News Archives: July, 2024
The Investment Company Institute published its latest "Trends in Mutual Fund Investing" for June 2024 and its monthly "Month-End Portfolio Holdings of Taxable Money Funds". ICI's monthly Trends shows money fund totals rising $13.0 billion in June to $6.092 trillion. MMFs have increased by $642.1 billion, or 11.8%, over the past 12 months (according to ICI's Trends through 6/30). Money funds' June asset increase follows an increase of $90.9 billion in May, $4.3 billion in April, a decrease of $73.0 billion in March, an increase of $55.1 billion in February, $82.4 billion in January, $34.9 billion in December, $213.9 billion in November, a decrease of $13.6 billion in October and gains of $74.1 billion in September, $123.9 billion in August and $31.4 billion last July. Bond fund assets increased $38.2 billion to $4.871 trillion, and bond ETF assets increased and still remain above the $1.5 trillion level (after passing it for the first time ever 6 months ago).
Money fund assets surpassed bond fund assets in September 2022 for the first time since 2010 and they continued to hold a sizeable lead last month. (The bond fund totals don't include bond ETFs, which total $1.593 trillion as of 6/30, according to ICI.) According to Crane Data's Money Fund Intelligence Daily, money funds have increased by $42.5 billion in July (through 7/29) month-to-date to $6.531 trillion. (Note that `ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.)
ICI's monthly release states, "The combined assets of the nation's mutual funds increased by $302.96 billion, or 1.1 percent, to $27.09 trillion in June, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an outflow of $6.06 billion in June, compared with an inflow of $7.79 billion in May.... Money market funds had an outflow of $6.53 billion in June, compared with an inflow of $74.16 billion in May. In June funds offered primarily to institutions had an outflow of $14.97 billion and funds offered primarily to individuals had an inflow of $8.44 billion."
The Institute's latest statistics show that Taxable MMFs were higher while Tax Exempt MMFs were lower from last month. Taxable MMFs increased by $13.2 billion in June to $5.963 trillion. Tax-Exempt MMFs decreased $0.2 billion to $129.3 billion. Taxable MMF assets increased year-over-year by $628.3 billion (11.8%), and Tax-Exempt funds rose by $13.8 billion over the past year (11.9%). Bond fund assets increased by $38.2 billion (after increasing by $60.6 billion in May) to $4.871 trillion; they've increased by $235.2 billion (5.1%) over the past year.
Money funds represent 22.5% of all mutual fund assets (down 0.2% from the previous month), while bond funds account for 18.0%, according to ICI. The total number of money market funds was 276, unchanged from the prior month and down from 280 a year ago. Taxable money funds numbered 231 funds, and tax-exempt money funds numbered 45 funds.
ICI's "Month-End Portfolio Holdings" confirms a drop in CDs and Treasuries last month. Repurchase Agreements remain the largest composition segment, increasing $85.5 billion, or 3.6%, to $2.431 trillion, or 40.8% of holdings. Repo holdings have decreased $577.2 billion, or -19.2%, over the past year. (See our July 11 News, "July Money Fund Portfolio Holdings: Repo Jumps; TDs, Treasuries Down.")
Treasury holdings in Taxable money funds decreased $7.8 billion, or -0.3%, to $2.276 trillion, or 38.2% of holdings. Treasury securities have increased by $1.092 trillion, or 92.2%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they decreased $13.9 billion, or -2.0%, to $687.9 billion, or 11.5% of holdings. Agency holdings have increased by $15.4 billion, or 2.3%, over the past 12 months.
Certificates of Deposit (CDs) remained in fourth place; they decreased by $61.9 billion, or -17.2%, to $298.8 billion (5.0% of assets). CDs held by money funds rose by $63.5 billion, or 27.0%, over 12 months. Commercial Paper remained in fifth place, up $3.4 billion, or 1.4%, to $253.1 billion (4.2% of assets). CP increased $71.1 billion, or 39.1%, over one year. Other holdings decreased to $17.1 billion (0.3% of assets), while Notes (including Corporate and Bank) decreased to $4.8 billion (0.1% of assets).
The Number of Accounts Outstanding in ICI's series for taxable money funds increased to 69.736 million, while the Number of Funds was unchanged at 231. Over the past 12 months, the number of accounts rose by 10.448 million and the number of funds decreased by 1. The Average Maturity of Portfolios was 34 days, down 2 from May. Over the past 12 months, WAMs of Taxable money have increased by 10.
Money fund yields remained flat at 5.13% on average in the week ended July 26 (as measured by our Crane 100 Money Fund Index, an average of 7-day yields for the 100 largest taxable money funds). Yields were 5.13% on 6/28, 5.14% on 5/31, 5.13% on 4/30, 5.14% on 3/31 and 2/29/24, 5.17% on 1/31/24, 5.20% on 12/31/23, 4.94% on 6/30/23, 4.61% on 3/31/23 and 4.05% on 12/31/22. The vast majority of money market fund assets now yield 5.0% or higher. Assets of money market funds fell by $8.2 billion last week to $6.513 trillion according to Crane Data's Money Fund Intelligence Daily. Weighted average maturities were unchanged at 34 days. The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 706), shows a 7-day yield of 5.03%, unchanged in the week through Friday. Brokerage sweep rates also remained unchanged, contrary to the discussions on a number of brokerage earnings calls in recent weeks. (For more on recent Brokerage Sweep News, see these CraneData.com stories: "Federated Hermes' Donahue, Cunningham Call Hits Sweeps, Flows, Rates" (7/29/24), "Ameriprise, Raymond James Discuss Sweeps Issues on Earnings Call Q&As" (7/26/24), "Barron's Writes on Pressure on Sweeps" (7/25/24), "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures" (7/19/24), "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues" (7/17/24).)
Prime Inst money fund yields were unchanged at 5.18% in the latest week. Government Inst MFs were up 1 bp at 5.12%. Treasury Inst MFs were unchanged at 5.07%. Treasury Retail MFs currently yield 4.85%, Government Retail MFs yield 4.84%, and Prime Retail MFs yield 5.02%, Tax-exempt MF 7-day yields were up 50 bps to 2.92%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (7/26), 67 money funds (out of 826 total) yield under 3.0% with $42.9 billion in assets, or 0.7%; 57 funds yield between 3.00% and 3.99% ($88.5 billion, or 1.4%), 254 funds yield between 4.0% and 4.99% ($1.121 trillion, or 17.2%) and 448 funds now yield 5.0% or more ($5.260 trillion, or 80.8%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged (again) at 0.62%. The latest Brokerage Sweep Intelligence, with data as of July 26, shows that there were no changes over the past week. (We haven't seen any of the changes mentioned on earnings calls, which apparently only apply to a narrow slice of "advisory" accounts <b:>_.) `Nine weeks ago, we removed the rates for TD Ameritrade from the listings, which completed its merger with Charles Schwab and which pushed the averages higher (2 bps). Three of the 10 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
A new piece from Morgan Stanley's E*Trade subsidiary, perhaps in reaction to the recent sweeps program scrutiny, titled, "`Money market funds: What to know about the low-risk investments," explains, "A money market mutual fund -- also called a money market fund -- is a type of fund that invests in high-quality, short-term debt instruments, including US government securities, municipal securities, and other securities, such as commercial paper, certificates of deposit (CDs), and repurchase agreements (repos). Money market funds pay dividends, referred to as yield, that typically reflect short-term interest rates, which moved rapidly upward in 2022 and 2023 as the Federal Reserve hiked its benchmark Fed funds rate from near zero to over 5% to help tame inflation. Unlike most other mutual funds or exchange-traded funds, money market funds don't aim to generate capital gains -- the yield is the only return on the investment. Money-market funds are of relatively low risk. In general, the prices of money market funds do not tend to experience the same type of volatility as stock prices."
Discussing the "Types of money market funds," E*Trade states, "By law, money market funds can only invest in securities with short maturities (typically 13 months or less). The securities in which they invest, however, can vary slightly. Funds often fall into three main categories: Government: Invest 99.5% or more of the fund's total assets in cash, US government securities, or repurchase agreements collateralized by government securities; Municipal: Invest primarily in municipal bonds, meaning the yield is typically exempt from federal income taxes; and, Prime: Invest in a variety of taxable short-term corporate and bank debt securities, as well as commercial paper and repos, among other securities."
The piece tells us, "Money market funds have strict maturity, credit quality, and diversification requirements, making them a lower-risk investment for investors who may be looking for an alternative to holding cash. Investors can generally sell their shares back to a money market fund on any business day at the NAV. Additionally, some municipal money market funds can offer advantages in taxable brokerage accounts since income may be exempt from federal income taxes."
It warns, "Though rare, there have been instances where money market funds dipped below their $1 NAV, resulting in investors losing part of the principal value of their investment (referred to as 'breaking the buck'). Money market funds with floating share prices can also lose value. Money market funds may impose liquidity fees or redemption restrictions during times of market stress. It's important to note that money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency the way CDs and other bank deposits are."
E*Trade comments, "When evaluating money market funds, investors may find themselves asking, 'Should I just invest in the fund with the highest yield?' The short answer is that there are many factors to consider in addition to the yield and historical performance. For instance, the net expense ratio reflects the percentage of a fund's assets that goes toward operating expenses and management fees. Investors may also want to pay attention to the initial investment minimum, which for retail funds can range from a few hundred dollars to several thousand dollars."
Finally, they write, "Money market funds are lower-risk investments that can offer liquidity and income but limited capital-gains potential. For investors with short time horizons, money market funds can help provide an option where capital preservation is the primary objective. As with other investments, it's important to consider diversifying your holdings and understand any potential risks associated with a specific security. Also, since all money market funds are different, investors should consider a fund's characteristics and its prospectus to make sure it aligns with their individual financial goals."
In related news, Fidelity Investments also wrote recently on "6 ways to earn more on your cash." It says, "Whether you are looking for a place to stash cash for short-term needs or waiting for the right opportunity to invest it for the long term, you have more opportunities right now to capture relatively high yields than you've had in decades. That's because the Federal Reserve’s policy of keeping interest rates high to fight inflation has pushed up yields on many popular ways to hold cash. But while the Fed has kept rates 'higher for longer' than many predicted, the central bank's leaders have said they expect to start cutting rates later this year. That makes this an excellent time to make sure your cash is earning as much as it can and to lock in today's high yields while they're still available. Once the Fed announces a decision to lower its key interest rate, known as the fed funds rate, yields on cash products are likely to begin declining shortly after. Some are likely to decline sooner after a rate cut than others and that may be another thing to consider as you look at your options for where to put your cash."
They tell us, "The good news is the range of options for keeping your cash safe and accessible while also earning interest are extensive. You can easily compare their yields and other characteristics on Fidelity.com. But finding the one that's right for you is not about just picking the highest-yielding option. It also depends on your particular needs and time frame. That fact makes it useful to understand how quickly cuts in interest rates might affect yields on the various options for storing your cash. Products such as longer-term CDs and bonds allow you to hang on to high yields for a longer time after interest rates start coming down. To get those yields, however, you'd need to give up access to your cash in the short term, which may not be what you want."
The piece adds, "Here are 6 destinations to consider when determining where to put your cash. 1. Savings accounts. Savings accounts at banks offer flexibility and insurance from the Federal Deposit Insurance Corporation (FDIC). Some brokerage firms offer cash management accounts, which automatically move cash in their clients' accounts into bank savings accounts which provide them with FDIC protection.... 2. Money market mutual funds. Money market funds are mutual funds that invest in short-term debt securities with low credit risk and yields that tend to closely track changes in the direction of the Fed's target interest rate.... 3. Certificates of deposit. CDs are time-deposit accounts issued by banks in maturities from 1 month to 20 years.... 4. Individual short-duration bonds.... 5. [and] Short-duration bond funds."
Pittsburgh-based Federated Hermes reported Q2'24 earnings and hosted its Q2'24 earnings call late last week. On the call, President & CEO J. Christopher Donahue, comments, "In the second quarter, we reached another record high for money market fund assets of $426 billion and total money markets assets of $587 billion.... Total money market assets increased by $8 billion in the second quarter. Money market strategies continue to benefit from favorable market conditions for cash as an asset class, elevated liquidity levels in the financial system, and attractive yields compared to cash management alternatives like bank deposits and direct investments in money market instruments like T-bills and commercial paper." (Note: Please join us for our European Money Fund Symposium, Sept. 19-20, 2024 in London, England. Registration is $1,000 and our discounted hotel rate expires August 14.)
He explains, "In the upcoming period of declining short-term rates, we believe market conditions for money market strategies will continue to be favorable compared to direct market rates and bank deposit rates. Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.45% at the end of Q2, up from about 7.35% at the end of Q1. Now, looking at recent asset totals as of a few days ago, managed assets were approximately $786 billion, including $589 billion in money markets.... Money market mutual fund assets were at $429 billion."
During the Q&A, Federated was asked about "a pickup in institutional money fund flows when the Fed starts cutting." Donahue comments, "It's very hard to detect that movement when it hasn't happened yet. Debbie will comment on what's going on exactly in the marketplace, but we remain confident about the long-term progress of this event, because of what happened every time they have begun to ease rates. And we've gone through that a number of times before, in Q3'19, when they began to ease rates and how that worked out for us in terms of 22% or so percent increase in assets; the industry also went up 14%. But I'll let Debbie comment on discussions with institutional clients and how they're looking at this."
Money market CIO Debbie Cunningham responds, "All the clients are discussing extending duration, taking maybe some of their core cash or their strategic cash and moving it out the curve a little bit. They're questioning whether we're extending duration within our money market funds themselves for their operating cash, which we have been. But ... until the first rate cut happens, you don't see much of that movement in anticipation. Everybody likes to prepare. Everybody likes to discuss. But the actual movement doesn't generally start to occur until the first cut happens. So we are having those conversations. There is nothing different about them. They are healthy. They are what we would expect. But we're not really seeing that type of movement yet. If the Fed cuts in September or November or December, that's when that should occur in all likelihood."
Another analyst states, "One of the big topics of conversation in the wealth management channel has been the need to pay higher yields on client cash. Obviously, there are several different options that those firms have to do that, but I was just wondering if you see potential opportunity with that move?" Donahue answers, "Yeah, we do.... When you start talking to people about yields ... they say, it's 5% in the money fund that helps the retail trade in my opinion.... What we like about the whole move is that people and the marketplace do a lot better if they're getting marketplace returns for their cash.... If they're going to sell based on higher yields, and then they got to find out the money funds are higher, that's going to work out well for us."
TD Cowen's Bill Katz states, "If rates start to go lower, the expectation for most of your peers is that money that's sitting in money market is going to migrate out and go into longer duration." Donahue says, "What we see in the money market fund side is that money market asset continues to grow. If you ask Debbie or me, or somebody else would say, the whole thing is going to $7 trillion, and we're going to maintain, if not expand, our market share. Even though people will move out the yield curve, is very difficult for us to see the money move ... to fixed income. But there's so much more money coming into the system that you just continue this march up.... `So I would not look for the money market part of our business declining because rates rise, I look [for] the opposite.... So the path forward for organic growth is continued money market funds and continued activity on the fixed income side across the yield curve."
Cunningham states, "The only thing I'd add ... is the flows that we've had since the cycle began into liquidity products have been 80% driven by retail flows [from] deposit products, which will still continue ... in favor of the money market fund. The institutional flows have been minor in comparison. Our expectation would be that when rates start to go lower, you'll see that makeup of flows be about 50% retail, 50% institutional. [T]he retail will continue. It's just the institutional [will] pick up."
Asked again about potentially increasing yields on sweep accounts, Cunningham tells us, "The only thing I'd say ... is that we do have a lot of sweep account products through intermediaries. And when they advertise something like an increase in their deposit sweeps to maybe 2%. As [Chris] mentioned, they then look at where their sweep is [vs.] the money fund and see it coming in at over 5%. It's more of an advertisement as to the realization of where true yields are in the market today and I think beneficial to us."
She explains, "As far as sweep products into our money funds, we have many relationships along those lines. Prior to the reforms that took place in 2016 when institutional prime funds became floating NAV, [some] sweep products went into prime institutional products. For the most part, now the sweep products go into our government products. And those continue to be stable net asset value and very viable.... Even with increased deposit rates [we're] more than double those rates. So I think the benefit of just knowledge that there or higher rates out there is good from our business standpoint."
Commenting on extending duration in MMFs, Cunningham says, "Product by product [it] is a little bit different, but we are probably extended somewhere in the neighborhood of 5 to 8 days over the course of the last month or so. That is a reflection of number one, getting some of what we think was good relative value in the curve early on in that time period, [but] not so much today. It would be more difficult extending today. Today, we're happy to be able to just maintain where we are. Most of our products are in [the] low 40 to low 50-day weighted average maturity target range.... But honestly, with where the yield curve is right now, we think it's overdone with the expectation of rate cuts."
Finally, she adds, "So our current expectation would be for two rate cuts, it really hasn't changed too much. Some in the group expecting a September start with then a December follow-on. My own expectation would be more like November. I don't think there's any reason to do anything ahead of the election. Certainly with the GDP print that we just had the first quarter -- the second quarter continues to be, I think, the type of growth environment that's acceptable to the Fed. And why contemplate or bring about the contemplation of pre-election sort of discussions about the Fed if you don't have to. So that's my reasoning behind why a November start. With two rate cuts in 2024, [it] would take the target rate down to that 4.75% level rather than the 5.25% where it is today."
This week, we heard another batch of second-quarter earnings calls for brokerages, and the analyst questions keep pouring in over advisory sweeps, cash sorting and regulatory and legal pressure for some firms to pay higher rates. Ameriprise Financial CFO Walter Berman comments on their Q2 earnings call, "Total cash balances, including third-party money market funds and brokered CDs, were $81.9 billion, which was over 8% of clients' assets. Clients remain heavily concentrated in yield-oriented products, with highly liquid products like money market funds being more in favor than term products like certificates and brokered CDs. We are beginning to see clients put money back to work in wrap and other products on our platform, and we expect this to continue over time as markets and rates normalize, which creates a significant opportunity. Cash balances, excluding money market funds and brokered CDs, were $40.6 billion, driven by normal seasonal tax patterns and the transition of cash related to [the] Comerica partnership.... Underlying cash sweep was stable in the quarter as expected, and that trend continues in July. I want to provide some additional perspective on sweep cash. Our cash sweep is a transaction account for money in motion that is in between investments or for cash to pay fees, which is similar to a bank checking account. `Cash sweep is not meant to be an investment option for significant cash balances over extended periods. We have a broad range of higher-yielding products available for clients seeking to hold cash over extended periods, which is where a large portion of the excess cash has gone. As a result, our clients generally have very low cash rebalances, which are now approximately $6,000 on average. At this point, we do not anticipate any changes in our approach to cash sweep." (For more, see these Crane Data News articles: "Barron's Writes on Pressure on Sweeps" (7/25/24), "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures" (7/19/24) and "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues" (7/17/24).)
During the Q&A, Analyst Suneet Kamath from Jefferies asks, "I wanted to start with the cash sweep commentary.... So it doesn't sound like you’re planning on making any big changes, but I know in the past, you've said that's always subject to the competitive environment. Obviously, we've seen a handful of companies take some actions on their cash sweep rate. So I guess the question is I'm trying to reconcile those two [statements]. Is it that the moves that those peers are making are sort of catching up to you? Or is your sort of client account size different that you're just not experiencing the same need to make those changes?" Berman responds, "Let me start ... as you know, we operate within regulatory and fiduciary standards. Therefore, we feel certainly looking at sweep in its transactional aspect of cash and motion, it's totally appropriate and aligned. I can't really comment on what's taking place with the wirehouses. I don't understand it.... All I know is what we do from that standpoint and all the actions we have taken to ensure that the money is in sweep is really for transactional purposes.... Our rates are competitive, and we keep the appropriate level of cash that we think is necessary to operate. [O]bviously, we'll evaluate things as [they] go, but ... looking at what we have today, we think it's totally appropriate."
