News Archives: October, 2019
A press release entitled, "J.P. Morgan 2019 Global Liquidity PeerView Survey Reveals Demand for Money Market Funds Remains Strong in Late-Cycle, as Focus on ESG Increases." It explains, "J.P. Morgan Asset Management released the 2019 Global Liquidity PeerView Survey, revealing that even as the market outlook continues to evolve, demand for money market funds is still strong, adoption of treasury management systems continues to rise, and more investors are incorporating ESG criteria to screen investments. The 2019 Global Liquidity PeerView Survey features responses from 346 CIOs, treasurers and other senior cash investors around the world, representing an approximate combined cash balance of USD $1 trillion."
Paula Stibbe, Global Head of Liquidity Sales for J.P. Morgan A.M., comments, "The changing global economic environment presents investors with many new challenges, from slowing growth, rising trade tensions, and falling interest rates. This year's PeerView results suggest that in this environment, demand for money market funds remains strong, and investors with short-term fixed income portfolios are increasingly looking at areas such as ESG screening and treasury management systems when evaluating their cash investment strategy."
The release tells us, "MMFs remain the most permissible investment (in 92% of investment policies), followed by bank obligations (62% of policies) and U.S. Treasuries (60%). Most survey respondents (75%) plan to maintain their stable NAV MMFs, based on the market outlook for the coming year.... Investors are increasingly…using ESG criteria to screen investments. 19% of respondents globally are doing so now, and an additional 25% are likely to start within the next two years."
It also says, "The percentage of investors surveyed using such systems [treasury management systems] is now 61%. The features used most are cash management and treasury accounting (98%), investments and debt management (67%) and FX and interest rate risk management (50%). Asia Pacific (APAC) investors are more likely to develop in-house systems (43%) than use third parties; in the U.S., only 12% and in EMEA 11% developed their systems in-house.... Term deposits continue to be the most popular investment solution to avoid negative interest rates in EUR- and GBP-denominated investments (62%), followed by ultra-short duration bond funds (23%)."
The full 2019 J.P. Morgan Global Liquidity Investment Peerview survey's intro explains, "As our survey reports, demand for money market funds is strong, and investors with short-term fixed income portfolios continue to seek out the strategies and solutions that can best help them navigate a changing environment.... Also on liquidity investors' minds in the first few months of the year: the final phase of European Money Market Fund Reform. The transition to new fund structures and new rules went smoothly, since most investors were already familiar with these features."
It continues, "Amid these shifting pressures, investors will be looking for strong investment partners who can help them understand the implications of the latest macroeconomic and geopolitical developments, offer guidance on cash segmentation and provide insights into the global interest rate outlook. The most effective partner can align innovative products and solutions that best meet an investor's liquidity requirements, risk tolerance and return objectives. As investors re-evaluate their cash investment decision making -- an often demanding but always critical process -- they will greatly benefit from a peer comparison. It can reveal how their policies and practices resemble, and differ from, those of their peers. In this regard, the J.P. Morgan Global Liquidity Investment PeerViewSM survey can serve as an indispensable industry benchmark."
The survey finds, "Around 41% of respondents had a cash balance of less than USD 500 million, while 19% had a cash balance of more than USD 5 billion," adding, "Stable NAV money market funds and bank obligations are the most permissible investments, followed by U.S. Treasuries, floating NAV money market funds and (among Asia Pacific participants only) structured deposits/wealth management products."
JPMAM writes, "Firms in the Americas are significantly more likely to permit more investment instruments than European and Asia Pacific companies. These include stable/constant/low volatility NAV money market funds, commercial paper, asset-backed commercial paper, traditional repurchase agreements, corporate debt securities, variable-rate demand notes, asset backed securities, mortgage-backed securities and municipal notes."
They tell us, "The percentage of cash allocated to stable/constant/low volatility NAV money market funds is highest in Europe (57%) and lowest in Asia Pacific (30%). However, many clients in Asia Pacific (30%) indicated in 2019 that they will be adding stable/constant/low volatility/ floating MMFs to their portfolios. Investment in structured deposits is also expected to increase in Asia Pacific."
According to the results, total cash allocation breaks down as follows: Stable/constant/low volatility NAV money market funds (45%); Floating NAV money market funds (7%); Wealth management products (Asia Pacific participants only) (2%); U.S. Treasuries (6%); U.S. government agencies (2%); Bank obligations (22%); Commercial paper (3%); Corporate debt securities (4%); Structured deposits (5%) and; All others (4%). The survey also found, "Treasury management systems (TMS) are used by 61% of respondents, with 19% using in-house resources.... Of the 209 using a TMS solution, 68% found the benefit of integrating MMF investments into it medium to high."
The survey adds, "Nearly a fifth of all respondents currently factor ESG into their investment decisions, with another 25% planning to do so within two-years.... Few firms are currently investing in ultra-short fixed income ETFs, mainly due to restrictive investment policy statements; more than 80% of those surveyed said they were unlikely to consider, or were not considering, doing so.... Performance/risk-adjusted returns, investment expertise and insights and firm relationships remain the top factors influencing the choice of an asset manager, consistent with results in previous years across regions and cash balances."
Finally, it concludes, "As our survey reveals, rising political risk tops the list of investment challenges, with respondents grappling with U.S.-China trade tension and concerned about Brexit. They are increasingly turning toward sustainable, socially responsible investing using ESG criteria to select investments. At a time of global change and evolving macroeconomics and financial markets, the demand for money market funds remains strong -- MMFs remain the most permissible security within investment policies."
As the Federal Reserve Board of Governors meets and prepares to cut short-term interest rates a third time, yields on money market funds, bank deposits and brokerage sweeps continue to inch lower. (They should drop again following an expected Fed cut Wednesday.) The highest-yielding money market funds, which rose above the 2.0% level about a year ago, are now almost all below 2.0% once again. As of 10/28, just one money fund on CraneData.com's Highest-Yielding Money Funds table (which excludes internal or restricted funds), DWS ESG Liquidity Fund Cap, yields over 2.0%. Only a handful of "fin-tech" and internet banks are still paying over 2.0% currently, but these should all be gone by next week. The average money fund, as measured by our Crane 100 Money Fund Index, is yielding 1.68% as of Oct. 29, down from 1.80% a month ago and down from 2.08% at the start of the year.
Brokerage sweep rates inched lower in the latest week as Wells Fargo cut rates. Wells dropped its rate for a number of tiers (including the $100K) from 0.16% to 0.10%. Our Crane Brokerage Sweep Index inched down to 0.19% from 0.20% in the week ended October 25 for balances of $100K. TD Ameritrade has the lowest rates for balances at this level (0.04%) while Fidelity continues to have the highest rates (0.94%). E*Trade, Merrill and Morgan Stanley are all paying 0.05%, Ameriprise, Schwab and UBS and now Wells Fargo are paying 0.10%, Raymond James is paying 0.15%, and RW Baird is paying 0.45% for balances of $100K.
Bankrate.com recently wrote about sweep accounts in, "With commission-free trading nearly everywhere, here's what investors should demand now." They tell us, "Fidelity Investments took a few days to fire its shot in the price war ... and ... said that it would 'automatically direct retail investors' cash into higher yielding alternatives available for new brokerage and retirement accounts.... The sweep account could be a new battlefront, and investors should keep an eye on this area to see who might be helping or shortchanging them as a way to make up lost trading revenue."
Financial Planning also writes about sweep in its article, "3 retail broker titans went commission free. Here's what happens next." They tell us, "With the Fed cutting interest rates twice this year, and the 10-year Treasury yield edging toward an all-time low, brokerages scratched commission revenue 'precisely when the markets look least robust,' Michael Pizzi, CEO of E-Trade, said on the company's earnings call."
The article adds, "[TD Ameritrade] may also look to cash interest to boost its bottom line, albeit in the future. Hockey says the company will be able to renegotiate its bank deposit pricing in 2021 with TD Bank, which currently owns 43% of TD Ameritrade. That new arrangement would become effective in 2023.... Cash sweeps may also help E-Trade's bottom line, according to CFO Chad Turner. At the end of this year, the company will have the option to sweep its premium savings deposits to third-party institutions. Turner adds, 'As of the end of the quarter, we have almost $12 billion of sweep deposits that are off balance sheet.'"
In other news, a press release entitled, "360T and ICD Drive Treasury Efficiency Through Deep Integration" tells us, "ICD and 360T have deepened the integration of their respective trading applications, allowing mutual clients to seamlessly leverage both platforms and unlock over 300 money market funds (MMFs), time deposits from nearly 300 banks, short-duration bond funds, FX and more. Through the enhanced end-to end workflow, practitioners can utilize a simple and highly-automated experience, designed to offer greater insight into their investments, cash positions, consolidated reporting and exposure analytics at no additional cost."
Fiona Seifferer, COO Americas at 360T, comments, "The deep integration with ICD was designed in partnership with clients in an effort to save time, improve security and to offer better visibility through consolidated reporting." The release adds, "In addition to broader access to short-term investment and FX products, clients receive exceptional service from both 360T and ICD, ensuring they maximize the benefits of the integrated offering."
Tory Hazard, ICD's CEO explains, "ICD's mission is to provide a superior product to the corporate treasury marketplace. With the enhanced integration through our single-sign-on and data flow into our award-winning Transparency Plus, clients now have a complete picture of their entire investment portfolio and underlying exposures."
Finally, Crane Data published its Weekly Money Fund Portfolio Holdings statistics and summary yesterday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection. The latest cut (with data as of Oct. 25) includes Holdings information from 84 money funds (up 15 from a week ago), which represent $1.973 trillion (up from $1.465 trillion) of the $3.885 trillion (50.8%) in total money fund assets tracked by Crane Data.
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $690.7 billion (up from $520.8 billion a week ago), or 35.0%, Treasury debt totaling $621.5 billion (up from $448.9 billion) or 31.5%, and Government Agency securities totaling $365.7 billion (up from $297.6 billion), or 18.5%. Commercial Paper (CP) totaled $99.0 billion (up from $71.6 billion), or 5.0%, and Certificates of Deposit (CDs) totaled $96.7 billion (up from $75.5 billion), or 4.9%. A total of $58.3 billion or 3.0%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $41.1 billion, or 2.1%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $621.5 billion (31.5% of total holdings), Federal Home Loan Bank with $266.2B (13.5%), Fixed Income Clearing Co with $110.6B (5.6%), BNP Paribas with $78.3 billion (4.0%), Federal Farm Credit Bank with $55.4B (2.8%), JP Morgan with $42.2B (2.1%), RBC with $40.6B (2.1%), Wells Fargo with $38.8B (2.0%), Societe Generale with $35.5B (1.8%) and Federal Home Loan Mortgage Co with $34.8B (1.8%).
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($161.0), Fidelity Inv MM: Govt Port ($138.2B), Goldman Sachs FS Govt ($105.0B), BlackRock Lq FedFund ($105.0B), Federated Govt Oblg ($98.4B), Wells Fargo Govt MMkt ($84.2B), BlackRock Lq T-Fund ($79.0B), Fidelity Inv MM: MMkt Port ($71.3B), JP Morgan 100% US Trs MMkt ($68.6B) and Morgan Stanley Inst Liq Govt ($62.4B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
Strategic Treasurer's latest "Treasury Update Podcast," entitled, "Seismic Shifts in Corporate Treasury: Focus on Investments," features Morgan Stanley Investment Management's Rick Wilkinson and Fred McMullen. The pair discuss online money market fund trading portals in detail, and also address a number of other recent technology topics. Wilkinson says, "Let's look at the portal landscape first. That was one of the first technologies that was introduced that really helped the corporate treasurer in their day to day activities. It allowed them to go to one spot to place all of their investments instead of having to go to each of the fund families independently."
He explains, "Traditionally, portals were run by banks or independent technology companies and weren't really run by asset managers. Now, you also have portals that over time, their functionality has been greatly enhanced. There's a lot of analytics that are available in portals today and other enhancements have come down the line.... What I think the portal companies have done well over time, is respond to market events and respond to client demand.... A lot of the functionalities delivered by these portals have been in response to market events."
Wilkinson continues, "Investment managers have started to aggressively enter the portal space, either building in-house technology to offer portals or by acquiring technology companies or portal companies. You also look at the TMS [treasury management system] providers, and they're starting to offer ... investment functionality, by partnering with portal providers. We've seen several deals over the last year or two where money market fund portals and TMS providers are now working together to deliver investment functionality, directly within the TMS itself. And then, there are other portal providers out there that are starting to develop TMS-like functionality within their portal to enhance their offering."
Why are these changes happening? He answers, "One, it's competition. There are more and more portals out there ... so the competition to drive assets to portals is increasing. Also, ... corporate treasurers are continuously asked to do more with less. The technology providers and asset managers are trying to gain market share by providing solutions that will make the corporate treasurer's job easier.... From the asset manager side, as fee pressure continues to increase, investment managers are looking for new ways to reduce expenses and attract new AUM and increase revenue."
On the future, Wilkinson says, "I think that you will continue to see developments, especially from the asset manager side, where asset managers are continually going to try to increase their presence in the space. I think you're going to see the independent portals, or larger independent portals react like they have so far, and continue to try to keep the market share they've traditionally had. You also have the banks.... It's going to be hard to take those clients away from the banks. You might see some consolidation, but you're definitely going see competition continue to increase in the space over the next several years."
MSIM's McMullen was asked about AI [artificial intelligence]. He comments, "The idea here is that it can really help companies -- whether they're industrial companies or financial services companies, banks, you name it -- change their operating models to deliver enhanced value.... The concern is: 'Is this more about augmenting the intelligence of the work force or is this about replacing?' And there's going to be some displacement, of course. But I think this is much more about augmenting. And you could see just numerous examples of this, you know, across, again, industrial and financial businesses."
McMullen continues, "In industries like financial services ... and functions like Treasury, I think the real focus is on data. Data harnessing technologies are changing how organizations obviously collect, analyze and act on information. And that's very real. We see that in our businesses across the board. We're focused on what technologies can be applied to risk management.... Specific to investment management, you're trying to improve the risk return profile of your investments, create alpha, minimize credit risk in the liquidity space.... Can we use, are we using AI to optimize liquidity, making sure there's enough liquidity in the portfolios to meet clients' needs but not having too much so that it's a drag on the return of the portfolio? That's where things like AI are coming more and more into play."
He also comments, "Right now, you see what's happening in the payment side of the world. When you want to pay something or move money, how instantaneous you can do that? On the institutional side, through the SWIFT system, the Fedwire system, you cannot move money instantaneously, 24 hours a day, around the globe. I wouldn't say it's a clunky process, but it is not an instantaneous, seamless process. But that is going to change over time with these technological developments.... I don't think it's at a tipping point in terms of financial services and in terms of service groups like Treasury management functions."
McMullen tells us, "As we travel around the country and we talk about some of these themes and trends in some of the groups, it's a very mixed bag because in some of the groups we deal with, they are incorporating advanced Treasury technology, installing Treasury workstations and trying to achieve that automation and efficiency that we all want to achieve. And then there's a lot of folks we deal with that are very concerned about that.... You'll have someone ask, 'Well, why would I ever want that? Because that's what I do.' So, there is a fear factor."
He adds, "I think you've got to start ... by convincing people that the benefits of freeing up time and resources to work on more value-added initiatives. What can you do if you have better cash flow forecasting? What can you free your time up to do? Are there other areas of the business you can automate or make more efficient? And I think it's that mindset that has to happen.... Most of the clients we deal with transact using a portal in some way, shape or form. They don't necessarily have their arms there. Their main function is not investments. It's not understanding portals. Their main function is managing treasury."
Finally, Wilkinson comments, "There definitely is some noise. I think it's important when we talk to clients ... to educate them on what's out there. But also be upfront with them about the technology and how it's evolving. If you want to get in at the forefront, some of this technology might not be as seamless as it will be in a couple years. Do you want to invest in that right away, or do you want to see how it plays out? It's very important for clients to talk with their investment managers, talk to their portal providers and ask them what they are doing, what they're seeing in the space, what technology they're utilizing and what's coming down the pipe. And then also talk to their peers to find out what they're using, how they implement some of this and if it's been successful for them."
Federated Investors, the 5th largest manager of money funds, reported 3rd quarter earnings last week and hosted its quarterly earnings call Friday. The company, which generates over 40% of its revenue from money funds, discussed recent money market fund trends, and compared money funds to recent bank deposit and ultra-short ETF flows. (See the press release, "Federated Investors, Inc. Reports Third Quarter 2019 Earnings" and see the Q3 Earnings Call Transcript on Seeking Alpha here.) J. Christopher Donahue, president and chief executive officer, commented in the earnings release, "As the Federal Reserve cut rates twice in the quarter, investors sought Federated's range of ultrashort products and other fixed income strategies, and our liquidity management solutions approached record highs."
