News Archives: September, 2019
A week ago, Crane Data hosted its 7th annual European Money Fund Symposium in Dublin, Ireland, which attracted about 110 money fund and money market professionals from Europe, the U.S. and worldwide. For the keynote presentation, Patrick Rooney, Senior Regulatory Affairs Manager of Irish Funds, the trade group representing mutual funds domiciled in Ireland, discussed, "Money Market Funds in Ireland." He 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."
Rooney continued, "Retail is tiny.... In terms of the investor base, it is very U.K. focused.... We have new data from the Central Bank of Ireland which indicates that 57% of the assets ... are held by U.K. investors. That is on a first counterparty basis, so it maybe doesn't take into account the intermediate nature of a lot of the distribution on the MMF side. People may be coming through platforms and actually resident elsewhere. But nonetheless that's a very significant portion. 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."
He commented, "Over a 5-year period back to 2014, debt securities comprised the largest part of the portfolio, unsurprisingly. But there has been an evolution. They've gone from 63% of the portfolio in 2014 to 45% today.... Securities financing, which I understand would be the reverse repos under the Central Banks' reporting terminology, has been growing in proportion which is quite interesting over the years. That's gone from E33 billion to E116 billion, so quite significant growth there. I guess MMFs are increasing their liquidity levels and increasingly using reverse repo, perhaps in anticipation of money market fund reform. It certainly doesn't show any major shift at the point of implementation of MMFR.... Certainly, it demonstrates that there is a high level of liquidity in MMFs, well in excess of the regulatory thresholds that are applied under the MMFR."
Rooney also said, "If you look at the currency breakdown, the U.S. dollar is obviously the most popular currency denomination for assets, followed by GBP. Euro has held steady, which is very interesting given the situation that we have in regard to RDM and negative yield. Despite all of that and the operational disruption or impact to investors, the assets have actually grown in the euro segment, from 76 billion to 80 billion. That's good to see, that there hasn't been any lasting impact in relation to all of that."
He continued, "Looking in more detail now at the product lineup ... we got this data recently from the Central Bank.... All three product categories are available, the low volatility NAV the variable NAV -- I don't have a breakdown of short-term vs. standard -- and public debt constant NAV.... LVNAV is the winner with a strong offering of 47 funds. I think we had expected that as the successor products for prime institutional CNAV, with the features that those kinds of investors are looking for -- with stability in the NAV and some yield as well. Next is variable NAV. There's more variable NAV in Ireland than there was before MMFR reform. I think maybe that's reflective of promoter's desire to offer the full suite of products post MMFR reform and make them available to investors and let investors decide which one would suit them best. Public Debt CNAV has transitioned over. There is obviously, you know, a defined market for that which is of a certain size, so 25 public debt CNAV funds."
Irish Funds' Rooney stated, "When we look to see how the assets are aligned, there's quite a shift. Investors have voted with their feet and have largely voted for low volatility NAV MMF, which is the predominant type of MMF category in Ireland. That is what we had expected and hoped would happen in terms of the popularity of that product, because it meets the needs of those CNAV investors. So, E405 billion in low volatility NAV MMF. The public debt NAV moves to the next most popular type of product category, so that has largely transitioned across. Then variable NAV is very small relative to the other two categories at 22 billion.... What this demonstrates is the market for VNAV remains quite limited.... Stability is the name of the game."
He also said to the Dublin crowd, "Looking at some of the live issues, I've just selected three that MMF managers are facing at the moment. Brexit planning is obviously one of them. UCITS managers ... are typically the type of entity that manage MMF.... They would have UCITS passports anyway, so access to the European market was not a major issue. What we have seen is MMF fund managers, just like other fund managers, adding resourcing to their existing management companies and using Ireland more as a home, as their investment fund hub in Europe."
On Brexit's impact, Rooney told us, "The continued distribution of Irish MMFs into the U.K., to access that very large U.K. investor base is clearly of critical importance to us and of long-term strategic importance. An arrangement is negotiated there and the temporary permissions regime has been very helpful in the medium term, and we look forward to a lot more long-term resolution in relation to distribution. I think right now the focus is on the potential, the very real potential, for a hard Brexit and planning for that. A lot of engagement is going on between industry and the Central Bank in relation to the plans for that and resourcing fund administrators for example, to deal with any market fallout and market impact that may arise."
He added, "Moving on to MMF regulatory reporting and stress testing, ESMA finalized their reporting and stress testing guidelines back in July.... They have rolled back on some additional data requirements that were based on the AIMFD and less relevant, really to the reporting in terms of an MMFs.... But there is still a need for a big data build on this, and MMF managers are in the process of rolling that out with their fund service providers. We are engaging with the Bank on that rollout and discussing any potential additional requirements that the Central Bank might impose over and above the MMFR template. So that is ongoing."
Rooney continued, "ESMA did release liquidity stress testing guidelines as well, in response, I suppose to concerns over Woodford, for liquidity and open-ended funds, which I don't think is an issue for MMFs.... ESMA did take that into account and has limited the scope to aspects that are not covered under the MMFR and identified those aspects which should be helpful. In the case of a conflict between MMFR and ESMA liquidity stress testing guidelines, ESMA has stated that the MMFR rules will take precedence."
Finally, he said, "A word on sustainability.... This is coming very quickly. I think it's almost unprecedented the pace and the level of detail coming out from the European Commission and European Institutions. In the next two to three years, really, we'll have a very detailed framework on sustainability which will aim to reorient capital flows towards more sustainable investment products, increase transparency and disclosure and harmonize standards in relation to the disclosure of sustainability, and also result in sustainability factors being integrated into the risk management of funds.... It's a very active area and one where I'm sure MMFs can use their market power as well in order to influence behavior at issuers in relation to ESG factors."
Money fund assets rose again for the fourth week in a row, the 7th week out of the past 8 and the 21st week out of the past 23. ICI's latest "Money Market Fund Assets" report shows that MMF totals have increased by $395.0 billion, or 13.0%, year-to-date. Over the past 52 weeks, ICI's money fund asset series has increased by $559 billion, or 19.4%, with Retail MMFs rising by $242 billion (22.7%) and Inst MMFs rising by $317 billion (17.4%). We review ICI's latest assets, as well as their monthly "Trends" and "Portfolio Composition" totals below.
ICI writes, "Total money market fund assets increased by $40.45 billion to $3.44 trillion for the week ended Wednesday, September 25, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $39.53 billion and prime funds increased by $716 million. Tax-exempt money market funds increased by $206 million." ICI's weekly series shows Institutional MMFs jumping $36.3 billion and Retail MMFs increasing $4.2 billion. Total Government MMF assets, including Treasury funds, were $2.577 trillion (74.8% of all money funds), while Total Prime MMFs were $732.0 billion (21.3%). Tax Exempt MMFs totaled $134.0 billion, 3.9%.
They explain, "Assets of retail money market funds increased by $4.16 billion to $1.31 trillion. Among retail funds, government money market fund assets increased by $2.64 billion to $747.42 billion, prime money market fund assets increased by $1.66 billion to $434.92 billion, and tax-exempt fund assets decreased by $145 million to $123.31 billion." Retail assets account for over a third of total assets, or 37.9%, and Government Retail assets make up 57.2% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $36.29 billion to $2.14 trillion. Among institutional funds, government money market fund assets increased by $36.88 billion to $1.83 trillion, prime money market fund assets decreased by $946 million to $297.06 billion, and tax-exempt fund assets increased by $351 million to $10.72 billion." Institutional assets accounted for 62.1% of all MMF assets, with Government Institutional assets making up 85.6% of all Institutional MMF totals.
The Investment Company Institute also released its monthly "Trends in Mutual Fund Investing" and its latest monthly "Month-End Portfolio Holdings of Taxable Money Funds" reports yesterday. The latest numbers show money fund assets jumping $87.0 billion to $3.367 trillion in August. This follows increases of $78.2 billion in July, $41.5 billion in June and $89.3 billion in May. In the 12 months through August 31, 2019, money fund assets have increased by $499.6 billion, or 17.4%.
The release states, "The combined assets of the nation's mutual funds decreased by $103.45 billion, or 0.5 percent, to $19.93 trillion in August, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."
It explains, "Bond funds had an inflow of $8.90 billion in August, compared with an inflow of $36.38 billion in July.... Money market funds had an inflow of $83.38 billion in August, compared with an inflow of $74.50 billion in July. In August funds offered primarily to institutions had an inflow of $61.40 billion and funds offered primarily to individuals had an inflow of $21.98 billion."
The latest statistics show that Taxable MMFs gained assets last month while and Tax Exempt MMFs lost assets. Taxable MMFs increased by $88.0 billion in August to $3.232 trillion. Tax-Exempt MMFs decreased $1.0 billion in August to $134.8 billion. Taxable MMF assets increased year-over-year by $495.7 billion (18.1%). Tax-Exempt funds rose by $4.0 billion over the past year (3.1%). Bond fund assets increased by $74.7 billion in August (1.7%) to $4.568 trillion; they've risen by $402.7 billion (9.7%) over the past year.
Money funds represent 16.9% of all mutual fund assets (up from 16.4% the previous month), while bond funds account for 22.9%, according to ICI. The total number of money market funds was 367, down one fund from July and down from 383 a year ago. Taxable money funds numbered 286 funds, and tax-exempt money funds remained at 81 funds.
ICI's "Month-End Portfolio Holdings" update confirms a big jump in Treasury holdings and Repo last month. Repurchase Agreements remained in first place among composition segments; they increased by $30.3 billion, or 2.5%, to $1.237 trillion, or 38.3% of holdings. Repo holdings have risen by $313.6 billion, or 33.9%, over the past year. (See our Sept. 12 News, "Sept. Money Fund Portfolio Holdings: Treasuries, Repo Jump; CP Down.")
Treasury holdings in Taxable money funds increased by $80.6 billion, or 10.7%, to $831.5 billion, or 25.7% of holdings. Treasury securities have increased by $56.4 billion, or 7.3%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they decreased $17.7 billion, or -2.6%, to $662.0 billion, or 20.5% of holdings. Agency holdings have risen by $28.2 billion, or 4.5%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased by $11.7 billion, or 4.5%, to $271.2 billion (8.4% of assets). CDs held by money funds have grown by $78.4 billion, or 40.6%, over 12 months. Commercial Paper remained in fifth place, down $733 million, or -0.3%, to $231.4 billion (7.2% of assets). CP has increased by $41.5 billion, or 21.9%, over one year. Notes (including Corporate and Bank) were up $723 million, or 7.2%, to $10.7 billion (0.3% of assets), while Other holdings decreased to $13.1 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 184.0 thousand to 35.677 million, while the Number of Funds decreased by one to 286. Over the past 12 months, the number of accounts grew by 3.316 million and the number of funds decreased by 13. The Average Maturity of Portfolios was 31 days, one more than in July. Over the past 12 months, WAMs of Taxable money funds have increased by 1 day.
The Investment Company Institute latest "Worldwide Regulated Open-Fund Assets and Flows, Second Quarter 2019" shows that money fund assets globally rose by $32.5 billion, or 0.5%, in Q2'19, break above the $6.1 trillion level to $6.192T. 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. We review the latest Worldwide MMF totals, below. (Thanks again to those who attended our European Money Fund Symposium in Dublin earlier this week too!)
ICI's release says, "Worldwide regulated open-end fund assets increased 2.9 percent to $51.43 trillion at the end of the second quarter of 2019, excluding funds of funds. Worldwide net cash inflow to all funds was $340 billion in the second quarter, compared with $320 billion of net inflows in the first quarter of 2019. The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations. The collection for the second quarter of 2019 contains statistics from 47 jurisdictions."
It explains, "The growth rate of total regulated open-end fund assets reported in US dollars was boosted by a slight depreciation of the US dollar over the second quarter of 2019. For example, on a US dollar-denominated basis, fund assets in Europe increased by 2.9 percent in the second quarter, compared with an increase of 1.6 percent on a euro-denominated basis."
ICI's quarterly continues, "On a US dollar-denominated basis, equity fund assets increased by 2.9 percent to $22.72 trillion at the end of the second quarter of 2019. Bond fund assets increased by 4.4 percent to $11.10 trillion in the second quarter. Balanced/mixed fund assets increased by 2.8 percent to $6.36 trillion in the second quarter, while money market fund assets increased by 0.5 percent globally to $6.19 trillion."
The release also says, "At the end of the second quarter of 2019, 44 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/mixed funds was 12 percent. Money market fund assets represented 12 percent of the worldwide total."
ICI adds, "Net sales of regulated open-end funds worldwide were $340 billion in the second quarter of 2019. Flows out of equity funds worldwide were $45 billion in the second quarter, after experiencing $28 billion of net inflows in the first quarter of 2019. Globally, bond funds posted an inflow of $236 billion in the second quarter of 2019, after recording an inflow of $267 billion in the first quarter.... Money market funds worldwide experienced an inflow of $72 billion in the second quarter of 2019 after registering an inflow of $36 billion in the first quarter of 2019."
According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. strengthened its position as the largest money fund market in Q219 with $3.201 trillion, or 52.0% of all global MMF assets. U.S. MMF assets increased by $122.1 billion (4.0%) in Q2'19 and increased by $380.9B (13.5%) in the 12 months through June 30, 2019. China remained in second place among countries overall, despite assets plunging in the latest quarter. China saw assets decrease $110.9 billion (-9.5%) in Q2 to $1.060 trillion (17.2% of worldwide assets). Over the 12 months through June 30, 2019, Chinese MMF assets have fallen by $104.8 billion, or -9.0%.
Ireland remained third among country rankings, ending Q2 with $558.7 billion (9.1% of worldwide assets). Dublin-based MMFs were up $13.1B for the quarter, or 2.4%, but down $10.2B, or -1.8%, over the last 12 months. Luxembourg remained in fourth place with $384.9 billion (6.2% of worldwide assets). Assets there decreased $666 million, or 0.2%, in Q2, and were up $27.7 billion, or 7.7%, over one year. France was in fifth place with $371.2B, or 6.0% of the total, down $9.2 billion in Q2 (-2.4%) and down $34.5B (-8.5%) over 12 months.