Asked how much client cash is held in "wrap advisory accounts," Berman says, "It's about $12 billion." He responds to another question, "I think our total cash is about $80 billion to $81 billion. In money markets and in third-party CDs, [it] is about $40-odd billion. And we are seeing that certainly money is still coming into ... money markets ... but it's slowed a little on the CD side. So from that standpoint, ... we are seeing less in CDs and there is a shift. People are staying shorter from that standpoint, as they're trying to take advantage of the yield curve."
Brennan Hawken of UBS comments, "[I'm] curious to drill down a little bit on the $12 billion of sweep within advisory accounts. Do you know what portion of that $12 billion would include Ameriprise as a fiduciary or investment advisor? A little more specifically, what portion of that $12 billion would be in the employee channel and in any portfolios where Ameriprise with centrally managed or central models where Ameriprise is the advisor?" Ameriprise CEO Jim Cracchiolo answers, "A lot of our central models are really run by outside managers, institutional and oversight is there. So ... even in those type of models, it's roughly around 2% or so. And even in our advisor discretion, it's actually less than on the institutional models. So I would probably say as you look at it. Now we haven't broken that out between employee, nonemployee, et cetera, because these models are all run in certain ways. But it is, as Walter said, a very low balance. It's what 2% or so, and there is constant trading activity, fees being pulled, the foreign taxes being paid, things like that.... If there's any higher balance, whether institutional or otherwise, they are moved into money markets and other short-duration products as well. So that's how we look at it and manage it, and that has been appropriate. We disclosed that very clearly. And from a clients and a legal perspective, we feel very comfortable with what that is."
Analyst Michael Cyprys of Morgan Stanley asks, "I Just wanted to circle back to the cash fee commentary, just hoping you could clarify for us how and to what extent are advisors compensated on cash sweep balances? More broadly, ... how you do see the scope over time for the way customers pay for services to evolve and potentially over time move away from sweep? ... What are other ways that customers could pay for services?" Cracchiolo answers, "You have transactional activity ... so there's always a certain low level of cash. Now what we really do is monitor and if cash is in any account at a larger level, ... we really look for it to be moved.... They invest in a lot of cash instruments, money markets, CDs, various other short-term duration ... and actually, the sweep actually went lower rather than increase. So that's the same thing in all of the wrap and institutional. Now within that, if there is more money sitting in that count, we don't want that cash to be a high balance even if it's invested out because that's not the purpose of the wrap account. But in so doing, if there is positional cash and they're in earning instruments, then the advisors do get paid.... But again, that's something that's monitored and we feel very comfortable with.... As far as the future is concerned, there's always adjustments that will occur in pricing and what you would have to do to offset some of the cost of your services that we will constantly look at. But if you're asking in the near term, we feel very good about where that is right now. We're not exactly sure what some of the changes that some people are bringing in [are or] for what reasons. So I'm not sure that was as clear as it maybe to you, but it wasn't to us."
During Raymond James Financial's call, CEO Paul Reilly comments, "Total clients' domestic sweep and enhanced savings program balances ended the quarter at $56.4 billion, down 3% from March of 2024. We are pleased to see cash balances remain relatively flat in the quarter following fee billings paid in April." CFO Paul Shoukry states, "Clients' domestic cash sweep and enhanced saving program balances ended the quarter at $56.4 billion, down 3% compared to the preceding quarter and representing 4.3% of domestic ... client assets. So far in the fiscal fourth quarter, domestic cash sweep balances have declined about $1.25 billion, as cash inflows have partially offset quarterly fee billings of approximately $1.5 billion."
During their Q&A, Shoukry states, "People are talking about, 'Well, what's the difference to this program, that program?' Our sweep programs are very, very different.... If you look at our sweep programs, we offer from 25 to 300 basis points. The programs that people have been talking about offer one basis point to 50 basis points. So we start off with a whole different value proposition. We have $3 million of FDIC per individual or $6 million joint in the sweep. We have also in our programs, very competitive money market funds or institutional classes available to everyone irrespective of the size of investments, and you can see how those have grown dramatically. We have an enhanced savings program ... offering high rates and up to $50 million of FDIC insurance, which you've also seen grow. And our advisors and clients, if you look at the shift, have taken appropriate actions to invest the money. So I don't know what's happening in some of the other programs. I can tell you ours are well thought through; we think they're very compliant."
He adds, "We've prided ourselves, subject to criticism from this [analyst] group ... for having such high sweep rates. But we've done it because we believe both it's the right thing to do, and it's regulatory ... compliant.... So we're going to have to look at movements and each of the movements have been a little different. We don't know totally what they apply to. [`W]e don't see anything that we know of today that's forcing us to change rates, but we meet weekly and we're going to be competitive. So if the competitive landscape of rates change, we have to be competitive both for our advisors and our clients.... If things happen, we're going to adjust. But as of today, we're looking at stuff, but with no current plans."
Asked again about advisory cash rates and, "What percentage of fee-based accounts is in cash at the kind of the lowest rates?" Reilly responds, "So if you look at our advisory sweeps, we'll just focus on those, about 2.5% of those assets are in cash, and to us that's frictional cash. You can't find an institutional portfolio or anyone that doesn't have some cash in it at those levels for trading, for paying fees, for whatever you do in them. So we view that as frictional or spending cash. The average cash amount in those accounts are $8,900.... I don't know where you go to a bank and get kind of our sweep rates at that amount of cash. So the other thing, if you look at those accounts and you can tell the shift, because before rates started moving, it was just cash in those accounts.... The money markets, CDs, and Treasuries combined are $22,600 in those accounts. So you can see it's much more invested, certainly on higher-yield instruments.... So, we think it's, you know, we're putting clients money to work with those numbers."
Reilly also comments, "If there was a squeeze on cash in the industry, where would you get the cash? You would offer higher rates to get it out of Treasuries and money market funds and whatever. I think that cash has seemed to have stabilized pretty much everywhere, or it's starting to anyway. Who knows where that goes? We have a very clear buffer still for operating our business. But I think a demand for cash or if rates go up, you start to see that ... pressure. But if rates go down and there's plenty of cash, I don't see what really squeezes that outside of following the market as rates fall. So I don't see anything else barring some unusual thing in the industry."
Another analyst asked about "third-party bank sweep yields falling by 18 basis points sequentially and about 25 basis points over the last two quarters." Shoukry replies, "A lot of that is initiatives that we run where we offer kind of a higher rate for new cash that comes into the sweep program to the firm and/or maturities from money market funds, Treasuries, and those type of things where clients want the functionality of the sweep program, but want a comparable rate to move over and benefit from the FDIC insurance and the availability of the cash in the sweep program. So as we've kind of implemented those initiatives, we've been able to effectively bring over cash from those sources through the quarter, which while it increases the average cost of the funding, it increases also the amount of funding that we have and it's still net attractive. So it's really a win-win-win initiative that we've put into place in the sweep programs.... I think now it's roughly somewhere in the 15% to 20% range of the total sweep balances that are in those type of programs."
Commenting on sweep rates, Shoukry says, "So our grid starts ... from 25 basis points and goes all the way up to 3% on the cash sweep program. There has been some migration and mix shift to the higher yielding programs and initiatives that we've offered, which are actually closer to 5%." On deposit betas, he adds, "It'll largely depend on the competitive environment. But because we have been generous in passing rates to clients and through these other programs that have near money market fund rates like Enhanced Savings Program, etc., we should have a lot of sensitivity to the downside as well in both the asset and on the funding side of things. So, we do feel like we have an ample amount of cushion. But again, it'll depend on the competitive environment and the demand for cash across the industry as rates go down."
Finally, he adds, "We continue to believe that we're closer to the end of the sorting cycle than the beginning. And some of the metrics that Paul discussed just in the fee-based accounts, having $8,900 of cash sweeps per account, whereas we have $22,600 of money market funds, CDs and Treasuries. A lot of these clients, to the extent they had investable cash balances, have been invested in the higher yielding alternatives. As we've always said since the very beginning, and we're one of the first, if not the first, to say it, we're not going to declare the end of the trend until we have several quarters of history to look back on and start seeing growth in the cash balances. And ultimately, that growth will come from the stabilization of the runoff and the migration and the ... continued growth ... of client assets. And as we retain, recruit advisors and those advisors bring on more client assets, there'll be cash associated with that, and that ultimately will drive the growth and the balances." (See also, Barron's "Raymond James Stock Jumps After Earnings. The Focus Is on Sweep Accounts.")
The Financial Stability Board, an "international body that monitors and makes recommendations about the global financial system," recently published a report titled, "Enhancing the Resilience of Non-Bank Financial Intermediation," which contains a series of recommendations on global money market fund regulations. The group explains in their summary, "Conjunctural and structural developments in the global financial system over the past decade have increased the reliance on market-based intermediation. Non-bank financial intermediation (NBFI) has grown to almost half of global financial assets and become more diverse. As a result, the importance of NBFI for the financing of the real economy has increased. However, the experience of the 2008 global financial crisis, the March 2020 market turmoil and more recent episodes of market stress demonstrated that NBFI can also create or amplify systemic risk." (See the FSB's press release, "FSB Chair calls for further progress implementing non-bank financial intermediation reforms," and their letter, "FSB Chair's letter to G20 Finance Ministers and Central Bank Governors: July 2024.")
The report explains, "Drawing on the lessons from these events, the FSB developed a work programme to enhance the resilience of the NBFI sector. This is intended to ensure a more stable provision of financing to the economy and reduce the need for extraordinary central bank interventions. In particular, the aim of policies by the FSB and standard-setting bodies (SSBs) has been to reduce excessive spikes in the demand for liquidity; enhance the resilience of liquidity supply in stress; and enhance risk monitoring and the preparedness of authorities and market participants. To date, these policies have involved largely repurposing existing policy tools rather than creating new ones, given the extensive micro-prudential and investor protection toolkit already available."
It continues, "A number of policy deliverables have already been agreed under the FSB's work programme, including to enhance money market fund resilience (2021) and to address liquidity mismatch in open-ended funds (2023). Policies have also been proposed by the FSB and SSBs in early 2024 to enhance margining practices and the liquidity preparedness of non-bank market participants for margin and collateral calls. A key area of current policy focus is to enhance the monitoring of, and address financial stability risks from, leverage in NBFI. To this end, the FSB expects to publish by the end of 2024 a consultation report with proposed policy approaches for authorities."
The summary says, "The design and implementation of NBFI policies continues to advance, albeit at an uneven pace across jurisdictions. Progress is hampered by a number of challenges, including the heterogeneity of the sector; the diversity of institutional frameworks and market practices across jurisdictions; and common data challenges that impede a full assessment of NBFI vulnerabilities and the formulation of effective policy responses. The global financial system remains vulnerable to further liquidity strains, as many of the underlying vulnerabilities and key amplifiers of stress in the NBFI sector during recent market incidents are still largely in place. It is therefore critical to finalise and implement international reforms to enhance NBFI resilience, so that market participants internalise fully their own liquidity risk -- rather than rely on extraordinary central bank and other official sector interventions -- and authorities are better prepared for stress events."
It tells us, "The report concludes by outlining further work to assess and address systemic risk in NBFI that the FSB, in collaboration with the SSBs, will carry out. The work is structured in three main areas: in-depth assessment and ongoing monitoring of vulnerabilities in NBFI; the development of policies to enhance NBFI resilience; and the monitoring of the implementation and assessment of the effects of NBFI reforms. This work will help the FSB determine whether collectively the reforms have sufficiently addressed systemic risk in NBFI, including whether to develop additional tools for use by authorities."
The section titled, "Resilience of money market funds and short-term funding markets," states, "MMFs are important providers of short-term financing and are used by investors to invest excess cash and manage their liquidity.... The FSB published in 2021 a report on policy proposals to enhance MMF resilience (2021 FSB Report), with policy options to address MMF vulnerabilities by imposing on redeeming investors the cost of their redemptions; enhancing the ability to absorb credit losses; addressing regulatory thresholds that may give rise to cliff effects; and reducing liquidity transformation."
It comments, "A recent FSB peer review took stock of the measures adopted or planned by FSB member jurisdictions in response to the 2021 FSB Report. The main vulnerability identified in the review continues to be the mismatch between the liquidity of MMF asset holdings and the redemption terms offered to investors, which makes MMFs susceptible to runs from sudden and disruptive redemptions.... This vulnerability can be amplified by the presence of a high share of institutional investors and a stable or low-volatility net asset value, and by rules that may give rise to threshold effects that provide incentives for investors to pre-emptively redeem their MMF holdings in times of stress."
The FSB report explains, "While MMFs in most jurisdictions exhibit a strong home bias in both their asset portfolios and investor bases, there are some cases of significant cross-border funding and investing flows -- particularly in Europe -- that can transmit vulnerabilities across borders and markets. These vulnerabilities are often difficult to assess given data gaps on MMF investors and on the issuers of the instruments in which the MMFs invest. The existence of these cross-border flows, as well as differences in availability or calibration of policy tools, creates the potential for regulatory arbitrage and cross-border spillovers, raising the need in such cases for international cooperation in closing data gaps and implementing policy reforms to ensure resilience."
It also tells us, "The report finds that progress in implementing the 2021 FSB policy proposals has been uneven across jurisdictions. Authorities in all jurisdictions report that they had implemented policies aimed at addressing MMF vulnerabilities prior to the 2021 FSB Report. Since then, some jurisdictions have introduced new policy tools or recalibrated existing ones (China, India, Indonesia, Japan, Korea, Switzerland, US), while others are still in the process of developing or finalising their reforms (EU, South Africa, UK). Given the vulnerabilities reported in individual jurisdictions, further progress on implementing the FSB policy toolkit would be needed to enhance MMF resilience and thereby limit the need for extraordinary central bank interventions during times of stress. In particular, the extent to which minimum liquidity requirements are calibrated appropriately to address MMF vulnerabilities has not been examined but there is a significant variation between jurisdictions and MMF types."
The FSB writes, "Based on these findings, the peer review report made three recommendations. First, FSB jurisdictions that have not yet done so should review their policy frameworks and adopt tools to address identified MMF vulnerabilities, taking into consideration the 2021 FSB policy proposals. Where relevant tools (such as minimum liquidity requirements) are already available, FSB jurisdictions should consider whether these need to be re-calibrated to ensure their effective use and to maintain a sufficient level of MMF resilience, including by taking account of experience with previous stress events, potential cross-border spillovers and regulatory arbitrage. Second, the FSB will take the findings of this peer review into account in its monitoring of the vulnerabilities and policy tools for MMFs. Finally, IOSCO should consider the review's findings when it revisits its 2012 Policy Recommendations for MMFs in light of the 2021 FSB Report."
They then comment, "The 2021 FSB Report had noted that policies aimed at enhancing the resilience of MMFs could be accompanied by measures that aim at improving the functioning of the underlying short-term funding markets, though it cautioned that such measures, while useful, might not change the limited incentives of market participants to trade or of dealers to intermediate, particularly during stress periods. The FSB, in consultation with IOSCO, followed up on those findings by analysing commercial paper (CP) and negotiable certificates of deposit (CD) markets in core funding jurisdictions (EU, Japan, UK, US), including by exploring potential market reforms to improve the functioning and potentially the resilience of these markets."
The report says, "The size, microstructure and legal framework of CP and CD markets vary significantly across jurisdictions.... The US market is the largest globally, while Europe has different market segments across issuer domicile and currency as well as two international markets – the London-based Euro Commercial Paper (ECP) and Paris-based Negotiable European Commercial Paper (NEU CP). The overall size of US and EU markets remains much smaller than its all-time high in 2007, while the Japanese market (where all issuance is JPY-denominated) has grown since 2007."
It also tells us, "With regard to vulnerabilities, the analysis largely confirmed the findings of previous FSB work -- namely, that these markets, although subject to inefficiencies, tend to generally function well in normal times but are susceptible to illiquidity in times of stress. The vulnerabilities in these markets pertain to the short-term nature of CP and CDs that results in a buy-and-hold market; concentration of investors and dealers; susceptibility of some key investors, such as MMFs, to large and sudden redemption requests in times of stress, thereby exacerbating liquidity demands; the opacity of these markets, which may exacerbate illiquidity due to information asymmetry and contribute to reliance on dealers; limited adoption of electronification and digitisation in these markets; and high interconnectedness of these markets with other funding markets, meaning that stress can be transmitted within the financial system and across borders."
The FSB report adds, "Potential market reforms that can be considered by industry and public authorities are grouped into three areas, which may be interlinked: Improving market microstructure, e.g. through digitalisation, shorter settlement conventions and streamlined generation processes for transaction identification; Enhancing regulatory reporting and public disclosures, e.g. through increased regulatory reporting in areas such as amount outstanding per issuer, investor profiles on an aggregated basis, and post-trade information such as pricing; Expanding private repo markets for CP and CD collateral, to provide a channel for investors and intermediaries to generate liquidity."
Finally, they comment, "The report notes that while such reforms may have a positive impact on CP and CD market functioning in normal times -- particularly if used in combination and appropriately tailored to each jurisdiction -- they would likely not, on their own, significantly enhance the resilience of these markets. The idiosyncratic nature of these markets means that not all potential reforms in the report may be appropriate or relevant for all jurisdictions. Jurisdictions should therefore consider the relative merits of these reforms for their own CP and CD markets, including how they could complement other policies such as to address vulnerabilities in MMFs, while market participants need to manage their liquidity risk accordingly. Authorities should also consider whether and how they may be able to help catalyse or support industry initiatives to improve market functioning, particularly for primary CP and CD markets."
For more, see these Crane Data News pieces: "FSB Report Looks at Vulnerabilities in CP and CD Markets in US, Europe" (5/29/24), "FSB's Thematic Review on Money Fund Reforms Reviews Global Markets" (2/28/24), and "ESMA, FSB Push European Money Fund Reforms; New HSBC ESG Euro MF" (3/27/23).
We're ramping up preparations for our 10th Annual Crane's European Money Fund Symposium, which will take place Sept. 19-20 at the Hilton London Tower Bridge in London, England. The latest agenda is now available and registrations are now being taken for our European money market mutual fund event. We provide more details on the show below, and feel free to contact us for more information. Our 2023 European Symposium event in Edinburgh attracted over 150 money fund professionals, sponsors and speakers. Given the return attractive rates and expectations for another round of regulatory changes in Europe, we expect our show in London to once again be the largest gathering of money market professionals outside the U.S.
"European Money Fund Symposium offers European, global and 'offshore' money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, and an excellent and informal networking venue," says Crane Data President Peter Crane. "Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals," he adds.
Registration for European Money Fund Symposium is $1,000 USD. EMFS will be held at the Hilton London Tower Bridge. Hotel rooms must be booked before August 14 to receive our discounted rate of L329. Visit www.craneeurosymposium.com to register, and contact us to request the PDF brochure. (Let us know too if you'd like information on speaking or sponsorships too.)
The EMFS agenda features sessions conducted by many of the leading authorities on money funds in Europe and worldwide. The Day One Agenda for Crane's European Money Fund Symposium includes: "Welcome to European Money Fund Symposium" with Peter Crane of Crane Data; followed by an "IMMFA Update: The State of MMFs in Europe" with Veronica Iommi of IMMFA and Alastair Sewell of Aviva Investors; "Online Trading Portals & Corporate Investors" with Sam Jacob of BNY Mellon and Paul Przybylski of JPMAM; and, "Senior Portfolio Manager Perspectives," featuring Ketan Shah of Legal & General Inv. Mgmt. and Douglas McPhail of Morgan Stanley I.M., and moderated by Dan Singer of J.P. Morgan Securities.
The afternoon will consist of: "Sterling & U.K. Money Fund Issues" with Harm Carstens of DWS Investment, Paul Mueller of Invesco and Aman Samra of Abrdn; "Euro, ESG & French Standard Money Funds" with David Callahan of Lombard Odier I.M., Marc Fleury of BNP Paribas A.M. and Vanessa Robert of Moody's Ratings; "U.S. Money Fund & European USD Update," with Peter Crane of Crane Data and Deborah Cunningham of Federated Hermes; and lastly, "Ultra-Short Bond Funds & Beyond Short MMFs" with Valerio Lupini of Fitch Ratings, Josh Bramwell of Aviva and Rustam Muradov of J.P. Morgan A.M.