On the call, Donahue stated, "Now we turn to money markets. These assets increased about $26 billion in Q3 [to $359.3 billion, $261.2 billion of which were money funds]. We saw positive money market fund flows from a variety of institutional and intermediary clients during the third quarter. Money market strategies continue to have a significant yield advantage compared to average deposit rates. With recent Fed rate cuts, money fund yields also compare favorably to ... direct market rates and to longer duration securities given the relatively flat yield curve. Our money market fund market share including sub advised funds at the end of the third quarter increased to just over 8.4%, up from about 8.1% for the prior quarter and 7.3% for the third quarter of 2018."
CFO Tom Donahue explained, "Total revenue was up about $19 million or 6% from the prior quarter due mainly to $13.6 million of higher money market revenue, primarily from higher average money market assets. And $3.9 million of higher revenue from an additional day in Q3. Performance fees of $1.4 million were recorded in Q3, no performance fees were recorded in Q2. Revenue was up about $32 million or 10% compared to Q3 of last year due mainly to higher money market revenue of $37 million, partially offset by decrease in revenue of $1.7 million related to lower average equity assets."
During the earnings call Q&A, one analyst asked about zero commissions at brokerages and ETFs. Donahue responded, "It strikes us that big large customers such as we have on the cash side are not influenced one way or the other by a $4.95 charge, whether it's there or not. The next point would be that our customers overwhelmingly are looking for daily liquidity at par. And we are simply not aware from our customer base of that kind of a dynamic occurring where the cash that they have with us would be susceptible to moving into a variable asset value ETF. Also note that those ETFs are pricey, they're 100 bucks or 50 bucks which is really setting the stage for allowing a change from the NAV based on bid-ask spreads. And don't forget the trading differences in how those ETFs work ... they [act] more like stocks [with] T+2 [settlement]. `Our customers are more interested in current use and capability of getting their money. So basically I would say that not all pontifications apply to all clients and we haven't seen that dynamic."
Cunningham discussed recent flows on the call, stating, "We continue to see demand across all three categories of our products; this includes Governments, Primes and Munis. On an actual basis, Government probably garnered the most, just given their larger size. But on a percentage basis, primes and munis actually out [performed] the government sector. Having said that, we -- the shareholders in all of these products -- benefited from the volatility in the repo rates during the mid-September time period, and to some degree continuing ... into the fourth quarter, although in a much, much more muted basis."
She explained, "It [the repo spike] certainly was not reflective of any type of credit event, so they were pretty easy conversations to be having with our shareholders who were questioning what, in fact what was happening in the marketplace. What it basically came down to was a supply and demand mismatch, with some regulatory overlay and maybe some operational glitches from the Fed themselves at least initially.... So those are pretty easy stories to have or information to give to underlying shareholders. And the comfortability I think increased to their participation in the marketplace at that point then."
Donahue commented on gaining assets, "You must have the investment performance. You must have the distribution side. You've got to have the products right at the right time. And the way this business has worked on all of those, they don't all work in sync all the time. You don't win every game. And I don't think there's anything missing. There's just the constant effort of doing the blocking and tackling necessary to win.... One other thing I would say that makes us unique is the power of the money funds. Don't forget when we went public in 1998, you were there Bill [Katz]. Our phraseology was a franchise for all seasons. And so these money funds really count in terms of producing revenues and net income at times when other things aren't firing on all cylinders. And therefore, you can keep the other aspects of the business going very strongly. And this is worked out very well for the long haul."
When asked about fee pressures, Donahue answered, "Well, over the long haul perhaps our experience in money market funds is somewhat indicative. Back in the 70s they were differently priced than they are today. And there were always efforts to lower the prices over ... many decades. And our job is to continue to produce the performance [on] the underlying product, tell a story and maintain the efficacy of the business. And in the end, the clients are willing to pay for performance and clients ... the underlying client or the intermediary client ... want to be able to select the best of the best for these types of efforts.... You can always assume in this business that there is always pricing pressure. It is just part of life."
Discussing money funds vs. bank deposits, Cunningham said, "From a bank product perspective, certainly whether you're looking at the institutional side of the market or the retail side of the market makes a difference. But in either case, the money funds, the managed products ... continue to provide a pretty substantial spread versus those direct products in the marketplace, something on the order of 100 to 150 basis points on the retail and probably still something on the order of 15 to 20 bps maybe even larger on the institutional side depending upon the size of the institution."
She also explained, "As for the lag in the marketplace in a declining rate environment, essentially what we have seen initially was a slightly inverted money market yield curve that turned into a fairly flat money market yield curve. That is now back to a positive money market yield curve, which is reflective of both expectations from the Fed's movement in the future, as well as some of the supply and demand dynamics especially in the Treasury market. With more steepening of the yield curve, [we have] the ability we as liquidity managers to purchase ... higher yielding securities out in the 6 to 12 month areas."
Cunningham also said, "I would expect that we will continue to be able to maintain some of the yield in the portfolios, not necessarily entirely reflecting each move that the Fed might make. That's basically what we've seen with that sort of inversion to flattening to slight steepening now that's already occurred.... The 25 basis points probably haven't played out and potentially won't if that type of a yield curve configuration is maintained."
When asked again about disruption by short-term ETFs, Donahue answered, "So I already commented on the potential of ETF disrupting money market funds, which we simply don't see because customers that we deal with want daily liquidity at par. So I'm not going to go through that catalog. I would ask Debbie if she has comments on that."
Cunningham responded, "Well, I mean we certainly have reviewed the competitors in the marketplace that have ETF products. Like many other types of short-term products [including] ultra short funds, they have gathered assets in the ... slightly declining rate environment that we've been in. However, not [to] the same degree [as the] money market fund industry.... So I think to some degree as we go south of 2% on short term rates, the low rate environment will [stay] above zero. But still lower rates cause people to maybe want to look at their cash balances as to what buckets they need to be in -- those are absolutely necessary for daily activity versus those that maybe might be drawn on 6 to 12 months from now. Potentially there you get some stratification as to how your cash is invested, but at this point we're not even really seeing any kind of impediments from an ETF perspective in that regard."
Finally, Donahue added, "Now I think the second part of your question related to the future of cash. I have a lot of confidence that the Fed will protect its province [from] crypto currencies and wants to run the show as they have indicated that they will do. This does not mean that we are not exploring working on all sorts of ideas about the future of cash, of which I'm not going to get into much detail on. But ... I can assure you that things like 7-by-24, round the globe and things like that are being investigated by many in this field. And we will be in the forefront of that as it evolves."
Money fund providers and corporate cash managers gathered in Boston earlier this week for AFP 2019, the Association for Financial Professionals' Annual Conference. Perennial topics like safety, liquidity and yield, along with recent market events, were discussed, as well as a new dose of technology, portals and ESG. We briefly quote from a couple of the sessions below, and we also review the latest money fund asset totals.
During the session, "Beyond Trading: Exploring Portal Capabilities," hosted by Tom Knight of Institutional Cash Distributors (ICD), Mark Sahler of Jeffries commented, "Obviously, being in treasury, some of the needs that we have are being able to preserve liquidity and to have a nimble way to move cash from money funds, FX investments and to create an opportunity for us to move money without the use of banks and borrowing."
He explained, "[With] cash optimization, there are a lot of opportunities. We don't just use the money fund portal; we invest in very large FX funds. I invest in securities, ... Treasury funds, money funds, Prime.... Being an investment bank, we need to mobilize cash properly on a more daily basis than some other firms. We can buy large pools of securities that would require us to come in and out.... We use the money fund portal primarily to obtain those objectives. I have larger balances in money funds than a lot of corporates have for that reason -- because it's just easier."
On portals, Sahler added, "From a risk management perspective, you can see across your pools of investments. You can see what your potential risk is, what your asset risk is and your concentrations in a lot of different sectors.... We can get into and out of 20 or 30 funds in a pretty easy way using the money fund portal. The other thing about the coordination.... Stability is key, and liquidity.... You really need to get to the cash in a quick way. You need to take a more offensive approach to portfolio liquidity."
Another panelist, Matthew Post of Qualcomm told the audience, "On the money fund side, we do have offshore US dollar funds, we use both prime and government domestic 2a-7 funds.... Offshore ... China, for example, has a lot of our short term liquidity, so we usually stagger between having bank deposits and having money funds for our short-term investments.... We have currently about $10-or-12 billion in cash and cash equivalents. I'd say about two-thirds of that is in money market funds."
He continued, "We want to make sure we have large funds so that we can carry larger positions and not have to worry about liquidity. We have a limit of 5 percent maximum in aggregate.... We do have quite a lot of money funds that we have invested in across the space ... at least a dozen or so.... That way we have diversified funds."
Another session, "Drowning in Liquidity But Still Thirsty: How Much is Too Much?," was run by Garret Sloan of Wells Fargo Securities. In it, Bethany Glassbrenner of American Eagle Outfitters explained why corporates were holding 50% of their cash in bank deposits during the zero yield era. She said, "That's when the market rates were starting to compress. There wasn't a lot of yield to be had ... we were kind of hovering in that zero-interest rate environment. So, the banks were offering ECR, and that was the best you could get. If you were comfortable with your banks and ECR was the only opportunity for any yield, then ECR was a great opportunity ... with the unlimited deposit insurance."
She added, "If you're comparing apples to apples, I could be in a safe bank deposit or a safe government fund.... I say 10 to 15 basis points is my is my threshold of chasing. If it's not more than 10 basis points, I'm just going to stay liquid because our businesses are uncertain and we don’t know what's coming around the corner. I'd rather just stay liquid and, at a comparable deal, than get tied up in a time deposit or something.... The juice has to be worth the squeeze."
In other news, money fund assets increased again this week after a dip last week; they've risen 10 weeks out of the past 12, and 24 weeks out of the past 27. ICI's latest "Money Market Fund Assets" report shows that MMF totals have increased by $438 billion, or 14.4%, year-to-date. Over the past 52 weeks, ICI's money fund asset series has increased by $604 billion, or 21.0%, with Retail MMFs rising by $253 billion (23.3%) and Inst MMFs rising by $351 billion (19.5%).
ICI writes, "Total money market fund assets increased by $17.55 billion to $3.49 trillion for the week ended Wednesday, October 23, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $12.38 billion and prime funds increased by $5.80 billion. Tax-exempt money market funds increased by $633 million." ICI's weekly series shows Institutional MMFs rising $11.7 billion and Retail MMFs increasing $5.8 billion. Total Government MMF assets, including Treasury funds, were $2.599 trillion (74.6% of all money funds), while Total Prime MMFs were $748.6 billion (21.5%). Tax Exempt MMFs totaled $138.1 billion, 4.0%.
They explain, "Assets of retail money market funds increased by $5.81 billion to $1.34 trillion. Among retail funds, government money market fund assets increased by $1.90 billion to $765.18 billion, prime money market fund assets increased by $4.10 billion to $446.84 billion, and tax-exempt fund assets decreased by $188 million to $125.71 billion." Retail assets account for over a third of total assets, or 38.4%, and Government Retail assets make up 57.2% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $11.74 billion to $2.15 trillion. Among institutional funds, government money market fund assets increased by $10.48 billion to $1.83 trillion, prime money market fund assets increased by $1.70 billion to $301.78 billion, and tax-exempt fund assets decreased by $446 million to $12.36 billion." Institutional assets accounted for 61.6% of all MMF assets, with Government Institutional assets making up 85.4% of all Institutional MMF totals.
Earlier this month, assets tracked by Crane Data's Money Fund Intelligence Daily broke the $3.8 trillion level for the first time ever. Month-to-date through October 23, assets tracked by our MFID have increased by $53.1 billion to $3.812 trillion. In October so far, the Crane Institutional MF Index has increased by $26.6 billion to $2.527 trillion, while the Crane Retail MF Index has risen $24.1 billion to $1.144 trillion. Prime MMFs have increased by $30.5 billion to $1.062 trillion while Govt (including Treasury) MMFs have grown by $20.1 billion to $2.610 trillion.
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary yesterday, which confirmed that total money fund assets jumped again last month, rising by $82.9 billion in September to $3.850 trillion. It was the 15th straight month of gains for money funds overall. Prime MMFs increased $11.7 billion in September to close at $1.063 trillion, their highest level since July 2016, while Govt & Treasury funds rose by $72.9 billion to a record $2.647 trillion. Tax Exempt funds fell by $1.7 billion to $139.1 billion. Yields fell again for Prime MMFs and Govt MMFs in September, while Tax Exempt yields rose. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below.
Last month's big asset gains follow increases of $76.3 billion in August, $75.6 billion in July, $41.9 billion in June, $78.2 billion in May, $690 million in April, $87.9 billion in March, $76.9 billion in February and $31.4 billion in January. (Our MFI Daily product shows money fund assets up by another $53.0 billion in October through 10/22.) Over the 12 months through 9/30/19, total MMF assets have increased $693.8 billion, or 22.0%, according the SEC's series. (Note that the SEC's series includes a number of internal money funds not reported to ICI or others, though Crane Data tracks most of these.)
Of the $3.850 trillion in assets, $1.063 trillion was in Prime funds, which rose $11.7 billion in September after increasing $10.6 billion in August, $22.3 billion in July, $9.6 billion in June and $8.9 billion in May. Prime funds represented 27.6% of total assets at the end of September. They've increased by a stunning $316.7 billion, or 42.4%, over the past 12 months. Government & Treasury funds totaled $2.647 trillion, or 68.8% of assets. They rose $72.9 billion in September, $66.0 billion in August, $53.5 billion in July, $31.8 billion in June and $67.3 billion in May. Govt & Treas MMFs are up $373.0 billion over 12 months, or 16.4%. Tax Exempt Funds decreased $1.8B to $139.0 billion, or 3.6% of all assets. The number of money funds was 369 in September, down one from the previous month and down 14 funds from a year earlier.
Yields for Taxable MMFs were lower in September for the 7th month in a row. This year's declines follow 24 months of (almost straight) increases. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on Sept. 30 was 2.13%, down 13 basis points from the previous month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 2.18%, down 12 basis points. Gross yields fell to 2.03% for Government Funds, down 15 bps from last month. Gross yields for Treasury Funds decreased 11 basis point to 2.03%. Gross Yields for Muni Institutional MMFs rose from 1.42% in August to 1.58%. Gross Yields for Muni Retail funds rose from 1.42% to 1.56% in September.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 2.05%, down 13 bps from the previous month and the same as 7/31/18. The Average Net Yield for Prime Retail Funds was 1.92%, down 13 bps from the previous month an down 0.01% since 7/31/18. Net yields fell to 1.76% for Government Funds, down 15 bps from last month. Net yields for Treasury Funds decreased 11 basis point to 1.80%. Net Yields for Muni Institutional MMFs rose from 1.30% in August to 1.45%. Net Yields for Muni Retail funds rose from 1.15% to 1.28% in September. (Note: These averages are asset-weighted.)
WALs and WAMs were predominately up in September, with only Prime Institutional funds falling in WAM and Treasury falling in WAL. The average Weighted Average Life, or WAL, was 32.1 days (up 0.6 days from last month) for Prime Institutional funds, and 72.8 days for Prime Retail funds (up 5.9 days). Government fund WALs averaged 98.1 days (up 1.1 days) while Treasury fund WALs averaged 95.2 days (day 1.8 days). Muni Institutional fund WALs were 16.2 days (up 2.2 days), and Muni Retail MMF WALs averaged 38.5 days (up 1.3 days).
The Weighted Average Maturity, or WAM, was 31.0 days (down 1.6 days from the previous month) for Prime Institutional funds, 40.7 days (up 4.0 days from the previous month) for Prime Retail funds, 29.8 days (up 2.2 days) for Government funds, and 36.9 days (up 0.8 days) for Treasury funds. Muni Inst WAMs were up 2.1 days to 15.9 days, while Muni Retail WAMs increased by 1.2 days to 35.9 days.
Total Daily Liquid Assets for Prime Institutional funds were 37.6% in September (down by 1.7% from the previous month), and DLA for Prime Retail funds was 25.5% (up 0.8% from previous month) as a percent of total assets. The average DLA was 46.6% for Govt MMFs and 91.3% for Treasury MMFs. Total Weekly Liquid Assets was 53.8% (down 0.7% from the previous month) for Prime Institutional MMFs, and 41.9% (down 0.6% from the previous month) for Prime Retail funds. Average WLA was 71.9% for Govt MMFs and 98.2% for Treasury MMFs.
In the SEC's "Prime MMF Holdings of Bank-Related Securities by Country table for September 2019," the largest entries included: Canada with $158.4 billion, the U.S. with $132.8 billion, Japan with $105.1 billion, France with $75.2B, Germany with $56.0B, Australia/New Zealand with $44.7B, the UK with $38.8B, the Netherlands with $37.4B and Switzerland with $21.4B. The biggest gainers among the "Prime MMF Holdings by Country" include: Canada (up $13.6B), the US (up $6.3B), Germany (up $2.5B), the Netherlands (up $2.1B), Australia/New Zealand (up $1.2B) and Japan (up $0.8B). The biggest decreases were France (down $15.3B), the UK (down $7.0B) and Switzerland (down $2.8B).
