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Fitch Ratings recently sent out an update entitled, "European MMF Reform: September 2018 Dashboard," which tells us, "Aviva Investors became the first money market fund (MMF) manager to convert to the new structures under the European MMF reforms. Aviva's sterling liquidity and sterling government liquidity funds switched to low-volatility net asset value (LVNAV) MMFs from short-term variable net asset value (VNAV) funds on 3 September 2018. The transition was smooth, with assets remaining broadly stable, auguring well for future conversions." They explain, "Discussions between the EC and ESMA continue on the eligibility of Reverse Distribution Mechanisms (RDM) in LVNAVs. ESMA asked the EC for more clarity on the subject in July, following the EC's statement in January that RDM was not compatible with the reforms. The final outcome on RDM remains unclear which brings significant uncertainty for fund investors and providers. Pending further guidance providers are considering solutions which might include prospectus amendments, LVNAVs with accumulating (variable) share classes or short-term VNAVs. Investors may, however, faced with the uncertainty in euros, move some money into bank deposits." The Fitch piece adds, "Euro MMFs hold around 43% of their portfolios in commercial paper. In the scenario in which lots of fund providers have to close and liquidate their euro short-term MMF portfolios due to RDM issues, negative pricing or liquidity pressure could emerge. The risk of this scenario is mitigated by the alternatives solutions being considered to euro LVNAVs; furthermore, any liquidation scenario may take place over a period of time, rather than instantaneously: most commercial paper in rated euro MMFs (69%) matures within the next three months, thus providing a 'natural' liquidation option over a limited timeframe."

The ICI's latest weekly "Money Market Fund Assets" report shows MMF assets falling sharply in the latest week after hitting their highest levels since early 2010 the prior week. Institutional assets plunged while Retail assets rose. Overall assets are now up $35 billion, or 1.2%, YTD, and they've increased by $129 billion, or 4.7%, over 52 weeks. ICI writes, "Total money market fund assets decreased by $14.87 billion to $2.87 trillion for the week ended Wednesday, October 17, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $13.65 billion and prime funds decreased by $1.50 billion. Tax-exempt money market funds increased by $267 million." Total Government MMF assets, which include Treasury funds too, stand at $2.204 trillion (76.7% of all money funds), while Total Prime MMFs stand at $535.1 billion (18.6%). Tax Exempt MMFs total $134.3 billion, or 4.7%. They explain, "Assets of retail money market funds increased by $6.08 billion to $1.08 trillion. Among retail funds, government money market fund assets increased by $4.83 billion to $645.64 billion, prime money market fund assets increased by $190 million to $310.91 billion, and tax-exempt fund assets increased by $1.07 billion to $126.09 billion." Retail assets account for over a third of total assets, or 37.7%, and Government Retail assets make up 59.6% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds decreased by $20.96 billion to $1.79 trillion. Among institutional funds, government money market fund assets decreased by $18.47 billion to $1.56 trillion, prime money market fund assets decreased by $1.69 billion to $224.16 billion, and tax-exempt fund assets decreased by $801 million to $8.21 billion." Institutional assets account for 62.3% of all MMF assets, with Government Inst assets making up 87.0% of all Institutional MMFs.

BlackRock, the 3rd largest manager of money funds with $288.1 billion, mentioned cash a few times in its recent Q3 Earnings Call. CFO Gary Shedlin commented, "BlackRock's cash management business experienced net outflows of $15 billion, driven by the planned redemption of a single escrow mandate. Excluding this redemption, our cash platforms saw $9 billion of net inflows and continue to leverage scale and Cachematrix technology to better serve clients. We are now the second largest money market manager globally and have steadily increased market share by more than 250 basis points over the last 3 years." [Note: We believe this is incorrect. Crane Data shows BlackRock as the 3rd largest money fund manager globally behind Fidelity and J.P. Morgan.] Chairman & CEO Larry Fink said on the conference call, "Investors worldwide are taking a defensive posture highlighted by the market volatility we saw last week. Short-term government bond funds are seeing their highest inflows since 2010. Cash balances have grown to $80 trillion globally even as companies execute record amount of share repurchases and M&A accelerates globally. Asset management industry flows overall has slowed considerably. At the same time in this environment even more clients are turning to BlackRock for investment and technology solutions to navigate their portfolios." He added, "Asset and wealth managers are rethinking their business models and looking for ways to operate more efficiently and rigorously managing risk in more volatile market environments at times with this type of volatilities where we see more interest in our Aladdin business. These trends are driving increased demand for BlackRock's broad-based technology services and digital tools.... Aladdin for Wealth and Cachematrix technology services grew by 18% year-over-year, and we expect these trends to continue to drive low to mid teens growth on an annual basis going forward. The impact of technology is extending beyond our direct technology business. For example, we're transforming our cash management business, one of BlackRock's oldest businesses, by integrating technology into our business model. We're delivering training technology powered by Cachematrix to onboard cash clients who are looking for more than a simple cash product. Cash management in BlackRock is now a technology business."