The Day Two Agenda includes: "Strategists Speak: Rates, Risks & Hot Topics" with Soniya Sadeesh of Deutsche Bank and Ronald Man of BofA Securities; "Global, Continental & Brussels Overview" with Dennis Gepp of Federated Hermes, Corrado Camera of ICI Global and Rudolf Siebel of BVI; and, "Money Fund Reforms: Latest US & Pending EU" with Brenden Carroll of Dechert LLP and John Hunt of Sullivan & Worcester LLP.
The afternoon of day 2 will include: "Repo Developments & Platforms in Europe" with Cassandra Jones of State Street and Andy Turvey of GLMX; "Dealer & Issuer Supply Roundtable" with George MacKenzie of Rabobank, Marianne Medora of Groupe BPCE/Natixis, Stewart Cutler of Barclays and Kieran Davis of TD Securities; and, "Chinese Money Funds & Asian Markets" with Michael Mango of S&P Global Ratings and Minyue Wang of Fitch Ratings.
Also, we're starting to make plans for our next Crane's Money Fund University, which will be held in Providence, R.I., Dec. 19-20, 2024. Money Fund University covers the history of money funds, interest rates, regulations (Rule 2a-7), ratings, rankings, money market instruments such as commercial paper, CDs and Treasuries, and portfolio construction and credit analysis. We also include segments on offshore money funds and ultra-short bond funds. Money Fund University's comprehensive program is good for both beginners and experienced professionals looking for a refresher.
Mark your calendars for our next Bond Fund Symposium, which will be held in Newport Beach, Calif., on March 27-28, 2025. (Click here to see last year's agenda.) Bond Fund Symposium is the only conference devoted entirely to bond mutual funds, bringing together bond fund managers, marketers, and professionals with fixed-income issuers, investors and service providers. The majority of the content is aimed at the growing ultra-short and conservative ultra-short bond fund marketplace.
Finally, Crane Data is making preliminary preparations for our next big show, Money Fund Symposium, which is scheduled for June 23-25, 2025 in Boston, Mass. The agenda will be released later this fall and registrations will open late this summer.
Money Fund Symposium attracts money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators for 2 1/2 days of sessions, socializing and networking. Visit the MF Symposium website at www.moneyfundsymposium.com for more details. Registration is $1000, and discounted hotel reservations will be available. We hope you'll join us next summer in Boston! (E-mail us at info@cranedata.com to request the full brochure.)
Let us know if you'd like more details on any of our events, and we hope to see you, in London in September, in Providence in December, in Newport Beach in March 2025 or in Boston in June 2025. Thanks to all of our speakers and sponsors and for your support!
We've seen 15 Prime Institutional money funds with over $250 billion in assets (over 1/3 of the sector) announce exits from the space to date, but now comes a decision by one to live with the new rules in a unique way. A Prospectus Supplement for First American's Institutional Prime Obligations Fund" tells us, "In July 2023, the U.S. Securities and Exchange Commission ('SEC') adopted amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended. Among other requirements, the Amendments will require institutional prime and institutional tax-exempt money market funds, including First American Institutional Prime Obligations Fund, to impose a mandatory liquidity fee when such funds experience daily net redemptions that exceed 5% of net assets based on net redemption information available within a reasonable period after the last computation of each such fund's net asset value on a particular day. Funds subject to the mandatory liquidity fee will not be required to apply such fee if the amount of the fee is less than 0.01% of the value of the shares redeemed."
It explains, "The mandatory liquidity fee requirement will become effective on October 2, 2024. In calculating the amount of the mandatory liquidity fee under Rule 2a-7, the fee amount must be based on a good faith estimate, supported by data available, of the costs the fund would incur if it sold a pro rata amount of each security in its portfolio to satisfy the amount of net redemptions. The calculation must factor in the spread costs and market impacts for each portfolio security, as described further in this supplement. A fund may assume a market impact of zero for its daily and weekly liquid assets."
A section titled, "Fund to Invest Solely in Daily or Weekly Liquid Assets," says, "In consideration of the mandatory liquidity fee requirement, the fund intends to transition its portfolio to invest solely in securities that are considered daily or weekly liquid assets under Rule 2a-7 (typically maturing in five business days or less or subject to a demand feature that is exercisable within five business days). Although it has no current intention of investing in securities maturing in greater than five business days, the fund may do so in accordance with the requirements of Rule 2a-7. Between the date of this supplement and the Compliance Date, the fund will increasingly transition its portfolio to securities that are considered daily or weekly liquid assets, so that the portfolio will be invested solely in such securities on or prior to the Compliance Date."
Under the heading, "Fund Subject to Discretionary and Mandatory Liquidity Fee Requirements," the filing tells us, "As noted in the prospectus supplement dated April 1, 2024, under authority delegated to the adviser by the fund's board of trustees, the adviser is also permitted to impose a liquidity fee on redemptions (up to 2%) if it determines it is in the best interests of the fund to impose a liquidity fee (the 'discretionary liquidity fee'). While the fund will be subject to the new mandatory liquidity fee requirement, to the extent the fund invests solely in securities that are considered daily or weekly liquid assets as intended, the market impact factor to be used in the calculation of the amount of the mandatory liquidity fee will be zero and, therefore, no liquidity fee will be required to be assessed. See 'Shareholder Information -- Additional Information on Purchasing and Redeeming Fund Shares -- Liquidity Fees,' included in this supplement, for more information on the discretionary and mandatory liquidity fees."
The filing also comments that the "Fund Will Have a Single Net Asset Value Calculation Time," stating, "Additionally, effective September 3, 2024, the fund will calculate the net asset value (NAV) per share of each share class of the fund at 2:00 p.m. Central time on each business day that the fund is open. As of this date, the fund will no longer calculate its NAV per share at 8:00 a.m. Central time or 11:00 a.m. Central time."
Under "Principal Investment Strategies," First American writes, "Institutional Prime Obligations Fund invests in high-quality short-term debt obligations, including: commercial paper; U.S. dollar-denominated obligations of domestic and foreign banks with total assets of at least $500 million (including fixed and variable rate certificates of deposit, time deposits, and bankers’ acceptances); non-convertible corporate debt securities; securities issued by the U.S. government or one of its agencies or instrumentalities; municipal securities, including variable rate demand notes, commercial paper, and municipal notes and other short-term municipal obligations; and repurchase agreements."
They add, "The fund intends to invest solely in securities that are considered daily or weekly liquid assets under Rule 2a-7 under the Investment Company Act of 1940, as amended (the '1940 Act') (typically maturing in five business days or less or subject to a demand feature that is exercisable within five business days). Although it has no current intention of investing in securities maturing in greater than five business days, the fund may do so in accordance with the requirements of Rule 2a-7."
For more, see the Crane Data News updates, "Schwab, JPM, Meeder Announce Prime Inst Conversions to Government" (7/18/24), "Invesco Files to Liquidate Prime Inst MMFs; UBS MF Converting to Retail" (6/13/24), "BlackRock Liquidates TempFund, LEAF" (6/10/24), "Federated Hermes Merging Prime Inst Money Funds; Prime Value To POF" (6/6/24), "Allspring to Merge Heritage MMF Into Govt MMF; UBS Converting Fund" (6/3/24), "DWS Liquidating ESG Liquidity Fund, 7th Prime Inst to Exit" (5/22/24), "Dreyfus Files to Liquidate Cash Management Prime Inst MMF, Tax Exempt" (5/13/24), "Goldman Files to Liquidate Prime Inst MMFs; Barron's: MMFs Tempting" (4/22/24), "Federated Liquidating Money Mkt Trust" (4/1/24), "Vanguard Market Liquidity Fund Files to Go Government, Joins American" (3/20/24) and "American Funds Central Cash to Convert to Govt to Avoid Liquidity Fees" (2/6/24).
In other news, Investment News writes again on brokerage sweep accounts in "Higher rates on cash could cost LPL $380 million: analyst." They explain, "After a tumultuous week for broker-dealers facing higher yields on client cash, one securities analyst on Friday said that higher interest rates on clients' cash held in advisory accounts may cost LPL Financial Holdings Inc. as much as $380 million, shaving off $3.80 per share on the company's earnings in the future. The analyst, Jeff Schmitt of William Blair Equity Research, wrote the note about LPL in the wake of the company being sued by a client on Wednesday in federal court in San Diego, with the claim alleging that LPL's cash sweep program allows the company to unjustly enrich itself, which potentially constitutes a breach of fiduciary duty."
The article says, "Last Friday, Wells Fargo & co. said it expected to take a hit to spread income this year after recently raising sweep rates in client advisory accounts. Morgan Stanley on Tuesday said that, like Wells Fargo, it was raising rates on clients' cash in advisory sweep accounts. With LPL, Raymond James Financial Inc. and Ameriprise Financial Inc. all set to report earnings for the quarter ending in June next week, one senior industry executive expressed his concern over how significant the impact the repricing of clients' cash could be for each firm."
The analyst Schmitt wrote, "We make no claims on the validity of the lawsuit at this stage and await additional information from the company during its earnings call next Thursday. However, to the extent LPL does have to increase sweep rates on advisory accounts, we wanted to provide our initial thoughts on the company's potential exposure." The piece adds, "He estimated that LPL had about $23 billion of client cash in advisory accounts." (See also our July 19 News, "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures.")
Last week, Federal Reserve Bank of Dallas President Lorie Logan gave a speech titled, "A level playing field for deposit insurance," which discussed increasing the FDIC deposit limit and other means of preventing bank deposit runs. The talk took place at a conference with the theme, "Exploring Conventional Bank Funding Regimes in an Unconventional World." Discussing "The importance of bank funding," she tells us, "Funding risk is both one of the oldest challenges in banking and one of the most timely. The most basic activity banks do is transform deposits into longer-term investments. Banks accept deposits, promise to return them whenever depositors want and invest in the meantime in less-liquid assets, such as loans that finance investment and fuel economic growth. So, as I'm sure the panelists in our history session this afternoon will discuss, bankers have long understood the importance of being prepared to meet withdrawals -- and of maintaining depositors' confidence so they don't withdraw money based on unfounded fears."
Logan explains, "But as we saw in 2023, maintaining depositors' confidence can be challenging in today's highly networked society that allows bank runs to propagate with unprecedented speed. Now that banking conditions have stabilized and the immediate pressures banks felt last year have passed -- though we should always remain watchful for any risks that may emerge -- it's a good time to consider whether adjustments in banks' liquidity risk management or in related public policies can support a strong and vibrant banking system in the modern environment."
She comments, "From my standpoint, there are three main ways to ensure sound liquidity risk management in banking. First, regulations can require banks to hold a certain amount of liquid assets, or banks can choose to do so voluntarily. This approach is important, but relying exclusively on it would have a drawback. By limiting the amount of liquidity transformation banks do, this approach limits the amount of banking they do. Second, as a complement to holding liquid assets, bankers and regulators can ensure banks have reliable and ready access to contingent funding sources. Contingent funding can come from private markets and from central bank backstops such as the Federal Reserve's discount window and Standing Repo Facility or from similar facilities."
Logan continues, "And third, banks and regulators can work to stabilize the deposit and funding base. For example, diversifying deposit sources can make a bank's funding more resilient. And deposit insurance can reinforce customers' confidence that their money is safe, thus preventing bank runs and limiting the potential liquidity outflows that banks may need to meet. These three approaches interact. Buffers of liquid assets and sound plans for contingent funding can reassure depositors and prevent runs, accomplishing some of the same goals as deposit insurance. And to the degree deposit insurance succeeds in preventing runs, banks may not need as much access to liquid assets or contingent funding."
She states, "In my view, a level playing field is achievable when it comes to deposit insurance, but that could require some change. Right now, a couple of factors related to deposit insurance come together to give the largest banks a potential advantage in attracting deposits. Federal insurance coverage is limited to $250,000 per depositor. That limit is supposed to give small depositors confidence while creating incentives for larger depositors to investigate their banks' condition. While large depositors could theoretically provide helpful market discipline, they also often perceive -- rightly or wrongly -- that some banks are too big to fail and that the government will bail out those banks or their depositors in a crisis. Such perceptions undermine market discipline and tilt the playing field toward big banks."
Logan states, "When I checked recently, several of the country's biggest banks were offering interest rates of just 1 to 6 basis points on a standard savings account. How many community banks can attract deposits at rates like that, when money market rates are over 500 basis points? Of course, there are many reasons why the largest banks may be able to pay lower interest rates than other banks. For example, some customers may value these banks' wide range of capital markets, settlement, custodial, international and other services or their extensive branch networks."
She adds, "But the evidence of a tilt goes beyond interest rates. Amid the severe banking stresses in early 2023, we heard many reports of depositors pulling their funds from smaller banks and moving to the largest ones. Just in the second week of March 2023, deposits at the country's 25 largest banks rose $113 billion, while deposits at all other domestic banks fell $172 billion. The shift was significant enough that executives at several of the largest banks mentioned it in their quarterly earnings calls."
Logan then says, "If you step back and look at how deposit insurance works, these actions by depositors aren't surprising. And although the flows to larger banks ebbed as banking conditions calmed, the underlying incentives remain. Especially when it comes to business accounts, $250,000 isn't such a large deposit. A small business employing 110 people at the median wage would need $250,000 in its checking account just to cover a biweekly payroll. What small business owner has time to conduct regular, thorough checkups on a bank's health? So, many depositors prefer to bank at institutions where they don't have to think hard about whether their funds are safe."
She explains, "And there's an important exception to the $250,000 limit. If a bank fails and the Treasury secretary and the boards of the FDIC and Federal Reserve agree there's a serious threat to financial stability, the FDIC can cover all deposits, even those above the limit. The government makes no advance commitments about when it will invoke that systemic risk exception. The exception has sometimes been applied to cover uninsured deposits at relatively small banks, such as when Silicon Valley Bank (SVB) and Signature Bank failed in 2023. Still, most depositors didn't foresee that action. If they had, they probably wouldn't have run on SVB and Signature in the first place. By contrast, while the government has not provided a formal guarantee to the eight U.S. firms designated as Global Systemically Important Banks, or G-SIBs, most market participants think it's pretty unlikely the authorities would let those firms' depositors lose money. After all, these banks are officially systemically important."
Logan then states, "Conceptually, there are a couple of possibilities for restoring balance. Regulators could adopt even tougher regulations on the largest banks. But such regulations could put a drag on the economy by raising big banks' costs for some of the unique and critical intermediation services they provide. Or, authorities could increase the deposit insurance limit so that deposits would be more equally protected at all banks. The FDIC proposed some interesting options along those lines in a report last year. Of course, the benefits of a higher limit have to be weighed against potential costs, such as whether deposit insurance premiums would need to rise or whether a higher limit could increase moral hazard and encourage banks to take excessive risks."
Finally, she adds, "Lastly, I'd note the growing use of reciprocal deposit networks, which allow banks to swap deposits in excess of the limit with each other to provide depositors more insurance. Reciprocal deposits reached $379 billion in the first quarter of this year, up from $157 billion at the end of 2022. The vast majority of reciprocal deposits -- 89 percent -- are at banks with less than $100 billion in assets. That reflects both the funding environment for smaller banks and the less-favorable regulatory treatment of very large reciprocal deposits. Reciprocal deposits can cost banks more than 10 basis points in network fees. Smaller banks' willingness to pay this cost to work around the deposit insurance limit suggests the limit's too low. As a society, if we're going to provide the insurance anyway -- which is what happens when banks use reciprocal deposits -- we may as well increase the limit so we can avoid the costs, operational risks and regulatory mirages involved in passing deposits back and forth between banks."
We wrote earlier this week on a number of earnings reports which show a continued shift from bank deposits into money market funds. (See our July 17 News, "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues.") The Wall Street Journal covers the topic in, "Yield-Hungry Wealth Management Clients Are Becoming a Headache for Big Banks." They explain, "Brokerage customers are still demanding more for their cash. And banks are scrambling to keep up. Across several banks with large wealth-management businesses, a common theme in second-quarter earnings reports was continuing to have to pay higher rates to hang on to brokerage customers' cash that isn't invested in things like stocks and bonds. Wells Fargo and Morgan Stanley called out increases in some of the rates they pay on certain brokerage account deposit products, and Bank of America noted a rise in rates paid on wealth-management deposits."
The article continues, "Since interest rates began to climb in 2022, banks have had to figure out ways to slow the bleeding of low-cost deposits to things like high-yield online savings accounts, certificates of deposit or money-market funds. This leakage has been a major factor squeezing banks' net interest earnings. As rates crest, and ultimately start to fall, that pressure should begin to ease, but the question is how fast. With many investors expecting just one rate cut for now, they may keep wanting good returns for their cash for longer."
The Journal says, "Where pricing pressure appears to still be most acute is in brokerage accounts, where people often keep money they aim to earn on -- rather than what just sits in a checking or lower-yielding savings account, waiting to be spent. It didn't help that the second quarter saw many customers taking cash out of their banks to pay taxes, which added to the overall scarcity of deposits."
They add, "Bank of America on Tuesday said that the quarter-over-quarter increase in the total rate paid across deposits in its global wealth and investment management business accelerated for the first time in several quarters as customers continued to rotate their cash.... Morgan Stanley told analysts on Tuesday that it intends to make changes to some brokerage advisory sweep deposit rates 'against the backdrop of changing competitive dynamics.'"
Investment News also has been writing about the increase in advisory sweep rates mentioned on some of the earnings calls. Their piece, "Wells Fargo discloses problems with fees on cash," tells us, "It appears that large wealth management businesses are running into a wall over the amount they are paying clients in interest for certain cash accounts. The Securities and Exchange Commission has been focused on cash sweep account options for the past few years.... Wells Fargo disclosed last fall that it was facing an 'advisory account cash sweep investigation' by the commission."
They explain, "Advisory accounts at broker-dealers charge clients fees rather than commissions. Now, Wells Fargo's Wealth and Investment Management group, which includes its 12,000 brokers, banks reps and financial advisors, has changed the pricing for such accounts in what looks like a win for clients while costing the firm hundreds of millions of dollars in income.... A Wells Fargo spokesperson said the company had nothing to add beyond the discussion during the conference call on Friday."
Another recent Investment News' update, "Morgan Stanley increases cash sweep pricing for advisory clients," comments, "As interest rates soared over the past couple years, some financial advisors and clients have criticized their firms for short-changing them on yield and interest generated from cash deposits. The Securities and Exchange Commission has been focused on cash sweep account options and hit firms with penalties over the matter. The return clients are getting on cash appears to be front and center of the industry right now."
They quote Morgan Stanley CFO Sharon Yeshaya from their earnings call, "In the third quarter, we intend to make changes to our advisory sweep rates against the backdrop of changing competitive dynamics. The impact of these intended changes will be largely offset with the expected gains from the repricing of our investment portfolio.... Therefore third quarter [net interest income] will be primarily driven by the path of sweeps, and NII could decline modestly in the third quarter. Later in the call she declined to comment when asked whether Morgan Stanley was under any regulatory pressure to have better pricing for clients on certain cash accounts."
In other news, State Street Global Advisors (SSGA) recently published a "Q3 2024 Cash Outlook: Poised to be Eventful." It states, "The Fed's policy rate trajectory remains uncertain, with expectations of rate cuts in 2024 diminishing. But several other factors, such as the US presidential election, record cash levels, and regulatory changes in the money market fund industry, could be just as consequential for investors."
They discuss, "Record Liquidity Levels," writing, "Abundant liquidity in the system, as evidenced by the record-high commercial bank deposits (over $17 trillion) and money market balances (over $6 trillion), indicates ready cash to deploy in the event of a market repricing or if an attractive business opportunity presents itself. This excess liquidity may cushion against potential market downturns."