The SEC's "Trend in Prime MMF Holdings of Bank-Related Securities by Major Region" table shows Europe had $287.8B (down $21.3B from last month), the Eurozone subset had $178.4B (down $11.3B). The Americas had $291.8 billion (up $19.8B), while Asia Pacific had $175.8B (up $3.5B).
The "Prime MMF Portfolio Composition" chart shows that of the $1.063 trillion in Prime MMF Portfolios as of September 30, $316.3B (29.8%) was in CDs and Time Deposits (down from $333.3B), $326.3B (30.7%) was in Government & Treasury securities (direct and repo) (up from $310.1B), $141.7B (13.3%) was held in Non-Financial CP and Other securities (up from $139.9B), $226.7B (21.3%) was in Financial Company CP (up from $213.5B) and $63.5B (6.0%) was in ABCP (down from $63.8B).
The SEC's "Government and Treasury MMFs Bank Repo Counterparties by Country" table shows the U.S. with $237.2 billion, Canada with $167.0 billion, France with $196.7 billion, Germany with $22.2 billion, Japan with $136.4 billion, the U.K. with $88.5 billion and Other with $36.6 billion. All MMF Repo with the Federal Reserve fell by $5.0 billion in September to $7.1 billion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs with 9.5%, Prime Retail MMFs with 9.2%, Muni Inst MMFs with 2.2%, Muni Retail MMFs with 8.7%, Govt MMFs with 17.8% and Treasury MMFs with 15.8%.
Brokerage sweep rates inched lower in the latest week as Ameriprise, Schwab and UBS all cut rates on their $100K to under $250K middle tier. (The previous week Morgan Stanley Smith Barney and UBS cut rates on this tier.) Our Crane Brokerage Sweep Index inched down to 0.20% from 0.21% in the week ended October 18 for balances of $100K. TD Ameritrade has the lowest rates for balances at this level (0.04%) while Fidelity continues to have the highest rates (0.94%). E*Trade, Merrill and Morgan Stanley are all paying 0.05%, Ameriprise, Schwab and UBS are paying 0.10%, Raymond James is paying 0.15%, and Wells Fargo is paying 0.16% for balances of $100K.
The Wall Street Journal wrote last week on Charles Schwab's Q3 earnings in the article, "Schwab Profit Rises to Record As Cash gain Offsets Rate Cuts." It says, "Charles Schwab Corp. reported record third-quarter earnings that topped expectations, as growing cash balances helped the e-broker offset the impact of falling interest rates.... The Federal Reserve cut rates twice during the period, pinching revenue at banks that profit from lending and investing client cash."
The article continues, "Schwab and other e-brokers make a significant portion of their profits by sweeping cash daily from customers' brokerage accounts into the firms' banking arms. For Schwab, net internet revenue made up 60% of overall revenue during the September quarter." It adds, "One such lever is in rising cash balances, which help make up for less lucrative yields on investments and loans during the quarter. Prompted by growing concerns over the economic outlook, clients moved a bigger share of their portfolios to cash. As a percentage of total client assets, cash rose to 11.4% - the highest since February – as customers pared equity holdings."
Schwab CFO Peter Crawford commented in the earnings release, "Our continued success with clients and full-service model enabled us to deliver third quarter revenues of $2.7 billion, up 5% year-over-year. Net interest revenue rose 7% from a year ago to $1.6 billion, largely a result of generally higher investment yields and higher client cash allocations. Growing client balances in purchased money market funds, advisory solutions, and other third-party mutual funds and ETFs pushed asset management and administration fees to $825 million, increasing 2% year-over-year."
In addition to Schwab's money fund flows, TD Ameritrade recently began featuring money market funds on its website. A notice says, "Now It's Easier to Find Competitive Money Market Funds. You can view funds with no transaction or short-term redemption fees." It explains, "If you're looking for cash management solutions for either short- or long-term strategies, money market funds are one alternative. We recently updated our money market funds page to include only no-load funds with no transaction fees and no short-term redemption fees. You can sort the list by 7-day yield."
In other news, the Financial Times writes, "Money market fund managers bet on a surge in demand for ESG products. The article tell us, "After outsized growth through the first half of 2019, fund managers are expanding their suites of money market funds that incorporate environmental, social and governance factors into their investment decisions. Europe has led the way in this expansion."
The FT says, "In early October, DWS relaunched two existing short duration Europe, Middle East and Africa (Emea) fixed income funds as money market funds with an ESG label, and announced plans to add the ESG moniker to a third fund next year. And in August, BlackRock launched a series of European money market funds that only invest in securities that meet certain ESG criteria.... ESG money market funds saw their assets under management grow 15 per cent to $52bn during the first half of 2019, according to research from Fitch Ratings."
It explains, "Nonetheless, the funds' name change at DWS does not mean their portfolios are changing. 'No changes ... were necessary as the ESG quality was already high in DWS money market funds,' the firm said in a statement. Mr Carstens, however, dismisses any suggestion that this indicates the standards for labelling an ESG fund are too loose. Instead, he points out that DWS has been moving to incorporate ESG for a while, and the funds' management team has had a long lead time to shift these portfolios."
The FT continues, "This process at DWS is an example of what Fitch describes as a shift from 'implicit' consideration of ESG to an 'explicit' consideration. Money market funds have always utilised ESG principles because their 'core investment objectives ... are principal preservation and the provision of timely liquidity,' the rating agency writes. However, recently money funds have begun looking at these factors more proactively."
It adds, "Still, some industry observers are not convinced that the ESG trend is more than what Peter Crane of Crane Data, who tracks money market funds, has previously described as more like a 'fad'. He noted that some of the larger players in the market, like Fidelity, had yet to make a move."
For more on ESG Money Market Funds, see these Crane Data News stories, "Morgan Stanley Latest to Convert MMF to ESG; New DWS European ESG (10/17/19), MFI Intl: European Money Fund Assets Surge Too; BlackRock LEAF; EMFS (8/15/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19), Money Fund Assets Up 13th Week Straight; Fitch on ESG in Money Funds (7/19/19), SSGA Goes Live with ESG Money Market Fund; Fitch on Prime MF Flows (7/3/19) and Cap Advisors Group Demystifies ESG Investing; Weekly Portfolio Holdings (6/19/19).
A press release entitled, "J.P. Morgan Launches New Liquidity Management Platform, Morgan Money," tells us, "J.P. Morgan Asset Management ... announced the launch of Morgan Money, a new institutional investing platform to replace the firm's existing Global Cash Portal. The platform delivers a real-time dashboard to invest, a single access point for operations, and enhanced risk management controls." Paula Stibbe, Global Head of Liquidity Sales, comments, "Morgan Money is designed to deliver a seamless customer experience, centered on operational efficiency, end-to-end system integration, and effective controls. The platform was designed for clients, by clients – embedding their needs and priorities into its core capabilities and functionality."
The release says, "Three key features of the Morgan Money platform include: A real-time dashboard to invest with ease -- Quickly access information including trade entries and transaction processing [and] Access to more than 80 short-term investment solutions by JPMAM and other leading investment management firms; One access point for operational efficiency -- Historical reporting and audit trail [and] Flexible Integration Services and other related solutions; Effective controls through active risk management -- Automated compliance monitoring, Multiple levels of optional authentication, [and the] Ability to analyze a portfolio and potential investments with risk analytics."
Paul Przybylski, Head of Product Strategy and Development, adds, "The launch of Morgan Money further demonstrates our commitment to partnering with clients to develop tools that enable them to build stronger liquidity strategies. Technology is ever-changing and we are committed to creating transformative digital capabilities that deliver meaningful client outcomes today and into the future." To learn more about Morgan Money, please visit www.jpmorgan.com/morganmoney.
In a related Q&A, when asked about the difference JPMAM tells us, "Morgan Money has been built on [the] latest core infrastructure utilizing [the] latest available technology.... The platform resides on brand new hardware and is designed to be migrated to our Cloud platform in 2020. The new platform offers a clean, modern look and feel that provide a much more intuitive experience than its predecessor, Global Cash Portal."
They state, "From a functionality perspective, Morgan Money has a brand new risk analytics and reporting platform designed to provide granular detail for our clients' global portfolios. Lastly, and most importantly, Morgan Money is an open architecture platform providing access to the industry's top money market fund providers globally."
JPMAM also comments, "We at J.P. Morgan, from a firm wide perspective, have mantra 'mobile first, digital everything' as the industry continues to evolve and change. To that point, we continue to stay innovative and strive to provide our clients with best experiences as the shift to digital distribution continues to shape our global liquidity industry as a whole."
They also tell us, "Uncertainty around the global economy and equity markets continue to drive market volatility, which has increased the demand for cash and ultra-short duration products across the industry. J.P. Morgan Asset Management continues to be a market leader in the space. Demand continues to grow as investors seek to pull money onto the side lines, and move down the curve in search of the most return per unit of risk."
Finally, they comment, "Being able to provide a broad range of financial services continues to be a key to our success and one of the main reasons we build strong relationships with our clients. We have a vested interest in seeing our clients succeed, partnering with them across all aspects of their business, and protecting their business and retirement investments, and we take those responsibilities seriously."
The news was originally reported by mutual fund industry publication FundFire, who published the article, "JP Morgan Targets Inst'l Investors with New Cash Mgmt Platform." They wrote, "J.P. Morgan Asset Management is rolling out a new cash management investing platform for institutional investors. The platform, branded Morgan Money, replaces an existing system called Global Cash Portal, with new risk analytics and reporting features designed to provide a more granular view of an investor's portfolio."
They explained, "Institutional investors can now also access 80 cash strategies from J.P. Morgan and other asset managers, including money market, ultra-short and short-duration products in multiple currencies. Investors can also put money into J.P. Morgan's separately managed accounts (SMAs) and customize them to meet specific needs or investment parameters, according to a company brochure."
FundFire added, "The additional reporting functions in the new platform come as providers aim to deliver transparency as a competitive strategy in the money market space.... Firms tend to unveil new money market platforms in the lead up to the Association for Financial Professionals (AFP)'s Treasury and Finance conference.... J.P. Morgan has also expanded its relationships with clients that have showed interest in the money fund space, according to Przybylski. J.P. Morgan had $677.5 billion in assets in its global liquidity business as of Sept. 30."
As we mentioned in our October 3 Link of the Day, "Stable NAV Bill Filed in House Again," efforts are again underway to roll back the last round of money market fund reforms and to return the $1.00 NAV for all money funds. Bills have again been filed in the House and Senate, and the lobbying has begun. A new letter from the Government Finance Officers Association, National Association of Counties, U.S. Conference of Mayors, National League of Cities, International City/County Management Association, National Association of Health and Educational Facilities Finance Authorities, National Council of State Housing Agencies, American Public Power Association and Large Public Power Council, tells us, "The organizations listed above, representing state and local governments, authorities, and other public entities, wish to express their support for S. 733 and H.R. 4492, the bipartisan Consumer Financial Choice and Capital Markets Protection Act, which was recently introduced in the House by Representatives Gwen Moore Moore (D-WI) and Steve Stivers (R-OH), and in the Senate by Senators Pat Toomey (R-PA), Bob Menendez (D-NJ) and Gary Peters (D-MI)."
It states, "Our organizations have long opposed the Securities and Exchange Commission (SEC) modifications to SEC Rule 2a-7 of the Investment Company Act of 1940, which have created an unnecessary disruption to the public funding markets by changing the net-asset-value (NAV) accounting methodology for institutional prime and municipal money market mutual funds (MMMF) from stable to floating. Our members rely on the hallmark stable NAV feature in a variety of ways. First, many governments have specific state or local statutes and policies that require them to invest in financial products with a stable NAV. This is done to ensure that public funds are appropriately safeguarded to best serve the entity."
The letter continues, "Second, MMMFs with a stable NAV are the most commonly used investment by state and local governments. Forcing governments to find alternative investments to prime and municipal MMMFs creates additional risk for public funds by driving them to lower yielding government funds or potentially less suitable products. Such options may not meet liquidity standards required by their governments to meet cash management policies and statutes. H.R. 4492 and S. 733 would restore the ability of state and local governments to use prime and municipal stable NAV funds for their essential and critical investment needs."
It also says, "In addition to the appropriate and historical use of MMMFs as state and local government investments, it is important to note that MMMFs are the largest purchasers of short-term municipal securities. Due to the SEC's floating NAV rule, municipal money market funds have significantly curbed their appetite for these securities, thus decreasing demand and increasing costs to state and local governments that issue this type to fund state and local government operations and finance transportation projects, utilities, affordable housing, public schools and hospitals, and pollution mitigation, among other purposes."
The GFOA, et. al. comment, "In fact, as a result of implementation of the floating NAV rule in October 2016, municipal MMMFs assets fell by nearly 50 percent, thereby shrinking the funding pool available to municipal borrowers. Municipalities fortunate enough to continue selling their debt to tax-exempt funds saw their borrowing costs increase by nearly double the Federal Reserve's rate increases since implementation of the rule. Those short-term costs have increased even more for state and local governments that can no longer sell their debt to MMMFs and must borrow from other investors or replace the debt with bank loans."
Finally, they adds, "State and local governments and other public entities have utilized prime and municipal MMMFs safely and effectively for more than 40 years to both manage liquidity and provide a reliable source of working capital to fund public services and finance continued infrastructure investment and economic development throughout all economic conditions. We ask that you support S. 733 and H.R. 4492 so that state and local governments can continue to have unrestricted access to these safe and highly liquid capital markets tools."
We obtained the letter from the GFOA, and learned about it from the Bond Buyer, who published the piece, "Finance officers renew push for stable net asset value." They wrote, "Finance officers say a change in net asset value requirements put in place by the Securities and Exchange Commission years ago has 'significantly' curbed money market mutual funds' appetite for short-term municipal securities, negatively impacting issuers. In a letter sent to the House Financial Services Committee and the Senate Banking Committee this week, the Government Finance Officers Association renewed its call for money market funds to go back to a fixed net asset value after the SEC flipped the switch to floating NAVs in institutional MMMFs."
For more, see our previous Crane Data News stories: "House to Vote on Stable NAV Bill" (1/22/18) and "Stable NAV Bill Re-Introduced in House; Amortized Cost for Inst Funds?" (5/24/17).
In other news, a number of financial firms are releasing their latest Q3 earnings and hosting conference calls. On one of the few to discuss "cash", BlackRock CFO Gary Shedlin says, "In the recent market environment, clients' preference has favored lower risk assets and approximately 85% of our organic growth over the last year has been in fixed income and cash, which have relatively lower fees compared to other asset classes.... BlackRock's cash management platform saw $32 billion of net inflows, a post-financial crisis record and crossed the $500 billion AUM threshold as we continue to leverage scale for clients and deliver innovative digital distribution and risk management solutions through Cachematrix and Aladdin. Cash is a strategic asset class and BlackRock's diverse cash management offering, including prime, ESG, government and munis, position us well to serve our clients' cash needs and continue to grow our market share."
CEO Larry Fink comments, "For the first time since the financial market, the Fed announced that they would add liquidity into the system after a brief spike in short-term repo rates signaled liquidity constraints, or maybe supply issues.... I've spoken in the past about using technology to drive more of BlackRock's revenues. Technology is a priority and a strategic differentiator for BlackRock. In addition to generating direct technology revenues, we're increasingly using technology to enhance our results in our asset management business. For example, we're transforming our cash management business by integrating technology into our business model. We are delivering Cachematrix technology to help clients streamline their operations and quickly and efficiently make more informed decisions."
He continues, "Five years ago, cash management was a $281 billion business. Through technology, organic growth and acquisition, we crossed $500 billion in AUM in July. This represents over a 200 basis point global market share increase from five years ago and is an important milestone as scale is a key value proposition for clients in the asset class. Increasingly, more and more BlackRock holistic client relations are starting through a cash management assignment."
Finally, Fink adds, "We are also seeing clients increasingly adapting shorter duration fixed-income ETFs as a substitute for cash in their portfolios.... Having commission-free for low duration makes ETFs a great alternative to bank deposits, a really good solution [in place of] money market funds. And so, a commission free in the fixed-income realm, cash and fixed-income, is a real opener for so many more participants."
Following the conclusion of our European Money Fund Symposium last month in Dublin, Crane Data is now making plans for its "basic training" conference, Money Fund University. Our 10th annual MFU will take place at the Renaissance Hotel in Providence, R.I., January 23-24, 2020. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market fund regulations, money fund alternatives, offshore markets, and other recent industry trends. Our educational conference features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers, and the Providence show will include an extended free training session for Crane Data clients. We review the MFU agenda, and also next week's AFP conference, below. (We hope to see many of you at AFP -- come visit us at booth #2627!)
Money Fund University offers a 2-day crash course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, and money market instruments such as commercial paper, Treasury bills, CDs and repo. We also cover portfolio construction and credit analysis. (See the latest agenda here or e-mail us to request the latest brochure.)