Japan remained in sixth place with $102.7 billion (1.7%); assets there rose $5.1 billion (5.3%) in Q2 and decreased by $4.3 billion (-4.1%) over 12 months. Korea, the 7th ranked country, saw MMF assets rise $2.4 billion, or 2.8%, in Q2'19 to $90.4 billion (1.5% of the world's total MMF assets); they've fallen $4.7 billion (-5.0%) for the year. Brazil remained in 8th place, as assets increased $5.4 billion, or 6.6%, to $84.0 billion (1.4% of total assets) in Q2. They've increased $9.3 billion (12.5%) over the previous 12 months.
ICI's statistics show India remaining in 9th place with $66.3B, or 1.1% of total, up $2.5B (4.0%) in Q2 and down $579M (-0.9%) for the year. Mexico was in 10th place, increasing $3.2 billion, or 5.1%, to $66.1 billion (1.1% of total assets) in Q2 and increasing $10.0 billion (17.7%) over the previous 12 months. (Note that ICI's data no longer includes money fund figures for Australia. Australia's MMF assets, which had been one of the largest markets in the world, were mysteriously shifted into the "Other" category several years ago.)
The United Kingdom ($26.1B, up $139M and down $3.3B over the quarter and year, respectively) ranked 11th ahead of South Africa ($24.8B, up $483M and up $2.6B). Chinese Taipei ($23.6B, down $891M and down $565M), Canada ($23.1B, up $907M and up $3.0B), and Chile ($20.0B, up $605M and down $4.0B) rank 13th through 15th, respectively. Switzerland, Belgium, Norway, Germany and Spain round out the 20 largest countries with money market mutual funds.
ICI's quarterly series shows money fund assets in the Americas total $3.402 trillion, up $132.7 billion in Q2, while European money funds moved back ahead of Asia and Pacific money funds for the first time since Q3'18. Asian MMFs decreased by $101.9 billion to $1.350 trillion, while Europe saw its money funds increase by $1.2 billion in Q2'19 to $1.416 trillion. Africa saw its money funds increase $483M to $24.8 billion.
Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have mainly domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, if you'd like to see our MFI International product, or if you'd like to see Powerpoints on Chinese, French or Irish money funds from our latest European Symposium.
In the wake of the Fed's rate cut last week, brokerage firms again cut sweep rates, led by the highest-yielding brokerage Fidelity. After shocking the market by hiking rates following the Fed's July 31 rate cut, Fidelity has just lowered its rates across the board by 0.13%. Fidelity dropped its sweep rates from 1.07% to 0.94% on all tiers, and they're not alone, Fin-tech firms also dropped rates. Betterment's rate currently sits at 2.21%, a 0.23% drop from its early August rate of 2.44%, and Wealthfront has also dropped down from a rate of 2.32% in early August to 2.07%. (Thanks to those who attended our European Money Fund Symposium in Dublin, Ireland this week! Safe travels home, watch for coverage in our next MFI newsletter, and we hope to see you next year in Paris!)
Our latest Brokerage Sweep Intelligence publication shows that three brokerages out of 11 cut sweep rates in the latest week. E*Trade, Fidelity and Merrill Lynch all lowered rates on some tiers. E*Trade and Fidelity cut rates across the board while Merrill Lynch only lowered their yields on the highest-balance tiers.
E*Trade cut rates across all tiers -- their $100K balance dropped from 0.08% to 0.05%. Rates below their $100K balance dropped by 0.02% while rates above $250K dropped by 0.05%. Fidelity trimmed its rates by 0.13% across the board; their $100K balance tier now pays 0.94%. Merrill Lynch cut its rates for balances under $250K to 0.08% from 0.10% (they cut rates on all higher tiers too).
Our Crane Brokerage Sweep Index, an average of the 11 largest brokerage firms' "sweep" rates, is currently showing a rate of 0.24% for balances under $100K, down 1 bps from 0.25% last week. The average FDIC sweep rate is now 0.24% for balances of $100K to under $250K, 0.29% for balances under of $250K to under $500K, 0.33% for balances of $500K to under $1 million, 0.51% for balances of $1 million to under $5 million and 0.62% for balances over $5 million.
While Fidelity lowered rates, it is still holds the highest FDIC-insured sweep rates with a yield of 0.94% as of Sept. 20. (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. Raymond James ranked third with rates of 0.25% at the $100K tier, followed by Schwab, with a 0.18% rate. Wells Fargo was fifth, yielding 0.17% on balances of $100K, with UBS and Ameriprise in sixth yielding 0.15%. Morgan Stanley offers 0.10%, while Ameritrade follows with 0.07%. Merrill and E*Trade ranked last with rates of just 0.05%.
In related news, Bankrate published, "5 ways to use you brokerage like a savings account." They write, "As brokerage accounts and bank accounts begin to look more alike, savers can often do many of the same things in each account. In brokerage accounts, not only can you invest in stocks, bonds and funds, you can often use the account as an omnibus financial account. In other words, you can typically write checks and pay bills with your account, often while collecting interest too."
The article continues, "Savers can stash their cash in a brokerage and rack up interest in a money market fund. Typically brokerages sweep any excess cash into a basic money market fund [sic], allowing you to collect some extra coin. For example, TD Ameritrade offers 0.04 percent on balances up to $5,000, ranging up to 0.43 percent on much higher amounts.... If you want to step up to a better deal, you should look at Interactive Brokers, which offers a rate that's more competitive with those at top banks."
Bankrate says, "If you want to get your whole account balance working at an even higher rate, then you might consider buying an exchange-traded fund (ETF)... ETFs offer a yield that's in line with short-term interest rates, and the bonds in the fund are short-term, typically less than a year in duration.... If you're interested in this kind of investment, you can purchase it just as you would a stock or other security, by placing an order with your broker using the fund's ticker symbol."
The piece tells us, "Another way is buying a money market mutual fund backed by bonds of the federal government.... This kind of money market mutual fund invests in very short-term bonds of the federal government, typically with an average maturity of 30 to 60 days. So the fund tracks short-term rates, and as they rise and fall, the fund's yield will change as well.... One example of this money market mutual fund is the Vanguard Federal Money Market Fund (VMFXX). As of early September 2019, it offered a yield of 2.06 percent, and the average maturity of a holding was just 34 days."
It adds, "If you're looking for a high-yield savings option from within your brokerage, consider turning to a CD.... A brokered CD is like a bank CD in that it pays a contractually guaranteed rate of interest.... Brokered CDs can be purchased at new issue through an online brokerage, and will usually have a small commission charge. They're typically available with a minimum investment of $1,000 and are available in $1,000 increments.... If you need to close the CD for some reason, you'll have to sell it into the market, like you would with a bond or stock."
Finally, Bankrate writes, "If you already have a robo-adviser account or are looking for a high-yield cash management account, then turning to a robo-adviser could be a great option.... Robo-advisers Wealthfront and Betterment are now offering interest rates that are competitive with the best online banks.... A robo-adviser is an excellent choice for cash savings."
Investment News also mentions robo-advisors in, "Wealthfront cash accounts up assets to $20B." They say, "New products, including high-yielding savings accounts, have helped Wealthfront double its assets to $20 billion in the past eight months, the robo-advisor said last Monday."
The article adds, "Fintech expert Lex Sokolin said he isn't surprised by Wealthfront's growth.... That interest rate is the cost of customer acquisition. Banks don't like going this high because it spoils the whole industry, but for fintechs it is just another growth hack."
This month, Money Fund Intelligence interviews FIS SGN's Vice President of Product Management Mike Vogel and FIS SGN's Short-Term Cash Management Product Manager Matt Borchardt. We discuss the online money market fund trading portal's history, their latest developments and overall market issues. Our Q&A follows. (Note: The following is reprinted from the September issue of Money Fund Intelligence, which was published on September 6. Contact us at info@cranedata.com to request the full issue or to subscribe.)
MFI: Give us some history. Vogel: FIS is a leading provider of technology and solutions for merchants, banks and capital markets around the world. We focus on scale and have an extensive portfolio of solutions to help our clients connect and securely manage their operations. FIS continues to grow both organically and through acquisitions including SunGard in 2015 and our most recent acquisition, WorldPay, which closed in July 2019, bringing us to 55,000 employees in 48 countries.
Borchardt: Our FIS SGN Short-Term Cash Management (STCM) Portal started with a SunGard acquisition in 2002 and we have been growing and expanding it ever since with a mission to serve treasury managers by adding efficiency in any way possible. Today, STCM provides access to 257 funds and other investments across 45 fund families processing over $4T in transactions each year.
MFI: Tell us about the Treasury workstation market. Vogel: We have a joint solution with our own FIS treasury management systems, Quantum and Integrity, bundled with STCM to help provide a seamless experience for our treasury users. Along with our FIS solution, STCM is connected to most other Treasury workstations for integrated trade submission. We are fortunate to have FIS treasury systems in house which helps give us a detailed level of understanding of what today’s Treasury professional needs to be more effective and productive. Our treasury clients, like all FIS clients, want systems that are always on, resilient and secure and our product roadmaps across FIS are aligned to meet these demands.
Borchardt: Our joint product teams are continually improving and enhancing our integration as client's trading, regulatory and reporting needs change, most recently adding fully automated cash sweep trades directly from Quantum to STCM. The automated cash sweeps simplify end of day processing and provide yield pick-up over leaving remnant balances in their custody account. We also have more great collaborations with Quantum and Integrity on tap that will really improve the daily life of our Treasury Managers. We can't announce [these] yet, but [will be] rolling some out in the near future.
MFI: What about FIS's money fund lineup? Borchardt: In the U.S., we offer money market funds, short-duration bond funds, FDIC-insured deposit products, and private liquidity funds. Globally, we offer all EU post-Reform fund categories -- Public Sector CNAV, Prime LVNAV, Short Term VNAV, and Standard VNAV -- across 7 currencies. We're also always ready to expand our offerings based on client demand or market shifts, like adding ESG funds, more diverse short-term investment products and a few others that are in development.
MFI: What are your big challenges? Vogel: Technology changes are always an undercurrent in our industry, and they’re accelerating every day. Treasury managers continue to increase their expectations of data and information to be available and at their fingertips, real-time and 24/7 across platforms. Regulatory changes are constant and unavoidable, creating multiple challenges the last few years with U.S. and EU Reform driving significant changes.
Borchardt: Domestically, the Federal Reserve obviously weighs heavily in the near term with their latest rate cut and the potential for more to come, fueling fears surrounding an inverted yield curve. Those fears will also likely impact the M&A deals that have swelled balances over the past couple of years. This could result in corporates retreating into their shell while they wait to see what is going to happen.
In Europe, EU Reform and continued negative rates have caused a lot of clients to flee the EUR Funds and be much more uncertain of the status of their funds in general. The new fund structure in Europe took quite a while to settle in, and like Prime funds in the U.S., it may take a while before client monies start returning to fluctuating NAV products. Within STCM, we have had success easing client concerns on FNAV funds in Europe streamlining reconciliation through Quantum and Integrity position integration. Brexit is another concern we are preparing for with our clients. We plan to be ready for whatever ultimately happens and ensure no service interruption as a result. The Brexit process has also led to a large asset expansion in mainland Europe, increasing our client and fund provider presence further into the EU.
MFI: Are you done with European money fund reforms? Borchardt: From a functional perspective, our reform-related updates were completed along with the industry in Q1 this year. But as our users have grown more comfortable with the changes and developed their internal processes with particularly the EUR LVNAV and VNAV funds, they have identified additional features that would make their process easier to manage. We are in the process of implementing follow up enhancements. As I'm sure you are aware, it took time for the fund companies to coalesce around a 'standard implementation' of EU Reform measures making it a bit of a moving target. So clients were also hindered in their ability to pre-plan their processes.
MFI: Talk about your options beyond money funds. Borchardt: In the U.S., we have short-duration bond funds, private liquidity funds, and FDIC-insured deposit products to go along with our money market fund offerings. Outside the U.S., we have diverse set of offerings around the standard MMFs post-reform, along with short-duration bond funds, and we have been working toward adding deposit products in that market as well.
MFI: Are you looking at ESG? Borchardt: Absolutely. We have already on-boarded several ESG-specific funds in the U.S. and Europe. We think ESG is a market that is on the verge of expansion, and the funds profiled recently in Money Fund Intelligence are part of our plans. We’re also exploring additional angles on this theme in the form of veteran owned/operated funds and minority owned. However, those are still in the exploratory stage. We stay in almost daily contact with our fund families to keep up to date on their plans and to make sure we are on the front edge of that movement.
MFI: Talk about your investors. Vogel: STCM has a broad base of global clients, including treasury and investment specialists at over 400+ corporations, hedge funds, public utilities, local governments, and colleges and universities.
MFI: What about fees? Borchardt: Since we are an independent, fund-neutral portal, we are able to carry the best institutional share classes that funds have to offer. While we cannot directly speak to the pressure that the fund families are feeling regarding management fees, we have seen an increase in fund companies moving their client funds into lower fee share classes on the portal recently.
MFI: Do portals ever charge investors? Vogel: STCM has no upfront or ongoing charges to the clients, and FIS Treasury workstation integration provides additional value through ease of integration and efficiencies for our joint users.
MFI: Where are you looking for expansion? Vogel: From an expansion perspective, we have been looking at new products on the market that are in line with our users’ needs and investment strategies to bring them a more complete portfolio of products. Part of this has been the ESG initiative, as well as our expansion to supporting funds in new jurisdictions outside of the U.S. Borchardt: Outside the U.S, our focus has been in Europe recently, given Brexit and EU Reform, and many of our enhancements have been in line with that. However, we operate on a single instance, so any new functionality is provided to all users immediately.
MFI: What about the future? Vogel: We think the future is going to require significant commitment to the role of technology in the investing process as treasury departments continue to add more responsibilities and need automation to keep up. On the fund side of that equation, their staff is having more responsibility placed upon them and portfolio managers are working to find ways to lower their fees. Using technology to improve automation in that process as well will become more and more important. I mean, we still have fund families in Europe that are running heavily on faxed trades ... seeking out a technology partner for their clients to use.
Borchardt: As for the investment goals of our clients, we are seeing more sophistication in the review process and concern for things other than just yields. This is part of what is guiding us to add the ESG funds as a major focus in the near term. Most of the fund families we’ve been speaking with are heavily focused there and trying to determine their niche, and corporates are developing policies that include social considerations instead of just shareholder value. I’m sure you saw the statement that came out of the recent Business Roundtable lending credence to this theory. With all of this, our goal is to make sure that we are agile to respond regardless of where the market goes and keep things automated and efficient.