SSGA says, "The substantial issuance of US Treasury Bills has been readily absorbed by money market funds and other cash investors, contributing to stable funding markets. The continued attractiveness of T-Bill rates may further support demand and provide a haven in these uncertain markets.... Commercial paper yields, although slightly cheaper than months ago, remain relatively expensive given a potential recessionary environment and the relative value proposition compared to T-bills. Additionally, impending money market fund reforms, which could significantly impact institutional prime money market funds, may create upward pressure on yields."
They conclude, "The second half of 2024 will be far from quiet, with a confluence of events and evolving data shaping market dynamics. The presidential election, Federal Reserve policy decisions, record liquidity levels, and regulatory changes in the money market fund industry are just some of the factors that will contribute to an eventful and potentially volatile market environment. While uncertainty abounds, ample liquidity, resilient funding markets, and attractive yields in certain segments may offer opportunities for investors who remain vigilant and adaptable. By closely monitoring these key areas and adjusting strategies accordingly, investors can navigate the challenges and capitalize on opportunities that lie ahead."
The last set of announcements on funds planning to exit the Prime Institutional Money Fund space took place a little over a month ago. But we recently found a new batch of funds declaring exits ahead of the October 2 deadline for the new emergency liquidity rules in the latest round of Money Fund Reforms. A filing for the $5.8 billion Schwab Variable Share Price Money Fund (SVUXX) tells us, "The Board of Trustees of The Charles Schwab Family of Funds has determined that it is in the best interest of the Schwab Variable Share Price Money Fund, a series of the Trust, and its shareholders to reorganize with and into the Schwab Government Money Fund. Accordingly, the Board has approved an Agreement and Plan of Reorganization that would provide for the reorganization of the Acquired Fund into the Surviving Fund. (See the Crane Data News updates, "Invesco Files to Liquidate Prime Inst MMFs; UBS MF Converting to Retail" (6/13/24) and "BlackRock Liquidates TempFund, LEAF" (6/10/24).)
It states, "The Plan of Reorganization approved by the Board sets forth the terms by which the Acquired Fund will transfer its assets and liabilities to the Surviving Fund in exchange for Ultra Shares of the Surviving Fund, and subsequently distribute those Surviving Fund shares to shareholders of the Acquired Fund. After the Reorganization is consummated, shareholders of the Acquired Fund will become shareholders of the Surviving Fund. The Reorganization is intended to be tax-free, meaning that shareholders of the Acquired Fund will become shareholders of the Surviving Fund without realizing any gain or loss for federal income tax purposes. It is expected that the Reorganization will occur on or about September 9, 2024."
Schwab's filing says, "Shareholder approval of the Reorganization is not required. Shareholders of the Acquired Fund will receive a prospectus/information statement prior to the Reorganization that describes the investment objective, strategies, expenses and risks of an investment in the Surviving Fund and provides further details about the Reorganization. Charles Schwab Investment Management, Inc. (investment adviser) will bear the costs associated with the Reorganization."
It explains, "The Surviving Fund has a substantially similar investment objective to that of the Acquired Fund.... The Acquired Fund invests primarily in high-quality short-term money market investments issued by U.S. and foreign issuers, such as commercial paper, promissory notes, certificates of deposit, and other money market securities, including securities issued by the U.S. government or its agencies and instrumentalities. The Surviving Fund is a 'government money market fund' and as such intends to operate as a government money market fund under the regulations governing money market funds."
Schwab adds, "Beginning June 7, 2024, the Acquired Fund will gradually transition its portfolio to invest a greater percentage of its net assets in government securities. As a result, the Acquired Fund's yield may be impacted.... Effective as of the close of business on June 28, 2024: The Acquired Fund will close to new investors; Existing shareholders of the Acquired Fund (including participants in 401(k) plans) as of the Closing Date may continue to purchase additional shares and receive dividends and/or distributions in the form of additional shares of the Acquired Fund, and registered investment advisers who maintain investments in the Acquired Fund on behalf of client accounts as of the Closing Date may continue to purchase additional shares on behalf of their clients, up until the close of business on September 5, 2024."
Another filing for the $1.4 billion JPMorgan Securities Lending Money Market Fund (VSLXX), an internal or private Prime Inst MMF, states, "At its June 2024 meeting, the Board of Trustees approved the conversion of the JPMorgan Securities Lending Money Market Fund to qualify as a 'government money market fund' as defined in Rule 2a-7 under the Investment Company Act of 1940, as amended. As a result, the Fund will make certain changes to its investment policy. investment strategies and related risks, including the adoption of a new investment policy to invest at least 99.5% of its total assets in cash, government securities and/or repurchase agreements that are 'collateralized fully' by cash or government securities."
It tells us, "The Fund expects that these changes will become effective on or about September 3, 2024. On the Effective Date, a new prospectus will replace the existing prospectus for the Fund. You should refer to the New Prospectus for the Fund, when it is available. Please note that the New Prospectus reflecting changes for the Fund is not yet effective and that the information in this supplement may be changed at any time prior to the Effective Date."
JPM writes, "The following is a brief summary of some of the changes that are anticipated to take effect on the Effective Date. Please refer to the New Prospectus, once available, for a more complete discussion of the Fund's strategies after the Effective Date.... The Fund intends to qualify as a 'government money market fund,' as such term is defined in or interpreted under Rule 2a-7 under the Investment Company Act of 1940, as amended. 'Government money market funds' are required to invest at least 99.5% of their assets in (i) cash, (ii) securities issued or guaranteed by the United States or certain U.S. government agencies or instrumentalities and/or (iii) repurchase agreements that are collateralized fully, and are exempt from requirements that permit money market funds to impose a liquidity fee. While the J.P. Morgan Funds' Board of Trustees may elect to subject the Fund to liquidity fee in the future, the Board has not elected to do so at this time."
They comment, "Under the new strategy, the Fund, under normal conditions, will invest its assets exclusively in: debt securities issued or guaranteed by the U.S. government, or by U.S. government agencies or instrumentalities or Government-Sponsored Enterprises ('GSEs'), and repurchase agreements fully collateralized by U.S. Treasury and U.S. government securities. The Fund is a money market fund managed in the following manner: The Fund seeks to maintain a net asset value ('NAV') of $1.00 per share."
Finally, the $507 million Meeder Inst Prime Money Market Fund (FLPXX) has also converted into Meeder Government Money Market Fund. (For more on recent Prime Institutional MMF liquidations and conversions, see these additional stories: "Federated Hermes Merging Prime Inst Money Funds; Prime Value To POF" (6/6/24), "Allspring to Merge Heritage MMF Into Govt MMF; UBS Converting Fund" (6/3/24), "DWS Liquidating ESG Liquidity Fund, 7th Prime Inst to Exit" (5/22/24), "Dreyfus Files to Liquidate Cash Management Prime Inst MMF, Tax Exempt" (5/13/24), "Goldman Files to Liquidate Prime Inst MMFs; Barron's: MMFs Tempting" (4/22/24), "Federated Liquidating Money Mkt Trust" (4/1/24), "Vanguard Market Liquidity Fund Files to Go Government, Joins American" (3/20/24) and "American Funds Central Cash to Convert to Govt to Avoid Liquidity Fees" (2/6/24).)
In related news, the $264 million BNY Mellon Government Money Market Fund (MLMXX) announced that it is liquidating, explaining, "The Board of Trustees of BNY Mellon Funds Trust has approved the liquidation of BNY Mellon Government Money Market Fund, a series of the Trust, effective on or about August 27, 2024. Before the Liquidation Date, and at the discretion of Fund management, the Fund's portfolio securities will be sold and/or allowed to mature in their normal course and the Fund may cease to pursue its investment objective and policies. The liquidation of the Fund may result in one or more taxable events for shareholders subject to federal income tax."
Dreyfus says, "Accordingly, effective on or about July 18, 2024, the Fund will be closed to any investments for new accounts, except that new accounts may be established for 'sweep accounts' and by participants in group retirement plans (and their successor plans), provided the plan sponsor has been approved by BNY Mellon Investment Adviser, Inc. in the case of BNYM Adviser-sponsored retirement plans, or BNY Mellon Wealth Management, in the case of BNYM WM-sponsored retirement plans, and has established the Fund as an investment option in the plan before the Closing Date. The Fund will continue to accept subsequent investments until the Liquidation Date."
They add, "Fund shares held on the Liquidation Date in BNYM WM Retirement Plans will be reallocated to other previously approved investment vehicles designated in plan documents as determined by BNYM WM and/or a client's trustee or other fiduciary, where required, within BNYM WM's investment discretion should the consent of a client's third-party fiduciary not be obtained prior to the Liquidation Date. Fund shares held on the Liquidation Date in BNYM Adviser Retirement Plans will be exchanged for Wealth shares of Dreyfus Government Cash Management."
Asset managers, brokerages and banks continue to report second-quarter earnings, and several of the calls have discussed money fund and "cash sorting". On the "Charles Schwab Corporation 2024 Summer Business Update Tuesday, CFO Peter Crawford comments, "I'll provide some high-level perspective on what we're seeing with regard to our clients' transactional cash.... The important point is that we are proceeding through what we've described ... as a transitional year, but ... at a slightly faster pace than we had anticipated just six months ago, with ... a continued moderation of client cash realignment activity despite seasonal pressures and the impact of very high investor engagement, [and] sequential growth in our net interest margin." Schwab's money fund assets rose to an average of $523.7 billion in Q2'24 from $375.9 billion a year earlier, an increase of $147.8 billion, or 39.3%. Deposits fell from $312.5 billion a year ago to $258.1 billion in Q2, a decline of $54.4 billion, or -17.4%. according to their quarterly earnings release. (See Seeking Alpha's Schwab update transcript here.)
He tells us, "Our clients' transactional cash balances are typically pressured in the first half of the year by engagement in the markets in January and February and then tax season in April and early May. And that was no different in 2024. But even so, we continue to see a moderation of the rate-driven client cash realignment activity.... Turning our attention to the balance sheet, total assets dropped by 4%, driven primarily by tax-related outflows and the continuation, albeit at a much slower pace, of the client cash realignment activity we have experienced for a little over two years. The overall level of realignment within Bank Sweep and Schwab One in the quarter was down about 50% versus the same quarter in 2023."
Crawford continues, "We have seen strong growth in margin utilization to start the year, and to support that activity, we directed about $5 billion of client cash from the banks to the broker-dealers. That caused our level of supplemental borrowing to rise slightly in the quarter.... Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish, investor sentiment, client cash balances have largely trended consistent with our expectations, despite rates remaining higher than the Fed and the market predicted earlier in the year."
He also says, "All indications support that we are in the very late innings of client cash realignment activity. In fact, over the course of Q2, client-driven outflows from Bank Sweep despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to continued decline to supplemental borrowing. Now with new client acquisition and organic growth returning to our historical norms, and all signs suggesting that the Fed funds rate has likely peaked ... we expect the utilization of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time. We believe we're nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again."
Crawford adds, "Over the last two-plus years, that [long-term growth] formula has admittedly been obscured to an extent by the impact of rising rates and what that has done to client transactional cash balances. But with rates seeming to plateau and client cash realignment moderating, while organic growth returns to that historical level, we're nearing the point where that simple and straightforward formula ... should become clear."
During the Q&A, Crawford is asked about deposits rates when the Fed cuts. He responds, "The scenario that I outlined is based off the Fed cutting rates a single time the rest of this year in September. In terms of deposit betas, I wouldn't necessarily assume that deposit betas are symmetrical. If you look historically, deposit betas tend to be a bit higher in the easing cycle than they are in a tightening cycle. And so, while we certainly haven't made any decisions exactly about what we'll do with deposit rates, I think that's a reasonable expectation. We also would expect that as rates come down, the cost of any replacement supplemental funding that we have to access comes down as well. And we'd also expect that, on the margin, rate cuts would, over time, bring about higher levels of clients' transactional cash as the incentive for them to utilize alternative solutions like purchase money funds and CDs become somewhat less."
Asked if about scrutiny of advisory sweeps, he answers, "With respect to the Wells Fargo issue, we have provided money market fund sweep cash and -- or money market yields on bank cash for all of our fiduciary-driven investment advisory solutions already. So, I don't really see the Wells Fargo report having any kind of meaningful implications for us. We've been doing this for an extended period of time already."
Crawford adds, "I know there's a lot of focus on kind of month-to-month, even at times week-to-week changes in deposit flows. I think it's important to maybe set a little bit of context. So, first is deposit flows over a short period of time are influenced by net new assets, of course, the cash is brought in from new accounts, and then what clients do with that cash. And that can be rate-driven allocations that they make to purchase money funds, CDs and so forth. It can also be into engagement in the markets, equities, mutual funds.... And so that can create some variability. We have seen strong engagement in the markets. When we look at the rate-driven activity among our clients, that continues to go down."
He says, "The second point of context I would make ... is that you do see variability in those flows from, frankly, from day to day or month to month. And we can see $2 billion or $3 billion of net inflows or outflows on a particular day. And so, when you just look at a month's numbers, depending on what day of the week the month ends on, it can influence the level of transactional cash that we report on that monthly basis. I'd say June ... was comparable to May. July has started off stronger. It's still early, it's about halfway through the month, so we'll see how the month ends. But it ... started off definitely stronger than in terms of deposit flows than May."
Crawford explains, "In terms of the long term, ... we would expect in a stable environment that client transactional cash grows with the growth in accounts and the growth in total assets. We actually recently did a study to look at clients who opened their accounts roughly 20 years ago. And what we see over time is, as those clients increase the net worth in their accounts, increase assets in their accounts, their cash balances go up and they actually stay at a relatively constant percent of the assets in the account."
Finally, he tells us, "So, I think as you are modeling our transactional cash over a long period of time, over years, I think it's reasonable to expect that that transactional cash grows with the growth in assets and the growth in accounts. When rates are rising, ... growth will be a little bit lower, and rates are falling, that growth will be a little bit faster. But I think over time in a stable environment, that's a reasonable expectation over, again, over multiple years."
Also, earlier this month on BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, "In the second quarter, we saw equity markets power to another record high and more clients starting to re-risk. `Investors waiting in cash have missed out on significant equity market returns over the last year and more investors are stepping back into risk assets. BlackRock is a ... winner when there's assets in motion.... Over the past few months, the slate of client mandates we've been chosen for is the most broad and diversified has been in years across active equity and fixed income, customized liquidity accounts, private markets and multi-product Aladdin assignments."
He states, "Cash management net inflows of $30 billion were driven by government and international prime funds. Flows benefited in part from clients reinvesting in cash strategies in early April after redeeming balances during the last week of March. Net inflows included multiple large new client mandates, as connectivity between our cash and capital markets teams allows us to deliver clients holistic advice and market insight. Our scale and active approach for clients around their liquidity management are driving sustained growth in our cash platform."
Asked about the shift from deposits to MMFs during the Q&A, Small comments, "I'd say a couple of dynamics we've definitely seen in the platform. Post Silicon Valley Bank, we saw through Cachematrix, in our institutional business, I think clients just being more mindful, tactical and kind of operationally flexible in how they manage cash. We think that largely for an institutional manager like BlackRock that's been a good trend of being able to put together technology and customized liquidity accounts in a way that we can grow."
He adds, "Then, ultimately, we have seen this business grow. But I'd also flag that bond ETFs have been a real surrogate, I think for kind of how clients are managing cash. And as Larry mentioned, over the last year we've seen $100 billion basically of organic growth in bond ETFs, which I think have been used as cash or cash proxies along the way as clients manage their liquidity dynamically across money funds, separate accounts and traded instruments like ETFs."
Crane Data's latest Money Fund Intelligence International shows that assets in European or "offshore" money market mutual funds moved higher over the past 30 days to a record $1.292 trillion, while yields were mostly flat. Assets for EUR and GBP MMFs rose over the past month, while USD MMFs fell. Like U.S. money fund assets, European MMFs have repeatedly hit record highs in 2023 and 2024. These U.S.-style money funds, domiciled in Ireland or Luxembourg and denominated in US Dollars, Pound Sterling and Euros, increased by $20.7 billion over the 30 days through 7/12. The totals are up $94.6 billion (7.9%) year-to-date for 2024, they were up $166.9 billion (16.2%) for the year 2023. (Note that currency moves in the U.S. dollar cause Euro and Sterling totals to shift when they're translated back into totals in U.S. dollars. See our latest MFI International for more on the "offshore" money fund marketplace. These funds are only available to qualified, non-U.S. investors and are almost entirely institutional.) (Note too: Please join us for our European Money Fund Symposium, which will take place Sept. 19-20, 2024 in London, England. Registrations are $1,000 and our discounted hotel rate expires August 14.)
Offshore US Dollar money funds decreased $815 million over the last 30 days and are up $35.1 billion YTD to $684.6 billion; they increased $100.0 billion in 2023. Euro funds increased E19.6 billion over the past month. YTD, they're up E35.7 billion to E270.6 billion, for 2023, they increased by E54.5 billion. GBP money funds increased L293 million over 30 days, and they're up L14.6 billion YTD at L249.9B, for 2023, they fell L28.1 billion. U.S. Dollar (USD) money funds (214) account for over half (53.0%) of the "European" money fund total, while Euro (EUR) money funds (122) make up 22.6% and Pound Sterling (GBP) funds (143) total 24.4%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Monday), below.
Offshore USD MMFs yield 5.23 (7-Day) on average (as of 7/12/24), unchanged from a month earlier. Yields averaged 4.20% on 12/30/22, 0.03% on 12/31/21, 0.05% on 12/31/20, 1.59% on 12/31/19 and 2.29% on 12/31/18. EUR MMFs finally left negative yield territory in the second half of 2022 but they should remain flat until the ECB moves rates again. They're yielding 3.65% on average, down 14 bps from a month ago and up from 1.48% on 12/30/22, -0.80% on 12/31/21, -0.71% at year-end 2020, -0.59% at year-end 2019 and -0.49% at year-end 2018. Meanwhile, GBP MMFs broke the 5.0% barrier 12 months ago and now yield 5.13%, down 1 bp from a month ago, and up from 3.17% on 12/30/22. Sterling yields were 0.01% on 12/31/21, 0.00% on 12/31/20, 0.64% on 12/31/19 and 0.64% on 12/31/18.
Crane's July MFI International Portfolio Holdings, with data as of 6/30/24, show that European-domiciled US Dollar MMFs, on average, consist of 26% in Commercial Paper (CP), 16% in Certificates of Deposit (CDs), 23% in Repo, 23% in Treasury securities, 11% in Other securities (primarily Time Deposits) and 1% in Government Agency securities. USD funds have on average 43.0% of their portfolios maturing Overnight, 8.3% maturing in 2-7 Days, 9.8% maturing in 8-30 Days, 10.5% maturing in 31-60 Days, 7.2% maturing in 61-90 Days, 14.0% maturing in 91-180 Days and 7.2% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (40.4%), France (11.5%), Canada (9.3%), Japan (8.3%), the U.K. (4.6%), the Netherlands (4.2%), Australia (3.9%), Sweden (3.4%), Germany (3.0%) and Finland (2.8%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $160.7 billion (23.3% of total assets), Fixed Income Clearing Corp with $38.3B (5.5%), Nordea Bank with $18.1B (2.6%), BNP Paribas with $18.0B (2.6%), Credit Agricole with $17.9B (2.6%), RBC with $17.9B (2.6%), Citi with $14.2B (2.1%), Toronto-Dominion Bank with $14.1B (2.0%), JP Morgan with $14.0B (2.0%), and Bank of America with $13.9B (2.0%).
Euro MMFs tracked by Crane Data contain, on average 42% in CP, 21% in CDs, 19% in Other (primarily Time Deposits), 16% in Repo, 2% in Treasuries and 0% in Agency securities. EUR funds have on average 37.6% of their portfolios maturing Overnight, 11.4% maturing in 2-7 Days, 12.6% maturing in 8-30 Days, 8.7% maturing in 31-60 Days, 8.9% maturing in 61-90 Days, 12.7% maturing in 91-180 Days and 8.0% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (30.3%), Japan (12.6%), the U.S. (8.8%), Germany (8.1%), Canada (6.1%), the U.K. (5.1%), Austria (4.6%), Australia (3.7%), Netherlands (3.7%) and Belgium (3.6%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E13.4B (6.0%), Republic of France with E10.8B (4.8%), BNP Paribas with E10.5B (4.7%), JP Morgan with E9.7B (4.3%), DZ Bank AG with E8.7B (3.9%), Credit Mutuel with E8.2B (3.7%), Societe Generale with E8.2B (3.6%), Erste Group Bank AG with E7.0B (3.1%), Mitsubishi UFJ Financial Group Inc with E6.6B (3.0%) and Sumitomo Mitsui Banking Corp with E6.6B (2.9%).