The website SustainableInvest.com, run by mutual fund industry veterans Henry Shilling and Steve Scheoke, writes about "ESG Liquidity Fund Targeted to Institutional Investors Offered by DWS." They explain, "DWS, formerly Deutsche Asset Management, made its sustainable investing debut in the US last month by repurposing the firm's existing $329.3 million DWS Variable NAV Money Market Fund. DWS launched an institutional money market fund that integrates environmental, social and governance considerations while at the same time employing exclusionary screens." The update adds, "While not the only sustainable money market fund offering available to investors in the US, this fund's strategy relies on ESG integration rather than emphasizing a values-based approach pursued by the GuideStone Money Market Fund. The fund is strictly geared to institutional investors, it invests in a broader range of money market instruments and is subject to a fluctuating versus a stable net asset value.... Only companies with an ESG rating above a minimum threshold determined by DWS are considered for investment by the fund. The proprietary ESG rating is derived from multiple factors: Level of involvement in controversial sectors and weapons; Adherence to corporate governance principles; ESG performance relative to a peer group of companies; and Efforts to meet the United Nations' Sustainable Development Goals." (See also Crane Data's Sept. 7 News, "DWS ESG Liquidity Goes Live; Federated Explains Prime Private Fund," and our August 13 News, "DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering.)

An article in Sunday's New York Times, entitled "Income Investors Finally Have a Chance to Cash In," tells us, "Multiple Federal Reserve rate increases are finally making it possible to earn a decent yield. For the first time since the financial crisis, playing it safe is paying off for income investors. After a decade when conservative money market funds and similar short-term investments yielded close to zero, it is now possible to earn about 2 percent and even a bit more. Vanguard Prime Money Market fund yields more than 2 percent. A six-month Treasury bill yields 2.4 percent, up from 0.6 percent at the beginning of 2017. Ally Bank pays a 3 percent annual yield on a five-year certificate of deposit, with an early withdrawal fee equal to five months of interest." The piece continues, "Money invested in savings and C.D. bank accounts is guaranteed to hold its value. Money market mutual funds lack an outright guarantee but are designed to deliver the same steady ride. In both instances, you've got no downside risk and your upside is the interest you earn." It quotes, Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research, "When I go out and talk to clients, all of a sudden everybody is sitting in T Bills or cash equivalents." The Times adds, "And if you have money parked in a brokerage sweep account, you might want to reconsider how much is sitting there. According to Crane Data, such accounts yield just 0.22 percent, on average, as firms are moving the accounts from higher-yielding money market mutual funds -- with an average yield of 1.8 percent -- into bank accounts that pay a lot less to investors but generate nice fees for the brokerages." In related news, Barron's wrote this weekend, "What This Mess Means for Your Money," and discussed, "What to do with your cash." They tell us, "One upside to rising rates is that money-market funds and other cash proxies pay a bit more -- although not enough to generate a 'real' inflation-adjusted return. Taxable money-market funds aimed at individuals yield an average 1.53%, up from 0.75% a year ago, according to Crane Data. Vanguard Prime Money Market (VMMXX) yields 2.2%. Mysavingsdirect, an online bank, offers a 2.25% annual percentage yield on savings of up to $2 million in deposits. Accounts held at American Express National Bank, Ally Bank, and Barclays Online Savings yield 1.9%."

A Prospectus Supplement for the TD Money Market Portfolio, TD U.S. Government Portfolio, TD Municipal Portfolio, TD California Municipal Money Market Portfolio, and TD New York Municipal Money Market Portfolio says, "On September 26, 2018, the Board of Directors (the 'Board') of TD Asset Management USA Funds Inc. (the 'Company') approved the liquidation of each of the TD Money Market Portfolio, TD U.S. Government Portfolio, TD Municipal Portfolio, TD California Municipal Money Market Portfolio and TD New York Municipal Money Market Portfolio, each a series of the Company, pursuant to the terms of a Plan of Liquidation for each Portfolio. The approval by the Board of the liquidations was based on the recommendation of TDAM USA Inc., the Portfolios' investment adviser ('TDAM'), which has determined that the Portfolios are no longer viable from a business and economic perspective. Under its Plan of Liquidation, each Portfolio will be liquidated on or about November 19, 2018 (the 'Liquidation Date'). On or before the Liquidation Date, all portfolio securities of the relevant Portfolio will be converted to cash or cash equivalents, and the Portfolio will cease investing its assets in accordance with its stated investment objective and policies. On the Liquidation Date, shareholders in the Portfolio as of the Liquidation Date will receive, as a liquidating distribution, an amount equal to their proportionate interest in the net assets of the Portfolio, after the Portfolio has paid or provided for all of its charges, taxes, expenses, and liabilities.... In connection with its liquidation, effective October 3, 2018, each Portfolio will be closed to new accounts, including through exchanges into the Portfolio from other funds in the Company. Investors may continue to redeem shares of each Portfolio."