The morning of Day One of the 2020 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane of Crane Data; The Federal Reserve & Money Markets with Mark Cabana of Bank of America Merrill Lynch; Credit Analysis & Portfolio Management with Robert Motroni of JP Morgan AM; and, Instruments of the Money Markets Intro with Teresa Ho of J.P. Morgan Securities.
Day One's afternoon agenda includes: Repurchase Agreements with Ho and Jake Kruk of J.P. Morgan Securities; Treasuries & Govt Agencies with Sue Hill of Federated Investors and Matt Lachance of TD Securities; Tax-Exempt Securities & VDRNs with John Vetter of Fidelity Investments; Commercial Paper & ABCP with Jean-Luc Sinniger of Citi Global Markets and CDs, TDs & Bank Debt with Vanessa McMichael of Wells Fargo Securities and Marian Trano of Bank Hapoalim.
Day Two's agenda includes: Money Fund Regulations: 2a-7 Basics with Brenden Carroll of Dechert LLP and Jamie Gershkow of Stradley Ronon; Offshore Money Funds & Ultra-Shorts with Crane of Crane Data, John Hunt of Sullivan & Worcester LLP and Kerry Pope of Fidelity; Ratings, Monitoring & Performance with `Greg Fayvilevich of Fitch Ratings and Joseph Giarratano of S&P Global; and, Money Fund Data & Wisdom Training with Peter Crane. The conference ends with its annual MFU "Graduation" ceremony (where diplomas are given to attendees).
New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane's Money Fund University is just $500, exhibit space is $2,000, and sponsorship opportunities are $3K (Bronze), $4K (Silver), and $5K (Gold). A block of rooms has been reserved at the Providence Renaissance.
We'd like to thank our past and pending MFU sponsors -- Dreyfus/BNY Mellon CIS, J.P. Morgan Asset Management, Fitch Ratings, TD Securities, S&P Global Ratings, Dechert LLP, Fidelity Investments and Federated Investors -- for their support, and we look forward to seeing you in Providence in January. E-mail Pete Crane (pete@cranedata.com) for the latest brochure or visit www.moneyfunduniversity.com to register or for more details.
Crane Data is also preparing the preliminary agenda for its next Bond Fund Symposium, which will be held March 23-24, 2020, at the Hyatt Regency Boston. Our Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Bond Fund Symposium is $750; exhibit space is $2,000 (includes 2 tickets); and sponsorship opportunities are $3K, $4K, $5K, and $6K. Our mission is to deliver the best possible conference content at a reasonable price to bond fund professionals and investors.
We'll also soon be making plans for our "big show," Money Fund Symposium, which will be held June 24-26, 2020, at the Hyatt Regency in Minneapolis. Finally, mark your calendars for next year's European Money Fund Symposium, which will be held Sept. 17-18, 2020, in Paris, France. Watch for details on these shows in coming weeks and months.
In other news, money market mutual fund distributors and cash managers will be travelling to Boston this weekend for AFP 2019, the Association for Financial Professionals' huge annual gathering of corporate treasurers, which takes place Oct. 20-23. AFP is the largest gathering of corporate investors in the country, attracting over 5,000 treasury management professionals, as well as a host of large banks and institutional money fund managers.
This year, sessions involving money funds and/or cash investing include: "Beyond Trading: Exploring Portal Capabilities," featuring Thomas Knight of Institutional Cash Distributors (ICD), Matthew Post of Qualcomm and Mark Sahler of Jeffries; "Cash Investment Management: Forget the Fads & Focus on the Fundamentals," with Ellen Bockius of BlackRock, Susan Colross of T-Mobile, Mike Dambach of Biogen <b:>`_and `Chris Nasson of Twilio; and, "Drowning in Liquidity But Still Thirsty: How Much is Too Much?," with Laura Fox Barnes of Allegis Group, James Gilligan of Evergy, Bethany Glassbrenner of American Eagle Outfitters and Garret Sloan of Wells Fargo Securities.
AFP also includes the segments: "Environmental, Social, & Governance (ESG) Factors and Credit Ratings: Making the Connection," featuring Jeff Kotkin of Eversource Energy, Shalini Mahajan of Fitch Ratings and Andrew Steel of Fitch Ratings; "How to Measure Success, Performance and Risk in a Cash Portfolio," with Kimberly Kelly-Lippert of American Honda Motor Company, Raymond Facinelli of Capital Advisors Group, Leonard Brooks of Regeneron Pharmaceuticals and Nicholas Ro of Toyota Financial Services. See you at the show!
Morgan Stanley will soon join DWS, BlackRock and SSGA in the "ESG" (environmental, social, governance) money market fund space. A recent Prospectus Supplement filing for the "Morgan Stanley Institutional Liquidity Funds" explains, "At a meeting held on September 24-25, 2019, the Board of Trustees of Morgan Stanley Institutional Liquidity Funds approved various changes to the Fund, including revising its name and modifying its principal investment strategies, each change effective October 31, 2019.... All references to 'Money Market Portfolio' in each Prospectus are hereby deleted and replaced with 'ESG Money Market Portfolio'." We review this latest filing, as well as some other news in the ESG MMF space, below.
The Morgan Stanley ILF change says, "The Adviser believes that environmental, social and governance ('ESG') factors have the ability to impact the fundamental credit risk of an entity. The Fund's investment process incorporates information about ESG issues via an integrated approach within the Adviser's fundamental investment analysis framework. The Adviser may engage with management of certain issuers regarding corporate governance practices as well as what the Adviser deems to be materially important environmental and/or social issues facing a company. The Adviser has proprietary ESG-scoring methodologies that explicitly consider the risks and opportunities ESG factors pose to money market instruments. By combining third-party ESG data with proprietary views, the Adviser creates unique scoring methodologies that it applies to issuers."
It continues, "During the security selection process, the Adviser employs a rules-based process to construct the portfolio. Initially, the Adviser determines from the universe of money market fund-eligible issuers those which, in its opinion, have the lowest credit risk and/or best credit profile, excluding the following: Corporations that generate revenue from the manufacturing or production of tobacco; Corporations that generate revenue from the manufacturing or production of landmines and cluster munitions (i.e., an explosive weapon that randomly scatters submunitions); Corporations that generate revenue from the manufacturing or production of firearms; Corporations that generate revenue from the mining of thermal coal or coal fired power generation; and Corporations that primarily generate revenue from the fossil fuel industries, which the Adviser has determined produce a certain level of carbon emissions."
The supplement also comments, "The Fund's adherence to its ESG criteria and application of related analyses when selecting investments may affect the Fund's performance depending on whether such investments are in or out of favor and relative to similar funds that do not adhere to such criteria or apply such analyses. Socially responsible norms differ by country and region, and a company's ESG practices or the Adviser's assessment of such may change over time. The Fund may invest in companies that do not reflect the beliefs and values of any particular investor.... The exclusionary criteria related to the Fund's ESG criteria may result in the Fund forgoing opportunities to buy certain securities when it might otherwise be advantageous to do so, or selling securities for ESG reasons when it might be otherwise disadvantageous for it to do so."
It tells us, "During the security selection process, the Adviser employs a rules-based process to construct the portfolio. Initially, the Adviser determines from the universe of money market fund-eligible issuers those which, in its opinion, have the lowest credit risk and/or best credit profile.... The Fund may invest in green commercial paper (a security that is typically issued to raise capital specifically to support climate-related or environmental projects) issued by companies that would otherwise be subject to fossil fuel exclusions so long as the Adviser has determined that the proceeds will not be used to finance fossil fuel generation capabilities."
The filing adds, "After applying the above exclusion screens, the Adviser calculates proprietary ESG scores for the remaining issuers based on a number of variables, such as environmental, social, government, controversy and ESG momentum factors. The Adviser then sets minimum ESG score thresholds.... From the final list of ESG-approved issuers, the Adviser determines the securities and issuers in which the Fund will invest, taking into account a variety of relevant considerations (including, without limitation, yield, interest rate changes, credit quality and duration). Under normal circumstances, the Fund will invest 100% of its net assets (excluding cash) in securities whose issuer or guarantor, in the Adviser's opinion at the time of purchase, meets the Fund's ESG criteria."
Finally, it says, "The Fund's adherence to its ESG criteria and application of related analyses when selecting investments may affect the Fund's performance depending on whether such investments are in or out of favor and relative to similar funds that do not adhere to such criteria or apply such analyses. Socially responsible norms differ by country and region, and a company's ESG practices or the Adviser's assessment of such may change over time. The Fund may invest in companies that do not reflect the beliefs and values of any particular investor.... The exclusionary criteria related to the Fund's ESG criteria may result in the Fund forgoing opportunities to buy certain securities when it might otherwise be advantageous to do so, or selling." Note: Morgan Stanley Inst Liq MMP Inst, the Prime Inst fund to be converted, currently holds $3.1 billion, while Morgan Stanley Inst Liq Prime Inst (MPFXX) holds $11.5B (presumably the latter will remain non-ESG).
In related news, Funds Europe writes, "DWS applies ESG to money market funds." Their article tells us, "DWS is to apply environmental, social and governance (ESG) criteria across its money market funds managed in Europe, Middle East, and Africa. A euro institutional fund and a US dollar institutional fund have already integrated ESG criteria, while and additional euro fund will do at a later date. The firm said ESG integration in the money market funds was at an early stage but client demand already existed. The German fund manager's ESG standards include sector exclusions, best-in-class rankings, and screening -- but according to the firm, no portfolio allocation changes were necessary due to an 'already high' standard of ESG."
The update quotes, DWS's Harm Carstens, "These adjustments mean that non-financial aspects relating to ESG will play a stronger role in the fundamental analysis and portfolio allocation by investors, alongside the traditional financial considerations." The piece also tells us, "The Deutsche Institutional Money plus fund has become the DWS Institutional ESG Euro Money Market Fund. Deutsche Institutional USD Money plus is rebranded as DWS Institutional ESG USD Money Market Fund. And the DWS Rendite Optima Four Seasons - which will adopt ESG next spring and add the term to its new name - is for now called the DWS Euro Money Market fund."
Note that DWS also recently extended fee waivers on its U.S. domestic DWS ESG Liquidity Funds. The Capital Shares, Institutional Shares and Institutional Reserved Shares filing says, "Effective December 1, 2019, the Advisor has contractually agreed to waive its fees and/or reimburse fund expenses through November 30, 2020 to the extent necessary to maintain the fund's total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expenses) ... at a ratio no higher" than 0.10%, 0.12% and 0.17% for Capital Shares, Institutional Shares and Institutional Reserved Shares, respectively.
Finally, we also wrote recently about J.P. Morgan Money Market Funds' filing and alternate strategy of incorporating ESG into their overall fund processes (instead of launching a specialized fund). They amended their prospectuses to "`provide information on how the adviser integrates environmental, social and governance factors into each Fund's investment process." It says, "As part of its security selection strategy, the adviser also evaluates whether environmental, social and governance factors could have material negative or positive impact on the cash flows or risk profiles of many companies in the universe in which the Fund may invest. These determinations may not be conclusive and securities of issuers that may be negatively impacted by such factors may be purchased and retained by the Fund while the Fund may divest or not invest in securities of issuers that may be positively impacted by such factors."
For more on ESG money funds, see our Crane Data News: `MFI Intl: European Money Fund Assets Surge Too; BlackRock LEAF; EMFS (8/15/19), Federated Earnings Call Discusses Big MMF Inflows, Rate Cuts and ESG (7/29/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19), Money Fund Assets Up 13th Week Straight; Fitch on ESG in Money Funds (7/19/19), SSGA Goes Live with ESG Money Market Fund; Fitch on Prime MF Flows (7/3/19) and Cap Advisors Group Demystifies ESG Investing; Weekly Portfolio Holdings (6/19/19).
Crane Data's latest MFI International shows assets in "offshore" or European money market mutual funds rising in USD and GBP and inching lower in Euro over the past month through October 11. These U.S.-style funds, domiciled in Ireland or Luxemburg and denominated in US Dollars, Sterling and Euro, increased by $9.3 billion to $856.4 billion over the past month (9/11 through 10/11), and they're now up by $10.4 billion year-to-date. Offshore USD money funds are up $5.5 billion over 1 month and they're up $12.1 billion YTD. Euro funds are down E1.0 billion over a month, and YTD they're up E0.1 billion. GBP funds have risen by L4.1 billion through October 11, are they are up by L21.9 billion YTD. U.S. Dollar (USD) money funds (190) account for over half ($466.0 billion, or 54.4%) of our "European" money fund total, while Euro (EUR) money funds (88) total E99.1 billion (12.8%) and Pound Sterling (GBP) funds (123) total L231.3 billion (32.8%). We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers yesterday), below.
Offshore USD MMFs yield 1.84% (7-Day) on average (as of 10/11/19), down from 2.29% on 12/31/18, but up from 1.19% at the end of 2017. EUR MMFs yield -0.56 on average, compared to -0.49% at year-end 2018 and -0.55% on 12/29/17. Meanwhile, GBP MMFs yielded 0.63%, one less than 0.64% on 12/31/18 but up from 0.24% at the end of 2017. (See our latest MFI International for more on the "offshore" money fund marketplace. Note that these funds are only available to qualified, non-U.S. investors.)
Crane's MFII Portfolio Holdings, with data (as of 9/30/19), show that European-domiciled US Dollar MMFs, on average, consist of 30% in Commercial Paper (CP), 21% in Certificates of Deposit (CDs), 20% in Repo, 17% in Treasury securities, 10% in Other securities (primarily Time Deposits) and 2% in Government Agency securities. USD funds have on average 34.5% of their portfolios maturing Overnight, 9.4% maturing in 2-7 Days, 13.4% maturing in 8-30 Days, 13.2% maturing in 31-60 Days, 7.5% maturing in 61-90 Days, 15.7% maturing in 91-180 Days and 5.5% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (28.8%), France (13.2%), Canada (12.0%), Japan (9.6%), Germany (7.5%), the United Kingdom (6.6%), the Netherlands (5.5%), Sweden (3.3%), Australia (2.7%), China (2.0%), Switzerland (1.9%), Singapore (1.6%), Belgium (1.4%) and Norway (1.3%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $86.6 billion (16.7% of total assets), BNP Paribas with $21.3B (4.1%), Bank of Nova Scotia with $17.1B (3.3%), Mitsubishi UFJ Financial Group Inc with $14.1B (2.7%), Wells Fargo with $12.4B (2.4%), Toronto-Dominion Bank with $12.1B (2.3%), Standard Chartered Bank with $12.1B (2.3%), RBC with $11.6B (2.2%), Mizuho Corporate Bank Ltd with $11.1B (2.1%) and Barclays PLC with $10.6B (2.0%).
Euro MMFs tracked by Crane Data contain, on average 48% in CP, 24% in CDs, 18% in Other (primarily Time Deposits), 7% in Repo, 0% in Agency securities and 3% in Treasuries. EUR funds have on average 21.9% of their portfolios maturing Overnight, 10.0% maturing in 2-7 Days, 16.5% maturing in 8-30 Days, 18.0% maturing in 31-60 Days, 8.0% maturing in 61-90 Days, 21.4% maturing in 91-180 Days and 4.2% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (27.9%), Japan (13.9%), the US (12.5%), Germany (9.3%), Sweden (7.3%), the U.K. (5.6%), Switzerland (4.2%), the Netherlands (4.1%), China (2.8%), Belgium (2.8%), Canada (2.2%), Finland (1.9%) and Abu Dhabi (1.4%).
The 10 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.2B (5.2%), Credit Agricole with E5.1B (5.1%), Mizuho Corporate Bank Ltd with E4.5B (4.4%), Republic of France with E3.8B (3.8%), Citi with E3.6B (3.6%), BPCE SA with E3.3B (3.3%), Nordea Banks with E3.3B (3.3%), Svenska Handelsbanken with E3.0B (3.0%), Mitsubishi UFJ Financial Group Inc with E2.9B (2.9%) and Procter & Gamble Co with E2.8B (2.7%).
The GBP funds tracked by MFI International contain, on average (as of 9/30/19): 35% in CDs, 26% in Other (Time Deposits), 22% in CP, 12% in Repo, 5% in Treasury and 0% in Agency. Sterling funds have on average 26.1% of their portfolios maturing Overnight, 10.0% maturing in 2-7 Days, 12.1% maturing in 8-30 Days, 14.4% maturing in 31-60 Days, 9.5% maturing in 61-90 Days, 22.4% maturing in 91-180 Days and 5.5% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: the United Kingdom (18.5%), Japan (16.2%), France (16.0%), Canada (9.9%), Germany (7.4%), Sweden (4.6%), the Netherlands (4.4%), United States (3.6%), Australia (3.5%), Singapore (3.1%), China (2.4%) and Abu Dhabi (2.3%).