The GBP funds tracked by MFI International contain, on average (as of 6/30/24 ): 40% in CDs, 19% in CP, 22% in Other (Time Deposits), 16% in Repo, 3% in Treasury and 0% in Agency. Sterling funds have on average 33.8% of their portfolios maturing Overnight, 10.6% maturing in 2-7 Days, 11.1% maturing in 8-30 Days, 10.6% maturing in 31-60 Days, 9.7% maturing in 61-90 Days, 13.6% maturing in 91-180 Days and 10.5% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (15.9%), Japan (15.0%), Canada (13.2%), the U.K. (13.1%), Australia (9.8%), the U.S. (9.7%), Singapore (3.1%), Finland (3.1%), the Netherlands (3.0%) and Spain (1.9%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L13.9B (6.7%), BNP Paribas with L9.2B (4.4%), Toronto-Dominion Bank with L8.8B (4.3%), Sumitomo Mitsui Trust Bank with L8.6B (4.2%), JP Morgan with L7.4B (3.6%), Mizuho Corporate Bank Ltd with L7.0B (3.4%), National Australia Bank Ltd with L6.8B (3.3%), RBC with L6.7B (3.2%), Nordea Bank with L6.0B (2.9%) and Australia & New Zealand Banking Group Ltd with L5.9B (2.8%).
The July issue of our Bond Fund Intelligence, which was sent to subscribers Monday morning, features the stories, "Worldwide BF Assets Jump to $13.0 Trillion, Led by U.S.," which quotes from ICI's latest global asset totals, and "Ho, Sabatino, Weaver Discuss Alt-Cash, Ultra-Shorts at MFS," which excerpts from our annual Money Fund Symposium held in Pittsburgh last month. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns rose in June while yields were mixed. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
BFI's "Worldwide" article states, "Bond fund assets worldwide increased in the latest quarter to $13.0 trillion, led higher by four of the largest bond fund markets -- the U.S., Luxembourg, Ireland and China. We review the ICI's 'Worldwide Open-End Fund Assets and Flows, First Quarter 2024' release and statistics below."
The piece continues, "ICI's report says, 'Worldwide regulated open-end fund assets increased 0.5% to $69.17 trillion at the end of the first quarter of 2024.... The Investment Company Institute compiles worldwide regulated open-end fund statistics on behalf of the International Investment Funds Association (IIFA).'"
Our second article states, "Crane Data hosted its Money Fund Symposium conference last month in Pittsburgh, which featured a segment titled, 'Alt-Cash: Ultra-Short Bonds, SMAs & Offshore' with Teresa Ho of J.P. Morgan Securities, Rob Sabatino of UBS Asset Management and Jeff Weaver of Allspring Global. Ho says, 'If we just focus on liquidity investors, what we find is that aggregate balances have generally trended higher since the pandemic.... There's still a lot of cash in the front end.... But focusing on the ultra-short and short-term bond funds ... I think it's fair to say that they haven’t been getting the love that they deserve.' (Note: Materials are available in our 'Money Fund Symposium 2024 Download Center.')"
It states, "She explains, 'Flows in the sector have generally been trending lower over the past couple of years. Notwithstanding a couple of months of inflows ..., the sector has consistently seen outflows, ... though the outflows have moderated recently. [T]hese flows pale in comparison to what's been happening in money market funds.'"
Our first News brief, "Returns Up Again, Yields Lower in June," states, "Bond fund returns were higher again in June, while yields were lower. Our BFI Total Index rose 0.90% over 1-month and is up 5.31% over 12 months. (Money funds rose 5.26% over 1-year as measured by our Crane 100 Index.) The BFI 100 increased 0.87% in June and 4.85% over 12 mos. Our BFI Conservative Ultra-Short Index was up 0.49% over 1-month and 5.79% for 1-year; Ultra-Shorts rose 0.49% and 6.40%. Short-Term returned 0.64% and 6.00%, and Intm-Term rose 1.02% in June and 3.75%. BFI's Long-Term Index was up 0.95% and 3.37%. High Yield rose 0.83% in June and 9.48% for 12 mos."
A second News brief, "J.P. Morgan Asks in 'Short Duration Bond Fund Update: Are the Tides Turning?' They write, 'For the first time in a while, flows into low-duration bond funds turned positive in May.... Among the ultra-short and short-term bond funds we track, AUMs increased by $4.6bn on the month. All fund strategies experienced inflows, led by short-term credit.... This is in contrast to the persistent decline in AUMs that has marked much of this sector over the past year.'"
Our next News brief comments, "MarketWatch's 'Bond Funds on Record Pace,' explains, 'Investors have been pouring into bond funds this year as interest-rate cuts begin trickling out from global central banks. Bond funds have attracted nearly $400 billion in net inflows already this year -- about 51% of the full-year record total set in 2021, according to EPFR data. 'Actively managed funds have absorbed the biggest share of the flows so far this year,' said Cameron Brandt, director of research at EPFR, in a ... client note.'"
A BFI sidebar, "MStar: PIMCO's Schneider," says, "Morningstar writes on 'How Investors Can Outpace the Returns of Money Market Funds.' They ask PIMCO's Jerome Schneider, 'How attractive are money markets these days relative to other short-term opportunities?' He responds, 'It's a $6 trillion question at this point in time.... Listen, there's a great amount of opportunity for investors to be defensive and in fact safe by earning 5% plus or minus in money market and T-bill-like investments. We fully understand that, as investors, and understanding why people want to have that beautiful triumvirate of capital preservation, liquidity management, with some positive return for once. But what we also are finding is that ... if you move just slightly beyond the money market space into that zero to one-year space in a more diversified portfolio ... you can have additional opportunities through earning additional income [in] corporate bonds as well as asset-backed securities.... And it puts a total return metric well above 6% at this point in time without taking much interest-rate exposure.'"
Finally, another sidebar, "EFAMA's 2024 Fact Book" tells readers, "EFAMA, the European Fund and Asset Management Association, published its annual 'Fact Book,’ which includes statistics on European funds and a section on European bond funds. They write, 'The sudden and severe monetary tightening of 2022 ... resulted in a decrease in the valuations of existing bonds and substantial net outflows from bond UCITS. In 2023, conversely, bond UCITS rebounded as interest rates stabilized. [C]entral banks ended their consecutive rate hikes, and by year end, some investors were even anticipating potential rate cuts in 2024. This optimistic outlook fueled a ... rally in 2023, with inflows reaching E144 billion, a notable contrast to the net outflows the year before.'"
One year ago, we wrote that the "SEC Adopts Money Market Fund Reforms," which reviewed the U.S. Securities & Exchange Commission's latest attempt to make money funds more robust and able to withstand events like the March 2020 Covid crisis. Our update said, the "Money Market Fund Reforms ... abandoned [the SEC's] swing pricing proposal for Prime and Tax Exempt Institutional money market funds and replaced it with a mandatory liquidity fee regime. They also increased liquidity and disclosure requirements." We review the reforms with a focus on the latest piece to go live -- the Form N-MFP disclosures -- below. (Note: Crane Data has been adjusting our Form N-MFP data files to incorporate the latest data reporting changes. Our files have now been posted for Money Fund Wisdom subscribers, though we'll no doubt be tweaking and correcting some issues in the coming days.)
The SEC's "Fact Sheet" from the release a year ago says, "The Commission is considering adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments are designed to improve the resilience and transparency of money market funds by: Increasing minimum liquidity requirements to provide a more substantial buffer in the event of rapid redemptions; Removing provisions from the current rule that permit a money market fund to temporarily suspend redemptions and removing the regulatory tie between the imposition of liquidity fees and a fund's liquidity level; Requiring certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors; and Enhancing certain reporting requirements to improve the Commission’s ability to monitor and assess money market fund data." The full 424-page final rule and the Chair Gensler's and the Commissioner's statements are also available.
The press release, "SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers," says, "The Securities and Exchange Commission ... adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress."
It continues, "To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund's liquidity costs are de minimis. In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. These amendments are designed to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly."
SEC Chair Gary Gensler commented, "Money market funds -- nearly $6 trillion in size today -- provide millions of Americans with a deposit alternative to traditional bank accounts. Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors -- fearing dilution or illiquidity -- may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds' resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors."
The release adds, "Separately, the amendments will also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers. The rule amendments will become effective 60 days after publication in the Federal Register [which should be in several weeks] with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024."
We wrote on August 3, 2023, on the "Amendments to Reporting Requirements in SEC Reforms; Investor Type," which states, "It's been 3 weeks since the SEC passed and published its 424-page Money Market Fund Reforms, and we continue to dig through and discuss the details with money fund professionals, investors and servicers. Of particular interest to Crane Data are the latest "Amendments to Reporting Requirements," which should produce yet another bonanza of data and business for us as market participants look for assistance in compiling, navigating and interpreting the updated batch of data disclosures. Below, we quote from the rule's section on disclosures and reporting. The new reporting amendments become effective June 11, 2024."
The "Reporting Requirements" section says about "Amendments to Form N-CR," "We are adopting the amendments to Form N-CR as proposed. In particular, the final amendments add a new requirement for a money market fund to report publicly if it experiences a liquidity threshold event (i.e., the fund has invested less than 25% of its total assets in weekly liquid assets or less than 12.5% of its total assets in daily liquid assets) because such an event represents a significant drop in liquidity of which investors should be aware. We are also adopting all other proposed amendments to Form N-CR, including the structured data requirement, to improve the availability, clarity, and utility of information about money market funds."
The "Amendments to Form N-MFP" and "New Information Requirements" section (starting on page 135) states, "We are adopting, with the modifications discussed below, the reporting requirements regarding additional information about the composition and concentration of money market fund shareholders and about prime funds' sales of non-maturing investments. In addition, similar to the proposed requirement to report information about the use of swing pricing, we are requiring funds to report information about their application of liquidity fees under the final rule. Further, because the final rule will permit stable NAV funds to use share cancellation in a negative interest rate environment, we are requiring reporting related to share cancellation."
Discussing "Shareholder Concentration," the rules tell us, "In a change from the proposal, after considering comments raising privacy and related concerns, we will not require money market funds to disclose the name of each person who is known by the fund to own beneficially or of record 5% or more of the shares outstanding in the relevant class. Rather, the final rule requires money market funds to report only the type of beneficial or record owner who owns 5% or more of the shares outstanding in the relevant class. Accordingly, amended Form N-MFP includes the following categories of owner types from which filers will make the appropriate selection: retail investor; non-financial corporation; pension plan; non-profit; state or municipal government entity (excluding governmental pension plans); registered investment company; private fund; depository institution or other banking institution; sovereign wealth fund; broker-dealer; insurance company; and other. The shareholder concentration information the final amendments require will provide the Commission and investors with a greater ability to monitor redemption and liquidity risks."
It continues, "As proposed, the final amendments require funds to use a 5% ownership threshold for the shareholder concentration reporting requirement. Commenters generally did not engage substantively on the proposed 5% ownership threshold, though one commenter did agree that 5% would be an appropriate threshold. Funds currently provide similar ownership information using a 5% threshold on an annual basis in their registration statements. More frequent reporting of information on Form N-MFP is designed to facilitate monitoring of a fund's potential risk of redemptions by an individual or a small group of investors that could significantly affect the fund's liquidity."
The SEC writes, "Upon consideration of the comments, the amended rule will not require funds to report the names of the greater than 5% owners. Although shareholder concentration information is already reported publicly by funds on an annual basis on Form N-1A, we recognize the sensitivities associated with publicly reporting the names of owners with ownership of more than 5% on a monthly basis. Accordingly, the amendments instead require funds to provide information about the types of owners who invest 5% or more in a class of the fund.... In response to comments questioning the value of shareholder concentration information, we believe that more frequent information about shareholder concentration will assist both the Commission and investors in monitoring a fund's potential risk of redemptions."
On "Shareholder Composition," the new rule tells us, "We are adopting, as proposed, amendments requiring a money market fund that is not a government money market fund or a retail money market fund to provide information about the composition of its shareholders by type. Accordingly, funds must identify the percentage of investors within the following categories: non-financial corporation; pension plan; non-profit; state or municipal government entity (excluding governmental pension plans); registered investment company; private fund; depository institution and other banking institution; sovereign wealth fund; broker-dealer; insurance company; and other. This information is designed to assist with monitoring the liquidity and redemption risks of institutional money market funds, as different types of investors may pose different redemption risks."
For "Liquidity Fees," they require, "Consistent with the changes described above in the liquidity fee mechanism section, and in a change from the proposal, we are amending Form N-MFP to require money market funds to report the date on which the liquidity fee was applied, the type of liquidity fee, and the amount of the liquidity fee applied by the fund. In addition, we are removing existing reporting requirements on Form N-CR related to the application of liquidity fees because we believe monthly reporting of the frequency, type, and size of liquidity fees on Form N-MFP is more consistent with the modified liquidity fee framework we are adopting than requiring current reporting on Form N-CR."
They add, "We are also adopting as proposed a new item in Form N-MFP that would require filers to indicate whether the fund is established as a cash management vehicle for affiliated funds and accounts. This item is designed to make it easier and more efficient to identify privately offered institutional money market funds. Separately, and as proposed, we are adopting an amendment to the form to require a fund to affirmatively state whether it seeks to maintain a stable price per share, consistent with our proposal."
Finally, under "More Frequent Data Points," the final rule states, "As proposed, we are amending Form N-MFP to require a money market fund to provide in its monthly report certain daily data points to improve the utility of the reported information. Specifically, the amendments require a fund to report its percentage of total assets invested in daily liquid assets and in weekly liquid assets, net asset value per share (including for each class of shares), and shareholder flow data for each business day of the month. Currently, in monthly reports on Form N-MFP, a money market fund must provide the same general information on a weekly basis.... As proposed, we are also increasing the frequency with which funds report certain yield information. Currently, funds must report 7-day gross yields (at the series level) and 7-day net yields (at the share class level) as of the end of the reporting period. We are amending Form N-MFP to require funds to report this information for each business day."
Crane Data's July Money Fund Portfolio Holdings, with data as of June 30, 2024, show that Repo holdings jumped while, Other, Treasuries and Agencies fell. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) decreased by $0.4 billion to $6.346.1 trillion in June, after increasing $105.6 Billion in May and decreasing $61.4 billion in April. Assets decreased $63.1 billion in March, increased $66.9 in February, $86.6 in January, $51.1 billion in December and $244.0 billion in November. They decreased $57.9 billion in October, but increased $56.1 in September, and $106.7 billion in August. Repo continues to bounce back and remained as the largest portfolio segment after reclaiming the top spot two months prior, increasing $99.3 billion in June, following a steep slide four months prior. Treasuries decreased by $17.3 billion, staying at the No. 2 spot among portfolio segments. The U.S. Treasury continues to be the single largest Issuer to MMFs. `In June, U.S. Treasury holdings decreased to $2.428 trillion, while the Fed RRP's increased by $200.4 billion to $614.9 billion. Agencies were the third largest segment, CP remained fourth, ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Note: We still haven't published our monthly Form N-MFP summaries and data set due to changes in the SEC's file formats. Watch for this data to be posted in coming days once we've fixed our programs to adjust for the myriad changes which went into effect this month.)
Among taxable money funds, Repurchase Agreements (repo) increased $99.3 billion (4.0%) to $2.580 trillion, or 40.7% of holdings, in June, after increasing $26.8 billion in May, $94.9 billion in April, $13.4 billion in March, decreasing $137.6 billion in February, and decreasing $163.2 billion in January. Treasury securities decreased $17.3 billion (0.7%) to $2.428 trillion, or 38.3% of holdings, after increasing $51.0 billion in May and decreasing $144.9 billion in April. Treasuries decreased $19.6 billion in March, increased $206.2 billion in February, $104.7 billion in January and $69.6 billion in December. Government Agency Debt was down $16.9 billion, or -2.3%, to $724.1 billion, or 11.4% of holdings. Agencies increased $19.9 billion in May, $3.8 billion in April, decreased $14.2 billion in March and $6.7 billion in February. They increased $43.9 billion in January. Repo, Treasuries and Agency holdings now total $5.733 trillion, representing a massive 90.3% of all taxable holdings.
Money fund holdings of CP and CDs decreased in June as well as Time Deposits. Commercial Paper (CP) decreased $2.0 billion (-0.7%) to $268.5 billion, or 4.2% of holdings. CP holdings decreased $2.8 billion in May, $30.7 billion in April, $3.9 billion in March and $2.1 billion in February, and increased $18.6 billion in January. Certificates of Deposit (CDs) decreased $5.6 billion (-2.8%) to $193.8 billion, or 3.1% of taxable assets. CDs decreased $15.8 billion in May, $2.2 billion in April, $18.7 billion in March, increased $0.8 billion in February and $19.5 billion in January. Other holdings, primarily Time Deposits, decreased $57.5 billion (-29.2%) to $139.3 billion, or 2.2% of holdings, after increasing $26.2 billion in May, $17.7 billion in April, decreasing $20.3 billion in March, increasing $5.7 billion in February and $63.4 billion in January. VRDNs decreased to $11.9 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will post our Tax Exempt MMF holdings separately Thursday around noon.)
Prime money fund assets tracked by Crane Data decreased to $1.166 trillion, or 18.4% of taxable money funds' $6.346 trillion total. Among Prime money funds, CDs represent 16.6% (up from 14.5% a month ago), while Commercial Paper accounted for 23.0% (up from 19.6% in May). The CP totals are comprised of: Financial Company CP, which makes up 15.2% of total holdings, Asset-Backed CP, which accounts for 6.2%, and Non-Financial Company CP, which makes up 1.6%. Prime funds also hold 0.5% in US Govt Agency Debt, 6.9% in US Treasury Debt, 22.5% in US Treasury Repo, 0.4% in Other Instruments, 9.9% in Non-Negotiable Time Deposits, 7.7% in Other Repo, 10.2% in US Government Agency Repo and 0.8% in VRDNs.
Government money fund portfolios totaled $3.426 trillion (54.0% of all MMF assets), up from $3.215 trillion in May, while Treasury money fund assets totaled another $1.754 trillion (27.6%), unchanged from $1.754 trillion the prior month. Government money fund portfolios were made up of 21.0% US Govt Agency Debt, 17.0% US Government Agency Repo, 30.9% US Treasury Debt, 31.0% in US Treasury Repo, 0.0% in Other Instruments. Treasury money funds were comprised of 73.6% US Treasury Debt and 26.2% in US Treasury Repo. Government and Treasury funds combined now total $5.180 trillion, or 81.6% of all taxable money fund assets.
European-affiliated holdings (including repo) decreased by 134.2 billion in June to $656.3 billion; their share of holdings lowered to 10.3% from last month's 12.5%. Eurozone-affiliated holdings decreased to $438.2 billion from last month's $494.5 billion; they account for 6.9% of overall taxable money fund holdings. Asia & Pacific related holdings fell to $293.1 billion (4.6% of the total) from last month's $297.5 billion. Americas related holdings rose to $5.391 trillion from last month's $5.249 trillion, and now represent 85.0% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $106.9 billion, or 6.4%, to $1.786 trillion, or 28.2% of assets); US Government Agency Repurchase Agreements (down $11.7 billion, or -1.7%, to $700.0 billion, or 11.0% of total holdings), and Other Repurchase Agreements (up $4.2 billion, or 4.6%, from last month to $93.8 billion, or 1.5% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $1.2 billion to $177.8 billion, or 2.8% of assets), Asset Backed Commercial Paper (up $1.7 billion to $72.2 billion, or 1.1%), and Non-Financial Company Commercial Paper (down $2.5 billion to $18.5 billion, or 0.3%).