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States statistical survey (formerly the "Flow of Funds") last Friday. Among the 4 tables it includes on money market mutual funds, the Second Quarter 2019 edition shows that Total MMF Assets increased by $127 billion to $3.206 trillion in Q2. The Household Sector, by far the largest investor segment with $1.908 trillion, saw assets jump in Q2, as did the next largest segments, Nonfinancial Corporate Businesses and Other Financial Business (what we believe was formerly labelled Funding Corporations). Repos jumped and Treasuries plunged among money fund assets in Q2. (For those attending our European Money Fund Symposium, which takes place Monday and Tuesday this week, welcome to Dublin, Ireland! Watch for coverage of our event in coming days.)
The Fed's latest Z.1 numbers, which contain one of the few looks at money fund investor segments available, also show slight asset increases for Property-Casualty Insurance Life Insurance Companies and the Rest of the World categories in Q2 2019. Nonfinancial Noncorporate Business, State & Local Govts and Private Pension Funds also saw assets rise slightly in Q2, and State & Local Govt Retirement MMF holdings were flat. Over the past 12 months, the Household Sector, Other Financial Business (formerly Funding Corps) and Nonfinancial Corporate Businesses showed the biggest asset increases. Every category increased in assets over the past 12 months.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows that total assets increased by $127 billion, or 4.1%, in the second quarter to $3.206 trillion. Over the year through June 30, 2019, assets were up $283 billion, or 17.4%. The largest segment, the Household sector, totals $1.908 trillion, or 59.5% of assets. The Household Sector increased by $82 billion, or 4.5%, in the quarter, after increasing $26 billion in Q1'19. Over the past 12 months through Q2'19, Household assets were up $283 billion, or 17.4%.
Nonfinancial Corporate Businesses, the second-largest segment according to the Fed's data series, held $492 billion, or 15.3% of the total. Assets here rose by $19 billion in the quarter, or 4.1%, and they've increased by $40 billion, or 8.8%, over the past year. Other Financial Business (formerly Funding Corporations) was the third-largest investor segment with $258 billion, or 8.0% of money fund shares. They rose by $7 billion, or 2.6%, in the latest quarter. Other Financial Business has increased by $30 billion, or 13.4%, over the previous 12 months.
The fourth-largest segment, Private Pension Funds held 5.1% of money fund assets ($163 billion), up by $1 billion (0.6%) for the quarter, and up $9 billion, or 6.1%, for the year. Nonfinancial Noncorporate Businesses, which held $110 billion (3.4%), were in 5th place. The Rest of The World category remained in sixth place in market share among investor segments with 3.2%, or $103 billion, while State and Local Government Retirement Funds held $66 billion (2.0%), Life Insurance Companies held $55 billion (1.7%), Property-Casualty Insurance held $31 billion (1.0%), and State and Local Governments held $21 billion (0.7%) according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.799 trillion, or 56.1% of the total. Debt securities includes: Open market paper ($232 billion, or 7.2%; we assume this is CP), Treasury securities ($744 billion, or 23.2%), Agency and GSE-backed securities ($676 billion, or 21.1%), Municipal securities ($136 billion, or 4.2%), and Corporate and foreign bonds ($12 billion, or 0.4%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($1.133 trillion, or 35.3%) and Time and savings deposits ($259 billion, or 8.1%). Money funds also hold minor positions in Foreign deposits ($2 billion, or 0.1%), Miscellaneous assets ($10 billion, or 0.3%) and Checkable deposits and currency ($3 billion, 0.1%). Note: The Fed also lists "Variable Annuity Money Funds;" they currently total $36 billion.
During Q2, Debt Securities were down $96 billion. This subtotal included: Open Market Paper (up $15 billion), Treasury Securities (down $136 billion), Agency- and GSE-backed Securities (up $21 billion), Corporate and Foreign Bonds (up $3 billion) and Municipal Securities (up $1 billion). In the second quarter of 2019, Security Repurchase Agreements were up $153 billion, Foreign Deposits were up $1 billon, Checkable Deposits and Currency were up $35 billion, Time and Savings Deposits were up $34 billion, and Miscellaneous Assets were up $1 billion.
Over the 12 months through 6/30/19, Debt Securities were up $89B, which included Open Market Paper up $57B, Treasury Securities down $15B, Agencies up $13B, Municipal Securities (up $0), and Corporate and Foreign Bonds (up $4B). Foreign Deposits were down $1 billon, Checkable Deposits and Currency were down $12B, Time and Savings Deposits were up $82B, Securities repurchase agreements were up $224B, and Miscellaneous Assets were up $2B.
Note that the Federal Reserve changed its numbers related to money market funds substantially in the second quarter of 2018. Its "Release Highlights Second Quarter 2018" tells us, "New source data for money market funds from the U.S. Securities and Exchange Commission's (SEC) form N-MFP have been incorporated into the sector's asset holdings (tables F.121 and L.121). Money market funds not available to the public, which are included in the SEC data, are excluded from Financial Accounts' estimates. Data revisions begin 2013:Q1. Holdings of money market fund shares by households and nonprofit organizations, state and local governments, and funding corporations (tables F.206 and L.206) have been revised due to a change in methodology based on detail from the Investment Company Institute. Data revisions begin 1976:Q1."
Money funds rose for the 3rd week in a row and for the 20th week out of the past 22 weeks, retaking the $3.4 trillion level for the first time since October 2009. Assets jumped Tuesday and Wednesday after seeing big outflows Monday and the previous Friday due to quarterly tax payments; they ended the week just slightly higher. ICI's latest "Money Market Fund Assets" report shows that assets have increased by $355 billion, or 11.6%, year-to-date. Over the past 52 weeks, ICI's money fund asset series has increased by $537 billion, or 18.7%, with Retail MMFs rising by $239 billion (22.5%) and Inst MMFs rising by $298 billion (16.5%).
ICI writes, "Total money market fund assets increased by $4.91 billion to $3.40 trillion for the week ended Wednesday, September 18, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $3.48 billion and prime funds increased by $2.05 billion. Tax-exempt money market funds decreased by $611 million." ICI's weekly series shows Institutional MMFs falling $2.43 billion and Retail MMFs increasing $7.34 billion. Total Government MMF assets, including Treasury funds, were a record $2.537 trillion (74.6% of all money funds), while Total Prime MMFs were $731.26 billion (21.5%). Tax Exempt MMFs totaled $133.83 billion, or 3.9%.
They explain, "Assets of retail money market funds increased by $7.34 billion to $1.30 trillion. Among retail funds, government money market fund assets increased by $5.04 billion to $744.77 billion, prime money market fund assets increased by $3.20 billion to $433.26 billion, and tax-exempt fund assets decreased by $908 million to $123.46 billion." Retail assets account for over a third of total assets, or 38.3%, and Government Retail assets make up 57.2% of all Retail MMFs.
The release adds, "Assets of institutional money market funds decreased by $2.43 billion to $2.10 trillion. Among institutional funds, government money market fund assets decreased by $1.57 billion to $1.79 trillion, prime money market fund assets decreased by $1.16 billion to $298.00 billion, and tax-exempt fund assets increased by $297 million to $10.37 billion." Institutional assets accounted for 61.7% of all MMF assets, with Government Institutional assets making up 85.3% of all Institutional MMF totals.
Crane Data's separate and broader Money Fund Intelligence Daily series confirms the move higher, showing money fund assets rising by $4.4 billion to $3.726 trillion in the week ended Sept. 18. Assets increased by $23.0 billion on Wednesday (9/18) and $14.1 billion on Tues. (9/17), which made up for declines of $13.9 billion on Monday (9/16), the date of the big repo squeeze, and $20.4 billion on Friday (9/13). Month-to-date through 9/18, money fund assets have risen a total of $28.7 billion. Our latest Money Fund Intelligence XLS, which track an even broader set of funds than our MFI Daily, showed assets rising $85.3 billion to $3.568 trillion in August.
Despite the Fed's rate cut on Wednesday, money fund yields have moved higher due to this week's anomaly in the repo market. Our Crane 100 Money Fund Index, an average of the 100 largest Taxable MMFs, yielded 1.92% a week ago and now yields 2.08%, a jump of 16 bps, according to our MFI Daily. The broader Crane Money Fund Average yields also increased by 16 bps to 1.95%. Yields may continue to rise as the repo-spike works its way through but we assume they'll eventually move lower.
In other news, the Bottom Line Personal newsletter interviewed our Peter Crane, in a brief, entitled, "Higher Yields on Cash Accounts." The article says, "In the latest battle among brokerages, Fidelity, Charles Schwab and Vanguard have been offering unusually high yields of around 2% on cash. But investors should be careful to figure out what's really the best deal. Fidelity has started offering the Fidelity Government Money Market Fund as its 'sweep' account, providing a 1.83% yield recently.... That applies to new brokerage customers at Fidelity and to new and most existing retirement account holders but not automatically to existing brokerage customers."
It continues, "Their default sweep account is Fidelity Cash Management, which recently yielded 1.08%. However, customers can request the higher-yielding fund to be designated as the sweep account instead. The Fidelity yields are much higher than the recent average of 0.25% among all sweep accounts at brokerages."
Bottom Line tells readers, "Don't be fooled by Schwab's response to Fidelity's push. Schwab began promoting its Schwab Government Money Market Fund, recently yielding 1.86%, even though it is not available as a sweep account. Schwab's default sweep accounts recently yielded as low as 0.18%. Each time a customer wants to shift the cash from those accounts to the higher-paying account, the customer must contact Schwab."
The article adds, "Despite the promotions, neither Fidelity nor Schwab is offering the highest yields on cash accounts. Vanguard has long offered the Vanguard Federal Money Market Fund as its default sweep account, recently yielding 2.14%. Some online banks and brokerages, such as Betterment and Wealthfront, offer 2.3% or more."
Finally, safe travels to those heading across the pond for our European Money Fund Symposium, which starts Monday in Dublin, Ireland. The latest agenda is available and registrations are still being taken for the largest money market fund gathering in Europe. Contact us for more information, or feel free to stop by the Hilton if you're in Dublin. See you Monday!
The Federal Reserve Board cut interest rates again yesterday, lowering its Federal funds target rate range to 1.75-2.00 percent, its second cut in a month and a half. The Fed's previous cut on July 31 was the first reduction in over 10 years. (See our Aug. 1 News, "Fed Cuts Rates Quarter to 2.0-2.25 Percent; FP on USAA, Schwab Deal.") Money fund yields, which jumped Tuesday on the mysterious spike in repo rates, are expected to fall in coming days and to pass through the 25 basis point decline over the next month. We review the Fed move, the repo anomaly, and a couple other recent articles, below.
The Fed's release, entitled, "Federal Reserve issues FOMC statement," says, "Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed."
It continues, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective."
The Fed adds, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
The statement also says, "Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent."
The Federal Reserve Bank of New York also issued a statement yesterday, in reaction to the mysterious spike in rates on repurchase agreements, or "repo", on Monday. Their "Statement Regarding Repurchase Operation" tells us, "In accordance with the FOMC Directive issued September 18, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 8:15 AM ET to 8:30 AM ET tomorrow, Thursday, September 19, 2019, in order to help maintain the federal funds rate within the target range of 1-3/4 to 2 percent."
It adds, "This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 1.80 percent."
While we're as baffled as everyone over why repo rates would skyrocket on a mere $30 billion money fund outflows (caused by corporate tax payments and a Treasury auction settlement), we were surprised to see the spike's impact on money fund yields. Our Crane 100 Money Fund Index, which fell below 2.0% over a month ago and which stood at 1.93% on Monday (9/16), jumped 12 bps to 2.05%. One-day yields for some funds surged to over 4.0%, so yields could even rise in coming days as the repo super-spike works its way through. Of course, yields should then move lower, but stay tuned. (See also, Bloomberg's "Repo Market Panic" story.)
In other news, the Wall Street Journal wrote yesterday that the, "Fed Cut Threatens Online Account Growth." They explain, "Banks face risk higher-interest savings offerings will lose appeal as rates fall. Big banks bet that online savings accounts would help them bring in customers when rates were rising. Now that rates are falling, that growth may stall."
The piece continues, "Many banks started offering these accounts -- which often paid interest rates of at least 2% -- in the past couple of years to attract depositors. But some of these lenders, including PNC Financial Services Group Inc., Citizens Financial Group Inc. and CIT Group Inc., have recently started trimming their deposit rates."
It tells us, "Banks have broad latitude over what they pay on deposits, though they tend to move interest up and down as the Federal Reserve adjusts rates. Banks often are quicker to cut deposit rates than they are to raise them. Banks including Goldman Sachs Group Inc. and Ally Financial Inc. recently cut their deposit rates even before the Fed did."
Finally, the article adds, "Banks tweak interest rates to balance two different needs: They want to attract and retain customer deposits, but they don't want to pay more than customers demand. Banks make money on the difference between what they charge on loans and what they pay on deposits." It quotes PNC's CEO Bill Demchak from the company's July earnings call, "If you post in the top couple rates, you gather lots of deposits.... If you're off that frontier it slows you down."
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. We quote from ICI's latest report, review our latest Weekly Money Fund Portfolio Holdings, and summarize recent asset flows below. (See too our Sept. 12 News, "Sept. Money Fund Portfolio Holdings: Treasuries, Repo Jump; CP Down.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in August, prime money market funds held 29.2 percent of their portfolios in daily liquid assets and 43.5 percent in weekly liquid assets, while government money market funds held 62.3 percent of their portfolios in daily liquid assets and 79.8 percent in weekly liquid assets." Prime DLA increased from 26.7% in July, and Prime WLA increased from 42.0% the previous month. Govt MMFs' DLA increased from 60.3% in July and Govt WLA increased from 79.4% from the previous month.
ICI explains, "At the end of August, prime funds had a weighted average maturity (WAM) of 37 days and a weighted average life (WAL) of 71 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 30 days and a WAL of 98 days." Prime WAMs increased by two days from the previous month and WALs increased by three days. Govt WAMs increased by one day and WALs increased by three days.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas rose from $305.31 billion in July to $320.20 billion in August. Government money market funds' holdings attributable to the Americas rose from $1,945.33 billion in July to $2,005.24 billion in August."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $320.2 billion, or 44.4%; Asia and Pacific at $142.8 billion, or 19.8%; Europe at $253.2 billion, or 35.1%; and, Other (including Supranational) at $5.7 billion, or 0.8%. The Government Money Market Funds by Region of Issuer table shows Americas at $2.005 trillion, or 79.1%; Asia and Pacific at $127.0 billion, or 5.0%; Europe at $395.8 billion, or 15.6%, and Other (Including Supranational) at $7.6 billion, or 0.3%."