The 10 Largest Issuers to "offshore" GBP money funds include: the UK Treasury with L20.1B (11.2%), Mizuho Corporate Bank Ltd with L7.2B (4.0%), BPCE SA with L6.9B (3.9%), BNP Paribas with L6.5B (3.7%), Sumitomo Mitsui Banking Co with L6.5B (3.6%), Sumitomo Mitsui Trust Bank with L6.5B (3.6%), Credit Agricole with L6.4B (3.6%), DZ Bank AG with L6.2B (3.5%), Toronto-Dominion Bank with L5.9B (3.3%) and Mitsubishi UFJ Financial Group with L5.5B (3.1%).
In related news, ICI released its monthly "Money Market Fund Holdings" summary yesterday, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (For our initial review of September 30 Holdings, see our Oct. 10 News, "Oct. Money Fund Portfolio Holdings: Treasuries Surge, Break $1 Trillion").
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in September, prime money market funds held 25.5 percent of their portfolios in daily liquid assets and 42.6 percent in weekly liquid assets, while government money market funds held 61.7 percent of their portfolios in daily liquid assets and 80.6 percent in weekly liquid assets." Prime DLA decreased from 29.1% in August, and Prime WLA decreased from 43.4% the previous month. Govt MMFs' DLA decreased from 62.3% in August and Govt WLA increased from 79.8% from the previous month.
ICI explains, "At the end of September, prime funds had a weighted average maturity (WAM) of 38 days and a weighted average life (WAL) of 74 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 32 days and a WAL of 98 days." Prime WAMs increased by one day from the previous month and WALs increased by three days. Govt WAMs increased by two days day and WALs remained the same as the previous month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas rose from $320.20 billion in August to $347.07 billion in September. Government money market funds' holdings attributable to the Americas rose from $2,005.24 billion in August to $2,147.84 billion in September."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $347.1 billion, or 47.3%; Asia and Pacific at $146.7 billion, or 20.0%; Europe at $234.5 billion, or 31.9%; and, Other (including Supranational) at $5.9 billion, or 0.8%. The Government Money Market Funds by Region of Issuer table shows Americas at $2.149 trillion, or 82.4%; Asia and Pacific at $120.0 billion, or 4.6%; Europe at $324.8 billion, or 12.5%, and Other (Including Supranational) at $12.5 billion, or 0.5%."
The October issue of our Bond Fund Intelligence, which was sent out to subscribers Monday, features the lead story, "Worldwide Bond Fund Assets Jump in Q2; US, Brazil Up Big," which looks at the latest rankings of global bond fund markets and "Ultra-Shorts in Europe, Euro; Highlights from EMFS Dublin," which reviews comments on ultra-short bond funds at our recent European Money Fund Symposium. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show bond fund yields were mixed while assets continue flowing in September. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our lead "Worldwide" article says, "The Investment Company Institute released its 'Worldwide Regulated Open-Fund Assets and Flows Second Quarter 2019' recently, and the most recent data collection on mutual funds in other countries shows that global bond fund assets rose $1.007 trillion, or 9.5%, to $11.640 trillion in Q2'19. The increases were led by bond funds domiciled in the U.S., Luxembourg, Brazil and Ireland. Worldwide bond fund assets, which broke $10 trillion in Q4'17, have increased by $1.387 trillion, or 13.5%, the past 12 months."
It continues, "Over 12 months, the U.S., Luxembourg and Brazil showed the largest increases in bond fund assets. Ireland, Canada and China also showed big gains. France, The Netherlands, Austria and India saw declines in Q2, while the UK was the biggest asset loser over the past year.
Our "Ultra-Shorts in Europe, Euro" piece explains, "Crane Data recently hosted its 7th annual European Money Fund Symposium in Dublin, Ireland, which included a handful of discussions involving ultra-short bond funds and the space beyond money market funds. We quote from the 'Senior Portfolio Manager Perspectives' session, below, which was moderated by Kieran Davis of BGC Partners and featured J.P. Morgan Asset Management's Neil Hutchison, Dreyfus CIS's Jim O'Connor and Northern Trust AM's Peter Yi.
Hutchison says, "Sitting in European funds this year, the duration position of an ultrashort has really helped provide some performance. I've probably never been as long in duration as I was [in] early summer. It's a one-year maximum portfolio duration, I was sitting around 0.95 a year at one point. We've taken a bit of those chips off the table, but we're still relatively long duration.... We do believe that the ECB is arguably, at this stage, underpriced."
He explains, "We're going to maintain a long duration position. The point there is that duration, even in a negatively yielding world, has allowed us to have quite meaningful price performance. For our ultra-short income ETFs in Europe, with that sort of longer duration position, yes, everything in the fund is carrying negative but the performance year-to-date is positive 40 basis points. This is part of the narrative that we've got right now -- yield doesn't equal return. This ETF European ultra-short product is a case in point for that.... I mean there is still a bit of a roll down from negative to even more negative in Europe, so it's a relative point."
Our Bond Fund News includes the brief "Yields Mixed, Returns Down in Sept," which says, "Bond fund yields were flat while returns were mostly off last month. Our BFI Total Index returned -0.19% over 1-month and 6.62% over 12 months. The BFI 100 returned -0.21% in Sept. and 7.58% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.18% over 1-mo and 2.70% over 1-yr; Ultra-Shorts averaged 0.15% in Sept. and 2.84% over 12 mos. Short-Term returned 0.01% and 4.68%, and Intm-Term lost -0.37% but rose 8.65% over 1-year. BFI's Long-Term Index returned -0.61% in Sept. and 11.57% for 1-year; our High Yield Index returned 0.34% in Sept. and 5.22% over 1-year.
In another News brief, The Wall Street Journal writes, "Bond Funds Continue to Attract Cash." It says, "Give us our bonds! That seemed to be the cry of fund investors in the third quarter. Despite the resilience of the stock market -- and the healthy gains registered by stock funds so far in 2019 -- wary investors continued to send billions of dollars to the relative safety of bond funds."
A third News update covers the press release, "Schwab Expands Low-Cost Access to Fixed Income With Three New Exchange-Traded Funds." It tell us, "Charles Schwab Investment Management, Inc. (CSIM) ... is launching three new fixed income exchange-traded funds (ETFs). The new fixed income ETFs, whose 0.06% ... expense ratios ... are among the lowest in their respective projected Morningstar categories, will begin trading on October 10, 2019. The three funds are: Schwab 1-5 Year Corporate Bond ETF, Schwab 5-10 Year Corporate Bond ETF and Schwab Long-Term U.S. Treasury ETF."
BFI features a sidebar entitled "Thrivent Limited Maturity Bond Fund on AssetTV." This article says, "AssetTV recently featured Greg Anderson and Jon Paul Gagne, Sr. of Thrivent Asset Management's Limited Maturity Bond Fund. On the video, Anderson comments, 'Mike Landreville and I have been co-portfolio managers since 2005.... We're supported by a team of investment-grade analysts: a total of six investment-grade analysts, four securitized PMs and analysts, two fixed-income traders and then a team of high-yield and leveraged loan analysts and PMs if we choose to allocate to high-yield.... At a high level, the objective of the fund ... is: We want to be able to generate more yield than our peer group, than our competitors, with less risk. We do that in three ways: it's sector allocation, duration and yield curve management, and securities selection."
Finally, another sidebar, entitled, "JPM on Low Duration BFs," tells us, "J.P. Morgan Securities recently published a 'Low duration bond fund update,' which reviews the ultra-short bond fund segment. They write, 'Low duration bond funds have seen continued steady growth in recent months. We estimate total AUM across short-term and ultrashort mutual funds and ETFs registered $727bn as of 8/31/19, up $66bn year to date and $79bn year over year.... Both ultrashort funds (those with a portfolio duration between 0.5 and 1.5 years), and short-term funds (with a longer duration of 1.5 to 3.5 years) have seen growth lately, with balances rising by $13bn and $22bn, respectively over the last 4 months. This represents something of a revitalization for short-term funds, which were relatively flat for most of 2018 as investors flocked to ultrashorts."
Money fund assets rose for the sixth week in a row, the 9th week out of 10, and the 23rd week out of the past 25. ICI's latest "Money Market Fund Assets" report shows that MMF totals have increased by $422 billion, or 13.9%, year-to-date. Over the past 52 weeks, ICI's money fund asset series has increased by $582 billion, or 20.1%, with Retail MMFs rising by $247 billion (22.9%) and Inst MMFs rising by $335 billion (18.5%). We review ICI's assets, discuss our own Money Fund Intelligence Daily series, just broke over $3.8 trillion for the first time, and review a recent Wells Fargo MMFs commentary below.
ICI writes, "Total money market fund assets increased by $6.77 billion to $3.47 trillion for the week ended Wednesday, October 9, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $1.08 billion and prime funds increased by $4.17 billion. Tax-exempt money market funds increased by $1.51 billion." ICI's weekly series shows Institutional MMFs rising $0.9 billion and Retail MMFs increasing $5.9 billion. Total Government MMF assets, including Treasury funds, were $2.597 trillion (74.8% of all money funds), while Total Prime MMFs were $735.7 billion (21.2%). Tax Exempt MMFs totaled $136.8 billion, 3.9%.
They explain, "Assets of retail money market funds increased by $5.88 billion to $1.32 trillion. Among retail funds, government money market fund assets increased by $1.68 billion to $758.16 billion, prime money market fund assets increased by $2.80 billion to $439.93 billion, and tax-exempt fund assets increased by $1.41 million to $125.13 billion." Retail assets account for over a third of total assets, or 38.1%, and Government Retail assets make up 57.3% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $887 million to $2.15 trillion. Among institutional funds, government money market fund assets decreased by $593 million to $1.84 trillion, prime money market fund assets increased by $1.37 billion to $295.76 billion, and tax-exempt fund assets increased by $110 million to $11.71 billion." Institutional assets accounted for 61.8% of all MMF assets, with Government Institutional assets making up 85.7% of all Institutional MMF totals.
Crane Data's monthly Money Fund Intelligence, which is a separate and broader series than ICI's, shows that money fund assets overall rose by $76.3 billion in September to $3.786 trillion, after rising by $84.2 billion in August. Institutional MMFs increased by $51.5 billion, while Retail MMFs rose by $30.3 billion. Government & Treasury money funds are now also growing faster than Prime MMFs; they were up $36.4 billion and $28.9 billion, respectively, vs. Prime's $16.4 billion increase last month. (Note: Crane Data's asset totals include a number of internal and other money funds that aren't included in ICI's series, so our totals are substantially higher.)
Earlier this week, assets tracked by Crane Data's Money Fund Intelligence Daily broke the $3.8 trillion level for the first time ever. Month-to-date through October 9, assets tracked by our MFID have increased by $41.9 billion to a record $3.801 trillion. In October so far, the Crane Institutional MF Index has increased by $26.3 billion to $2.527 trillion, while the Crane Retail MF Index rose $14.2 billion to $1.135 trillion. Prime MMFs have increased by $17.6 billion to $1.049 trillion while Govt (including Treasury) MMFs have grown by $22.9 billion to $2.613 trillion.
In other news, Wells Fargo Money Market Funds published its latest "Portfolio Manager Commentary," which tells us, "Generally, what happens in the money markets stays in the money markets. They can seem a bit arcane, they're viewed by the business world as benign but necessary plumbing, and their various markets and mechanisms would be incomprehensible to the general public. So if something happens there that not only makes the business press but moves beyond it into the general media, it must have been noteworthy. Such was the case with the repurchase agreement (repo) market volatility in mid-September."
Senior Fund Manager Michael Bird explains, "The executive summary of events is that repo rates spiked higher, catching the attention not only of the Federal Reserve (Fed) but also of the media. While the Fed moved promptly to inject liquidity into the system by offering its own repo deal to primary dealers, it took a few days to get the details properly calibrated. Eventually the Fed drove repo rates down to relative levels not seen in over a year."
The commentary continues, "The Fed may have been left a bit red-faced by the spike in repo rates, partly because it calls into question its ability to control short-term rates, which is central to the transmission of monetary policy, and partly because regulators have been touting SOFR as an acceptable reference rate to replace LIBOR (the London Interbank Offered Rate). It took a few days to get the response right, but after adding the term operations, the Fed demonstrated the control it desired. Its next step will be to take more permanent measures to avoid the need for the temporary OMOs it used this time around. Among the leading contenders are a standing repo facility, which we discussed earlier this year here, or a resumption of asset purchases."
It also says, "For the second consecutive meeting, the Federal Open Market Committee (FOMC) reduced the federal funds target range by a quarter-percentage point to 1.75% to 2.00%, a move that was both expected and fully priced into the market. In addition to the 25-basis-point (bp) cut to the target range, the FOMC reduced both the reverse repo rate (RRP) and the interest on excess reserves (IOER) by 30 bps to 1.70% and 1.80%, respectively, in an effort to keep the effective funds rate within its target range.... There was even greater dissension within the ranks at this meeting compared to the last—three dissenters compared to two in July."
The Wells "Overview, strategy and outlook" also comments, "The mid-month repo kerfuffle ... had little impact on commercial paper rates. Overnight and very short paper felt some pressure at the time as each product is competing in the prime space for the same investment dollars. However, term commercial paper rates rose and fell incrementally in line with changes in LIBOR as the repo phenomenon was largely viewed as a short-term, supply-driven situation. Issuers in general were pretty well funded before quarter-end and therefore didn't need to pay a hefty premium to attract investment. Going forward, what should start to affect commercial paper levels is the looming year-end. Issuers typically prefer to be assured of being properly funded over year-end well beforehand and will pay a premium to attract investments to avoid year-end funding pressures. These funding pressures, coupled with uncertainty over the path of policy rates, might cause term levels to rise and widen further relative to LIBOR."
Finally, it adds, "Money market funds have exhibited exceptional growth since the beginning of the year. Crane Data indicates $604 billion has flowed into the funds since December 31, bringing overall balances to $3.758 trillion! This is not quite a record for balances though: Money market fund assets peaked on January 14, 2009, at $3.922 trillion. The growth this year has been split between government funds and prime funds. Remarkably, prime fund asset growth has exceeded government fund growth by 50%, with government funds adding $221 billion and prime funds drawing $303 billion.... If investors decide to de-risk going into year-end, the fourth quarter, which has historically been a period of growth for money market funds in general, may see larger flows than in years past. Who knows -- maybe we'll hit another high in money market fund assets this year. Stay tuned!"
Crane Data released its October Money Fund Portfolio Holdings Wednesday, and our most recent collection of taxable money market securities, with data as of Sept. 30, 2019, shows a huge jump in Treasuries, an increase in Agencies and a big drop in Repo. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $92.0 billion to $3.690 trillion last month, after increasing $93.0 billion in August, $102.1 billion in July and $18.7 billion in June. Repo continues to be the largest portfolio segment, followed by Treasury securities, which broke above the $1 trillion level for the first time ever, then Agencies. CP remained fourth ahead of CDs, 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 to see our latest Portfolio Holdings reports.)
Among taxable money funds, Repurchase Agreements (repo) fell by $76.8 billion (-5.9%) to $1.216 trillion, or 33.0% of holdings, after increasing $20.5 billion in August, $72.2 billion in July and $37.2 billion in June. Treasury securities leapt $134.7 billion (14.9%) to $1.041 trillion, or 28.2% of holdings, after increasing $89.8 billion in August, decreasing $3.7 billion in July and decreasing $19.6 billion in June. Government Agency Debt rose by $39.2 billion (5.5%) to $745.7 billion, or 20.2% of holdings, after decreasing $9.9 billion in August, increasing $18.2 billion in July and decreasing $26.0 billion in June. Repo, Treasuries and Agencies totaled $3.003 trillion, representing a massive 81.4% of all taxable holdings.
Money funds' holdings of CP rose in September, while Other (mainly Time Deposits) and CD holdings fell. Commercial Paper (CP) increased $7.4 billion (2.3%) to $330.0 billion, or 8.9% of holdings, after decreasing $15 billion in August, increasing $8.9 billion in July and increasing $5.5 billion in June. Certificates of Deposit (CDs) fell by $7.5 billion (-2.9%) to $250.0 billion, or 6.8% of taxable assets, after increasing $4.5 billion in August, decreasing $0.6 billion in July and increasing $15.3 billion in June. Other holdings, primarily Time Deposits, decreased $4.6 billion (-4.4%) to $99.4 billion, or 2.7% of holdings, after increasing $3.4 billion in August, $8.1 billion in July and $5.8 billion in June. VRDNs inched higher to $7.3 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately late Thursday.)
Prime money fund assets tracked by Crane Data increased $15 billion to $1.050 trillion, or 28.5% of taxable money funds' $3.689 trillion total. Among Prime money funds, CDs represent 23.8% (down from 24.9% a month ago), while Commercial Paper accounted for 31.5% (up from 31.2%). The CP totals are comprised of: Financial Company CP, which makes up 20.4% of total holdings, Asset-Backed CP, which accounts for 6.6%, and Non-Financial Company CP, which makes up 4.5%. Prime funds also hold 6.6% in US Govt Agency Debt, 10.7% in US Treasury Debt, 6.2% in US Treasury Repo, 1.3% in Other Instruments, 5.9% in Non-Negotiable Time Deposits, 4.9% in Other Repo, 6.6% in US Government Agency Repo and 0.5% in VRDNs.