The 20 largest Issuers to taxable money market funds as of June 30, 2024, include: the US Treasury ($2.428T, 38.3%), Federal Reserve Bank of New York ($614.9B, 9.7%), Federal Home Loan Bank ($567.2B, 8.9%), the Fixed Income Clearing Corp ($535.8B, or 8.4%), JP Morgan ($210.0B, 3.3%), RBC ($172.3B, 2.7%), Federal Farm Credit Bank ($146.8B, 2.3%), BNP Paribas ($137.7B, 2.2%), Citi ($135.4B, 2.1%), Bank of America ($115.0B, 1.8%), Goldman Sachs ($100.9B, 1.6%), Barclays PLC ($81.2B, 1.3%), Wells Fargo ($80.4B, 1.3%), Sumitomo Mitsui Banking Corp ($70.7B, 1.1%), Mitsubishi UFJ Financial Group Inc ($64.5B, 1.0%), Canadian Imperial Bank of Commerce ($54.8B, 0.9%), Toronto-Dominion Bank ($52.7B, 0.8%), Bank of Montreal ($49.8B, 0.8%), Credit Agricole ($47.3B, 0.7%) and Mizuho Corporate Bank Ltd ($43.8B, 0.7%).
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: the Federal Reserve Bank of New York ($614.9B, 23.8%), Fixed Income Clearing Corp ($535.8B, 20.8%), JP Morgan ($202.3B, 7.8%), RBC ($141.1B, 5.5%), Citi ($125.0B, 4.8%), BNP Paribas ($124.7B, 4.8%), Goldman Sachs ($100.6B, 3.9%), Bank of America ($91.4B, 3.5%), Wells Fargo ($74.7B, 2,9%) and Barclays ($68.6B, 2.7%). The largest users of the $614.9 billion in Fed RRP include: Vanguard Federal Money Mkt Fund ($74.2B), Goldman Sachs FS Govt ($50.5B), Fidelity Cash Central Fund ($41.3B), Fidelity Govt Money Market ($40.2B), JPMorgan US Govt MM ($31.0B), Vanguard Market Liquidity Fund ($28.3B), Vanguard Cash Reserves Federal MM ($24.9B), Schwab Value Adv MF ($21.6B), Fidelity Inv MM: Govt Port ($21.4B) and Fidelity Govt Cash Reserves ($20.7B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($31.2B, 5.8%), Toronto-Dominion Bank ($28.9B, 5.4%), Bank of America ($23.7B, 4.4%), Skandinaviska Enskilda Banken AB ($22.4B, 4.2%), Canadian Imperial Bank of Commerce ($21.6B, 4.0%), Mizuho Corporate Bank Ltd ($21.4B, 4.0%), Bank of Montreal ($21.1B, 3.9%), Sumitomo Mitsui Trust Bank ($19.1B, 3.6%), Mitsubishi UFJ Financial Group Inc ($18.7B, 3.5%) and Australia & New Zealand Banking Group Ltd ($17.0B, 3.2%).
The 10 largest CD issuers include: Bank of America ($15.9B, 8.2%), Sumitomo Mitsui Banking Corp ($14.5B, 7.5%), Mitsubishi UFJ Financial Group Inc ($12.3B, 6.4%), Sumitomo Mitsui Trust Bank ($12.0B, 6.2%), Toronto-Dominion Bank ($11.8B, 6.1%), Credit Agricole ($10.7B, 5.5%), Mizuho Corporate Bank Ltd ($9.2B, 4.7%), Bank of Montreal ($7.9B, 4.1%), Canadian Imperial Bank of Commerce ($7.6B, 3.9%) and Mitsubishi UFJ Trust and Banking Corporation ($7.3B, 3.7%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($17.3B, 7.1%), Toronto-Dominion Bank ($16.1B, 6.6%), Bank of Montreal ($12.7B, 5.2%), BPCE SA ($11.6B, 4.8%), Barclays PLC ($10.1B, 4.1%), Bank of Nova Scotia ($9.0B, 3.7%), Australia & New Zealand Banking Group Ltd ($8.2B, 3.4%), Canadian Imperial Bank of Commerce ($7.8B, 3.2%), JP Morgan ($7.7B, 3.2%) and BSN Holdings Ltd ($7.6B, 3.1%).
The largest increases among Issuers include: Federal Reserve Bank of New York (up $200.4B to $614.9B), Federal Farm Credit Bank (up $18.8B to $146.8B), Sumitomo Mitsui Banking Corp (up $9.8B to $70.7B), Fixed Income Clearing Corp (up $8.2B to $535.8B), RBC (up $8.1B to $172.3B), JP Morgan (up $7.8B to $210.0B), Banco Santander (up $4.1B to $22.6B), Australia & New Zealand Banking Group Ltd (up $4.0B to $25.1B), Sumitomo Mitsui Trust Bank (up $3.3B to $26.4B) and Wells Fargo (up $1.7B to $80.4B).
The largest decreases among Issuers of money market securities (including Repo) in June were shown by: Barclays PLC (down $39.7B to $81.2B), Federal Home Loan Bank (down $34.6B to $567.2B), Credit Agricole (down $25.5B to $47.3B), Citi (down $24.9B to $135.4B), US Treasury (down $17.3B to $2.428T), DNB ASA (down $14.1B to $10.5B), Societe Generale (down $13.3B to $40.6B), Deutsche Bank AG (down $12.5B to $15.9B), Mizuho Corporate Bank Ltd (down $10.0B to $43.8B) and Goldman Sachs (down $9.5B to $100.9B).
The United States remained the largest segment of country-affiliations; it represents 79.2% of holdings, or $5.023 trillion. Canada (5.8%, $368.5B) was in second place, while France (4.3%, $272.5B) was No. 3. Japan (4.2%, $264.3B) occupied fourth place. The United Kingdom (2.5%, $156.3B) remained in fifth place. Netherlands (0.9%, $55.0B) was in sixth place, followed by Australia (0.7%, $43.2B), Sweden (0.7%, $41.8B), Germany (0.6%, $37.8B), and Spain (0.4%, $25.3B). (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of June 30, 2024, Taxable money funds held 48.6% (up from 47.7%) of their assets in securities maturing Overnight, and another 12.2% maturing in 2-7 days (unchanged from 12.2%). Thus, 60.8% in total matures in 1-7 days. Another 11.9% matures in 8-30 days, while 9.8% matures in 31-60 days. Note that over three-quarters, or 82.5% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 5.0% of taxable securities, while 8.5% matures in 91-180 days, and just 4.0% matures beyond 181 days. (Visit our Content center to download, or contact us to request our latest Portfolio Holdings reports.)
EFAMA, the European Fund and Asset Management Association and the trade group for European mutual funds, recently published its annual "Fact Book," which includes a wealth of statistics on European funds and a section on European money market funds. A press release entitled, "2023 a record-breaking year for ETFs, EFAMA’s latest Fact Book shows," tells us, "EFAMA … published its 2024 industry Fact Book. This year's edition includes a foreword by EFAMA President, Sandro Pierri, in-depth analyses of trends in the European investment fund industry (for 2023 and over the longer term) and an extensive overview of regulatory developments across 29 European countries. It also contains a series of info-boxes addressing some important regulatory issues EFAMA is actively working on, including DORA, ELTIF, ESG ratings, withholding taxes, retail investment, sustainability disclosures, global fund distribution and T+1 settlement." See the full EFAMA 2024 Fact Book here. (Note: Please join us for our European Money Fund Symposium, which is Sept. 19-20, 2024 in London, England. Registrations are being accepted and our discounted hotel rate expires August 14.) (Note too: We haven't published our monthly Form N-MFP summaries and data set yet due to changes in the SEC's file formats. Watch for this data to be posted in coming days once we've fixed our programs to adjust for the myriad changes which went into effect this month.)
EFAMA Director General Tanguy van de Werve comments, "This year's Fact Book shows that UCITS are delivering good returns with costs declining, attracting both European and foreign investors. While this is good news for the financial wellbeing of those investors, there are still far too many European households not reaping the benefits of investing in capital markets. This is a pivotal year of change within the EU institutions, with clear recognition from policymakers that we need to encourage more retail investing to address the pension gap and support economic growth. To achieve that, we need decisive actions that simplify investing, cut red tape, and move us closer to a Savings and Investments Union."
The section on "UCITS money market funds," explains, "Net assets of money market funds (MMFs) ended the year at EUR 1.7 trillion. In terms of net sales, they attracted net inflows of EUR 170 billion over the full-year 2023. These figures marked the second-highest net sales of the decade, behind the record net sales of pandemic year 2020 (EUR 215 billion). The primary driver behind the 2023 inflows was the reversed yield curve for much of that year, both in Europe and the US. An inverted yield curve indicates that short term interest rates are generally higher than long-term rates, resulting in a higher yield for those funds investing primarily in short-term products such as MMFs, hence their appeal to investors…. Net asset growth of MMFs amounted to around 11% in 2023. Compared to long-term UCITS, MMF asset growth is essentially driven by net sales, as the valuation of the short-term instruments held by MMFs varies little over time. Net sales accounted for virtually the entirety of the 2023 net asset growth. In other years, however, exchange rate effects can have an impact on MMF asset growth."
EFAMA states, "Changes in short-term interest rates significantly impact the demand for MMFs. MMFs mainly invest in very short-term debt, often with a maturity of less than one year. Hence when short-term interest rates rise, MMF yields also tend to increase, making them more attractive to investors. This correlation was less evident during 2016-2021, when rates were negative, but became distinctly apparent again in 2023. Demand for MMFs is, however, also influenced by other factors, in particular their use as a 'safe haven' investment in times of crisis. This was clearly illustrated in 2020, when short-term rates hardly moved, but the uncertainty caused by the COVID-19 pandemic led to record MMF inflows."
They write, "Net sales of MMF UCITS by type of SFDR fund indicate that net inflows in 2023 were concentrated in Article 8 funds, amounting to EUR 110 billion -- as in 2022. Compared to long-term UCITS, net flows into Article 9 funds were close to zero in both years, as there are scarcely any Article 9 MMFs.... MMF costs fell from 0.17% in 2019 to 0.10% in 2021, before increasing to 0.16% in 2023. This level of ongoing charges remains very low compared to the costs of most long-term funds.... The performance -- net of costs -- of MMF UCITS tends to be lower than that of longer-term UCITS, given their shorter investment horizon and asset allocation. The exception was 2022, when MMF returns remained positive (1.6%), while all long-term UCITS saw negative returns."
EFAMA's Fact Book continues, "The MMF market is highly concentrated in three main domiciles. Ireland has the largest market share of UCITS MMF net assets at 42%, followed by Luxembourg at 29% and France at 24%. Combined, these three countries account for 95% of the European total at end 2023."
It says, "The EU MMFR ('Money Market Fund Regulation') was adopted in 2016 and came into full effect in January 2019. The MMFR distinguishes between three main categories of MMFs: Public Debt Constant Asset Value (PDCNAV) MMFs; Low Volatility Net Asset Value (LVNAV) MMFs; and, Variable Net Asset Value (VNAV) MMFs. Aside from these categories, the MMFR also distinguishes between Short-term and Standard MMFs. Short-term MMFs are required to adhere to tighter investment rules than Standard MMFs. All three types can be categorised as Short-term MMFs; Public Debt CNAV, LVNAV and Short-term VNAV. Standard MMFs must be variably priced, therefore only VNAV can be Standard MMFs."
EFAMA explains, "PDCNAV and LVNAV MMFs use amortised cost accounting -- provided certain conditions are met -- to value all their assets and to maintain a net asset value (NAV) or value of a share of the fund, at EUR1/GBP1/USD1. Public Debt CNAV MMFs must invest a minimum of 99.5% of their assets in public debt. Units/shares in an LVNAV MMF can be purchased or redeemed at a constant price, as long as the value of the assets in the fund does not deviate by more than 0.2% from par. Public Debt CNAV and LVNAV can only be short-term MMFs. VNAV MMFs refer to funds that use mark-to-market accounting to value some of their assets. The NAV of these funds will vary with the changing value of the assets and - in the case of an accumulating fund -- by the level of income received. VNAV can be either short-term or standard MMFs."
Discussing "Asset allocation -- Currency breakdown," they write, "MMFs net assets can be broken down by base currency. Collectively, three primary base currencies accounted for 99.5% of UCITS net assets at end 2023. EUR held the predominant position with 44% of net assets, followed by USD at 37% and GBP at 19%. The proportion of EUR MMFs declined from 49% in 2013 to 37% in 2019, as the demand for USD- and GBP MMFs increased over the same period, influenced by generally higher interest rates in those currencies. In 2023, the market share GBP declined from 24% to 19% and the share of EUR MMFs increased from 40% to 44%.... In 2023, investors showed a clear preference for short-term USD and EUR MMFs, whereas GBP MMFs recorded net outflows. These outflows are most likely related to UK pension funds rebalancing their portfolios after having rushed into GBP MMFs during the gilt market turmoil of October 2022.... Standard MMFs mainly recorded flat net sales over the year, with the exception of standard EUR MMFs, which attracted EUR 48 billion in net new money. These standard EUR VNAV MMFs are mainly used in France, where they play an important role in the cash management of many French corporations."
On "Asset allocation," EFAMA tells us, "An overview of the 2023 holdings of MMFs by geographical region shows that 35% of the short-term paper held by UCITS MMFs was issued in Europe. The US accounted for 30% and Asia-Pacific for 9%. Another 26% was issued in other countries, predominantly Canada and Australia.... After the US at 30%, short-term securities issued in France and Canada accounted for 24% and 23% of MMF assets, respectively, at end 2023. Australia (7%) and the UK (6%) completed the top five. A comparison of the asset breakdown by base currency and issuing country reveals that MMFs with a USD or GBP base currency allocated a significant portion of their assets to securities issued in a non-base currency country. Frequently, countries such as Canada or Australia (and companies based there) issue short-term debt in a major currency to attract more international investors. MMFs may also invest in debt denominated in a non-base currency and subsequently hedge the currency exposure. The MMFR does require, however, that all non-base currency exposures are fully hedged."
Finally, they comment, "European MMFs have seen considerable shifts in the maturity composition of their asset holdings over the past decade. Since the bulk of the fixed-income holdings of MMFs usually have a maturity of less than one year, the maturity breakdown can change entirely from one year to the next. The vast majority of fixed-income holdings had an average maturity of between three and 12 months. At end 2023, a little over 43% of the fixed-income assets of MMFs had a maturity between six and 12 months, while 41% had a maturity of between three and six months. Over the past decade, there has tended to be a general decline in the proportion of bonds with a maturity exceeding one year. On the other hand, the percentage of fixed-income holdings with a maturity shorter than three months, although generally quite small, has increased over the two most recent years."
Crane Data's latest monthly Money Fund Market Share rankings show assets increased among most of the largest U.S. money fund complexes in June, after rising in May and falling in March and April. Money market fund assets rose by $11.8 billion, or 0.2%, last month to $6.486 trillion. Total MMF assets have increased by $82.4 billion, or 1.3%, over the past 3 months, and they've increased by $612.3 billion, or 10.4%, over the past 12 months. The largest increases among the 25 largest managers last month were seen by Vanguard, Schwab, Goldman Sachs, Northern and DWS, which grew assets by $13.3 billion, $6.3B, $5.2B, $4.9B and $3.1B, respectively. Declines in June were seen by HSBC, Fidelity, BlackRock, RBC and SSGA, which decreased by $4.6 billion, $4.0B, $3.9B, $3.2B and $2.1B, respectively. 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, and look at money fund yields, which were slightly down in June.
Over the past year through June 30, 2024, Fidelity (up $179.6B, or 15.9%), Schwab (up $140.7B, or 35.8%), Vanguard (up $89.1B, or 17.0%), JPMorgan (up $85.6B, or 14.8%) and Federated Hermes (up $58.4B, or 14.8%) were the `largest gainers. Goldman Sachs, JPMorgan, Schwab, BlackRock and Vanguard had the largest asset increases over the past 3 months, rising by $27.4B, $18.7B, $17.9B, $14.1B and $13.9B, respectively. The largest declines over 12 months were seen by: Goldman Sachs (down $33.4B), Invesco (down $23.3B), Morgan Stanley (down $18.7B), American Funds (down $7.9B) and HSBC (down $6.4B). The largest declines over 3 months included: HSBC (down $33.4B), Fidelity (down $6.2B) and Dreyfus (down $6.1B).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $1.310 trillion, or 20.2% of all assets. Fidelity was down $4.0B in June, down $6.2 billion over 3 mos., and up $179.6B over 12 months. JPMorgan ranked second with $662.3 billion, or 10.2% market share (up $1.4B, up $18.7B and up $85.6B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard ranked in third place with $612.3 billion, or 9.4% of assets (up $13.3B, up $13.9B and up $89.1B). Schwab ranked fourth with $533.6 billion, or 8.2% market share (up $6.3B, up $17.9B and up $140.7B), while BlackRock was the fifth largest MMF manager with $518.1 billion, or 8.0% of assets (down $3.9B, up $14.1B and up $19.2B for the past 1-month, 3-mos. and 12-mos.).
Federated Hermes was in sixth place with $452.6 billion, or 7.0% (up $1.6B, up $3.1B and up $58.4B), while Goldman Sachs was in seventh place with $396.7 billion, or 6.1% of assets (up $5.2B, up $27.4B and down $33.4B). Dreyfus ($270.2B, or 4.2%) was in eighth place (down $2.0B, down $6.1B and up $12.5B), followed by Morgan Stanley ($244.5B, or 3.8%; down $1.3B, up $6.7B and down $18.7B). SSGA was in 10th place ($211.0B, or 3.3%; down $2.1B, down $5.2B and up $50.5B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Allspring (formerly Wells Fargo) ($196.4B, or 3.0%), Northern ($168.4B, or 2.6%), American Funds ($167.0B, or 2.6%), First American ($142.5B, or 2.2%), Invesco ($140.6B, or 2.2%), UBS ($106.1B, or 1.6%), T. Rowe Price ($46.6B, or 0.7%), DWS ($40.6B, or 0.6%), Western ($29.1B, or 0.4%) and HSBC ($29.1B, or 0.4%). Crane Data currently tracks 61 U.S. MMF managers, down 1 from 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 are the same as the domestic list, except: BlackRock moves up to the No. 3 spot, Vanguard moves down to the No. 4 spot and Goldman Sachs moves up to No. 5. Schwab moves down to the No. 6 spot, while Federated Hermes moves down to the No. 7 spot. Morgan Stanley moves up to the No. 8 spot while Dreyfus moves down to the No. 9 spot. 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 ($1.325 trillion), JP Morgan ($900.7B), BlackRock ($777.7B), Vanguard ($612.3B) and Goldman Sachs ($533.9B). Schwab ($533.6B) was in sixth, Federated Hermes ($464.2B) was seventh, followed by Morgan Stanley ($329.0B), Dreyfus/BNY Mellon ($292.7B) and SSGA ($258.1B), 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 July issue of our Money Fund Intelligence and MFI XLS, with data as of 6/30/24, shows that yields were slightly down in June across the Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 760), was 5.02% (down 1 bp) for the 7-Day Yield (annualized, net) Average, the 30-Day Yield was unchanged at 5.02%. The MFA's Gross 7-Day Yield was at 5.39% (down 2 bps), and the Gross 30-Day Yield also was down 2 bps at 5.38%. (Gross yields will be revised once we download the SEC's Form N-MFP data for 6/30/24. It may take some time this month, though, since the SEC just changed the format of the report.)