The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows MMF assets jumping in latest week to their highest levels since early 2010. Prime assets continued their climb after a two-week pause, and Govt assets rebounded strongly. Overall assets are now up $50 billion, or 1.8%, YTD, and they've increased by $147 billion, or 5.4%, over 52 weeks. ICI writes, "Total money market fund assets increased by $16.10 billion to $2.89 trillion for the week ended Wednesday, October 10, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $10.70 billion and prime funds increased by $4.16 billion. Tax-exempt money market funds increased by $1.24 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.217 trillion (76.8% of all money funds), while Total Prime MMFs stand at $536.6 billion (18.6%). Tax Exempt MMFs total $134.0 billion, or 4.6%. They explain, "Assets of retail money market funds increased by $4.55 billion to $1.08 trillion. Among retail funds, government money market fund assets increased by $2.23 billion to $640.81 billion, prime money market fund assets increased by $1.20 billion to $310.72 billion, and tax-exempt fund assets increased by $1.11 billion to $125.02 billion." Retail assets account for over a third of total assets, or 37.3%, and Government Retail assets make up 59.5% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds increased by $11.55 billion to $1.81 trillion. Among institutional funds, government money market fund assets increased by $8.47 billion to $1.58 trillion, prime money market fund assets increased by $2.96 billion to $225.85 billion, and tax-exempt fund assets increased by $128 million to $9.01 billion." Institutional assets account for 62.7% of all MMF assets, with Government Inst assets making up 87.0% of all Institutional MMFs.

Irish law firm Dillon Eustace published, a "Money Market Funds Regulation ('MMF Regulation') Update," which says, "On the 28 September 2018, ESMA published a Consultation Paper setting out draft guidelines on stress test scenarios under the MMF Regulation, which applies to all new and existing money market funds ('MMFs'). In accordance with Article 28 of the MMF Regulation, each MMF is required to establish sound stress testing processes that allow for the identification of possible events or future changes in economic conditions which could negatively impact on a MMF. In order to assess the potential impact that such events or changes could have on a MMF, the manager of a MMF must regularly conduct stress testing based on objective criteria and consider the effects of severe plausible scenarios. Where the stress testing reveals any vulnerability of a MMF, the manager of the MMF is obliged draw up an extensive report with the results of the stress testing and a proposed action plan. Article 28 of the MMF Regulation obliges ESMA to develop guidelines with a view to establishing common reference parameters of the stress test scenarios to be included in the stress tests which managers of MMFs are required to conduct. ESMA is obliged to update these guidelines at least every year taking into account the latest market developments. ESMA published the first set of these guidelines on 21 March 2018 (the "Guidelines"), however, it indicated at the time that section 4.8 of those Guidelines would be updated so that managers of MMFs have the stress testing information needed to fill in the corresponding fields in the reporting template mentioned in Article 37 of the MMF Regulation (i.e. the reporting template that must be used by managers of MMFs to report certain prescribed information to the competent authority of each MMF that they manage on a periodic basis). This information will include specifications on the type of stress tests and their calibration as well as the way to report the results in the reporting template."

Invesco's latest "Global Fixed Income Strategy" publication features a brief entitled, "The bottom line: What may LIBOR's phase-out mean for investors?" They write, "The London interbank offered rate (LIBOR) has long been the benchmark for numerous private-sector interest rates. Now, the US, UK, Europe, Japan, and Switzerland have set out to install replacement benchmarks with greater transparency. We speak with Justin Mandeville, Portfolio Manager and Jacob Habibi, Senior Analyst about the new benchmark rate chosen in the US – the secured overnight financing rate (SOFR) - and what it may mean for investors." Invesco asks, "How was the new rate determined?" Mandeville responds, "In the US, the Fed's Board of Governors and the Federal Reserve Bank of New York assembled the Alternative Reference Rates Committee (ARRC) in 2014 to find a replacement. After three years of carefully studying a variety of alternatives, including two other repo rates -- the Tri-party General Collateral Rate (TGCR) and the Broad General Collateral Rate (BGCR) -- the ARRC chose SOFR, which is the broadest of these options. The Federal Reserve Bank of New York began publishing SOFR in April of this year." The piece also asks, "What is SOFR?" Mandeville explains, "SOFR is a secured, overnight funding rate based on US Treasury repurchase (repo) transactions. It is considered to be one of the most robust indices available since it is based on a high volume of daily overnight transactions. According to Bloomberg, SOFR represents approximately USD800 billion in daily overnight transactions. One of the major advantages of the rate is that it provides market participants with greater transparency into the US Treasury repo market, a vital segment of the US financial system."