In other Holdings news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection. The latest cut (with data as of Sept. 13) includes Holdings information from 77 money funds (up from 48 two weeks ago), representing $1.690 trillion (up from $1.012 trillion two weeks ago) of the $3.597 trillion (47.0%) in total money fund assets tracked by Crane Data <b:>`_.
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $675.4 billion (up from $410.7 billion two weeks ago), or 40.0%, Treasury debt totaling $524.0 billion (up from $290.3 billion) or 31.0%, and Government Agency securities totaling $270.5 billion (up from $173.8 billion), or 16.0%. Commercial Paper (CP) totaled $77.9 billion (up from $54.2 billion), or 4.6%, and Certificates of Deposit (CDs) totaled $80.7 billion (up from $45.8 billion), or 4.8%. A total of $30.1 billion or 1.8%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $31.1 billion, or 1.8%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $524.0 billion (31.0% of total holdings), Federal Home Loan Bank with $181.9B (10.8%), Fixed Income Clearing Co with $110.9B (6.6%), BNP Paribas with $75.2 billion (4.5%), RBC with $54.2B (3.2%), Federal Farm Credit Bank with $47.6B (2.8%), Societe Generale with $36.9B (2.2%), JP Morgan with $35.0B (2.1%), Mitsubishi UFJ Financial Group Inc with $31.4B (1.9%) and Credit Agricole with $31.2B (1.8%).
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($149.0B), Fidelity Inv MM: Govt Port ($131.7B), Goldman Sachs FS Govt ($106.4B), BlackRock Lq FedFund ($99.9B), Wells Fargo Govt MMkt ($82.1B), BlackRock Lq T-Fund ($71.3B), Fidelity Inv MM: MMkt Port ($68.2B), JP Morgan 100% US Trs MMkt ($61.4B), Morgan Stanley Inst Liq Govt ($61.0B) and Goldman Sachs FS Trs Instruments ($59.3B). (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.)
Finally, we've been asked about recent asset flows given the turmoil in the repo market. (See today's Link of the Day for more.) We expect money fund assets to have rebounded Tuesday (they rose by $14.1 billion), but our MFI Daily shows assets declining by $13.9 billion on Monday (9/16) after falling by $20.4 billion on Friday (9/13). During the week ended 9/16, money fund assets declined by $38.0 billion to $3.689 trillion. These are quite normal-looking declines for a period including a quarterly corporate tax payment, so we too are baffled by the size of the repo spike.
Crane Data's latest MFI International shows assets in "offshore" or European money market mutual funds rising modestly in GBP and gently falling in USD and Euro in the latest month through September 13. These U.S.-style funds, domiciled in Ireland or Luxemburg and denominated in US Dollars, Sterling and Euro, decreased by $2.8 billion to $844.3 billion month-to-date in September, and they're now down by $1.6 billion year-to-date. Offshore USD money funds have inched up $1.4 billion MTD and they're up $7.1 billion YTD. Euro funds are down E6.3 billion so far in September, and YTD they're down E0.1 billion. GBP funds have risen by L2.3 billion through September 13, are they are up by L16.2 billion YTD. U.S. Dollar (USD) money funds (175) account for over half ($461.1 billion, or 54.6%) of our "European" money fund total, while Euro (EUR) money funds (78) total E98.9 billion (13.0%) and Pound Sterling (GBP) funds (103) total L225.6 billion (32.4%). 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 2.01% (7-Day) on average (as of 9/13/19), down from 2.29% on 12/31/18, but up from 1.19% at the end of 2017. EUR MMFs yield -0.53 on average, compared to -0.49% at year-end 2018 and -0.55% on 12/29/17. Meanwhile, GBP MMFs yielded 0.64%, the same as 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 8/31/19), show that European-domiciled US Dollar MMFs, on average, consist of 29% in Commercial Paper (CP), 23% in Repurchase Agreements (Repo), 22% in Certificates of Deposit (CDs), 12% in Other securities (primarily Time Deposits), 13% in Treasury securities and 1% in Government Agency securities. USD funds have on average 40.7% of their portfolios maturing Overnight, 6.1% maturing in 2-7 Days, 15.2% maturing in 8-30 Days, 11.7% maturing in 31-60 Days, 10.9% maturing in 61-90 Days, 11.7% maturing in 91-180 Days and 3.7% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (24.4%), France (15.2%), Canada (11.7%), Japan (10.3%), the United Kingdom (8.1%), Germany (7.0%), the Netherlands (5.1%), Sweden (3.9%), Australia (2.4%), China (2.4%), Switzerland (2.3%), Singapore (1.8%), Norway (1.5%) and Belgium (0.8%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $64.6 billion (12.6% of total assets), BNP Paribas with $20.3B (3.9%), Bank of Nova Scotia with $16.9B (3.3%), Barclays PLC with $16.3B (3.2%), Mitsubishi UFJ Financial Group Inc with $15.5B (3.0%), Wells Fargo with $13.6B (2.6%), Credit Agricole with $13.0B (2.5%), Standard Chartered Bank with $13.0B (2.5%), Toronto-Dominion Bank with $12.6B (2.4%) and Natixis with $12.4B (2.4%).
Euro MMFs tracked by Crane Data contain, on average 44% in CP, 20% in CDs, 23% in Other (primarily Time Deposits), 9% in Repo, 1% in Agency securities and 3% in Treasuries. EUR funds have on average 30.0% of their portfolios maturing Overnight, 3.6% maturing in 2-7 Days, 16.9% maturing in 8-30 Days, 15.7% maturing in 31-60 Days, 15.2% maturing in 61-90 Days, 15.1% maturing in 91-180 Days and 3.4% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (31.1%), Japan (14.9%), the US (10.5%), Germany (8.9%), Sweden (6.3%), the U.K. (5.0%), the Netherlands (4.5%), Belgium (3.6%), China (3.6%), Switzerland (3.0%), Canada (2.2%), Finland (1.5%) and Austria (1.2%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E7.4B (7.0%), BNP Paribas with E6.3B (5.9%), Mizuho Corporate Bank Ltd with E4.8B (4.5%), Republic of France with E4.3B (4.0%), Mitsubishi UFJ Financial Group Inc with E3.9B (3.6%), Citi with E3.5B (3.3%), BPCE SA with E3.4B (3.2%), Svenska Handelsbanken with E3.3B (3.1%), KBC Group NV with E2.9B (2.8%) and Nordea Bank with E2.9B (2.7%).
The GBP funds tracked by MFI International contain, on average (as of 8/31/19): 35% in CDs, 24% in Other (Time Deposits), 23% in CP, 12% in Repo, 5% in Treasury and 1% in Agency. Sterling funds have on average 27.1% of their portfolios maturing Overnight, 5.2% maturing in 2-7 Days, 12.8% maturing in 8-30 Days, 15.6% maturing in 31-60 Days, 14.4% maturing in 61-90 Days, 20.0% maturing in 91-180 Days and 5.0% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (19.2%), the United Kingdom (18.6%), Japan (15.6%), Canada (9.6%), Germany (6.6%), the Netherlands (4.9%), Sweden (4.5%), United States (3.6%), Singapore (3.1%), Australia (3.0%), China (2.1%) and Abu Dhabi (2.1%).
The 10 Largest Issuers to "offshore" GBP money funds include: the UK Treasury with L18.2B (10.6%), Credit Agricole with L7.9B (4.6%), Mizuho Corporate Bank Ltd with L7.4B (4.3%), BPCE SA with L6.5B (3.8%), Sumitomo Mitsui Banking Co with L6.2B (3.6%), BNP Paribas with L6.1B (3.5%), Mitsubishi UFJ Financial Group Inc with L5.7B (3.3%), Nordea Bank with L5.1B (3.0%), Toronto-Dominion Bank with L4.9B (2.8%) and Sumitomo Mitsui Trust Bank with L4.4B (2.5%).
In related news, J.P. Morgan Securities, in their latest "Short-Term Fixed Income," includes a brief Portfolio Holdings update. They tell us, "As risk-off sentiment rose last month, money fund balances continued their march upward. In aggregate, AUMs climbed $86bn. Government funds led the charge with $67bn of the increase, while prime followed on with $19bn in new money. This surge in balances has followed a sustained upward trend throughout the course of this year. Even accounting for seasonality, year-to-date MMF flows are about $361bn higher than they were through this time last year and $380bn higher than the 2012-2017 average.... The inflows have been mostly driven by prime funds, both retail (+$77bn) and institutional (+$71bn), as well as by institutional government funds (+$164bn)."
JPM explains, "MMFs should remain in demand as investors hide out volatile headline-driven equity markets and fixed income markets that fail to reward longer term risk-taking. In addition, money funds continue to offer a higher yield than bank deposits, on average; plus over the past seven years, MMFs have experienced on average over $85bn of inflows between now and the end of the year."
The update adds, "Government MMF holdings of Agency SOFR FRNs continued to increase in August, rising over $35bn. Government funds continue to hold close to 85% of all SOFR GSE FRNs outstanding.... In August, prime funds reduced dealer repo (-$10bn) in favor of Treasuries (+$16bn) and Agencies (+$5bn).... Bank CP/CD/TD exposures decreased modestly, by $6bn, though at a sector level the change in exposures varied widely. Allocations to Eurozone banks decreased, reversing last month's positive inflow. Amid heightened Brexit anxiety, allocations to British banks saw an overall decline of $6bn. Allocations to Norwegian, American, and Australian banks increased modestly.... At the individual issuer level, changes were largely idiosyncratic."
Finally, we wanted to remind readers once more about our 7th Annual Crane's European Money Fund Symposium, which will take place next week, Sept. 23-24, at The Hilton Dublin in Dublin, Ireland. The latest agenda is available and registrations are still being taken for the largest money market fund gathering in Europe. Contact us for more information, or feel free to stop by the show if you're in Dublin.... See you next week!
The September issue of our Bond Fund Intelligence, which was sent out to subscribers Monday morning, features the lead story, "Ultra-Short Gets Even Hotter; A Look at Negative Yields," which looks at the strong flows into the shortest segment of the bond fund marketplace and "Regulators, ICI Debate Run Risk in Bond Funds (Again)," which reviews the discussion over liquidity concerns and run risk in BFs. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show bond fund yields plummeted and returns skyrocketed in August. 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 "Ultra-Short" article says, "While falling rates may eventually diminish their glow, Ultra-Short Bond Funds, and Conservative Ultra-Short Bond Funds, continue to be among the hottest sectors of the bond fund marketplace. Year-to-date, the two combined categories have increased by $17.3 billion (to $159.3 billion), while over the past 12 months they've increased by $27.7 billion, or 21.1%. This makes them the fastest-growing segment and compares with growth of 10.1% for Bond Funds overall."
It continues, "Refinitiv's Lipper said on Friday, in a brief, 'Ultra-Short Obligation Funds Continue Their Hot Streak,' that, 'Lipper's Ultra-Short Obligation Funds peer group (including both mutual funds and ETFs) took in $2.1 billion in net new money for the fund-flows trading week ended Wednesday, September 11. This was the group's second-largest weekly net inflow ever (trailing only the $2.5 billion positive net flow for the November 21, 2018 fund-flows week) and its eleventh consecutive weekly net intake."
Lipper's brief adds, "Investor infatuation with this peer group extends way beyond the current quarter as ultra-short obligation funds have experienced only nine weekly net outflows since the start of 2017. This time period spans 141 weeks and equates to a 93.6% success rate in respect to achieving weekly net inflows. As could be expected, this run has led to the group's two best annual net inflows with $59.7 billion and $25.1 billion, respectively, for 2018 and 2017. The group has grown its coffers by $20.6 billion for the year to date and will surpass 2017 for the second largest annual net inflow if it continues at this rate."
Our "Regulators" piece explains, "Several studies and articles have been published recently discussing liquidity buffers and potential for a run in bond funds. Last month, the Federal Reserve published a study, 'Liquidity Transformation Risk in U.S. Bank Loan and High-Yield Mutual Funds,' and European regulator ESMA published a release and study on stress testing and liquidity. (See: 'Esma Publishes Stress Simulation Framework for Investment Funds.')"
The Financial Times covers the news in the piece, "European watchdog warns on bond fund liquidity risk." It tell us, "The European Securities and Markets Authority issued a warning ... after conducting an analysis of how the investment fund sector would cope with severe market shocks, such as the collapse in 2008 of Lehman Brothers, the US investment bank. Esma found that although most funds would have sufficient liquid assets to meet investors' redemption requests in the event of such 'extreme but plausible' shocks, there were 'pockets of vulnerabilities,' most notably among high-yield bond funds."
The FT explains, "Regulators have stepped up their scrutiny of fund liquidity after a number of high profile cases where problems have come to light, including H2O, a European asset manager owned by Natixis that loaded up on illiquid debt, and GAM, which suspended withdrawals from a range of bond funds run by the Swiss asset manager with large holdings of esoteric, illiquid assets."
Our Bond Fund News includes the brief "Yields Plummet, Returns Surge in August, which says, "Bond fund yields plunged while returns skyrocketed last month. Our BFI Total Index returned 1.16% over 1-month and 6.75% over 12 months. The BFI 100 returned 1.37% in August and 7.58% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.25% over 1-mo and 2.69% over 1-yr; the BFI Ultra-Short Index averaged 0.23% in August and 2.89% over 12 mos. BFI Short-Term returned 0.65% and 4.68%, and BFI Intm-Term returned 1.85% and 8.53%. BFI's Long-Term Index returned 3.10% in August and 11.63% for 1-year; our High Yield Index returned 0.26% in August and 5.29% over 1-year."
Another News brief quotes Investment News', "Falling rates expose duration risk in bond funds." They tell us, "Falling interest rates across the global fixed-income market have proven to be a boon for certain bond funds that are pushing the limits on interest-rate risk. For example, by delivering promised longer-duration exposure, both the Pimco Extended Duration Fund (PEDPX) and the Vanguard Extended Duration Treasury Index Fund (VEDIX) are up more than 32% this year. Virtually all the top-performing taxable bond funds tracked by Morningstar have gotten there by leaning on duration, which is a measure of a bond's sensitivity to interest rates that can cut both ways in a hurry."