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 5.13% (down 1 bp) and an average 30-Day Yield at 5.12% (down 1 bp). The Crane 100 shows a Gross 7-Day Yield of 5.39% (down 1 bp), and a Gross 30-Day Yield of 5.39% (unchanged). Our Prime Institutional MF Index (7-day) yielded 5.17% (down 1 bp) as of June 30. The Crane Govt Inst Index was at 5.11% (down 1 bp) and the Treasury Inst Index was at 5.08% (unchanged). Thus, the spread between Prime funds and Treasury funds is 9 basis points, and the spread between Prime funds and Govt funds is 6 basis points. The Crane Prime Retail Index yielded 5.02% (unchanged), while the Govt Retail Index was 4.83% (unchanged), the Treasury Retail Index was 4.83% (down 1 bp from the month prior). The Crane Tax Exempt MF Index yielded 3.63% (up 50 bps) as of June.
Gross 7-Day Yields for these indexes to end June were: Prime Inst 5.45% (down 1 bp), Govt Inst 5.37% (down 5 bp), Treasury Inst 5.36% (down 1 bp), Prime Retail 5.49% (down 1 bp), Govt Retail 5.36% (down 1 bp) and Treasury Retail 5.35% (down 1 bp). The Crane Tax Exempt Index rose to 4.01% (up 49 bps). The Crane 100 MF Index returned on average 0.42% over 1-month, 1.28% over 3-months, 2.47% YTD, 5.26% over the past 1-year, 2.95% over 3-years (annualized), 2.03% over 5-years, and 1.39% over 10-years.
The total number of funds, including taxable and tax-exempt, was down 1 in June at 880. There are currently 760 taxable funds, unchanged from the previous month, and 120 tax-exempt money funds (down 1 from last month). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The July issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Monday morning, features the articles: "AFP Liquidity Survey: Banks, MMFs, T-Bills Kings of Cash," which breaks down the latest trends in corporate cash; "Money Fund Symposium '24: Records, 5%, Big Prime Shift," which quotes from our recent Money Fund Symposium in Pittsburgh; and, "ICI Worldwide: MMFs Rise to $10.4 Tril. in Q1'24; US, China," which reviews the latest figures on money fund markets outside of the U.S. We also sent out our MFI XLS spreadsheet Monday a.m., and we've updated our Money Fund Wisdom database with 6/30/24 data. Our July Money Fund Portfolio Holdings are scheduled to ship on Wednesday, July 10, and our July Bond Fund Intelligence is scheduled to go out on Monday, July 15. (Note: We may not be publishing our latest Form N-MFP files and revisions on Tuesday, July 9. The SEC has changed the format of these files as their new regulations go into effect, so it may take us a number of weeks to revise our programs and collections. We'll keep you posted!)
MFI's "AFP" article says, "We wrote late last month on the '2024 AFP Liquidity Survey.' (See our June 24 News, 'AFP 2024 Liquidity Survey: Cash Still King Among Corporates, Increasing.') Below, we excerpt from `some of the highlights of the annual survey of corporate investors' cash habits. Discussing 'Current Allocations of Short-Term Investments,' AFP says, 'Companies maintain their investments in relatively few vehicles. Organizations invest in an average 2.7 vehicles for their cash and short-term investments -- unchanged from the average in 2023. Most organizations continue to allocate a large share of their short-term investment balances -- an average of 83% -- in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. This result is four percentage points higher than the 79% reported in 2023 -- and the highest percentage on record since AFP began tracking the data.'"
It continues, "They explain, 'The typical organization currently maintains 47% of its short-term investments in bank deposits. This allocation is the same as reported last year (2023) but is 8 percentage points lower than the 55% reported in 2022, and lower than both the 52% reported in 2021 and the 51% in 2020. This year's allocation is similar to percentages reported in 2019 (46%) and 2018 (49%).'"
We write in our MFS'24 article, "Crane Data recently hosted its Money Fund Symposium conference in Pittsburgh, where almost 600 money market professionals discussed rates, pending reforms, asset inflows and a number of other hot topics in cash. The opening session, 'Keynote: Fifty Years of Managing Money Funds' featured Federated Hermes' CEO Chris Donahue, who comments, 'Liquidity for me is the Eighth Wonder of the World, and money market funds make it that way.... Money market funds enable the capital markets to flow, enable cities to grow, enable wildlife to flourish. You know, the Irish said that Guinness was Mother's milk. I contend it's money market funds.' (Note: Conference materials and recordings are available in our 'Money Fund Symposium 2024 Download Center.')"
It tells us, "Laurie Brignac of Invesco, was asked about Money Fund Reforms during the 'Major Money Fund Issues 2024' segment. She comments, 'I think everybody in the room is painfully aware of the reforms and everything that's kind of going into that.... It's unfortunate, not surprising, seeing some of the transitions, the liquidations and things like that. We actually just filed today, so we will be liquidating our prime institutional funds, which is really sad because one of them is our oldest money market fund. It is 43 years old, so not quite 50.... But unfortunately, the mandatory liquidity fee is just not something that's going to be tenable to a lot of clients. So, we made that decision.'"
Our "ICI Worldwide" piece says, "The Investment Company Institute published, 'Worldwide Regulated Open-Fund Assets and Flows, First Quarter 2024,' which shows that money fund assets globally decreased $35.6 billion, or -0.3%, in Q1'24 to $10.405 trillion. But the series excluded Australia's 6th largest $286.7 billion, so assets would have increased by $236.8 billion (or 2.3%) with Australia included. Increases were led by a sharp jump in money funds in U.S. and China, while Luxembourg and Mexico also rose. Meanwhile, money funds in Ireland, Chile and Japan were lower. MMF assets worldwide increased by $944.5 billion, or 10.0%, in the 12 months through 3/31/24, and money funds in the U.S. represent 57.5% of worldwide assets."
It continues, "ICI says, 'On a US dollar-denominated basis, equity fund assets increased by 4.1% to $33.08 trillion at the end of the first quarter of 2024. Bond fund assets increased by 0.8% to $13.00 trillion in the first quarter. Balanced/mixed fund assets increased by 0.5% to $7.33 trillion in the first quarter, while money market fund assets decreased by 0.3% globally to $10.41 trillion.'"
MFI also includes the News brief, "MMF Assets Retake Record in July. ICI's latest weekly 'Money Market Fund Assets' show assets jumping by over $50 billion to a record $6.154 trillion. Assets have risen in 10 of the last 11 weeks, increasing by $185.5 billion (or 3.1%) since April 24. MMF assets are up by $267 billion, or 5.6%, YTD in 2024 (through 7/2/24). Crane Data's separate Money Fund Intelligence Daily series shows money fund assets rising by $61.7 billion in July, through 7/2, to a record $6.551 trillion. (Our MFI XLS shows assets up $11.8 billion in June to a record $6.487 trillion.)"
Another News brief, "Invesco Files to Liquidate Prime Inst MMFs; UBS MF Converting to Retail," says, "An SEC filing for Invesco Liquid Assets Portfolio and Invesco STIC Prime Portfolio tells us, 'On June 11, 2024, the Board of Trustees of Short-Term Investments Trust approved a Plan of Liquidation and Dissolution, which authorizes the termination, liquidation and dissolution of the Funds.' In related news, UBS Select Prime Preferred Fund announced that the fund will change to Retail.'"
A third News brief, "BlackRock Liquidates TempFund, LEAF," tells readers, "BlackRock also filed to liquidate 2 of its 3 Prime Institutional money funds, bringing the number of Prime Inst MMFs liquidating or converting to Government to 12 to date (with total assets of $245.8 billion, or 38.7% the $635.8 billion in Prime Inst MMFs)."
A sidebar, "Fidelity Intl Tokenizes MMF," says, "CoinDesk writes, 'Fidelity International Tokenizes Money Market Fund on JPMorgan's Blockchain,' which says, 'Fidelity International ... has tokenized shares in a money market fund (MMF) using JPMorgan's Ethereum-based private blockchain network, Onyx Digital Assets. Tokenization occurred near instantaneously through connectivity between the fund's transfer agent (JPMorgan's transfer agency business) and Tokenized Collateral Network ... said Fidelity International, a separate entity to U.S.-based FMR.'"
Our July MFI XLS, with June 30 data, shows total assets increased $11.8 billion to $6.487 trillion, after increasing $79.7 billion in May, decreasing $17.6 billion in April, $66.7 billion in March, increasing $50.0 billion in February, $87.0 billion in January, $24.5 billion in December and $219.8 billion in November. Assets decreased $39.3 billion in October, but increased $77.8 billion in September, $104.2 billion in August and $21.0 billion in July.
Our broad Crane Money Fund Average 7-Day Yield was down 1 bp at 5.02%, and our Crane 100 Money Fund Index (the 100 largest taxable funds) was down 1 bp to 5.13% in June. On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 averaged 5.40% and 5.39%, respectively. Charged Expenses averaged 0.38% and 0.26% for the Crane MFA and the Crane 100. (We'll revise expenses once we upload the SEC's Form N-MFP data for 6/30/24, though this may take some time as we adjust to the new N-MFP format.) The average WAM (weighted average maturity) for the Crane MFA was 34 days (unchanged) and the Crane 100 WAM was down 1 bp from previous month at 34 days. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The Investment Company Institute published its latest weekly "Money Market Fund Assets" report Wednesday (a day early due to the Independence Day Holiday), which shows money market mutual fund assets jumping over $50 billion to a record $6.154 trillion. Assets have risen in 10 of the last 11 weeks, increasing by $185.5 billion (or 3.1%) since April 24. MMF assets are up by $267 billion, or 5.6%, year-to-date in 2024 (through 7/2/24), with Institutional MMFs up $84 billion, or 2.7% and Retail MMFs up $184 billion, or 10.9%. Over the past 52 weeks, money funds have risen by $679 billion, or 12.4%, with Retail MMFs up by $457 billion (24.6%) and Inst MMFs rising by $223 billion (6.4%). (Crane Data's separate Money Fund Intelligence Daily series shows money fund assets rising by $61.7 billion in July, through 7/2, to a record $6.551 trillion.)
The weekly release says, "Total money market fund assets increased by $51.23 billion to $6.15 trillion for the six-day period ended Tuesday, July 2, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $44.47 billion and prime funds increased by $4.51 billion. Tax-exempt money market funds increased by $2.25 billion." ICI's stats show Institutional MMFs jumping $31.5 billion and Retail MMFs rising $19.7 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.975 trillion (80.8% of all money funds), while Total Prime MMFs were $1.048 trillion (17.0%). Tax Exempt MMFs totaled $131.3 billion (2.1%).
ICI explains, "Assets of retail money market funds increased by $19.70 billion to $2.47 trillion. Among retail funds, government money market fund assets increased by $13.34 billion to $1.58 trillion, prime money market fund assets increased by $4.65 billion to $778.40 billion, and tax-exempt fund assets increased by $1.70 billion to $119.23 billion." Retail assets account for over a third of total assets, or 40.2%, and Government Retail assets make up 63.7% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $31.53 billion to $3.68 trillion. Among institutional funds, government money market fund assets increased by $31.12 billion to $3.40 trillion, prime money market fund assets decreased by $148 million to $269.34 billion, and tax-exempt fund assets increased by $549 million to $12.09 billion." Institutional assets accounted for 59.8% of all MMF assets, with Government Institutional assets making up 92.4% of all institutional MMF totals.
According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets have risen by $61.7 billion in July (through 7/2) to a record $6.551 trillion. The previous record was $6.538 trillion on 4/2, which our asset series broke above on Monday and again on Tuesday. Assets rose by $15.7 billion in June and $91.4 billion in May, but they fell $15.8 billion in April and $68.8 billion in March. They rose $72.1 billion in February, $93.9 billion in January, $32.7 billion in December and $226.4 billion in November. MMF totals fell by $31.9 billion in October. They rose $93.9 billion in September, $98.3 billion in August and $34.7 billion in July. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.
In other news, Federated Hermes' Debbie Cunningham writes "Much to celebrate, much to discuss". Subtitled, "A gathering of professionals acknowledged five decades of money funds and sifted through issues in their future," she tells us, "If cash is king -- and we certainly think so -- it held court last month in Pittsburgh. The annual Crane Data Money Fund Symposium took place in the conference center attached to our global headquarters, and what a court it was. More than 600 portfolio managers, salespeople and clients came to celebrate the industry's remarkable growth in assets over its more than five decades of existence and to discuss salient issues in the industry. Topics included the broad health of the liquidity space, the effects that could result from potential Federal Reserve policy decisions, the reinstatement of the debt ceiling in January and, of course, the implementation of the last of the new SEC money market fund rules."
Cunningham continues, "This was not a rah-rah gathering. The panels took a hard look at these and other issues. One topic related to the 'reforms' was the impact they are having on prime institutional money funds. As was expected, they have led to many firms either consolidating their prime institutional funds (as we have done), closing them (only a few) or reconfiguring them as government products (the most common decision). We obviously think the category has worth due to its potential to offer higher yields and for its potential to appeal to investors when rates fall, as was the case after the implementation of the 2016 rules."
She comments, "About that. The timing of the first Federal Reserve rate cut of this cycle is more uncertain than ever. Factors include the range-bound nature of inflation data, mixed bag of economic reports and, of course, the election. By a slight margin, we anticipate two cuts to come in the fourth quarter, meaning after the election. The Federal Open Market Committee's projection for just one cut by year-end might be suspect as it appears members cast their 'dots' before the softer Consumer Price Index data was released.... In any case, the Fed seems biased to ease at a slow pace. That benefits the liquidity industry as it allows time for the front end of the Treasury yield curve to anticipate what will come next."
Finally, the Federal Reserve Board released its "Minutes of the Federal Open Market Committee, June 11–12, 2024." They state, "The manager turned next to policy rate expectations. The path of the federal funds rate implied by futures prices shifted a bit lower over the intermeeting period and indicated one and one-half 25 basis point cuts by year-end.... The manager then turned to money markets and Desk operations. Unsecured overnight rates were stable over the intermeeting period. In secured funding markets, repurchase agreement (repo) rates remained steady for most of the period but firmed close to the end of May because of month-end pressures and the effect of large settlements of Treasury coupon securities. Rate firmness around reporting and settlement dates was consistent with historical patterns."
The Minutes say, "Use of the overnight reverse repurchase agreement (ON RRP) facility remained sensitive to market rates and the availability of alternative investments. Usage was little changed over much of the period but dipped late in the period, coincident with the month-end firming in private repo rates. The staff projected ON RRP usage to decline in coming months, as net Treasury bill issuance was expected to turn positive and private repo rates were expected to continue to move higher relative to administered rates amid large issuance of Treasury coupon securities. The staff also projected that reserves will not change much in the near term, with the exception of quarter-end dates, and then will decline about in line with the shrinking of the Federal Reserve's portfolio after ON RRP balances are nearly fully drained. The uncertainty surrounding both projections, however, was considerable."
They also tell us, "Conditions in U.S. short-term funding markets remained stable over the intermeeting period. Average usage of the ON RRP facility was little changed, primarily reflecting the portfolio decisions of money market funds amid lower net Treasury bill supply. Banks' total deposit levels were roughly unchanged over the intermeeting period, as outflows of core deposits were about offset by inflows of large time deposits."
The Minutes add, "In support of the Committee's goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5¼ to 5½ percent. Members concurred that, in considering any adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks. Members agreed that they did not expect that it would be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, members agreed to continue to reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities. All members affirmed their strong commitment to returning inflation to the Committee’s 2 percent objective."
J.P. Morgan recently published, "Gaining momentum: A stablecoin market update." It states, "Stablecoins are gaining ground in the financial markets. In contrast to last year when market participants were still reeling from the collapses of several high-profile crypto entities, the regional banking crisis, and of course, the Fed's tightening campaign, the stablecoin market is growing once again. According to CoinMarketCap, the size of the stablecoin market is ~$160bn today, about a 30% increase from the local low in late 2023 and a little shy of the peak of $180bn in early 2022.... Tether remains the predominant player, with over $110bn of coins in circulation (a record high), comprising nearly 75% of this market versus 40% previously. To be sure, the rally in crypto/bitcoin so far this year has fueled much of the growth in stablecoins, or more specifically Tether, year-to-date. Indeed, Tether is presumed to be mostly used to trade in and out of native cryptocurrencies. But that's not to say the broader cryptocurrency market will be the sole driver of growth of stablecoins going forward. Importantly, global payment giants are increasingly embracing stablecoins as a form of digital payment, providing the utility value that perhaps many individuals and businesses have long sought, as costs of alternative payment transactions have increased and settlement times remain longer than desired."
JPM writes, "For example, Stripe recently announced that it will begin accepting stablecoins on its payments platform this summer. Merchants will be able to accept stablecoins that will automatically convert into fiat currency, allowing vendors anywhere access to global e- commerce. After launching its own stablecoin last year (named PYUSD, in partnership with Paxos Trust), PayPal also recently announced that it has enabled cross-border stablecoin transfers via its money transfer service called Xoom, allowing US customers to make stablecoin transfers to other countries with zero transaction fees. Ripple, a blockchain-based digital payment network whose main focus is a payment settlement asset exchange and remittance system (similar to SWIFT), is also launching its own stablecoin."
They explain, "More critically, Congress continues to work towards creating a legislative solution for stablecoins.... Ultimately, it remains unclear whether a stablecoin legislation could be passed in the US, particularly in an election year. However, if and when it does, we believe this could further accelerate stablecoin adoption, moving this asset class more mainstream and fueling further growth for this market. US compliant stablecoins would likely stand to benefit, while non-compliant stablecoins less so, potentially leading to some sort of consolidation in the industry."
JPM tells us, "Until a regulatory framework for stablecoins is developed and implemented, stablecoin issuers continue to actively manage their reserves as they see fit. That said, it is worth noting that their reserve portfolios have turned significantly more conservative since we started looking at them two years ago. Indeed, as of 1Q24, the majority of Tether's $110bn reserve portfolio consisted of direct exposure to Treasury bills ($74bn) and repos ($11bn). There is another $6bn of MMF exposure. The remainder was in cash deposits, non-US Treasury bills, and other asset classes ($19bn)…. On that last point, we recently commented that while stablecoin issuers currently make up a small portion of the Treasury bill market (1%), they are poised to grow meaningfully in the future should a stablecoin legislation come to fruition."
Shifting to the topic of "Tokenized MMFs, yield-bearing stablecoins, FedNow," they say, "In one of our first notes on stablecoins, we discussed the importance of following how stablecoins might evolve going forward, and perhaps more notably how the rest of the money markets and the banking system might evolve to either complement or substitute stablecoins as a cash alternative.... To that end, developments over the past two years have resulted in the functionality of deposits, stablecoins, and MMFs becoming more similar than ever before."
They continue, "Indeed, in October 2023, using JPM's Ethereum-based private blockchain and the bank's Tokenized Collateral Network (TCN), BlackRock tokenized shares of one of its MMFs and then transferred the tokenized MMF share to Barclays as collateral in an over-the-counter derivatives trade. More recently, Fidelity International, also using JPM's TCN, also tokenized shares of one of its MMFs to be used as collateral to meet margin requirements. All parties involved have noted operational efficiencies that could be gained in meeting margin requirements with tokenized MMF shares when segments of the market face acute margin pressures."
Finally, they add, "BlackRock has gone further to embrace tokenization through the recent launch of BUIDL (BlackRock USD Institutional Digital Liquidity MMF), its first tokenized MMF, in March 2024. In partnership with tokenization services platform Securitize.... As of April month-end, AUMs at BUIDL have accrued to $375mn. Similarly, Franklin Templeton launched its first tokenized MMF called Franklin OnChain US Government MMF (FOBXX) in April 2021 on the open-source blockchain Stellar, and in April 2023 expanded the fund to the Polygon blockchain platform.... As of May month-end, the fund has about $350mn in AUMs. At the same time, stablecoin issuers are exploring ways to provide yield to stablecoin holders, increasingly providing more MMF-like qualities. Indeed, earlier this month, Paxos, the company behind PayPal's stablecoin, introduced the Lift Dollar (USDL) that will pay about 5% yield, as crypto firms attempt to take advantage of elevated interest rates."
