sometimes regulations need to be changed, and almost always, investment policy needs to be changed. Whether it be adding language that was not necessarily tied to 2a-​7, that wasn'​t necessarily tied to stable net asset value, that wasn'​t necessarily tied to things that have been historically, hallmarks within the industry. So, [​we'​ve had] a lot of investment policy discussions, and ... discussions ... over the context of the size of funds."

She adds, "There used to be $​1.​9 trillion in prime money market funds, and if you didn'​t have a fund that was $​30 or $​40 billion in size, you were probably at a disadvantage in the market. Well, now there aren'​t any funds that [​big]. As far as the separately managed accounts side of the equation, you are talking about larger sizes there too, and if you are tailoring it to something that is very much to meet your own firm'​s needs, then you want to take a little more time. You don'​t want to simply copy a strategy which has ... worked historically over a long period of time. That may not be the case in the current environment. You want to think about it, and the cycle is extremely long, especially in comparison to what we have been used to over the course of many decades in signing up and undertaking new investment participants in traditional 2a-​7 money funds."

Mejzak comments, "​I think we have had … similar experiences as well. As far as investment policies [​and using an ETF], it being an equity introduces an entirely new challenge. [​Though] the underlying bonds or cash instruments, the fact that an ETF is an equity ... seems to be a challenge with your typical cash investor. I agree, [​another] challenge to investor policy statements is the size of funds.... [​T]​hat was a challenge we endured trying to launch our small product three years ago. [​Y]​ou ultimately need some sort of retail base, because a $​100 million fund isn'​t getting it done. And I think that has led us to our separate account business. When you have somebody with $​200-​300 million, they might want a comingled product. But sometimes we find them going to an SMA because that'​s a better place to be."

Roever adds, "So to be clear, you'​re not trying to run a small fund, you want to run a large fund. But in terms of growing the thing as a percentage of that, it'​s hard to manage one large investor or a couple large shareholders." Mejzak responds, "`​I think in our experience, most investment policies have a 5 or 10% limit, so it is very difficult to grow a fund with $​10 million subscriptions. That is why a focus of ours has been to go to the retail side, but that is a big challenge." Cunningham adds, "​And in addition to the 5 or 10% [​limit mandate], a lot of them have [​policies like] '​nothing less than $​100 million, nothing less than $​500 million, or nothing less than $​1 billion.' So put the two of those together and you have almost nothing, no availability."

Finally, Cunningham adds on private funds, "[​U]​ltimately, our goal in starting one in September of last year, was to basically recreate and give institutional investors the same experience they had been enjoying for the past 40 years in a prime money market fund. Ultimately, the objectives of daily liquidity, at par, with a reasonable return on a prime yield basis are essentially what the requirements are for our private money market fund. Because it is registered as a 3c-​7 product and not a 2a-​7 product, we are able to achieve those same things without gates and fees, and without using the words '​money market fund' in the descriptors of it."

She adds, "They are same-​day, T+​0 settlement. Because we use amortized cost, they flow very nicely on a continuous basis up until 5pm, which is the cutoff time for the product. I think honestly when we look at a lot of the flows that exited the institutional prime space in the second or third quarter of last year, much of it had to do with the fluctuating NAV and the gates and fees side. But I have to say a substantial amount of it had to do with the cutoff time for those products moving to 3 pm and even early in some instances. People were used to transacting up until 5 pm. We get a substantial amount of flows between 4 and 5 pm. When prime was not an option at that point, the only place to go was government. So this product in its private form, and use of amortized costs, allows us to go back out to 5 pm."

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