A third News update cites a WSJ piece, "Some Investors Are Betting the Flight to Bonds Is Overdone." This article says, "The 2019 bond rally has reached epic proportions this summer. A hearty pack of skeptical investors is betting it is way overdone. Sentiment in debt markets has rarely been more euphoric. Yields on German government bonds have slumped to all-time lows, pushing prices higher and driving the stock of global negative-yielding debt to $15 trillion. Yields on 10-year U.S. Treasurys this week fell below two-year yields for the first time since 2007, a pattern known as inversion that many investors view as a harbinger of economic recession."
Finally, a sidebar entitled quotes Morningstar in an article titled, "Intermediate Core-Plus Bond Funds Get Adventurous." It says, "Times are relatively tough for fixed-income managers. Geopolitical uncertainty, ultralow or negative yields around the world, and the decade-long recovery have resulted in rich valuations in several areas, including corporate credit. As a result, some managers in the intermediate core bond and intermediate core-plus bond Morningstar Categories have relied more heavily on securitized debt over investment-grade and/or high-yield corporates because they believe its various components offer some combination of favorable risk-adjusted returns, good diversification, and ample liquidity."
Morningstar adds, "The plain-vanilla side of securitized holdings is nothing new. Core bond funds have long invested in agency mortgage-backed securities. The Bloomberg Barclays U.S. Aggregate Bond Index's stake in agency mortgages is just below 28%. Here, we highlight how a few managers have emphasized this space in recent years."
Wells Fargo Asset Management's most recent monthly Portfolio Manager Commentary" discusses the most recent round of money market fund reforms and how funds might hold up during a recession. They tell us, "While not all recessions are created equal, the most recent SEC rules implemented in 2016, acting in combination with the stringent regulations imposed on the banking sector after the financial crisis, have created an even more stable backdrop for MMFs than existed in the past. The new rules that came with the SEC's MMF revamp, discussed in greater detail below, are consistent with the conservative manner in which our funds have always been managed, emphasizing preservation of capital and high levels of liquidity."
The update continues, "Although the SEC has required prime funds to maintain minimum positions of daily and weekly liquid assets of 10% and 30%, respectively, since 2010, the 2016 reforms to SEC Rule 2a-7, which governs MMFs, went a few steps further by coupling those limits with liquidity fees and gates in the event of their breach. Those few additional steps prompted investor concern over the potential loss of liquidity from the imposition of fees and gates. To recap, the rules give fund boards the ability to impose a liquidity fee or redemption gate if a fund's weekly liquidity level drops below 30%. Probably in large part to avoid triggering such an event, fund managers have typically maintained weekly liquid asset levels well above the 30% threshold."
It explains, "In addition to adhering to regulatory requirements, we believe the most important aspect of liquidity management is understanding the liquidity needs of the different investors in the fund. We have long-established know-your-customer procedures that allow for ongoing and regular communication between the sales and investment teams. As a result, the portfolio management team is better able to understand the nature and timing of the fund's cash flows and manage the fund's liquidity accordingly."
Wells also says, "The adoption of a floating net asset value (NAV) was also a significant concern for investors who were uncertain how much fluctuation they would see in their daily principal balance. We now have nearly three years of empirical evidence that shows institutional prime MMF NAV fluctuations have been minimal. The weekly liquid assets profile of a fund, as well as its holdings in floating-rate paper, can help decrease the NAV volatility that comes from the changing values of fixed-rate securities as interest rates change."
They write, "In addition to adopting the 2016 changes imposing the floating NAV and the possibility of fees and gates, MMFs continue to be required to meet Rule 2a-7's guidelines surrounding credit diversification, maturity restrictions, and risk oversight, all of which shape a product that should better withstand exogenous events, including a recession. The rule's credit diversification requirements allow funds to invest in a wide range of credits but limit the exposure to any single issuer. The intent of this rule is to minimize the impact of any single credit on a well-diversified portfolio. In addition, we have a dedicated credit team that reviews each issuer to help ensure minimal credit risk is maintained."
The authors explain, "Rule 2a-7's maturity restrictions serve to minimize the NAV impact of interest rate changes as shorter securities, those maturing sooner, have smaller price variations from a given interest rate move than longer securities, helping ensure a more stable product. Finally, our risk management team's stress tests of a MMF's ability to withstand certain hypothetical market stress events are an important tool used by portfolio managers. These hypothetical events include increases and decreases in short-term interest rates, downgrades or default of portfolio security positions, and a correlated increase in the credit spreads for certain portfolio securities, in combination with increases in shareholder redemptions."
They continue, "Having had an extended period to observe weekly liquidity levels in prime MMFs, investors appear to have become more comfortable with the ideas of a floating NAV and of fees and gates. Taken together, the demonstrated ample liquidity and relatively stable fund NAVs have encouraged investors to begin to move back into prime funds with at least a portion of their money market cash. As shown in the chart on the next page, prime assets have increased 87% since the 2016 SEC reforms and 26% since the beginning of 2019."
Finally, Wells writes, "Aside from Rule 2a-7, the capital requirements imposed on the banking sector by Dodd-Frank and the increased amount of high-quality liquid assets banks are required to hold, in part to meet highly adverse stress test scenarios, are in place to minimize the impact of a recession or an unexpected event on banks and systemically important financial institutions.... [T]he more robust banking regulations are especially beneficial to prime MMFs as they enhance the credit profile of a large portion of the funds' underlying assets.... Over the prime MMF complex, holdings of a variety of security types issued by the finance sector represent 58% of fund assets. Additionally, repurchase agreements secured by government securities executed with bank counterparties, as well as direct investments in government securities, comprise another 28% of prime funds' holdings."
The commentary concludes, "The liquidity, maturity, and diversification requirements mandated by the SEC have led to a more stable MMF product, especially in terms of liquidity and minimal NAV fluctuations, with an improved resilience in the face of market stresses. In addition, the bulk of the underlying holdings of the prime MMF sector are in securities issued by financial institutions, which have themselves been made more resilient by post-crisis regulations. If the economy does in fact slip into recession, the various changes to MMF and banking regulations have made MMFs better positioned to withstand economic stresses."
In other news, money fund assets rose again this week, the 19th increase out of the past 21 weeks. ICI's latest "Money Market Fund Assets" report shows that assets have increased by $350 billion, or 11.5%, year-to-date. Over the past 52 weeks, ICI's money fund asset series has increased by $516 billion, or 17.9%, with Retail MMFs rising by $234 billion (22.0%) and Inst MMFs rising by $283 billion (15.5%).
ICI writes, "Total money market fund assets increased by $16.77 billion to $3.40 trillion for the week ended Wednesday, September 11, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $10.25 billion and prime funds increased by $7.01 billion. Tax-exempt money market funds decreased by $490 million." ICI's weekly series shows Institutional MMFs rising $11.6 billion and Retail MMFs increasing $5.2 billion. Total Government MMF assets, including Treasury funds, were a record $2.534 trillion (74.6% of all money funds), while Total Prime MMFs were $729.21 billion (21.5%). Tax Exempt MMFs totaled $134.4 billion, or 4.0%.
They explain, "Assets of retail money market funds increased by $5.17 billion to $1.29 trillion. Among retail funds, government money market fund assets increased by $2.74 billion to $739.73 billion, prime money market fund assets increased by $2.78 billion to $430.05 billion, and tax-exempt fund assets decreased by $351 million to $124.37 billion." Retail assets account for over a third of total assets, or 38.1%, and Government Retail assets make up 57.2% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $11.60 billion to $2.10 trillion. Among institutional funds, government money market fund assets increased by $7.51 billion to $1.79 trillion, prime money market fund assets increased by $4.23 billion to $299.16 billion, and tax-exempt fund assets decreased by $139 million to $10.08 billion." Institutional assets accounted for 61.9% of all MMF assets, with Government Institutional assets making up 85.3% of all Institutional MMF totals.
Crane Data released its September Money Fund Portfolio Holdings Wednesday, and our most recent collection of taxable money market securities, with data as of August 31, 2019, shows a big jump in Treasury and Repo holdings, and declines in CP and Agencies. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $93.0 billion to $3.597 trillion last month, after increasing $102.1 billion in July, $18.7 billion in June and $77.2 billion in May. Repo continues to be the largest portfolio segment, followed by Treasury securities, 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) rose by $20.5 billion (1.6%) to $1.293 trillion, or 35.9% of holdings, after increasing $72.2 billion in July, $37.2 billion in June and $57.2 billion in May. Treasury securities rose $89.8 billion (11.0%) to $906.1 billion, or 25.2% of holdings, after decreasing $3.7 billion in July, $19.6 billion in June and $7.6 billion in May. Government Agency Debt fell by $9.9 billion (-1.4%) to $706.5 billion, or 19.6% of holdings, after increasing $18.2 billion in July, decreasing $26.0 billion in June and increasing $8.6 billion in May. Repo, Treasuries and Agencies totaled $2.906 trillion, representing a massive 80.8% of all taxable holdings.
Money funds' holdings of CP fell in August, while Other (mainly Time Deposits) and CD holdings rose. Commercial Paper (CP) decreased $15.0 billion (-4.4%) to $322.7 billion, or 9.0% of holdings, after increasing $8.9 billion in July, $5.5 billion in June and $14.0 billion in May. Certificates of Deposit (CDs) rose by $4.5 billion (1.8%) to $257.5 billion, or 7.2% of taxable assets, after decreasing $0.6 billion in July, increasing $15.3 billion in June and increasing $4.8 billion in May. Other holdings, primarily Time Deposits, increased $3.4 billion (3.4%) to $104.0 billion, or 2.9% of holdings, after increasing $8.1 billion in July, $5.8 billion in June and $0.4 billion in May. VRDNs inched lower to $7.1 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately late today.)
Prime money fund assets tracked by Crane Data increased $20 billion to $1.035 trillion, or 28.8% of taxable money funds' $3.597 trillion total. Among Prime money funds, CDs represent a quarter of holdings at 24.9% (the same as a month ago), while Commercial Paper accounted for 31.2% (down from 33.4%). The CP totals are comprised of: Financial Company CP, which makes up 19.2% of total holdings, Asset-Backed CP, which accounts for 6.7%, and Non-Financial Company CP, which makes up 5.3%. Prime funds also hold 6.4% in US Govt Agency Debt, 7.9% in US Treasury Debt, 8.1% in US Treasury Repo, 1.1% in Other Instruments, 6.8% in Non-Negotiable Time Deposits, 4.5% in Other Repo, 6.8% in US Government Agency Repo and 0.5% in VRDNs.
Government money fund portfolios totaled $1.753 trillion (48.7% of all MMF assets), up $52 billion from $1.701 trillion in July, while Treasury money fund assets totaled another $809 billion (22.5%), up from $789 billion the prior month. Government money fund portfolios were made up of 36.5% US Govt Agency Debt, 22.6% US Government Agency Repo, 15.8% US Treasury debt and 24.7% in US Treasury Repo. Treasury money funds were comprised of 67.6% US Treasury debt, 32.3% 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 71.2% of all taxable money fund assets.
European-affiliated holdings (including repo) fell by $1.8 billion in August to $738.2 billion; their share of holdings fell to 20.5% from last month's 21.1%. Eurozone-affiliated holdings rose to $485.1 billion from last month's $483.3 billion; they account for 13.5% of overall taxable money fund holdings. Asia & Pacific related holdings rose by $13.8 billion to $326.6 billion (9.1% of the total). Americas related holdings fell $80 billion to $2.30 trillion and now represent 70.3% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (down $21.0 billion, or -2.6%, to $777.1 billion, or 21.6% of assets); US Government Agency Repurchase Agreements (up $38.2 billion, or 8.9%, to $467.9 billion, or 13.0% of total holdings), and Other Repurchase Agreements (up $3.3 billion, or 7.4%, from last month to $48.1 billion, or 1.3% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $6.7 billion to $198.7 billion, or 5.5% of assets), Asset Backed Commercial Paper (up $1.5 billion to $69.3 billion, or 1.9%), and Non-Financial Company Commercial Paper (down $9.8 billion to $54.7 billion, or 1.5%).
The 20 largest Issuers to taxable money market funds as of August 31, 2019, include: the US Treasury ($906.1 billion, or 25.2%), Federal Home Loan Bank ($514.4B, 14.3%), Fixed Income Clearing Co ($204.8B, 5.7%), BNP Paribas ($134.7B, 3.7%), RBC ($122.2B, 3.4%), JP Morgan ($92.0B, 2.6%), Federal Farm Credit Bank ($82.3B, 2.3%), Barclays ($82.1B, 2.3%), Wells Fargo ($80.6B, 2.2%), Federal Home Loan Mortgage Co ($77.4B, 2.2%), Credit Agricole ($74.0B, 2.1%), Mitsubishi UFJ Financial Group Inc ($69.4B, 1.9%), Societe Generale ($59.0B, 1.6%), Sumitomo Mitsui Banking Co ($51.4B, 1.4%), Natixis ($48.9B, 1.4%), Toronto-Dominion Bank ($46.6B, 1.3%), Bank of Montreal ($46.1B, 1.3%), Bank of Nova Scotia ($45.6B, 1.3%), HSBC ($45.6B, 1.3%) and Bank of America ($43.5B, 1.2%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Fixed Income Clearing Co ($204.8B, 15.8%), BNP Paribas ($124.1B, 9.6%), RBC ($93.6B, 7.2%), JP Morgan ($79.3B, 6.1%), Barclays PLC ($71.7B, 5.5%), Wells Fargo ($66.4B, 5.1%), Credit Agricole ($52.8B, 4.1%), Societe Generale ($47.6B, 3.7%), Mitsubishi UFJ Financial Group Inc ($45.3B, 3.5%) and HSBC ($38.6B, 3.0%). Fed Repo positions among MMFs on 8/31/19 include: Fidelity Cash Central Fund ($7.1B), Fidelity Sec Lending Cash Central ($3.2B), Franklin IFT US Govt MM ($1.8B) 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: Toronto-Dominion Bank ($31.9B, 5.6%), RBC ($28.6B, 5.0%), Bank of Nova Scotia ($24.1B, 4.2%), Mitsubishi UFJ Financial Group ($24.0B, 4.2%), Credit Suisse ($21.3B, 3.7%), Credit Agricole ($21.2B, 3.7%), Sumitomo Mitsui Banking Co ($18.7B, 3.3%), Bank of Montreal ($18.1B, 3.2%), Mizuho Corporate Bank Ltd ($17.8B, 3.1%) and DNB ASA ($16.9B, 2.9%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group ($17.6B, 6.8%), Bank of Montreal ($15.8B, 6.2%), Toronto-Dominion Bank ($15.2B, 5.9%), Sumitomo Mitsui Banking ($14.3B, 5.6%), Wells Fargo ($13.8B, 5.4%), Mizuho Corporate Bank ($11.4B, 4.4%), Sumitomo Mitsui Trust Bank ($10.6B, 4.1%), Bank of Nova Scotia ($9.7B, 3.8%), Svenska Handelsbanken ($9.6B, 3.7%) and Canadian Imperial Bank of Commerce ($9.4B, 3.7%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($19.8B, 7.3%), Toronto-Dominion Bank ($16.2B, 6.0%), Credit Suisse ($12.8B, 4.7%), JPMorgan ($12.4B, 4.6%), Bank of Nova Scotia ($12.3B, 4.6%), Societe Generale ($10.0B, 3.7%), NRW.Bank ($9.8B, 3.6%), National Australia Bank Ltd ($9.3B, 3.5%), Toyota ($8.5B, 3.2%) and FMS Wertmanagement ($7.6B, 2.8%).