In related news, The Investment Association, a U.K. trade group, published a paper titled, "Money Market Funds and Tokenisation: Colleteral Opportunities." They write, "This briefing paper looks at the potential for a specific use of tokenised funds in the UK: namely, using Money Market Funds (MMFs) as collateral both in non-centrally cleared derivatives trades and the repo markets. The broader context for this use case is recent liquidity stresses in the repo and derivatives markets -- notably the 2020 'dash for cash' and the UK's 2022 gilt market volatility -- and the FCA's current consultation on Money Market Fund reforms, which, amongst other things, explores the application of tokenised MMFs for use in meeting margin requirements on noncentrally cleared derivative trades. The Technology Working Group to the HM Treasury Asset Management Taskforce (Taskforce Tech Working Group) recently set out the case for the tokenisation of UK authorised investment funds, along with a blueprint for delivering on that vision."
The IA says, "There is growing confidence, evidenced through recent initiatives, that tokenisation may be a particularly useful mechanism to enhance the utility of MMFs. This is in respect of operationalising the ability to use MMFs as collateral both in non-centrally cleared derivatives trades and the repo markets. Continuing developments in digital asset markets may offer other ways in which MMFs may adapt in future, particularly as decisions are made around reliable and secure on-chain currencies, and as the regulatory framework for stablecoins and the use of central bank funds for wholesale purposes becomes clearer. For the purposes of this paper, we focus on the immediate use case of the benefit of MMF tokenisation rather than the longer-term evolution of distributed ledger technology, and distinct from native digital assets such as cryptoassets."
They continue, "The post-2009 Global Financial Crisis reforms to require counterparties to post margin and collateral have mitigated counterparty risk but resulted in periodic spikes in liquidity demand. As we discuss further below, the transformation of counterparty risk into liquidity risk can be particularly challenging at moments of market stress such as the episodes in March 2020 (global 'dash for cash') and Autumn 2022 (UK gilt market crisis). Innovations such as MMF tokenisation are one way of lessening the pressure that results in such episodes. As noted above, one of the key uses of MMFs by institutional investors is in seeking to manage their liquidity needs for the margin and collateral calls required by their investment positions."
The IA piece comments, "The benefits to the wider financial system are clear, with MMFs less likely to be subject to large outflows if investors no longer need to sell their holdings to raise cash for margin and repo collateral. In addition, there are benefits that exist at the level of the fund manager and individual investor: Digitised onboarding AML/KYC/pre-qualified investors – streamlines, codifies and facilitates through efficient process; Faster settlement and clearing significantly reduces intermediation costs of settlement agents and post trade services; Instant collateral transfers free tied up capital during clearing and can significantly reduce intra-day exposure banking fees; Counterparty credit risk, bankruptcy risk, and performance risk are all greatly reduced due to the shortened settlement cycle; Collateral acceptability and subsequent usage reduces the need to hold HQLAs in reserve in case of margin calls, and therefore the resulting cash drag; Pledging MMF tokens as collateral can avoid operational inefficiencies experienced by some firms in having to recall and replace collateral in order to reclaim income/coupons; Reduction in issuance speed and time-to-market, wider and more diverse investor base; and, Reduction in intermediation fees through efficiency."
Finally, a press release titled, "Archax makes abrdn money market fund accessible and transferable on Algorand blockchain using Quantoz EURD electronic money token," tells us, "[T]he Algorand Foundation, Archax, and Quantoz Payments announced [that] The first ever tokenized money market fund has arrived on Algorand following the issuance by Archax of tokenized interests in abrdn's €3.8 billion Euro Money Market fund; Integration between Quantoz Payments and Archax allows for the use of EURD electronic money on the Archax digital assets platform; and, Native "no-code" atomic settlement of EURD/fund token in peer-to-peer secondary market transactions enables instant execution of interdependent transactions in a predefined order. Combining robust tokenized assets, on-chain digital money, and native atomic settlement, the partners have been able to illustrate the feasibility and efficiency of moving the end-to-end investment and cash settlement process on-chain: investment, asset transfer, trading, settlement, and distributions."
Nick Haasnoot, CEO of Quantoz Payments, comments, "The use of EURD to purchase Money Market Funds in tokenized format is a ramp up to deploy more tokenized financial instruments. Delivery Versus Payment via regulated electronic money will form the basis of an expected wide acceptance of this product, with opportunities for both retail and institutional investors towards a variety of assets." Graham Rodford, CEO and co-founder of Archax, adds "There is now real momentum building for tokenized real-world assets, and yield-bearing, regulated instruments, like money-market funds, are at the forefront of this activity."
For more, see these Crane Data News stories: "J.P. Morgan on Weekly Holdings, Treasury Repo Clearing; Fitch; OnChain" (5/2/24), "European Money Fund Symposium London, Sept. 19-20; Tokenized MMFs" (4/25/24), "CoinDesk on Tether Stablecoin; Paxos" (2/5/24), "Forbes: SEC Targets PayPal Stablecoin" (11/13/23), "J.P. Morgan on Stablecoin Shrinkage, Risks; Bloomberg, WSJ and NY Fed" (9/28/23), "CNBC on PayPal, Paxos' Stablecoin" (8/10/23) and "NY Fed on 'Runs on Stablecoins'" (7/19/23).
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets rose by $89.7 billion in May to $6.529 trillion (a new record), after falling $17.7 billion the month prior and hitting the previous record $6.525 trillion three months prior. The SEC shows Prime MMFs increasing $19.7 billion in May to $1.404 trillion, Govt & Treasury funds increasing $65.5 billion to $4.989 trillion and Tax Exempt funds increasing $4.5 billion to $135.8 billion. Taxable yields inched higher in May after dipping in April. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below. (Month-to-date in June through 6/28, total money fund assets increased by $15.7 billion to $6.489 trillion, according to Crane Data's separate, and slightly smaller, MFI Daily series.)
May's overall asset increase follows a decrease of $17.7 billion in April, $68.5 billion in March, an increase of $65.9 billion in February, $87.7 billion in January, $34.0 billion in December and $225.7 billion in November. MMFs decreased $41.2 billion in October, but increased $79.7 billion in September, $114.2 billion in August and $28.8 billion in July. Assets rose $19.6 billion in June. Over the 12 months through 5/31/24, total MMF assets increased by $618.0 billion, or 10.5%, according to the SEC's series.
The SEC's stats show that of the $6.529 trillion in assets, $1.404 trillion was in Prime funds, up $19.7 billion in May. Prime assets were down $30.0 billion in April, up $8.1 billion in March, $33.5 billion in February, $52.5 billion in January, $1.2 billion in December, $32.5 billion in November, $13.9 billion in October, $14.3 billion in September, $18.5 billion in August, $28.9 billion in July and $11.0 billion in June. Prime funds represented 21.5% of total assets at the end of May. They've increased by $204.2 billion, or 17.0%, over the past 12 months. (Note that the SEC's series includes a number of internal money funds not tracked by ICI, though Crane Data includes most of these assets in its collections.)
Government & Treasury funds totaled $4.989 trillion, or 76.4% of assets. They increased $65.5 billion in May, increased $9.3 billion in April, decreased $78.8 billion in March, increased $33.1 billion in February, $39.7 billion in January, $31.7 billion in December, $193.7 billion in November, decreased $62.4 billion in October, increased $64.6 billion in September, $92.2 billion in August, $3.1 billion in July and $4.9 billion in June. Govt & Treasury MMFs are up $396.6 billion over 12 months, or 8.6%. Tax Exempt Funds increased $4.5 billion to $135.8 billion, or 2.1% of all assets. The number of money funds was 289 in May, up 1 from the previous month and down 4 funds from a year earlier.
Yields for Taxable MMFs inched higher while Tax Exempt MMFs were lower in May. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on May 31 was 5.43%, unchanged from the prior month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 5.49%, unchanged from the previous month. Gross yields were 5.38% for Government Funds, up 1 bp from last month. Gross yields for Treasury Funds were up 1 bp at 5.37%. Gross Yields for Tax Exempt Institutional MMFs were down 12 basis points to 3.50% in May. Gross Yields for Tax Exempt Retail funds were down 18 bps to 3.51%.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 5.36%, unchanged from the previous month and up 24 bps from 5/31/23. The Average Net Yield for Prime Retail Funds was 5.22%, unchanged from the previous month, and up 23 bps since 5/31/23. Net yields were 5.14% for Government Funds, up 1 bp from last month. Net yields for Treasury Funds were up 1 bp from the previous month at 5.15%. Net Yields for Tax Exempt Institutional MMFs were down 12 bps from April to 3.38%. Net Yields for Tax Exempt Retail funds were down 18 bps at 3.27% in May. (Note: These averages are asset-weighted.)
WALs and WAMs were mostly up in May. The average Weighted Average Life, or WAL, was 47.6 days (up 2.8 days) for Prime Institutional funds, and 49.7 days for Prime Retail funds (up 1.7 days). Government fund WALs averaged 84.8 days (down 0.2 days) while Treasury fund WALs averaged 80.9 days (up 2.2 days). Tax Exempt Institutional fund WALs were 7.0 days (up 0.4 days), and Tax Exempt Retail MMF WALs averaged 25.4 days (up 0.5 days).
The Weighted Average Maturity, or WAM, was 28.7 days (up 1.1 days from the previous month) for Prime Institutional funds, 31.8 days (up 0.1 days from the previous month) for Prime Retail funds, 34.8 days (up 0.3 days from previous month) for Government funds, and 41.4 days (up 1.0 days from previous month) for Treasury funds. Tax Exempt Inst WAMs were up 0.4 days to 7.0 days, while Tax Exempt Retail WAMs were up 0.3 days from previous month at 24.6 days.
Total Daily Liquid Assets for Prime Institutional funds were 63.3% in May (up 1.7% from the previous month), and DLA for Prime Retail funds was 46.2% (up 0.4% from previous month) as a percent of total assets. The average DLA was 65.9% for Govt MMFs and 94.0% for Treasury MMFs. Total Weekly Liquid Assets was 75.6% (up 1.2% from the previous month) for Prime Institutional MMFs, and 62.3% (up 2.0% from the previous month) for Prime Retail funds. Average WLA was 80.3% for Govt MMFs and 99.3% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for May 2024," the largest entries included: the U.S. with $180.2B, Canada with $165.7 billion, Japan with $124.5 billion, France with $110.2 billion, the U.K. with $52.1B, the Netherlands with $40.8B, Germany with $29.7B, Aust/NZ with $27.7B and Switzerland with $8.1B. The gainers among the "Prime MMF Holdings by Country" included: Canada (up $19.9B), the U.S. (up $3.9B), France (up $2.4B), the U.K. (up $0.6B) and Switzerland (up $0.3B). Decreases were shown by: Germany (down $6.6B) Netherlands (down $3.8B), Japan (down $1.7B) and Aust/NZ (down $1.4B).
The SEC's "Prime Holdings of Bank-Related Securities by Region" table shows The Americas had $345.8 billion (up $23.7B), while Eurozone had $202.8B (down $5.2B). Asia Pacific subset had $182.0B (up $3.9B), while Europe (non-Eurozone) had $142.3B (up $11.1B from last month).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $1.391 trillion in Prime MMF Portfolios as of May 31, $628.6B (45.2%) was in Government & Treasury securities (direct and repo) (up from $620.1B), $371.4B (26.7%) was in CDs and Time Deposits (up from $358.2B), $179.9B (12.9%) was in Financial Company CP (up from $179.1B), $140.2B (10.1%) was held in Non-Financial CP and Other securities (down from $147.4B), and $70.9B (5.1%) was in ABCP (down from $72.4B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $507.4 billion, Canada with $200.8 billion, France with $200.3 billion, the U.K. with $141.6 billion, Germany with $25.2 billion, Japan with $139.6 billion and Other with $45.2 billion. All MMF Repo with the Federal Reserve was down $92.9 billion in May to $415.8 billion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 5.8%, Prime Retail MMFs with 7.0%, Tax Exempt Inst MMFs with 0.2%, Tax Exempt Retail MMFs with 3.4%, Govt MMFs with 15.5% and Treasury MMFs with 12.3%.
The European Systematic Risk Board (ESRB)'s European System of Financial Supervision recently published an "NBFI Monitor" titled, "EU Non-bank Financial Intermediation Risk Monitor 2024," which includes a chapter entitled, "The International Dimension of the EU Money Market Fund Industry." The piece explains, "This report considers the main risks and vulnerabilities associated with investment funds and other financial institutions (OFIs), as well as crypto-assets and associated intermediaries, in 2023. The size of the monitoring universe increased in 2023, mainly as a result of valuation effects. Total assets of EU investment funds and OFIs increased to €44.8 trillion and accounted for 41% of the EU financial sector.... In 2023 risks to the financial stability of the EU financial system coalesced around the impact of higher interest rates. As the full effect of tighter financing conditions may not yet have fully materialised, these risks also remain relevant looking ahead.... Higher interest rates and stretched asset valuations may also increase the risk of disorderly market corrections amplified by a reduction in market liquidity."
It continues, "This report includes three special features that complement the assessment of risks and vulnerabilities. The first special feature focuses on the ownership structure of management companies of EU-domiciled investment funds. It highlights that most EU fund managers belong to banking groups, unlike in the United States, where most asset managers are independent. These ownership ties can be relevant from a financial stability perspective, as they can create reputational risk or step-in risk.... The third special feature explores the international linkages of EU-domiciled money market funds (MMFs). It concludes that the global role played by EU-domiciled MMFs denominated in USD and GBP and the regulatory reforms occurring outside of the EU call for a comprehensive assessment of the EU regulatory framework for MMFs. Given the global nature of MMFs, less stringent prudential regulation of EU-domiciled MMFs compared with those operating in the United States and the United Kingdom might pose risks to financial stability, as EU MMFs might be less resilient and more susceptible to transmitting shocks to global markets."
The ESBR tells us, "The NBFI Monitor 2024 discusses the main systemic risks and vulnerabilities associated with investment funds and OFIs. The report covers the main developments in 20231 and considers a range of risks and vulnerabilities associated with financial intermediation outside the banking system, focusing on those related to liquidity and maturity transformation, use of leverage and interconnectedness. The report covers all investment funds and OFIs.... As investment funds and OFIs participate in a range of financial markets -- including derivatives, securities financing and securitisation -- entity-based monitoring is complemented by activity-based monitoring to provide a holistic assessment of financial stability risks."
They write, "Investment funds have a large footprint in many markets for financial instruments. Of all euro area institutional investors, investment funds were the most important holders of long term debt instruments and listed shares issued by euro area non-financial corporations (NFCs) in 2023.... Euro area MMFs held a large proportion of all euro area private short-term debt instruments. The sizeable market footprint highlights the important role played by investment funds in the provision of funding to the real economy and the financial sector. At the same time, it points to potential vulnerabilities, i.e. heightened market impact and contribution to negative price dynamics in stress events, as well as high interconnectedness within the financial sector."
The paper says, "Banking sector stress from March to April 2023 and impact on non-bank financial intermediation In March 2023 some US regional banks came under strain. Solvency concerns related to losses on their bond portfolios triggered large deposit outflows and a drop in stock prices. In particular, concerns mounted for banks with large exposures (relative to capital) to long-dated bonds, as higher interest rates resulted in large mark-to-market losses. Some banks with concentrated depositor bases (such as Silicon Valley Bank and Signature Bank) failed, while others were acquired by larger banks. The stress resulted in large deposit outflows from regional banks and cash inflows into larger US banks and government money market funds (MMFs). Banking sector stress spread beyond the United States with valuations of EU banks falling temporarily, although they were less exposed to interest rate risk and had a more diversified depositor base. Stress was particularly acute for Credit Suisse, which experienced large deposit outflows and outflows from its managed investment funds.... [I]nsurers and pension funds shifted from bank deposits to MMFs, albeit to a relatively small extent. This shift might have reflected the diversification benefits MMFs offer compared with banks, as MMFs invest in a range of short-term bank and non-bank financial claims."
It comments, "In 2023 no review of the MMF Regulation was proposed, although the ESRB and ESMA had suggested reforms to strengthen their resilience, resulting in the uneven implementation of Financial Stability Board (FSB) policy proposals across jurisdictions. In July 2023 the European Commission published a report on the functioning of the Money Market Fund Regulation (MMFR). The Commission concluded that 'the MMF Regulation has enhanced financial stability and overall successfully passed the test of the recent market stress episodes' and did not propose a revision of the legislation at this stage."
The ESRB says, "By contrast, the United States has already introduced new requirements for MMFs, while the United Kingdom launched a consultation in December 2023; in both jurisdictions liquidity requirements for MMFs have been or are planned to be substantially increased (see also special feature on the international dimension of the EU MMF industry). Nevertheless, the report of the European Commission identified several areas that should be further assessed with a view to strengthening MMF resilience, including decoupling the potential activation of LMTs from regulatory liquidity thresholds, which is similar to what the SEC has implemented and the United Kingdom is proposing. The FSB noted in its review of MMF reforms the uneven implementation across jurisdictions of its 2021 policy proposals."
They also state, "Risks related to external support and step-in risks are addressed in regulatory frameworks for banks and MMFs. The Basel Committee on Banking Supervision adopted guidelines to enhance the framework for identifying and managing step-in risk and alleviate potential spillovers to the banking sector. For MMFs [in Europe], sponsors are prohibited from providing external support with the intent or effect of guaranteeing liquidity or stabilising the share price. This provision was introduced to avoid contagion effects between MMFs and bank sponsors, as seen in 2007-0853. MMFs may still enter into transactions with affiliated or related parties provided certain conditions are met, such as if the transactions are not carried out at an inflated price where they are executed at arm's length conditions."
Discussing "The international dimension of the EU money market fund industry," the report tells us, "The EU is the second largest market for MMFs globally. The NAV of EU-domiciled MMFs amounted to €1.6 trillion as of 2023, making the EU the largest market globally after the United States.... It is home to three of the top five jurisdictions in terms of MMF assets (France, Ireland and Luxembourg). The large share of MMFs denominated in non-EU currencies highlights the global dimension of EU-domiciled MMFs. Although EUR-denominated MMFs account for the single largest share of EU-domiciled MMF NAV by currency (42%), the majority of EU-domiciled MMFs are denominated in other currencies. MMFs denominated in USD and GBP account for 37% and 20% of total NAV respectively, while other currencies play a minor role."
It explains, "EU-domiciled MMFs are by far the largest segment of the global GBP-denominated MMF sector but account for a small share of the USD-denominated MMF sector. With an NAV of around GBP 280 billion in 2023, EU-domiciled GBP-denominated MMFs account for around 90% of the global GBP-denominated MMF sector, compared with GBP 27 billion for United Kingdom domiciled MMFs. By contrast, with an NAV of around USD 570 billion in 2023, EU-domiciled USD-denominated MMFs are estimated to account for around 10% of the USD-denominated MMF sector."
The report then says, "This special feature focuses on potential financial stability implications arising from the global dimension of EU MMFs. There are several aspects to the global dimension of EU domiciled MMFs. First, they are held by investors outside of the EU. Second, they provide more funding to non-EU issuers and borrowers than EU entities. Third, they can have a large footprint in short-term funding markets outside of EUR, and in particular in GBP. This global dimension of EU domiciled MMFs underscores the financial stability challenges related to (i) the different regulatory reforms already finalised or being discussed outside of the EU, and (ii) options to provide support to MMFs and/or to the markets they operate in during times of stress."
Finally, the report adds, "EU-domiciled MMFs are key participants in unsecured short-term funding markets. They hold around 52% of short-term debt securities issued by euro area banks, 37% for euro area NFCs and 7% for euro area general government.... EU-domiciled GBP-denominated MMFs are particularly important for GBP short-term funding markets. First, they hold around 90% of GBP financial CP and CDs outstanding. They also hold around 30% of debt securities issued in GBP by euro area banks, making them an important source of GBP funding.... EU-domiciled USD-denominated MMFs also have a large footprint in USD short-term funding markets. Although they account for 10% of the USD-denominated MMF universe, they hold around 10 to 15% of USD unsecured short-term debt (CP and CDs) according to the FSB. Given low trading volumes on secondary markets, asset sales from EU-domiciled USD-denominated MMFs could negatively affect prices on those unsecured markets."