Barron's writes "Vanguard's Chief and 2 Other Fund CEOs on How Their Firms Will Change in the Future." The article says, "One thing is clear about the future of the fund industry: The big are likely to get bigger. So Barron's checked in with the heads of some of the largest asset managers to find out how they see the industry shaking out, where they are focusing their investments, and what worries them about the next downturn. Here are edited highlights from Reshma Kapadia's conversations with the CEOs of Vanguard Group, Capital Group, and T. Rowe Price Group." When asked, "What will the asset-management business look like in five to 10 years?" Vanguard's Tim Buckley tells Barron's, "The product revolution of the past 10 years was exchange-traded funds and target-date funds. The revolution of the next five to 10 years will be in advice. Advice will be higher quality. The ease of use will be far better and costs far lower. For the active industry to survive, costs have to come down -- not just in large-caps, but also small-caps, international, and even some alternatives.... We don't expect interest rates to be as high as they were in the 1980s or 1990s, but cash will also matter again. Companies will have to compete for the cash in investors' portfolios."

The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows MMF assets declining in the latest week, one week after money fund totals hit their highest levels since April 2010. Prime assets declined for the second week in a row after a string of recent gains. Overall assets are now up $34 billion, or 1.2%, YTD, and they've increased by $131 billion, or 4.8%, over 52 weeks. ICI writes, "Total money market fund assets decreased by $11.70 billion to $2.87 trillion for the week ended Wednesday, October 3, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $9.32 billion and prime funds decreased by $3.75 billion. Tax-exempt money market funds increased by $1.37 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.207 trillion (76.8% of all money funds), while Total Prime MMFs stand at $532.4 billion (18.5%). Tax Exempt MMFs total $131.4 billion, or 4.6%. They explain, "Assets of retail money market funds increased by $8.20 billion to $1.07 trillion. Among retail funds, government money market fund assets increased by $4.79 billion to $638.58 billion, prime money market fund assets increased by $2.61 billion to $309.52 billion, and tax-exempt fund assets increased by $802 million to $123.91 billion." Retail assets account for over a third of total assets, or 37.3%, and Government Retail assets make up 59.6% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds decreased by $19.89 billion to $1.80 trillion. Among institutional funds, government money market fund assets decreased by $14.11 billion to $1.57 trillion, prime money market fund assets decreased by $6.36 billion to $222.89 billion, and tax-exempt fund assets increased by $570 million to $8.88 billion." Institutional assets account for 62.7% of all MMF assets, with Government Inst assets making up 87.1% of all Institutional MMFs.

The Federal Reserve Bank of New York's Liberty Street Economics blog is publishing a series entitled, "The Effects of Post-Crisis Banking Reforms." The intro explains, "The financial crisis of 2007-08 exposed many limitations of the regulatory architecture of the U.S. financial system. In an attempt to mitigate these limitations, there has been a wave of regulatory reforms in the post-crisis period, especially in the banking sector. These include tighter bank capital and liquidity rules; new resolution procedures for failed banks; the creation of a stand-alone consumer protection agency; greater transparency in money market funds; and a move to central clearing of derivatives, among other measures. As these reforms have been finalized and implemented, a healthy debate has emerged in the policy and academic communities over the degree to which they have achieved their intended goals and the extent of any unintended consequences that might have arisen in the process. In 2017, the New York Fed initiated a project to study the effects of these post-crisis reforms on bank performance and vulnerability. This project, completed in June 2018, consisted of twelve studies evaluating a wide set of regulatory changes, including the introduction of liquidity regulation, living wills, the supplemental leverage ratio, market value accounting to measure bank capital, and the Consumer Financial Protection Bureau, among other reforms. Each study was carefully designed to identify how these regulatory changes affected the risk-taking, funding costs, and profitability of banks, as well as liquidity levels in debt markets." While the studies published to date deal primarily with bank and bank capital issues, we expect some money market and money fund touches in coming days.

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