The largest increases among Issuers include: US Treasury (up $89.8B to $906.1B), RBC (up $16.2B to $122.2B), Federal Home Loan Mortgage Co (up $9.8B to $77.4B), Federal National Mortgage Association (up $8.5B to $27.5B), DNB ASA (up $6.2B to $21.1B), Wells Fargo (up $4.8B to $80.6B), Mizuho Corporate Bank Ltd (up $3.8B to $38.6B), Standard Chartered Bank (up $3.5B to $12.2B), Sumitomo Mitsui Banking Co (up $3.5B to $51.4B) and Australia & New Zealand Banking Group Ltd (up $3.5B to $14.8B).
The largest decreases among Issuers of money market securities (including Repo) in August were shown by: Federal Home Loan Bank (down $27.5B to $514.4B), Fixed Income Clearing Co (down $12.7B to $204.8B), Credit Agricole (down $5.7B to $74.0B), HSBC (down $4.6B to $45.6B), Credit Suisse (down $4.5B to $27.0B), Barclays PLC (down $4,4B to $82.1B), JP Morgan (down $1.9B to $92.0B), Citi (down $1.9B to $40.2B), ABN Amro Bank (down $1.0B to $10.1B) and Federal Farm Credit Bank (down $0.6B to $82.3B).
The United States remained the largest segment of country-affiliations; it represents 61.6% of holdings, or $2.214 trillion. France (9.4%, $336.8B) was number two, and Canada (8.8%, $314.9B) was third. Japan (7.1%, $256.6B) occupied fourth place. The United Kingdom (4.6%, $163.5B) remained in fifth place. Germany (2.2%, $78.8B) was in sixth place, followed by The Netherlands (1.7%, $59.7B), Australia (1.3%, $46.7B), Switzerland (1.0%, $36.3B) and Sweden (0.9%, $32.1B). (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 August 31, 2019, Taxable money funds held 41.0% (up from 38.5%) of their assets in securities maturing Overnight, and another 13.7% maturing in 2-7 days (down from 16.1% last month). Thus, 54.7% in total matures in 1-7 days. Another 17.9% matures in 8-30 days, while 10.7% matures in 31-60 days. Note that over three-quarters, or 83.3% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 7.1% of taxable securities, while 7.5% matures in 91-180 days, and just 2.2% matures beyond 181 days.
The Federal Reserve Bank of New York posted a new brief recently on its "Liberty Street Economics" blog. Entitled, "The Transmission of Monetary Policy and the Sophistication of Money Market Fund Investors, it examines Fed rate moves and their impact on money market fund yields. Authors Marco Cipriani, Jeff Gortmaker, and Gabriele La Spada comment, "In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by money market funds (MMFs) to their investors and show that the impact varies depending on investors' sophistication."
The article states, "The chart below shows the net yield (the yield that MMF investors receive, net of the fees paid to the MMF) paid by the two main types of MMFs -- prime (red lines) and government (blue lines) -- to two different types of investors -- institutional (solid lines) and retail (dashed lines); the gray area represents the Federal Reserve target range for federal funds loans. All the yields increased with the Federal Reserve target range; moreover, as the target range moved away from the zero lower bound, the gap between rates paid by prime funds and government funds widened, with the latter generally below the target range. A gap also emerged between the rates paid to institutional versus retail investors, with institutional investors generally receiving a higher yield."
It explains, "To quantify the extent of the monetary policy pass-through to MMF investors, we computed the average increase in MMF yields in the month following each rate hike as a fraction of the increase in the rate paid to lenders at the overnight reverse repurchase facility (ON RRP).... On average, across all nine hikes, funds for institutional investors had the highest pass-through (63 percent for prime funds and 53 percent for government funds), while the pass-through was lower for retail investors (51 percent for prime funds and 42 percent for government funds). The difference between the one-month pass-through by institutional and retail funds was highest after the first rate hike: Whereas the one-month pass-through to institutional investors was 70 percent for prime funds and 34 percent for government funds, the one-month pass-through to retail investors was 45 percent for prime funds and just 1 percent for government funds."
The blog post continues, "To characterize the speed of adjustment of MMF yields to increases in the ON RRP rate, we show the number of days needed for the pass-through to exceed 50 percent after a rate increase.... On average, across the nine rate hikes, the number of days for the pass-through to reach 50 percent is higher for retail than for institutional funds, in both government and prime funds. The difference between institutional and retail funds was very high after the first rate hike but has been diminishing over time."
Finally, the piece states, "A possible explanation for the difference in the pass-through for institutional and retail MMFs is the lower financial sophistication of retail investors. This factor may have been especially material when the Federal Reserve changed its monetary policy stance after a long period of extremely low interest rates. As investors became more familiar with the new policy environment and investment opportunities, the pass-through for retail investors approached that of institutional investors. Such differences in transmission of monetary policy to different segments of the economy are key to understanding both the effectiveness of monetary policy implementation and its distributional effects."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be published Wednesday, Sept. 11, and we'll be writing our normal monthly update on the August 31 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 Tuesday morning. (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 Aug. 31, 2019, includes holdings information from 1,195 money funds (2 fewer than last month), representing assets of just under $3.8 trillion -- $3.798 trillion (up from $3.703 trillion). 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 $1,308 billion (up from $1,288 billion), or 34.4% of all assets. Treasury holdings total $916.7 billion (up from $825.3 billion), or 24.1%, and Government Agency securities totaled $723.6 billion (down from $732.9 billion), or 19.1%.
Commercial paper (CP) totals $338.0 billion (down from $352.8 billion), or 8.9%, and Certificates of Deposit (CDs) total $262.0 billion (up from $257.9 billion), or 6.9%. The Other category (primarily Time Deposits) totals $151.1 billion (up from $145.2 billion), or 4.0%, and VDRNs account for $99.2 billion (down from $101.2 billion last month), or 2.6%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $213.6 billion, or 5.6%, in Financial Company Commercial Paper; $62.6 billion or 1.6%, in Asset Backed Commercial Paper; and, $61.8 billion, or 1.6%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($823.6B, or 21.7%, U.S. Govt Agency Repo ($437.7B, or 11.5%) and Other Repo ($46.5B, or 1.2%).
The N-MFP Holdings summary for the 214 Prime Money Market Funds shows: CP holdings of $332.3 billion (down from $347.4 billion), or 31.3%; CD holdings of $257.9 billion (down from $258.0 billion), or 24.8%; Repo holdings of $262.0 billion (up from $205.2 billion), or 24.7%; Other (primarily Time Deposits) holdings of $104.3 billion (up from $93.2 billion), or 9.8%; Treasury holdings of $86.1 billion (up from $69.8 billion), or 8.1%; Government Agency holdings of $66.8 billion (up from $62.3 billion), or 6.3%; and VRDN holdings of $5.7 billion (the same as the previous month), or 0.5%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $213.6 billion (down from $216.6 billion), or 20.1% in Financial Company Commercial Paper; $62.6 billion (up from $62.5 billion) or, 5.9% in Asset Backed Commercial Paper; and $56.1 billion (down from $68.3 billion), or 5.3% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($87.2 billion, or 8.2%), U.S. Govt Agency Repo ($70.0 billion, or 6.6%), and Other Repo ($46.5 billion, or 4.4%).
Crane Data's latest Money Fund Market Share rankings show assets were up again for almost all U.S. money fund complexes in August. Money fund assets increased by $85.9 billion, or 2.3%, last month to $3.707 trillion. Assets have climbed by $207.0 billion, or 5.9%, over the past 3 months, and they've increased by $637.2 billion, or 20.8%, over the past 12 months through August 31, 2019. The biggest increases among the 25 largest managers last month were seen by Fidelity, Federated, JP Morgan, Goldman Sachs, SSGA and Schwab, which increased assets by $29.1 billion, $12.4B, $12.1B, $10.5B, $7.9B and $6.4B, respectively. Declines in assets among the largest complexes in August were seen by Invesco, Dreyfus, Vanguard and BlackRock, which decreased by $9.4B, $2.8B, $1.3B and $0.5B. 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, which moved lower in August.
Over the past year through August 31, 2019, Fidelity (up $134.5B, or 22.2%), American Funds (up $113.1B, or 711.9%; this was inflated by the addition earlier this year of the $108 billion American Funds Central Cash Fund), Federated (up $79.6B, or 39.1%), Vanguard (up $65.0B, or 20.7%), JP Morgan (up $61.0B, or 22.6%), Schwab (up $50.6B, or 39.4%) and SSGA (up $20.2B, or 24.1%) were the largest gainers. These complexes were followed by Morgan Stanley (up $20.1B, or 20.0%), Goldman Sachs (up $19.1B, or 9.6%), BlackRock (up $18.9B, or 6.5%) and First American (up $16.0B, or 29.2%). Fidelity, Federated, JP Morgan, Schwab and BlackRock had the largest money fund asset increases over the past 3 months, rising by $56.7B, $28.6B, $25.4B, $17.6B and $15.8B, respectively. The only decliners over 3 months were: Franklin (down $1.6B, or -7.3%), PGIM (down $1.1B, or -5.3%) and Dreyfus (down $1.0B, or -0.6%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $740.4 billion, or 20.0% of all assets. That was up $29.1 billion in August, up $56.7 billion over 3 mos., and up $134.5B over 12 months. Vanguard ranked second with $379.0 billion, or 10.2% market share (down $1.3B, up $1.3B and up $65.0B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan was third with $330.4 billion, or 8.9% market share (up $12.1B, up $25.4B and up $61.0B). BlackRock ranked fourth with $309.5 billion, or 8.3% of assets (down $0.2B, up $15.8B and up $18.9B for the past 1-month, 3-mos. and 12-mos.), while Federated remained in fifth with $283.1 billion, or 7.6% of assets (up $12.4B, up $28.6B and up $79.6B).
Goldman Sachs remained in sixth place with $218.9 billion, or 5.9% of assets (up $10.5 billion, up $10.6B and up $19.1B), while Schwab was in seventh place with $179.0 billion, or 4.8% (up $6.4B, up $17.6B and up $50.6B). Dreyfus ($159.2B, or 4.3%) was in eighth place (down $2.8B, down $1.0B and down $12.3B), followed by American Funds ($128.9B, or 3.9%, unchanged, up $1.9B and up $113.1B). Wells remained in 10th place ($122.5B, or 3.3%; up $355 million, up $1.3B and up $9.9B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Northern ($121.2B, or 3.3%), Morgan Stanley ($120.8, or 3.3%), SSGA ($103.9B, or 2.8%), Invesco ($71.8B, or 1.9%), First American ($70.8B, or 1.9%), UBS ($67.1B, or 1.8%), T Rowe Price ($39.2B, or 1.1%), DWS ($24.4B, or 0.7%), Western ($21.4B, or 0.6%) and DFA ($19.8B, or 0.6%). 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 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 ($749.7 billion), J.P. Morgan ($489.3B), BlackRock ($473.7B), Vanguard ($379.0B) and Goldman Sachs ($338.6B). Federated ($293.3B) was sixth, Schwab ($179.0B) was in seventh, followed by Dreyfus/BNY Mellon ($177.3B), Morgan Stanley ($156.1B) and Northern ($147.7B) 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 8/31/19, shows lower yields in August across all of our taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 754), fell 18 basis points to 1.80% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield decreased by 19 bps to 1.81%. The MFA's Gross 7-Day Yield decreased by 19 bps to 2.21%, while the Gross 30-Day Yield fell 21 bps to 2.22%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.94% (down 19 bps) and an average 30-Day Yield that decreased to 1.95%. The Crane 100 shows a Gross 7-Day Yield of 2.21% (down 19 bps), and a Gross 30-Day Yield of 2.23%. Our Prime Institutional MF Index (7-day) yielded 2.02% (down by 19 bps) as of August 31, while the Crane Govt Inst Index was 1.90% (down 21 bps) and the Treasury Inst Index was 1.85% (down 16 bps). Thus, the spread between Prime funds and Treasury funds is 17 basis points, while the spread between Prime funds and Govt funds is 12 basis points. The Crane Prime Retail Index yielded 1.85% (down 19 bps), while the Govt Retail Index was 1.60% (down 19 bps) and the Treasury Retail Index was 1.57% (down 21 bps). The Crane Tax Exempt MF Index yield had a smaller drop in August to 0.96% (down 3 bps).