Government money fund portfolios totaled $1.798 trillion (48.7% of all MMF assets), up $45.0 billion from $1.753 trillion in August, while Treasury money fund assets totaled another $842 billion (22.8%), up from $809 billion the prior month. Government money fund portfolios were made up of 37.6% US Govt Agency Debt, 19.2% US Government Agency Repo, 19.1% US Treasury debt and 23.8% in US Treasury Repo. Treasury money funds were comprised of 69.5% US Treasury debt, 30.4% in US Treasury Repo, and 0.0% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.562 trillion, or 71.6% of all taxable money fund assets.
European-affiliated holdings (including repo) fell by $94.7 billion in September to $643.5 billion; their share of holdings fell to 17.4% from last month's 20.5%. Eurozone-affiliated holdings fell to $428.7 billion from last month's $485.1 billion; they account for 11.6% of overall taxable money fund holdings. Asia & Pacific related holdings fell by $1.5 billion to $325.1 billion (8.8% of the total). Americas related holdings rose $188 billion to $2.718 trillion and now represent 73.7% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (down $27.7 billion, or -3.6%, to $749.4 billion, or 20.3% of assets); US Government Agency Repurchase Agreements (down $52.4 billion, or -11.2%, to $415.5 billion, or 11.3% of total holdings), and Other Repurchase Agreements (up $3.3 billion, or 6.9%, from last month to $51.4 billion, or 1.4% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $15.0 billion to $213.7 billion, or 5.8% of assets), Asset Backed Commercial Paper (up $0.2 billion to $69.5 billion, or 1.9%), and Non-Financial Company Commercial Paper (down $7.8 billion to $46.9 billion, or 1.3%).
The 20 largest Issuers to taxable money market funds as of Sept. 30, 2019, include: the US Treasury ($1,040.8 billion, or 28.2%), Federal Home Loan Bank ($551.5B, 14.9%), Fixed Income Clearing Co ($201.5B, 5.5%), RBC ($139.2B, 3.8%), BNP Paribas ($137.1B, 3.7%), JP Morgan ($105.8B, 2.9%), Wells Fargo ($82.4B, 2.2%), Federal Farm Credit Bank ($82.1B, 2.2%), Federal Home Loan Mortgage Co ($77.0B, 2.1%), Mitsubishi UFJ Financial Group Inc ($69.9B, 1.9%), Barclays ($52.8B, 1.4%), Sumitomo Mitsui Banking Co ($52.5B, 1.4%), Bank of Nova Scotia ($48.6B, 1.3%), Bank of America ($47.6B, 1.3%), Bank of Montreal ($46.9B, 1.3%), Credit Agricole ($46.8B, 1.3%), HSBC ($43.7B, 1.2%), Societe Generale ($43.6B, 1.2%), Toronto-Dominion Bank ($42.3B, 1.1%) and Citi ($40.8B, 1.1%).
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: Fixed Income Clearing Co ($201.5B, 16.6%), BNP Paribas ($125.0B, 10.3%), RBC ($106.3B, 8.7%), JP Morgan ($91.6B, 7.5%), Wells Fargo ($68.2B, 5.6%), Barclays PLC ($44.8B, 3.7%), Mitsubishi UFJ Financial Group Inc ($44.0B, 3.6%), Bank of America ($40.9B, 3.4%), HSBC ($37.9B, 3.1%) and Nomura ($36.2B, 3.0%). Fed Repo positions among MMFs on 9/30/19 include: Fidelity Cash Central Fund ($2.7B), Fidelity Sec Lending Cash Central ($1.4B), Franklin IFT US Govt MM ($1.1B), Wilmington US Govt MMF ($0.8B), Dreyfus Govt Cash Mngt ($0.6B), Goldman Sachs FS Treas Sol ($0.4B), Vanguard Market Liquidity Fund ($0.2B) and Western Asset Inst Govt ($0.0B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($32.9B, 5.7%), Toronto-Dominion Bank ($31.0B, 5.3%), Bank of Nova Scotia ($27.6B, 4.8%), Mitsubishi UFJ Financial Group ($25.9B, 4.5%), Credit Suisse ($20.9B, 3.6%), Bank of Montreal ($18.9B, 3.3%), Mizuho Corporate Bank Ltd ($18.3B, 3.2%), Credit Agricole ($18.3B, 3.2%), Canadian Imperial Bank of Commerce ($17.7B, 3.1%) and Sumitomo Mitsui Banking Co ($17.2B, 3.0%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group ($18.2B, 7.3%), Bank of Montreal ($16.0B, 6.4%), Toronto-Dominion Bank ($15.4B, 6.2%), Sumitomo Mitsui Banking ($13.9B, 5.6%), Wells Fargo ($13.7B, 5.5%), Mizuho Corporate Bank ($12.0B, 4.8%), Sumitomo Mitsui Trust Bank ($10.9B, 4.4%), DZ Bank AG ($10.3B, 4.1%), Svenska Handelsbanken ($10.0B, 4.0%) and Bank of Nova Scotia ($9.5B, 3.8%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($21.9B, 7.8%), Toronto-Dominion Bank ($14.7B, 5.2%), JPMorgan ($14.0B, 5.0%), Credit Suisse ($13.8B, 4.9%), Bank of Nova Scotia ($12.1B, 4.3%), National Australia Bank Ltd ($9.7B, 3.4%), NRW.Bank ($9.6B, 3.4%), Societe Generale ($9.3B, 3.3%), BNP Paribas ($9.2B, 3.3%) and DBS Bank Ltd ($8.7B, 3.1%).
The largest increases among Issuers include: the US Treasury (up $134.7B to $1,040.8B), Federal Home Loan Bank (up $37.1B to $551.5B), RBC (up $17.0B to $139.2B), JP Morgan (up $13.8B to $105.8B), Bank of America (up $4.1B to $47.6B), Bank of Nova Scotia (up $3.0B to $48.6B), BNP Paribas (up $2.3B to $137.1B), Federal National Mortgage Association (up $2.3B to $29.8B), Commonwealth Bank of Australia (up $2.2B to $11.2B) and Nomura (up $2.1B to $36.2B).
The largest decreases among Issuers of money market securities (including Repo) in Sept. were shown by: Barclays PLC (down 29.4B to $52.8B), Credit Agricole (down $27.2B to $46.8B), Natixis (down $16.4B to $32.6B), Societe Generale (down $15.4B to $43.6B), Mizuho Corporate Bank Ltd (down $11.1B to $27.5B), Goldman Sachs (down $10.6B to $25.9B), DNB ASA (down $6.3B to $14.7B), Toronto-Dominion Bank (down $4.3B to $42.3B), Fixed Income Clearing Co (down $3.3B to $201.5B) and Credit Suisse (down $3.2B to $23.8B).
The United States remained the largest segment of country-affiliations; it represents 64.7% of holdings, or $2.387 trillion. Canada (9.0%, $330.6B) was number two, and France (7.5%, $277.3B) was third. Japan (6.8%, $249.2B) occupied fourth place. The United Kingdom (3.5%, $129.6B) remained in fifth place. Germany (2.2%, $79.6B) was in sixth place, followed by The Netherlands (1.7%, $62.5B), Australia (1.4%, $50.9B), Sweden (1.0%, $37.4B) and Switzerland (0.9%, $32.6B). (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 September 30, 2019, Taxable money funds held 41.6% (up from 41.0%) of their assets in securities maturing Overnight, and another 13.6% maturing in 2-7 days (down from 13.7% last month). Thus, 55.2% in total matures in 1-7 days. Another 17.0% matures in 8-30 days, while 10.3% matures in 31-60 days. Note that over three-quarters, or 82.4% of securities, mature in 60 days or less (down slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 5.5% of taxable securities, while 9.5% matures in 91-180 days, and just 2.5% matures beyond 181 days.
Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be published Wednesday, Oct. 9, and we'll be writing our normal monthly update on the Sept. 30 data for Thursday's News. But we also generate a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings, and we posted these to the website yesterday. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of Sept. 30, 2019, includes holdings information from 1,099 money funds, representing assets of $3.885 trillion (up from $3.798 trillion last month). We review the latest N-MFP data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $1,231 billion (down from $1,308 billion), or 31.7% of all assets. Treasury holdings total $1,048 billion (up from $916.7 billion), or 27.0%, and Government Agency securities totaled $763.9 billion (up from $723.6 billion), or 19.7%. Holdings of Treasuries, Government agencies and Repo (the vast majority of which is backed by Treasuries and agencies) combined total $3.043 trillion, or 78.3% of all holdings.
Commercial paper (CP) totals $344.8 billion (up from $338.0 billion), or 8.9%, and Certificates of Deposit (CDs) total $254.1 billion (down from $262.0 billion), or 6.5%. The Other category (primarily Time Deposits) totals $145.2 billion (down from $151.1 billion), or 3.7%, and VRDNs account for $98.0 billion (down from $99.2 billion last month), or 2.5%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $226.7 billion, or 5.8%, in Financial Company Commercial Paper; $62.1 billion or 1.6%, in Asset Backed Commercial Paper; and, $50.2 billion, or 4.7%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($756.6B, or 19.5%, U.S. Govt Agency Repo ($424.4B, or 10.9%) and Other Repo ($50.0B, or 1.3%).
The N-MFP Holdings summary for the 214 Prime Money Market Funds shows: CP holdings of $339.0 billion (up from $332.3 billion), or 31.6%; CD holdings of $254.1 billion (down from $257.9 billion), or 23.6%; Repo holdings of $189.0 billion (down from $262.0 billion), or 17.6%; Other (primarily Time Deposits) holdings of $99.4 billion (down from $104.3 billion), or 9.3%; Treasury holdings of $116.9 billion (up from $86.1 billion), or 10.9%; Government Agency holdings of $70.4 billion (up from $66.8 billion), or 6.6%; and VRDN holdings of $5.6 billion (down from $5.7 billion), or 0.5%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $226.7 billion (up from $213.6 billion), or 21.1% in Financial Company Commercial Paper; $62.1 billion (down from $62.6 billion) or, 5.8% in Asset Backed Commercial Paper; and $50.1 billion (down from $56.1 billion), or 4.7% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($68.8 billion, or 6.4%), U.S. Govt Agency Repo ($70.0 billion, or 6.5%), and Other Repo ($50.0 billion, or 4.7%).
In other news, two recent articles discuss the latest entrants in high-yield internet banking and "fin-tech" options. In the first, The Wall Street Journal writes that, "Robinhood Joins the Online Cash War." They explain, "Robinhood Markets Inc. said it would offer a new higher-yielding cash account, in a bid to grow from its commission-free trading roots as bigger rivals scrap trading fees. The brokerage said Tuesday it would offer 2.05% annually on uninvested cash in customers' brokerage accounts, through partner banks, making it the latest fintech to use higher yields on cash to try to win business."
The piece explains, "Robinhood's move comes after Charles Schwab Corp., TD Ameritrade Holding Corp. and E*Trade Financial Inc. last week said they would eliminate commissions for online stock trades -- replicating the fee-free trading pitch that has helped Robinhood amass about 6 millions users since it was founded in 2012. To offer the relatively high yield on cash, Robinhood said it would sweep the money to a network of six partner banks, which in turn pay the interest that Robinhood passes back to customers. Through those partnerships, Robinhood -- which isn't itself a bank -- said it is able to offer Federal Deposit Insurance Corp. protection on as much as $1.25 million in cash for each client."
The Journal article continues, "Fintechs have been trying to move into traditional banking, betting that paying more on cash than many big banks and brokerages would draw new clients and more of existing customers' money. Robo-adviser Betterment LLC in July announced a similar new higher-yield offering, currently paying 2.04% annually on cash, and robo-rival Wealthfront Inc.'s version pays 2.07% annually. Those cash accounts work similarly to Robinhood's, distributing customer cash among partner banks that pay the interest and offer FDIC protection."
Finally, it adds, "Robinhood's new offering comes after a failed attempt late last year, when the firm announced a high-yield feature -- offering 3% on cash at a time when Federal Reserve rates were higher -- that it hadn't cleared with regulators. 'We made mistakes with that announcement, which led us to hit the reset button and start over from scratch,' Robinhood said in a blog post on its website Tuesday.... A Robinhood spokesman declined to comment on how much cash its clients typically have available in their brokerage accounts."
In the other article, American Banker writes about "A battle royal for online deposits." They tell us, "An online war is underway for deposits, as a wide range of players -- big banks, community banks, credit unions, digital-only bank platforms and fintechs -- offer high-interest savings and checking through apps and websites. Competition has hit a fever pitch for several reasons despite two interest rate cuts by the Federal Reserve this year."
Crane Data's latest Money Fund Market Share rankings show assets were up again for the vast majority of U.S. money fund complexes in September. Money fund assets increased by $80.2 billion, or 2.1%, last month to $3.784 trillion. Assets have climbed by $241.8 billion, or 6.8%, over the past 3 months, and they've increased by $703.1 billion, or 22.8%, over the past 12 months through Sept. 30, 2019. The biggest increases among the 25 largest managers last month were seen by Vanguard, BlackRock, Fidelity, Federated, Dreyfus, Wells Fargo and SSGA, which increased assets by $16.2 billion, $13.9B, $10.7B, $8.9B, $8.5B, $6.1B and $6.0B, respectively. Declines in assets among the largest complexes in September were seen by Goldman Sachs, PNC and Morgan Stanley, which decreased by $6.9B, $3.7B and $2.7B. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers. We review the latest market share totals below, and we also look at money fund yields in September.
Over the past year through Sept. 30, 2019, Fidelity (up $144.1B, or 23.7%), American Funds (up $111.9B, or 699.3%; this was inflated by the addition earlier this year of the $108 billion American Funds Central Cash Fund), Federated (up $87.7B, or 43.0%), Vanguard (up $67.1B, or 20.5%), Schwab (up $58.4B, or 46.1%), JPMorgan (up $52.4B, or 18.8%) and BlackRock (up $35.3B, or 12.2%) were the largest gainers. These complexes were followed by SSGA (up $27.8B, or 33.7%), Wells Fargo (up $22.1B, or 20.8%), First American (up $17.1B, or 30.4%) and Morgan Stanley (up $15.7B, or 15.3%). Fidelity, Federated, BlackRock, JP Morgan and Schwab had the largest money fund asset increases over the past 3 months, rising by $56.4B, $31.7B, $24.0B, $20.7B and $18.8B, respectively. Decliners over 3 months included: Franklin (down $4.2B, or -18.4%), American Funds (down $3.0B, or -2.3%), PNC (down $2.7B, or -17.5%), DFA (down $813M, or -4.0%) and Columbia (down $119M, or -0.8%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $752.8 billion, or 19.9% of all assets. That was up $10.7 billion in September, up $56.4 billion over 3 mos., and up $144.1B over 12 months. Vanguard ranked second with $394.4 billion, or 10.4% market share (up $16.2B, up $13.8B and up $67.1B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan was third with $332.1 billion, or 8.8% market share (up $1.31B, up $20.7B and up $52.4B). BlackRock ranked fourth with $323.3 billion, or 8.5% of assets (up $13.9B, up $24.0B and up $35.3B for the past 1-month, 3-mos. and 12-mos.), while Federated remained in fifth with $291.9 billion, or 7.7% of assets (up $8.9B, up $31.7B and up $87.7B).
Goldman Sachs remained in sixth place with $212.4 billion, or 5.6% of assets (down $6.9 billion, up $866M and up $13.4B), while Schwab was in seventh place with $185.0 billion, or 4.9% (up $6.0B, up $18.8B and up $58.4B). Dreyfus ($166.8B, or 4.4%) was in eighth place (up $8.5B, up $5.7B and up $846M), followed by Wells Fargo ($128.6B, or 3.4%, up $6.1B, up $9.6B and up $22.1B). American Funds dropped to 10th place ($127.9B, or 3.4%; unchanged, down $3.0B and up $111.9B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Northern ($124.3B, or 3.3%), Morgan Stanley ($118.1, or 3.1%), SSGA ($110.2B, or 2.9%), First American ($73.5B, or 1.9%), Invesco ($71.8B, or 1.9%), UBS ($69.3B, or 1.8%), T Rowe Price ($37.9B, or 1.0%), DWS ($26.7B, or 0.7%), Western ($23.5B, or 0.6%) and HSBC ($20.1B, or 0.5%). Crane Data currently tracks 67 U.S. MMF managers, the same 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 and BlackRock move ahead of Vanguard, Goldman moves ahead of Federated, and Morgan Stanley, SSGA and Northern move ahead of Wells Fargo and American Funds. Our Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($763.4 billion), J.P. Morgan ($490.8B), BlackRock ($486.1B), Vanguard ($394.4B) and Goldman Sachs ($327.8B). Federated ($301.7B) was sixth, Dreyfus/BNY Mellon ($186.1B) was in seventh, followed by Schwab ($185.0B), Morgan Stanley ($153.3B) and Northern ($149.6B) which round out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.