Gross 7-Day Yields for these indexes in August were: Prime Inst 2.32% (down 20 bps), Govt Inst 2.18% (down 21 bps), Treasury Inst 2.14% (down 15 bps), Prime Retail 2.31% (down 20 bps), Govt Retail 2.18% (down 21 bps) and Treasury Retail 2.14% (down 17 bps). The Crane Tax Exempt Index decreased 9 basis points to 1.42%. The Crane 100 MF Index returned on average 0.17% over 1-month, 0.53% over 3-months, 1.46% YTD, 2.14% over the past 1-year, 1.32% over 3-years (annualized), 0.83% over 5-years, and 0.43% over 10-years. The total number of funds, including taxable and tax-exempt, increased by 4 to 939. There are currently 754 taxable, up by 4, 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 September issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Monday morning, features the articles: "Sweeps Get Messy: Fidelity vs. Schwab; Lawsuit," which reviews the recent attention around money funds vs. FDIC sweeps; "FIS SGN's Vogel & Borchardt on Portals, Tech and Reforms," which profiles the portal formerly named SunGard; and, "MFI Intl Shows Euro Assets Jumping Despite Negative," which discusses assets and issues in "offshore" or European money market mutual funds. We've also updated our Money Fund Wisdom database with August 31 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, Sept. 11, and our Sept. Bond Fund Intelligence is scheduled to go out Monday, Sept. 16.
MFI's "Sweep," article says, "August was a crazy busy month in the brokerage 'sweep' space. Brokerages were cutting rates in reaction to the Fed's July rate cut, then Fidelity decided to hike its rates and advertise one of the only remaining money fund sweep options available. An ad war, which we termed 'Cash of the Titans,' ensued between Fidelity and Charles Schwab. Then, finally, the month was capped off by a sweep lawsuit against Merrill Lynch."
It continues, "Following an incomprehensible press release from Fidelity saying new accounts would sweep to its money fund, the two brokerage giants traded full page ads in The Wall Street Journal and New York Times. (Fidelity points out a 1.80% rate on SPAXX vs. low sweep rates for Schwab, and Schwab touting its higher-yielding position money fund.) Fidelity has also been running TV commercials (on CNBC and on ABC's Evening News)."
Our FIS SGN profile reads, "This month, Money Fund Intelligence interviews FIS SGN's Vice President of Product Management Mike Vogel and FIS SGN's Short-Term Cash Management Product Manager Matt Borchardt. We discuss the online money market fund trading portal's history, their latest developments and overall market issues. Our Q&A follows."
MFI says, "Give us a little history." Vogel responds, "FIS is a leading provider of technology and solutions for merchants, banks and capital markets around the world. We focus on scale and an have extensive portfolio of solutions to help our clients connect and securely manage their operations. FIS continues to grow both organically and through acquisitions including SunGard in 2015 and our most recent acquisition, WorldPay, which closed in July 2019, bringing us to 55,000 employees in 48 countries."
Borchardt adds, "Our FIS SGN Short-Term Cash Management (STCM) Portal started with a SunGard acquisition in 2002 and we have been growing and expanding it ever since with a mission to serve treasury managers by adding efficiency in any way possible. Today, STCM provides access to 257 unique funds and other investments across 45 fund families processing over $4T in transactions each year."
Our "MFI Intl" update says, "Crane Data's latest MFI International shows assets in 'offshore' or European money market mutual funds rising sharply in the latest month through August 30. These U.S.-style funds, domiciled in Ireland or Luxemburg and denominated in US Dollars, Sterling and Euro, increased by $5.8 billion to $847.2 billion the past month, but they're up by $1.2 billion YTD."
It continues, "Offshore USD money funds rose $2.1 billion the past month and they're up $5.7 billion YTD. Euro funds jumped E10.4 billion to break into the black YTD, up E6.2 billion. GBP funds jumped by L11.6 billion during August, are they are up by L13.9B YTD. U.S. Dollar (USD) money funds (​175) account for over half ($459.6B, or 54.3%) of our 'European' money fund total, while Euro (EUR) money funds (78) total E105.2B (13.3%) -- their highest level since 2011 -- and Pound Sterling (GBP) funds (103) total L223.3 billion (32.1%)."
The latest MFI also includes the News Brief, "Assets Up $500 Billion Over 1Yr." It tells us, "Money fund assets have risen in 18 out of the past 20 weeks and past 14 months in a row. ICI's new 'Money Market Fund Assets' report shows that MMF totals have increased by $316 billion, or 10.4%, year-​to-​date. Over the past 52 weeks, ICI's series has increased by $500 billion, or 17.5%, with Retail MMFs rising $224 billion (21.3%) and Inst MMFs rising $276 billion (15.2%). Crane Data's broader series shows assets rising $86.9 billion to break $3.7 trillion ($3.709T) level in August."
Our August MFI XLS, with Aug. 31, 2019, data, shows total assets rose by $86.9 billion in June to $3.709 trillion, after rising $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 1.82% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was down 19 basis points to 1.93%.
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA fell 17 basis points to 2.23% and the Crane 100 fell to 2.20%. 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 30 and 33 days, respectively (up one day for the Crane MFA and two days for the Crane 100). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Money fund assets rose this week, after falling the prior week due to month-end. MMFs have risen in 18 out of the past 20 weeks and are at again at their highest levels since October 2009. ICI's latest "Money Market Fund Assets" report shows that assets have increased by $333 billion, or 10.9%, year-to-date. Over the past 52 weeks, ICI's money fund asset series has increased by $500 billion, or 17.3%, with Retail MMFs rising by $231 billion (21.8%) and Inst MMFs rising by $269 billion (14.7%). We review ICI's latest asset totals, as well as Crane Data's latest onshore and offshore asset information below.
ICI writes, "Total money market fund assets increased by $16.75 billion to $3.38 trillion for the week ended Wednesday, September 4, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $9.22 billion and prime funds increased by $7.12 billion. Tax-exempt money market funds increased by $408 million." ICI's weekly series shows Institutional MMFs rising $6.3 billion and Retail MMFs increasing $10.5 billion. Total Government MMF assets, including Treasury funds, were $2.523 trillion (74.6% of all money funds), while Total Prime MMFs were $722.2 billion (21.4%). Tax Exempt MMFs totaled $134.9 billion, or 4.0%.
They explain, "Assets of retail money market funds increased by $10.48 billion to $1.29 trillion. Among retail funds, government money market fund assets increased by $6.48 billion to $736.99 billion, prime money market fund assets increased by $3.39 billion to $427.28 billion, and tax-exempt fund assets increased by $618 million to $124.72 billion." Retail assets account for over a third of total assets, or 38.1%, and Government Retail assets make up 57.2% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $6.27 billion to $2.09 trillion. Among institutional funds, government money market fund assets increased by $2.74 billion to $1.79 trillion, prime money market fund assets increased by $3.74 billion to $294.93 billion, and tax-exempt fund assets decreased by $209 million to $10.22 billion." Institutional assets accounted for 61.9% of all MMF assets, with Government Institutional assets making up 85.4% of all Institutional MMF totals.
For the month of August, Crane Data's MFI Daily shows money fund assets rising by $272.3 billion to $3.503 trillion. (Note, however, that we added $195 billion in new funds to our collections. See our Aug. 23 Link of the Day, "Crane Adds $195 Billion to MFI Daily," for details.) The adjusted money fund assets, without the 24 newly added funds, shows a jump of $77.6 billion. With the new funds included, MFI Daily shows $116.2 billion of the gains coming from Govt MMFs and $156.8 billion coming from Prime MMFs. But removing the new funds from our totals shows $61.9 billion in gains coming from Govt MMFs and $16.4 billion coming from Prime MMFs.
Crane Data's latest MFI International, which tracks assets of "offshore" or European money market mutual funds, also shows assets rising in the month of August. These U.S.-style funds, domiciled in Ireland or Luxemburg and denominated in US Dollars, Sterling and Euro, rose by $5.8 billion to $847.2 billion <b:>`_. (The Euro and Sterling funds are converted into U.S. Dollars.) Year-to-date, assets are up by just $1.2 billion. (The gains would be much larger were it not for the strong dollar.)
Offshore USD money funds rose $2.1 billion in August and they've risen by $5.7 billion YTD. Euro funds rose E10.4 billion and YTD are now positive, up E6.2 billion. GBP money funds rose by L11.6 billion through August 30; they're up by L13.9 billion YTD. U.S. Dollar (USD) money funds (175) account for over half ($459.6 billion, or 54.2%) of our "European" money fund total, while Euro (EUR) money funds (78) total E105.2 billion (12.4%) and Pound Sterling (GBP) funds (103) total L223.3 billion (26.4%). (We hope to see some of you in just over 2 weeks at our upcoming European Money Fund Symposium, which is Sept. 23-24 in Dublin, Ireland.)
Reuters also writes about money fund assets in the article, "U.S. money fund assets hit highest since October 2009: iMoneyNet." They say, "U.S. money market fund assets rose to their highest level since October 2009, as investors resumed their move into these low-risk products due to jitters about a slowing global economy and U.S.-China trade tensions, a private report showed on Wednesday."
The brief adds, "Assets of money funds, which are seen nearly as safe as bank accounts, have climbed by $14.87 billion to $3.331 trillion.... This brought their year-to-date increase in fund assets to about $360 billion.... Money funds are offering investors higher yields than most Treasury maturities. That, however, would change if the Federal Reserve reduces borrowing costs further."
Federated Investors recently published a new "Here & Now" Podcast entitled, "Cash is king ... again." In the discussion, Federated Senior VP & Senior Equity Strategist Linda Duessel interviews Deborah Cunningham, Federated's CIO for Global Liquidity Markets. She discusses asset inflows, money funds vs. deposits and ESG issues. Duessel says, "Debbie, Liquidity Products saw record inflows in this year's second quarter. What drove that growth?" Cunningham answers, "Well, there were three major reasons, Linda. First of all, interest rates are no longer at zero, so this has made cash an asset class again. Ultimately when we went through the decade of zero interest rates, people used cash because they needed to have liquidity for daily, weekly, monthly purchases. But other than that, it really wasn't something that was allocated because of the low return associated with it. But given that we no longer have those [ultra-low] interest rates and we're at interest rates that are in the 2% range, that has worked well as a safe harbor to some degree for those that are allocating."
She continues, "Money market rates also look very good versus other short term liquidity alternatives, especially deposit products. When you look at deposit betas, it's essentially the rate of change for bank deposit products versus what's happening from a rate of change in a markets rate basis. It's as low as it's ever been in a rising rate environment. Granted, we may be ending that rising rate environment now, but nonetheless, at 29%, that essentially means for every hundred basis points that the Fed raised, deposit products went up by 29 basis points. That's the institutional side of things. The retail side of the market is even worse."
Cunningham explains, "Ultimately, we've had very good growth because of the comparison to ... deposit products. When we're looking at overall rates now, you're looking at something that from a government product standpoint in money market funds, it's about a 215 to 220 [bps] gross yield. Prime products are 233 to 235. Even when you're looking at tax frees on the muni side of the equation, [you're talking about] 140 to 150. All of which are much, much higher than those [on] deposit products."
She comments, "The third major reason is basically what I mentioned before, that liquidity products, money market funds in particular, have been a safe haven in quite volatile times. If you go all the way back to 2018, it was the only one of the three major asset classes that actually had a positive return. And with all the global issues and uncertainty ... all of these things I think came to a crescendo in the second quarter and allowed people to take a safe haven approach, which put them into the liquidity markets.... Cash is looking pretty good. Even when we're looking at other types of fixed income securities."
When asked about falling rates, Cunningham responds, "The Fed lowered rates by 25 basis points in July.... If you look at our yields now in the money market industry, there are 25 to 35 basis points lower than where they were in the end of the first quarter, which is when the adjustments in the marketplace began to ring through.... Ultimately, if the Fed lowers rates by another 25 or 50 basis points, you're going to see a same direct impact with about a month to six weeks sort of lag."
She tells Duessel, "The asset growth has been tremendous. So when we look on an industry basis at total prime assets over the course of the last year, ending at the end of the second quarter, June 2019, the industry has had a 42% growth rate. Federated assets in the prime sector, [are] up 55%. Government assets, on an industry basis, [are] up 8%. Federated's government assets up 21%. And on the muni, side industry is only up 1%. But Federated's up 25%.... Ultimately, I think from a yield perspective, the market grew lazy once interest rates went below 1% and ... cash no longer proved to be an asset allocation tool at that point."
Comparing money market funds and bank deposits in a declining rate environment, Cunningham says, "Because of that deposit beta and banks' lack of moving interest rates up over the course of the last two and a half years in the increasing rate environment, the markets had begun to move away from bank deposit products. Bank deposit products were the place to be in the financial crisis. In 2008, 2009 they were 100% guaranteed for a period of time, and the markets flocked to them.... It wasn't until the Fed started raising rates at the end of 2016 that you actually started to see that reverse. Now at this point, you see deposits [growing] somewhere in the neighborhood of 2% to 10% over the last one to three years, versus money market funds (growing) anywhere from 10% to 20%.... In a declining rate environment, that will even grow larger, because the banks have already lowered their rates."
Duessel also asks Cunningham about ESG. She answers, "[B]eginning in 2019 ... we began to integrate the information that we receive from our Hermes counterparts ... into what is basically the qualitative assessments that our investment analysts do [on our] minimal credit risk, high quality determinations.... What we haven't done yet at this point is begin a named ESG money market fund. We may, we may not. It will be driven by client requests, essentially. I think at this point when we see what's happening from our own client standpoint, the ESG assessments and integration are being driven by the coastal clients. So East coast, West coast, both have what seems to be more of a unique interest and need in understanding how environmental, social and governance aspects impact our credit analysis process."
In related news, Federated's Cunningham also writes in her monthly commentary about, "An intriguing development at the Fed." She comments, "Is dissent forming in the Federal Reserve? The markets are convinced policymakers will cut rates at the September Federal Open Market Committee (FOMC) meeting, but they'd be wise to re-read the bottom of the July meeting's statement that said 'Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.'"
Cunningham continues, "In the meantime, cash managers -- really everybody -- can only deal with what is in front of them. The global rush to the haven of Treasuries caused the curve to fluctuate (although the U.S. Treasury's massive issuance of bills and notes kept it within a reasonable range). But with the Treasury and Libor yield curves fluctuating in August, we had to be very selective in our purchases. On any given day, the best offerings were vastly different than the day before. Some days, the 3-month area looked attractive; other days, 6-month paper stood out. Floaters continued to be a crucial part of our book of business, with spreads widening out, if only slightly. We did not alter our weighted average maturities (WAM) of 30-40 days for government funds and 40-50 for prime and muni funds. But we were able to move the actual WAMs longer within those ranges."
Finally, she adds, "Some unequivocal good news is that all sectors of the liquidity space on an industry-wide basis continued to take in flows. In August, the industry reached the highest amount of assets under management (around $3.6 trillion) since the peak of 2007 ($3.9 trillion). That is pretty amazing, especially for prime funds that many left for dead after reform. And how about this nugget: industry-wide, flows into prime funds in the second quarter of this year numbered more than total assets in the space immediately after reform."
The Block, a "research, analysis and news brand in the digital asset space," published a brief entitled, "Franklin Templeton proposes tokenized government money market fund on Stellar Network." It explains, "Franklin Templeton Investments, a global investment fund with nearly $700B in assets under management, has filed a preliminary prospectus with the SEC for a government money market fund whose shares will be tokenized on the Stellar network." We quote from this article, and from the full Form N-1A filing for Franklin Blockchain Enabled U.S. Government Money Fund, below.
Their article tells us, "In a statement shared with The Block, Franklin Templeton states that it 'believes that blockchain technologies have the possibility to knit traditional asset management products and services closer to transactional payments' and that 'a registered money market fund that is backed by hard assets and registered with the SEC under the Investment Company Act of 1940, with its shares existing as native digital assets on a blockchain and held in a digital wallet, can be an ideal stable digital asset to be used in the new economy.'"
It adds, "As part of the creation of the fund, Franklin Templeton will also develop a mobile app which will be available in the Apple App Store and Google Play. This app enables investors to purchase and redeem the tokenized shares on the government money market fund directly from the firm and also monitor the balance of the shares on the public Stellar blockchain."
The new Form N-1A (new fund) filing for the Franklin Blockchain Enabled US Government Money Fund says, "The Fund invests at least 99.5% of its total assets in Government securities, cash and repurchase agreements collateralized fully by Government securities or cash.... The Fund intends to be a 'Government money market fund,' as such term is defined in or interpreted under Rule 2a-7 under the Investment Company Act of1940. Shareholders will be given at least 60 days' advance notice of any change to the 99.5% policy."
It explains, "The Fund invests in: U.S. government securities which may include fixed, floating and variable rate securities. Repurchase agreements.... The Fund only buys securities that the investment manager determines present minimal credit risks. The Fund maintains a dollar-weighted average portfolio maturity of 60 calendar days or less, maintains a dollar-weighted average life for its portfolio of 120 calendar days or less, and only buys securities that mature in 397 calendar days or less."
The filing continues, "Although the Fund's transfer agent will maintain the official record of share ownership in book-entry form, the ownership of the Fund's shares will also be recorded on the Stellar network, an electronic distributed ledger that is secured using cryptography (referred to as a 'blockchain'). A blockchain contains a digital record or ledger of transaction data that is permanently recorded in files called 'blocks.' Blockchain networks are based upon software source code that establishes and governs their respective cryptographic systems for verifying transactions. The Fund will not invest in any cryptocurrencies (referred to as, among other things, virtual currencies)."
It states, "At this time, shares of the Fund are not currently available for purchase, sale or transfer from one shareholder to another shareholder (or potential shareholder) ('peer-to-peer') on the blockchain or in any secondary trading market. The Fund's investment manager believes that blockchain-based shares will provide increased transparency to Fund shareholders and may, in the future, permit reduced settlement times and provide other benefits to Fund shareholders."
Finally, Franklin says, "Users of the Stellar network must pay transaction fees (in the form of 'Stellar Lumens,' the native digital asset for the operation of Stellar) to the Stellar network in order to validate a transaction. Such transaction fees are intended to protect the Stellar ledger from frivolous or malicious computational tasks. These transaction fees will be the responsibility of the investment manager or its affiliates or a third party.... Upon the creation of an account through the App, a blockchain wallet and a corresponding public and private key pair will be created for each investor. A key pair consists of a public key and its corresponding private key, both of which are lengthy numerical codes, derived together and possessing a unique relationship."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of August 30) includes Holdings information from 48 money funds (down from 91 last week), representing $1.012 trillion (down from $1.957 trillion last week) of the $3.504 trillion (28.9%) 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 $410.7 billion (down from $800.8 billion last week), or 40.6%, Treasury debt totaling $290.3 billion (down from $560.5 billion) or 28.7%, and Government Agency securities totaling $173.8 billion (down from $303.7 billion), or 17.2%. Commercial Paper (CP) totaled $54.2 billion (down from $100.0 billion), or 5.4%, and Certificates of Deposit (CDs) totaled $45.8 billion (down from $92.9 billion), or 4.5%. A total of $22.3 billion or 2.2%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $15.2 billion, or 1.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $290.3 billion (28.7% of total holdings), Federal Home Loan Bank with $118.0B (11.7%), Fixed Income Clearing Co with $59.3B (5.9%), BNP Paribas with $36.2 billion (3.6%), Federal Farm Credit Bank with $31.9B (3.1%), Barclays PLC with $29.7B (2.9%), RBC with $28.4B (2.8%), Societe Generale with $23.0B (2.3%), JP Morgan with $22.2B (2.2%) and Credit Agricole with $21.0B (2.1%).
The Ten Largest Funds tracked in our latest Weekly include: Fidelity Inv MM: Govt Port ($134.6B), BlackRock Lq FedFund ($99.9B), Wells Fargo Govt MMkt ($82.0B), BlackRock Lq T-Fund ($77.7B), Fidelity Inv MM: MMkt Port ($66.6B), Morgan Stanley Inst Liq Govt ($61.8B), Dreyfus Govt Cash Mgmt ($53.7B), State Street Inst US Govt ($52.1B), BlackRock Lq Trs Trust ($38.6B) and Dreyfus Treas Sec Cash Mg ($31.1B). (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.)
Brokerage sweep accounts have been big news all throughout August. We've been reporting on the "Cash of the Titans," the advertising battle between Fidelity Investments and Charles Schwab over the rates paid on brokerage sweep accounts and cash. The two brokerage giants traded full page ads in The Wall Street Journal and New York Times earlier this month, but now Fidelity has begun running TV commercials on its money fund sweep. (We saw them on CNBC starting Thursday and on ABC News Friday night.) While this has drawn attention to the spread between lower-yielding FDIC-insured brokerage sweep rates and money market mutual funds, a new lawsuit is also shedding more light on the space. (Brokerage sweep accounts are averaging yields of 0.26%, according to our Brokerage Sweep Intelligence, while money market funds are averaging 1.94%, according to our Crane 100 Money Fund Index.)
AdvisorHub first broke the sweep lawsuit story in its piece, "Merrill Sued for 'Paltry' Sweep-account Interest Rates," and Crane Data wrote about it Thursday in our piece, "Merrill Sued Over Brokerage Sweep; A Look at Stable Value Lawsuits." The original press release, entitled, "Wolf Popper LLP Files Class Action Complaint Against Merrill Lynch, Pierce, Fenner & Smith Inc. Challenging Merrill's Low-Interest Sweep Account Practices," explains, "Wolf Popper LLP has filed a class action complaint in the U.S. District Court for the Southern District of New York (Case No. 1:19-cv-07998) against Merrill Lynch, Pierce, Fenner & Smith, Inc., a wholly-owned indirect subsidiary of Bank of America Corporation.... The lawsuit challenges Merrill's practice of defaulting customers into its lowest yielding 'sweep account,' which currently pays a paltry 0.05% annual percentage yield on cash balances. Merrill's interest rates are dramatically below competitors' rates of approximately 2.0%. Moreover, Merrill fails to follow SEC rules in initiating client accounts, which require clients' 'prior written affirmative consent' before Merrill sweeps their cash. The lawsuit, among other things, seeks to compel Merrill to adopt transparent disclosure concerning cash investments and pay investors reasonable, market-based interest on cash balances. The lawsuit also seeks payment of back interest."
Fund website ignites weighed in Friday, writing in "Merrill Sued Over Low-Yielding Sweep Accounts," "A brokerage and IRA client recently sued Merrill Lynch over the company's practice of sweeping cash into bank deposit products rather than higher-yielding options such as money market funds. The plaintiff, Sarah Valelly, had more than $1 million invested in four Merrill accounts, including through the firm's Merrill Edge program. The sweep defaults for her accounts yielded as much as 0.14% and as little as 0.06% 'at a time when other Merrill-sponsored accounts yielded as high as 2.07%,' the complaint reads."
Their article states, "In the past several years, brokerages have moved away from using money funds as the default vehicles for sweep cash -- decisions that were made at a time when yields in those funds were low and more comparable to the FDIC-insured bank deposit products that are now more common. However, the spread that banks can retain on the deposit products has given brokerages incentive to keep such products as the default or even prevent money funds from becoming sweep options. Firms that have moved toward bank products, rather than money funds, in their sweep programs include Merrill, Morgan Stanley, Edward Jones and Charles Schwab."
Barron's also covered the news (online only) in, "Investor Sues Merrill Lynch Over 'Paltry' Cash Yields." They write, "With interest rates heading down these days, investors may be wondering what they are earning on cash reserves. If their money is held in a brokerage 'sweep' account, the answer is probably not much. Sweep yields are well below 0.25% at most brokerage firms, according to Crane Data. That pales in comparison with money-market fund yields at around 1.9%. But rather than get mad, one investor is trying to get even: She has filed a lawsuit against Bank of America Merrill Lynch (BAC) over the 'paltry' yields in her sweep and checking accounts held at the firm." (See also, Investment News' "Merrill Lynch client sues over 'paltry' cash yields".)
The full Wolf Popper complaint tells us, "Beginning in the late 1990s, brokerage firms like Merrill began 'sweeping' customer's cash into bank accounts of affiliated entities that were lawfully able to use that cash to generate profits in their operations. The movement of that cash frequently came with only minimal disclosure to customers that their cash was being transferred to affiliated entities. Most times (at least with Merrill) the customer only earned a de minimus return on that cash-- well below the amounts earned by the affiliated entities and paid to Merrill on the use of the cash. In 2005, the NYSE, and subsequently, in 2013, the Securities and Exchange Commission, to counter this abuse in the brokerage industry, promulgated regulations establishing specific procedures for brokerage companies to contract with customers to sweep cash to affiliated entities."
They explain, "The SEC, effective March 3, 2014, adopted a Final Rule amending 17 C.F.R. 240.15c3-3 to add subparagraph (j)(2) requiring that brokerage firms like Merrill first secure a customer's 'prior written affirmative consent' in order to form a binding contract with customers for the use of their cash. See SEC Release No. 34-70072 ('Final Financial Responsibility Rules for Broker-Dealers'), 78 Fed. Reg. 51824 (August 21, 2013).... Merrill Edge is an online brokerage service operated by Merrill beginning in 2010. Merrill has, in its business practices, with regard to Merrill Edge, blatantly failed to secure a customer's 'prior written affirmative consent' to sweeping cash to an affiliated entity (as is required by Rule 15c3-3(j)(2)(ii)(A)). Rather, Merrill employs procedures on its website that intentionally or inadvertently omit and obfuscate disclosures on sweep accounts so that customers do not and cannot give their 'prior written affirmative consent' to the investment of their assets at Merrill's paltry interest rates."
The filing continues, "Since the 2000s, and specifically with respect to the online Merrill Edge accounts, those procedures have been replaced with internet-based account opening procedures and multiple, redundant and voluminous 8-point font PDF files.... Thus, account holders cannot and do not provide prior written affirmative consent to interest rate terms. Although opaque, the online 'Merrill Edge' customers earn the lowest possible interest rate available to Merrill customers ranging from 0.05% to 0.14% -- at a time when market rates on cash investments are approximately 2.0%. Merrill could have designed a website that was compliant with common law requirements to form an online contract and with SEC and NYSE regulations, but (apparently) choose not to out of concern that ... clear, conspicuous disclosure would alert customers that they were being defaulted into Merrill's lowest-yielding sweep accounts.... In either event, Merrill was financially motivated not to make the mandated disclosures."
It continues, "On March 6, 2014, the SEC issued 'Guidance' on compliance with new regulation 15c3-3(j)(2). The SEC emphasized that broker-dealers such as Merrill have the burden of demonstrating compliance with SEC regulations: 'Broker-dealers are reminded that, consistent with other Commission financial responsibility rules, they will bear the burden of demonstrating compliance with paragraph (j)(2)(i) of Rule 15c3-3'.... Comparing the amount of interest that Plaintiff was actually paid at 0.06% and 0.14% APY to the amount of interest that Plaintiff should have been paid at a market-based rate of 2.07% APY yields an astonishing underpayment of approximately $22,400.... Plaintiff also seeks a declaration that NYSE Information Memo 05-11 and SEC Rule 15c3-3(j)(2) are binding on Merrill with respect to procedures for sweep accounts, and injunctive relief compelling Merrill to comply with NYSE Info. Mem. 05-11 and SEC Rule 15c3-3(j)(2)."
Finally, the complaint adds, "The disclosures in the CMA Agreement that relate to Merrill's Sweep Program are not emphasized, but rather are scattered and buried within the 22-page, single-spaced 8-point font document.... Although unexplained on the Merrill website, a 'sweep program' is a 'service provided by a broker or dealer where it offers to its customer the option to automatically transfer free credit balances in the securities account of the customer to either a money market mutual fund product ... or an account at a bank whose deposits are insured by the Federal Deposit Insurance Corporation.' See 17 CFR 240.15c3-3(a)(17). Under SEC Rule 15c3-3, broker dealers such as Merrill are forbidden from using customer's assets to finance any part of their businesses unrelated to servicing securities customers. Brokerages, such as Merrill, however, may lawfully avoid these rules by 'sweeping' cash balances to affiliated banks, such as Bank of America, N.A., a wholly-owned subsidiary of BAC. See SEC Release No. 34-70072, 78 Fed. Reg. at 51839 ('transferring this excess cash to a bank account or money market fund is an alternative to retaining a credit balance in the customer's securities account.')."
For more on Brokerage Sweeps, see these Crane Data News articles: MMF Asset Surge Continues, Govt Funds Hit Record; ignites on Sweeps (8/23), Fitch Reviews French MMFs: Standard Not Really; More Sweep Coverage (8/21), IBD on Brokerage Sweep Accounts (8/20), Cash Stories: Barron's Explains Brokerage Sweeps; Bloomberg on Assets (8/19), Cash of the Titans: Schwab vs. Fidelity; MF Yields Dip Below 2.0 Percent (8/13), Barron's Clarifies Fidelity Sweep Push (8/12), WSJ on Fidelity: Cash's Sweeping Giant (8/9) and Fidelity Now Sweeps to Money Fund (8/8).