The September issue of our Money Fund Intelligence and MFI XLS, with data as of 9/30/19, shows lower yields in September across all of our taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 755), fell 12 basis points to 1.67% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield decreased by 5 bps to 1.76%. The MFA's Gross 7-Day Yield decreased by 12 bps to 2.08%, while the Gross 30-Day Yield fell 5 bps to 2.18%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.81% (down 13 bps) and an average 30-Day Yield that decreased to 1.92%. The Crane 100 shows a Gross 7-Day Yield of 2.08% (down 13 bps), and a Gross 30-Day Yield of 2.18%. Our Prime Institutional MF Index (7-day) yielded 1.86% (down by 14 bps) as of September 30, while the Crane Govt Inst Index was 1.74% (down 13 bps) and the Treasury Inst Index was 1.72% (down 10 bps). Thus, the spread between Prime funds and Treasury funds is 14 basis points, while the spread between Prime funds and Govt funds is 12 basis points. The Crane Prime Retail Index yielded 1.69% (down 13 bps), while the Govt Retail Index was 1.47% (down 12 bps) and the Treasury Retail Index was 1.45% (down 11 bps). The Crane Tax Exempt MF Index yield rose in September to 1.12% (up 15 bps).
Gross 7-Day Yields for these indexes in September were: Prime Inst 2.18% (down 14 bps), Govt Inst 2.04% (down 13 bps), Treasury Inst 2.02% (down 10 bps), Prime Retail 2.18% (down 13 bps), Govt Retail 2.05% (down 12 bps) and Treasury Retail 2.02% (down 11 bps). The Crane Tax Exempt Index increased 15 basis points to 1.57%. The Crane 100 MF Index returned on average 0.16% over 1-month, 0.51% over 3-months, 1.61% YTD, 2.15% over the past 1-year, 1.37% over 3-years (annualized), 0.86% over 5-years, and 0.45% over 10-years. The total number of funds, including taxable and tax-exempt, increased by one to 940. There are currently 755 taxable, up by 1, and 185 tax-exempt money funds (unchanged). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The October issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Monday morning, features the articles: "Institutional Money Funds Now Driving Flows; Yields Sink," which reviews the surge in money fund assets starting back in April; "European MF Symposium in Ireland Focuses on Future," which excerpts from the Irish Funds and IMMFA EMFS Sessions; and, "Worldwide Assets Hit Record $6.2T: US Jumps, China Falls," which discusses asset growth in money fund markets outside the U.S. We've also updated our Money Fund Wisdom database with Sept. 30 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 September Money Fund Portfolio Holdings are scheduled to ship on Wednesday, Oct. 9, and our Oct. Bond Fund Intelligence is scheduled to go out Monday, Oct. 14.
MFI's "Inst Money Fund," article says, "We've been discussing the surge in money fund assets repeatedly since April, when assets began climbing following normal annual tax outflows. Assets continue to grow strongly, but the composition of the growth has shifted since earlier in the year. Whereas Retail flows were faster in 2018 and in early 2019, Institutional assets have now become the main engine for money fund asset growth."
It continues, "Crane Data's MFI totals show that assets overall rose by $80.2 billion in September to $3.786 trillion, after rising by $84.2 billion in August. Institutional MMFs increased by $51.5 billion, while Retail MMFs rose by $30.3 billion. Government & Treasury money funds are now also growing faster than Prime MMFs; they were up $36.4 billion and $28.9 billion, respectively, vs. Prime’s $16.4 billion increase last month."
Our European MFS summary reads, "Crane Data recently hosted its 7th annual European Money Fund Symposium in Dublin, Ireland, which was once again the largest gathering of money market professionals in Europe. We quote from some of our keynote presentations below. The first featured Patrick Rooney, Senior Regulatory Affairs Manager of Irish Funds, which represents funds domiciled in Ireland, while the second featured Institutional Money Market Funds Association Chair Kim Hochfeld and new IMMFA Secretary General Veronica Iommi."
It writes, "Rooney's speech, 'Money Market Funds in Ireland,' told attendees, 'Assets [of money funds domiciled in Ireland] are at E491 billion. There's been significant growth since 2014 and more modest growth more recently. We are fast approaching the E500 billion mark, so half a trillion in assets. It's a very significant MMF industry here, third in the world after the USA and China. Ireland has further cemented its position as the lead MMF domicile in Europe with Luxembourg next and France rounding out the top three locations."
He continued, "Retail is tiny.... We have new data from the Central Bank of Ireland which indicates that 57% of the assets ... are held by U.K. investors.... The next biggest segment is the U.S. and then Ireland. It's unusual for Ireland to feature so prominently in the investor base given the cross-border international nature of our investment funds. That is largely [due] to the presence of some very large U.S. multinationals here who are using the MMFs."
Our "Worldwide" update says, "The Investment Company Institute's 'Worldwide Regulated Open-Fund Assets and Flows, Second Quarter 2019' report shows that money fund assets globally rose by $32.5 billion, or 0.5%, in Q2'19, to a record $6.192 trillion. The increase was driven by big gains U.S.-based money funds, but money fund assets in China plummeted. MMF assets worldwide have increased by $230.2 billion, or 3.9%, the past 12 months, and money funds in the U.S. now represent 52.0% of worldwide assets."
It adds, "ICI's release says, 'Worldwide regulated open-end fund assets increased 2.9% to $51.43 trillion at the end of the second quarter of 2019, excluding funds of funds…. On a US dollar-denominated basis, equity fund assets increased by 2.9% to $22.72 trillion.... Bond fund assets increased by 4.4% to $11.10 trillion ... while money market fund assets increased by 0.5% globally to $6.19 trillion.'"
The latest MFI also includes the News Brief, "House Stable NAV Bill Filed Again." It tells us, "Wisconsin Representative Gwen Moore (D-WI-4) recently filed H.R.4492, the 'Consumer Financial Choice and Capital Markets Protection Act of 2019,' the latest bill in the House of Representatives that attempts to restore the $1.00 NAV for all money funds) <b:>`_."
A second MFI News Brief titled, "Blackstone Buying Promontory, reads, "We learned from the private-equity website PE Hub that, 'Blackstone Group is buying Promontory Interfinancial Network for $2.5 billion.' The piece explains, 'Launched in 2002, Promontory provides technology-based services to banks to help them retain large-dollar relationships. The ... fintech supplies balance sheet management as well as deposit allocation services to 3,000 financial institutions.' Promontory runs the CDARS (certificate of deposit account registry service) and IND (insured network deposits) programs. Promontory is one of the largest networks servicing the $1.5 trillion brokerage sweeps market."
Our August MFI XLS, with Sept. 30, 2019, data, shows total assets rose by $80.2 billion in September to $3.786 trillion, after rising $86.9 billion in August, $78.1 billion in July, $40.0 billion in June and $91.1 billion in May. Our broad Crane Money Fund Average 7-Day Yield fell to 1.67% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was down 13 basis points to 1.81%.
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA fell 12 basis points to 2.08% and the Crane 100 fell to 2.08%. Charged Expenses averaged 0.41% (unchanged) and 0.27% (unchanged), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 31 and 34 days, respectively (up one day for both the Crane MFA and Crane 100). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary yesterday (it was posted late this month), which shows that total money fund assets jumped again last month, rising by $76.3 billion in August to $3.767 trillion. It was the 14th straight month of gains for money funds overall. Prime MMFs increased $10.6 billion in August to close at $1.051 trillion, their highest level since July 2016, while Govt & Treasury funds rose by $66.0 billion to a record $2.575 trillion. Tax Exempt funds fell by $78 million to $140.8 billion. Yields fell again for Prime MMFs and Govt MMFs in August, Tax Exempt yields fell too. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. (The SEC revised this report earlier this year to include more history and to split Prime into Prime Inst and Prime Retail and Muni into Muni Inst and Muni Retail.) We review their latest numbers below.
Last month's big asset gains follow increases of $75.6 billion in July, $41.9 billion in June, $78.2 billion in May, $690 million in April, $87.9 billion in March, $76.9 billion in February and $31.4 billion in January. (Our MFI Daily product shows money fund assets up by another $61.3 billion in September through 9/30.) Over the 12 months through 8/31/19, total MMF assets have increased $623.0 billion, or 19.8%, according the SEC's series. (Note that the SEC's series includes a number of internal money funds not reported to ICI or others, though Crane Data tracks most of these.)
Of the $3.767 trillion in assets, $1.051 trillion was in Prime funds, which rose $10.6 billion in August after increasing $22.3 billion in July, $9.6 billion in June, $8.9 billion in May and $27.8 billion in April. Prime funds represented 27.9% of total assets at the end of August. They've increased by a stunning $318.8 billion, or 43.5%, over the past 12 months. Government & Treasury funds totaled $2.574 trillion, or 68.3% of assets. They rose by $66.0 billion in August, $53.5 billion in July, $31.8 billion in June and $67.3 billion in May, but fell $20.7 billion in April. Govt & Treas MMFs are up $298.5 billion over 12 months, or 13.1%. Tax Exempt Funds decreased $78M to $140.8 billion, or 3.7% of all assets. The number of money funds was 370 in August, unchanged from the previous month but down 13 funds from a year earlier.
Yields for Taxable MMFs were lower in August for the fifth month in a row (the 6th for Prime). This year's declines follow 24 months of (almost straight) increases. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on August 31 was 2.26%, down 18 basis points from the previous month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 2.30%, down 17 basis points. Gross yields fell to 2.18% for Government Funds, down 21 bps from last month. Gross yields for Treasury Funds decreased 16 basis point to 2.14%. Gross Yields for Muni Institutional MMFs fell from 1.47% in July to 1.42%. Gross Yields for Muni Retail funds fell from 1.48% to 1.42% in August.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 2.18%, down 18 bps from the previous month but up 0.13% since 7/31/18. The Average Net Yield for Prime Retail Funds was 2.05%, down 16 bps from the previous month but up 0.12% since 7/31/18. (Note: These averages are asset-weighted.)
WALs and WAMs were predominately up in August, with only Prime Institutional funds falling in WAM. The average Weighted Average Life, or WAL, was 61.5 days (up 2.7 days from last month) for Prime Institutional funds, and 66.8 days for Prime Retail funds (up 3.9 days). Government fund WALs averaged 97.0 days (up 2.3 days) while Treasury fund WALs averaged 97.0 days (up 3.4 days). Muni Institutional fund WALs were 14.0 days (up 1.2 days), and Muni Retail MMF WALs averaged 37.2 days (up 5.8 days).
The Weighted Average Maturity, or WAM, was 32.6 days (up 0.4 days from the previous month) for Prime Institutional funds, 32.6 days (down 0.3 days from the previous month) for Prime Retail funds, 27.6 days (up 0.7 days) for Government funds, and 36.1 days (up 2.8 days) for Treasury funds. Muni Inst WAMs were up 1.4 days to 13.8 days, while Muni Retail WAMs increased by 5.8 days to 34.7 days.
Total Daily Liquid Assets for Prime Institutional funds were 39.3% in July (up by 0.9% from the previous month), and DLA for Prime Retail funds was 24.7% (up 2.5% from previous month) as a percent of total assets. The average DLA was 47.6% for Govt MMFs and 91.0% for Treasury MMFs. Total Weekly Liquid Assets was 54.5% (up 1.4% from the previous month) for Prime Institutional MMFs, and 42.5% (up 1.9% from the previous month) for Prime Retail funds. Average WLA was 71.8% for Govt MMFs and 97.6% for Treasury MMFs.
In the SEC's "Prime MMF Holdings of Bank-Related Securities by Country table for August 2019," the largest entries included: Canada with $144.8 billion, the U.S. with $126.1 billion, Japan with $104.3 billion, France with $90.5B, Germany with $53.5B, the UK with $45.8B, Australia/New Zealand with $43.5B, the Netherlands with $35.3B and Switzerland with $24.2B. The biggest gainers among the "Prime MMF Holdings by Country" include: Australia/New Zealand (up $3.6B), Japan (up $2.3B), Germany (up $2.1B) and the US (up $975M). The biggest decreases were the UK (down $6.4B), Canada (down $5.8B) and France (down $5.5B), the Netherlands (down $2.8B) and Switzerland (down $1.9B).
The SEC's "Trend in Prime MMF Holdings of Bank-Related Securities by Major Region" table shows Europe had $309.1B (down $7.6B from last month), the Eurozone subset had $189.7B (down $5.6B). The Americas had $271.6 billion (down $4.9B), while Asia Pacific, which was back after oddly missing from the SEC's July update, had $172.3B (up $6.2B).
The "Prime MMF Portfolio Composition" chart shows that of the $1.051 trillion in Prime MMF Portfolios as of August 31, $333.3B (31.7%) was in CDs and Time Deposits (up from $320.3B), $310.1B (29.5%) was in Government & Treasury securities (direct and repo) (up from $290.7B), $139.9B (13.3%) was held in Non-Financial CP and Other securities (down from $149.0B), $213.5B (20.3%) was in Financial Company CP (down from $216.6B) and $63.8B (6.1%) was in ABCP (down from $63.9B).
The SEC's "Government and Treasury MMFs Bank Repo Counterparties by Country" table shows the U.S. with $218.1 billion, Canada with $162.5 billion, France with $239.3 billion, Germany with $20.9 billion, Japan with $144.0 billion, the U.K. with $116.5 billion and Other with $35.8 billion. All MMF Repo with the Federal Reserve rose by $4.7 billion in August to $12.1 billion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs with 9.8%, Prime Retail MMFs with 9.8%, Muni Inst MMFs with 1.5%, Muni Retail MMFs with 7.9%, Govt MMFs with 17.9% and Treasury MMFs with 15.5%.
A statement dated Sept. 27, 2019, entitled, "Joint Trade Association Letter on Cash and Money Market Funds as Initial Margin," on the ISDA, or the International Swaps and Derivatives Association, website tell us, "On August 1, 2019, ISDA sent a letter to the CFTC and US Prudential regulators, co-signed by Managed Funds Association ('MFA'), Securities Industry and Financial Markets Association's Asset Management Group ('SIFMA AMG'), Investment Company Institute ('ICI'), Institutional Money Market Funds Association ('IMMFA'), and Securities Industry and Financial Markets Association ('SIFMA'). The letter requests that US regulators: allow the use of a broader range of MMFs meeting the conditions set out above; and allow the use of comparable EU MMFs in cases where substituted compliance is available through the issuance of a comparability determination by the US Prudential Regulators."
The full letter, addressed to the: Commodity Futures Trading Commission, Board of Governors of the Federal Reserve System, Department of Treasury/Office of the Comptroller of the Currency, Farm Credit Administration, Federal Deposit Insurance Corporation and Federal Housing Finance Agency and entitled, "Re: Posting Cash and Money Market Funds for Initial Margin," states that ISDA, MFA, SIFMA AMG, ICI, IMMFA, and SIFMA "are requesting that US regulators provide relief or amendments pertaining to posting money market funds ('MMF's) as initial margin to covered swap entities, including swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants (collectively, 'CSEs') and their counterparties which will become subject to the initial margin ('IM') requirements of the Margin and Capital Requirements for Covered Swap Entities ('USPR rule') and the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants ('CFTC rule') (collectively, the 'US Margin Rules.')
It explains, "Specifically, we request that the US prudential regulators and the CFTC provide relief or rule amendments to expand the types of money market funds that can be used as eligible collateral, including allowing non-US MMFs. We also request that the US prudential regulators permit substituted compliance with EU margin rules."
The letter continues, "Both in the United States and European Union, MMF regulations allow for the use of repurchase and reverse repurchase agreements, and the prospectuses for a large majority of MMFs in both jurisdictions contemplate the use of these transactions to properly manage short term liquidity. The US Margin Rules restrict such activity in the conditions for use of MMFs as eligible collateral, even though these same restrictions do not apply to use of MMFs as collateral for cleared swaps. EU margin rules for uncleared derivatives transactions also do not restrict MMFs' use of repurchase or reverse repurchase transactions. Consequently, parties subject to both EU and US margin requirements have limited options for using MMFs as collateral absent US regulators granting substituted compliance with the EU margin rules. Unless remedied, the use of MMFs as eligible collateral for IM will be extremely limited and the global market will be bifurcated by regulatory regime."
ISDA writes, "Cash is widely used as collateral in the derivatives market. According to the latest ISDA Margin Survey, 75.3% of derivatives collateral posted is cash. Cash settlement processing is efficient, fungible, and a high quality and highly liquid asset. Posting cash is a necessity for entities both directly and indirectly subject to the IM requirements."
They continue, "For both voluntary and also mandatory IM, buyside market participants have steadily increased the use of third party IM segregation arrangements and margin transfer deadlines continue to contract from a regulatory perspective, and as a consequence, there has been an increased use of MMFs as a secure and efficient reinvestment option with cash margin. As a result, the expected mechanism for reinvestment of cash is a custodian 'sweep,' where the custodian reinvests the cash within the segregated account into another eligible collateral asset via standing instructions. Buyside market participants using the custodian sweep process can efficiently meet margin calls with cash in compressed timeframes without having dedicated resources and overhead costs to manage the MMF investment process directly."
The letter adds, "We appreciate that the US Margin Rules allow for the use of redeemable securities in a pooled investment fund that holds only US Treasuries (or securities unconditionally guaranteed by the US Treasury) and cash funds denominated in US dollars, however, this form of eligible collateral is subject to the undue limitation.... 'Assets of the fund may not be transferred through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, or other means that involve the fund having rights to acquire the same or similar assets from the transferee.' This limitation severely reduces the number of eligible MMFs that could be used under the US Margin Rules, and this limitation is also inconsistent with other regulations such as CFTC Regulation 1.25 (which governs the investment of customer money by futures commission merchants ('FCMs') without similar restrictions)."
It tells us, "Providing for the use of MMFs with the ability to use securities lending, securities borrowing, repurchase agreements, and reverse repurchase agreements, including the use of comparable non-US MMF issuers and allowing substituted compliance with the EU Margin Rules will ensure global access to liquid eligible collateral offerings for cash reinvestment.... Accordingly, for the preceding reasons indicated, ISDA, MFA, SIFMA AMG, ICI, IMMFA, and SIFMA requests that US regulators: allow the use of a broader range of MMFs meeting the conditions set out above; and allow the use of comparable EU MMFs in cases where substituted compliance is available through the issuance of a comparability determination by the US Prudential Regulators."
Finally, ISDA's letter to EU regulators, including the EC, ESMA, EBA and EIOPA on the "Eligibility of non-EU Money Market Funds ('MMFs') as Initial margin of non-cleared derivatives – Request for modification of the EMIR Margin RTS," tells us, "With the upcoming revision of the European Commission Delegated Regulation (EU) 2016/2251 (EMIR Margin RTS) in the context of the EMIR Refit framework, the European Supervisory Authorities will notably adjust the timeline of implementation of IM for non-cleared derivatives.... This new environment of in scope entities makes it appropriate to consider alternative forms of collateral as compared to previous phases."
ISAD explains, "It would be appropriate to expand the scope of eligible instruments beyond EU UCITS and more specifically to non-EU Money Market Funds (MMFs). The International Swaps and Derivatives Association ('ISDA') requests that the ESAs extend the scope of MMFs for use as initial margin to additional funds beyond UCITS, and extend the applicability of the existing equivalence determination in respect of the US Commodity Futures Trading Commission's ('CFTC') Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants; Final Rule ('CFTC Rules')."
They tell us, "Both in the United States and European Union, the regulatory requirements for the margining of non-cleared derivatives allow for the use of MMFs as collateral. However, each regulatory regime imposes restrictions that, in practice, mean that there are no MMFs that are eligible under both the EMIR Margin RTS and either the CFTC Rules or the Margin and Capital Requirements for Covered Swap Entities adopted by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency ('USPR Rules')."
The letter adds, "As a result when an entity in scope of the CFTC Rules or USPR Rules (the 'US margin rules'), faces an entity in scope under the EU regulatory regime, neither counterparty may post cash to be reinvested into an MMF nor directly post an MMF as collateral. Where substituted compliance is available, the conditions on use of substituted compliance mean that, depending on the location of the parties, either US or EU MMFs can be posted, but not both. This restriction significantly decreases the options for viable eligible collateral considering settlement and transfer timing limitations and global fragmentation."
It states, "Based on the current EU requirements, only MMFs that are UCITS may be posted as eligible collateral -- no other structure of MMF. However, under the US margin rules, MMFs that are UCITS do not qualify as eligible collateral due to their ability to use repo. As a result, in the example above, the EU pledging counterparty would not be allowed to post cash for reinvestment into a MMF (subject to the availability of substituted compliance, discussed further below). Please note: ISDA has submitted a request to the CFTC and US Prudential Regulators to allow repo, reverse repo, and securities lending within MMFs used as initial margin. To accommodate a global market, MMFs in additional structures to UCITS must be available. We request that the requirements regarding MMFs as eligible collateral be expanded to include issuing entities that have similar MMF regulatory oversight within their applicable regime. To date, ISDA members have mostly identified the issue in the context of EU-US contractual relationships. But naturally such extension of eligible MMFs should be based on equivalence determination conditions, irrespective of the concerned jurisdiction."
Finally, the letter says, "Accordingly, for the preceding reasons indicated, ISDA requests that EU regulators: amend the EU Margin RTS to allow for the broader range of money market funds, not to be limited to UCITS; amend the Equivalence Determination in respect of the CFTC Rules to include SDs not established in the US; and issue an equivalence determination in respect of the USPR Rules for the benefit of SDs and SBSDs regardless of whether the registered entity is established in the US."
Today, we highlight another key session from last week's European Money Fund Symposium, which took place in Dublin, Ireland. The segment, "IMMFA Update: The State of MMFs in Europe," featured Institutional Money Market Funds Association Chair Kim Hochfeld (also an MD at Morgan Stanley I.M.) and new IMMFA Secretary General Veronica Iommi. The two discussed the transition to LVNAV money funds in Europe following MMF reforms, the current state and investor base of the funds and the evolving mission of the London-based money fund trade group. (Mark your calendars for next year's European MF Symposium, which is scheduled for Sept. 21-22, 2020, in Paris, France. Let us know too if you'd like to see the conference binder.)
Hochfeld told the EMFS, "I don't think I need to introduce to this audience the different money fund types that were introduced by the regs. We obviously have three types in the short-term money fund universe -- public debt CNAV, the LVNAV and the VNAV funds. The standard money funds still have a VNAV structure as they always did. The new funds all had to have ... required regulatory investment parameters and liquidity and reporting requirements. But the LVNAV structure really preserved the attractiveness of the product, the broad base of investors that we have here in Europe."
She explained, "Looking at how the funds all converted, there were really no surprises here, which is very encouraging to us as an industry. The old-style Treasury funds all pretty much converted to a public debt CNAV structure, and the vast majority of prime funds switched into the LVNAV structure, with a small 25 billion euros moving into a short-term VNAV structure.... The vast majority of assets just transferred over as expected. We didn't see any surprises like we did in the U.S. during money market fund reform in 2016."
The IMMFA Chair continued, "There was a small amount of AUM that was lost. We think that was due to the fact that some of the large sweep custodians were unable to process an LVNAV accumulating structure due to the abolishment of their reverse distribution mechanism at the last minute by the regulators. But as you'll see, those funds have actually come back into our universe. I'm happy to say that AUM is actually up, post conversion, very slightly, but it is most definitely up. On March 22, AUM was E639 billion, and on Sept. 6 IMMFA AUM was E701 billion. The increase has largely been in the dollar space.... So, [this is] hugely encouraging and obviously a stamp of approval from investors.... They still like the product and it still works for them. It's a very encouraging initial result post-conversion."
She explained, "When we look at the total money fund universe in Europe, so this is not just IMMFA, this is the majority of the French and German money fund industry as well, you can see that IMMFA AUM ... is actually still over 50% of the total 1.2 trillion euro AUM money fund industry.... The vast majority in currency terms of the overall industry is in euros. That is mostly down to the French industry. In the IMMFA universe ... the vast majority of assets is in dollars. Just looking at money funds by domicile, again we see the vast majority of the total European industry domiciled in Ireland which is 40%. France is 30 percent and Luxembourg is 25 percent of European funds."
Hochfeld added, "Each investor type has pretty much grown along with the overall growth in the industry. Corporates still form a large chunk of our overall AUM. The sector that's actually grown quite a lot with the money fund industry is what we classify as 'Funds' and this is actually the buy side fund industry. That's asset managers using money funds to manage excess cash. We really ascribe the rise in that investor base due to Basel III, which makes leaving cash at the custodian more and more expensive and a drag on return. As well as the fact that from a technical perspective, it's much easier to sweep assets into money funds from some of the large custodians."
She also said, "In terms of the location of our investors again, not a huge amount of change. We still see a vast majority of our AUM coming from the U.K. at around 40%. We have seen an increase in the non-E.U. portion of our investor base.... It grew by 50% to about 25% of the total. That's up from about 15% the year before. So non-E.U., the way we classify that in IMMFA is U.S., Switzerland, Channel Islands … Bermuda. Also some investors coming from Asian domiciles. That investor base has grown quite significantly."
The IMMFA Chair told the conference, "The strengths at the moment for the IMMFA universe: we have seen a strong and consistent growth in assets which is great news for most of us in the room. Money fund conversion was really a non-event here in Europe which is hugely encouraging. IMMFA has been going for 20 years and I hope we have another 20 happy years in front of us. We clearly have an investor base that likes the product that we offer. They’ve used it very consistently over the last 20 years and we hope to continue to see growth from our investors. The strong risk and credit management that we demand from our IMMFA funds, which has now been supplanted by the EU regs, is highly prized by cash investors and that has continued to be important."
Finally, she commented, "Clearly there are lots of weaknesses that we face as an industry. Negative yields in euros and potentially, maybe in Sterling coming up doesn't help us. That feeds into the fee compression that the whole industry is seeing…. Brexit is going to make it much more challenging for all of those funds which have distribution teams domiciled in the U.K. but have funds domiciled either in Dublin or in Luxembourg. That's putting increased costs into the business. Lastly but by no means the least, the money fund review in 2022 could turn out to be a threat for that industry, or it could turn out to put to bed the nervousness around the continuity of the LVNAV structure."
IMMFA's Iommi commented, "IMMFA is the only trade association in Europe which is actually dedicated to the money market funds industry.... It was originally formed over nineteen years ago to preserve CNAV for money market funds, and next year will be important because we’ll be celebrating our 20th anniversary.... Since the inception of IMMFA, as we all know, a lot has happened in the money market funds space. As we've heard today, our most notably changes were brought by money market fund reform and it's in light of these changes that we're currently reviewing our mission statement in conjunction with the board and our members. In particular, how we might be more inclusive, potentially embracing a broader membership. This does not however, change our core objective, which is to promote and support the development and integrity of the money market funds industry. We do this by informing and influencing policy makers regarding money market fund issues, educating investors about money market funds and providing regular data on members funds."
She stated, "Apart from money market funds regulation itself, IMMFA is also involved in other regulatory developments that may have an impact on money market participants. Current areas of focus here include obtaining greater regulatory clarity and consistency with respect to cash equivalents, status of short-term money market funds to improve certainty for investors, benchmark reform and the use of money market funds as collateral. Overshadowing all of these of course is Brexit which we'll continue to follow closely as the next chapters of the thriller unfold. Contributing to work on Brexit impacts, on current arrangements and future opportunities are a key focus for us. Of course, the biggest Brexit impacts for money market funds relates to where a fund is domiciled and where the investors are based."
Iommi added, "To conclude ... the EU money market fund regulation has provided greater consistency and transparency in the short-term money market funds space, and these changes as we've seen, have been generally very welcomed by investors. IMMFA funds under management are growing. But we cannot be complacent, we also need to be nimble and our governance structure does help us to be nimble. In addition, as I indicated at the outset, we are currently reassessing our primary mission as a trade association in preparation for how we position ourselves for the five year-review of the money market funds regulation and beyond."
Last week, in the wake of the Fed's rate cut, three brokerage firms cut sweep rates, most -notably yield leader Fidelity, who lowered rates from 1.07% to 0.94%. This week, another four brokerage firms followed suit and dropped rates, meaning seven out of 11 firms have now lowered rates following the September Fed cut. Raymond James, Schwab and Wells Fargo cut rates across the board while Ameriprise lowered rates only on one of its tiers. Fin-tech firm Betterment also lowered rates again this week (from 2.21% to 2.11%), as did a number of the highest-yielding banks. Our Crane 100 Money Fund Index fell from 2.04% to 1.80% in the week through Friday, Sept. 27 (after falling 12 bps the prior week, which also included a spike up to 2.08%). We review our latest Brokerage Sweep Intelligence publication, and quote from a couple recent brokerage sweep stories, below.
Among the latest reductions, Raymond James cut rates on its highest tiers (over $500K) by 0.20% and on all other tiers by 0.10%. Wells Fargo trimmed its rates by 0.01% on all balances below $1M; their $1M and $2M balances decreased by 3 bps and 7 bps, respectively. Schwab cut rates by 0.03% on all tiers below $1M; their $100K balance now sits at 0.15%. Their tiers above $1M fell by 0.06%. Finally, Ameriprise cut rates for its $250K tier to 0.20% from 0.25%.
Our Crane Brokerage Sweep Index, an average of the 11 largest brokerage firms' "sweep" rates, is currently showing a rate of 0.22% for balances under $100K, down 2 bps from 0.24% last week. The average FDIC sweep rate is now 0.23% for balances of $100K to under $250K, 0.28% for balances under of $250K to under $500K, 0.30% for balances of $500K to under $1 million, 0.49% for balances of $1 million to under $5 million and 0.59% for balances over $5 million.
Fidelity still holds the highest FDIC-insured sweep rates (among the $100K balance tier) with a yield of 0.94% as of September 27. (Note: This is comparing the FDIC sweeps; Fidelity also has an even higher yielding money fund sweep for new accounts.) RW Baird occupies the No. 2 spot in the weekly survey, paying out 0.57% on its $100K tier. Wells Fargo ranked third with rates of 0.16% at the $100K tier, followed by Ameriprise, Raymond James, Schwab and UBS , all with 0.15% rates. Morgan Stanley is paying 0.10% on balances of $100K, while TD Ameritrade is yielding 0.07%. Merrill and E*Trade ranked last with rates of just 0.05%.
The Wall Street Journal discusses sweeps in "Fed Rate Cuts Put Pressure on Electronic Brokers." The piece explains, "[S]ome of the juice behind the intensifying price war under way across the brokerage industry is drying up. Electronic brokers in recent years have become more reliant on their banking arms, which effectively subsidize low trading and investing fees. A key element of the business model was rising interest rates, but a flip in Federal Reserve policy this year to cutting them has changed the equation for e-brokers."
It continues, "But nothing is free. Behind the low prices offered to customers has been an explosion in the banking arms connected to online brokers. The bet has been that customers would prefer to sacrifice earning interest on their cash, and in some cases be willing to allocate more of their investment portfolios to cash instead of investing it, in exchange for low or no fees for products and services."
The Journal writes, "Rising interest rates have been key to this business model because they have more than made up for falling fee revenue. Schwab and others sweep money from clients' brokerage accounts into their banks, where the companies can earn more on the cash by investing the money themselves and lending it out. At Schwab, bank revenue now represents 60% of the overall amount, up from 38% in 2014. For E*Trade and TD Ameritrade, revenue generated by client cash now comprises about three-quarters and one-half of their businesses, respectively. That reliance means the online brokerage industry is increasingly at the mercy of the Fed."
The article adds, "Analysts aren't expecting a return to zero interest rates, and there are also silver linings that help offset the impact of falling rates. When a weaker economy weighs on the stock market, investors typically move a bigger share of their portfolios to cash for safety, and some of that cash is expected to flow into the brokerages' banks. And when rates drop, some customers who might otherwise move cash to higher-yielding alternatives, such as certificates of deposit, may be less motivated to do so because of those lower rates."
Finally, website OnWallStreet writes, "Cash sweep disclosures at center of lawsuit against Merrill Lynch." They say, "Merrill Lynch is facing a lawsuit that criticizes the firm's disclosures of a practice common at many brokerages -- cash sweeps. Sarah Valelly claims that inadequate disclosure and an unsuitable recommendation at Merrill Edge cost her more than $20,000 in cash yields over a 20-month period, according to a complaint which was filed in a federal court in New York in late August."
They quote from the complaint, "[Merrill's] sweep accounts pay investors a paltry 0.05% to 0.14% [APY] notwithstanding the absence of adequate disclosure, contract formation or customers' prior written affirmative consent to be placed into a sweep account." OnWallStreet tells us, "Among the claims in Valelly's lawsuit: negligence, breach of suitability standards and breach of contract. She is seeking injunctive relief and damages."
The article adds, "The firm will file a motion to dismiss the allegations by the end of the first week of November, according to a letter to the federal district judge that is dated September 20 and was filed in court by the wirehouse and retail brokerage's attorneys." For more Crane Data's Brokerage Sweep News, see: "Cash of the Titans Part II: Merrill Hit By Lawsuit Over Brokerage Sweeps (9/3)," "Cash of the Titans: Schwab vs. Fidelity; MF Yields Dip Below 2.0 Percent (8/13)" and "Fidelity Now Sweeps to Money Fund (8/8)."
