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PIMCO writes, "Repo Rate Spike: A 'Tail' of Low Liquidity." They say, "Banks' 'reporting' dates are known inflection points in the short-term funding markets and typically fall at the end of the month, quarter, and of course the year. But periodically, the 15th of the month is also a pressure point. Such was the case this past Monday when a short-term funding rate that had been hovering around 2.21% soared as high as 10%." The post explains, "The funding market succumbed to a trifecta of pressures: Payments on corporate taxes were due on 15 September, leading to high redemptions of more than $35 billion in money market funds; Cash balances increased by an additional $83 billion in the U.S. Treasury general account, which reduces excess reserves and simultaneously acts to reduce the aggregate supply of overnight liquidity available in funding markets; [and] Dealers needed an additional $20 billion in funding to finance the settlement of recent scheduled U.S. Treasury issuance.... None of these pressures was extraordinary or unforeseen, but together they had an extraordinary impact." PIMCO's piece continues, "We expect these episodes of funding stresses to become more frequent with demand for funding and U.S. Treasury supply forecast to increase heading into year-end and the Fed's reserve levels likely to drop further. Over the past two years as the Fed has undertaken 'quantitative tightening,' its reserves have declined to $1.4 trillion from $2.3 trillion in August 2017. Meanwhile, since June 2018, banks' holdings of U.S. Treasuries have more than doubled to over $200 billion from $100 billion. These holdings have been financed by money market funds which have increased their repo investments by over $300 billion this year alone, based on data from the Investment Company Institute." The article adds, "We think investors should be prepared for deteriorating liquidity in the funding markets into year-end and the impact of this on the financial markets as a whole, with potential costs for levered strategies and risk assets in particular.... From a broader investment perspective, market participants who have excess cash and can provide liquidity to the short-term funding markets may benefit.... As the past few days have shown, current market liquidity conditions warrant defensive positioning overall but can also present opportunities for investors who are in a position to take them."

We learned from the private-equity website PE Hub that, "Blackstone Group is buying Promontory Interfinancial Network for $2.5 billion, sources told Buyouts." Their article, "Blackstone to scoop up Promontory Interfinancial," explains, "Launched in 2002, Promontory provides technology-based services to banks to help them retain large-dollar relationships. The Arlington, Virginia, fintech supplies balance sheet management as well as deposit allocation services to 3,000 financial institutions, the company's website said. Mark Jacobsen, Promontory's president and CEO, is the former chief of staff at the FDIC and the Office of the Comptroller of the Currency. Eugene Ludwig, former U.S. Comptroller of the Currency, founded Promontory Interfinancial with several other leading bank executives.... Promontory was envisioned as a network comprised of thousands of financial institutions whose 'synthetic size' would help each member institution compete more efficiently, a statement said." An 8-K filing for The Bank of New York Mellon states, "On September 11, 2019, MCDI (Holdings) LLC, a wholly-owned subsidiary of BNY Mellon, along with the other holders of Promontory Interfinancial Network, LLC, entered into a definitive agreement to sell their interests in PIN. The transaction is expected to close in the fourth quarter of 2019, subject to customary closing conditions. Upon the closing of the transaction, BNY Mellon expects an after tax gain of approximately $600 million." Promontory runs the CDARS (certificate of deposit account registry service) and IND (insured network deposits) programs. `Promontory is one of the largest networks servicing the $1.5 trillion brokerage sweeps market.

U.K.-based publication HedgeWeek writes that, "Insight money market fund completes first cleared trade via central counterparty." The article explains, "A money market fund managed by asset manager Insight Investment has completed its first repo trade cleared via a central counterparty, providing investors in the fund with access to a fresh pool of liquidity and marking a further milestone in the structural development of the liquidity market.... This latest trade, placed by the GBP£24 billion Insight GBP Liquidity Fund, was cleared by the RepoClear 'Sponsored Clearing' service operated by global clearing house LCH. The service provides buy-side market participants with access to central clearing, a facility which until recent years has been largely restricted to the banking community. Central clearing can offer capital and operational efficiencies, enabling firms to reduce their risk, while increasing capacity in the market. It provides an alternative source of liquidity to the more common route of one-to-one, or 'bilateral', counterparty trading relationships." Chris Brown, Head of Money Markets at Insight Investment and portfolio manager of the fund, tells HedgeWeek, "This development is significant for money market funds, which use repo as an asset class and can now access a wider pool of liquidity. The ability of the buy side to clear with a central clearing counterparty deepens and diversifies the available sources of repo liquidity." Watch for more on Sterling and European money funds as we host our European Money Fund Symposium next week, Sept. 23-24, at The Hilton Dublin in Dublin, Ireland. The latest agenda is available and registrations are still being taken for the largest money market fund gathering in Europe. Contact us for more information, or feel free to stop by the show if you're in Dublin.... See you Monday!

"Spike in repo rate a technical event" writes Federated Investors' Sue Hill. She explains, "When rates on the typically steady overnight repurchase agreements behave like the stock market, as they did yesterday and this morning, even the broad market pays attention. But despite the flashing red lights, this increase in short-term rates is being driven by technical factors rather than credit concerns. A confluence of factors, chiefly the deadline for corporate quarterly tax payments and the settlement of $54 billion of net new U.S. Treasury supply, led to funding pressures over the past few trading sessions. That pushed rates on repo transactions with Treasury and agency collateral to an eye-popping 5% today for the general collateral type of trades done by money market funds. The volatility has been furthered by reserve balances at the Fed that have declined to a level that may make it more difficult for the Fed to maintain control over the level of short-term interest rates." She adds, "This event is unusual, but the surge -- and the resulting increase in yields on certain money funds -- is not a credit-driven event. The Fed acted quickly this morning to address this perceived reserve shortage through operations in the market that provide liquidity, and may announce new tools at the Federal Open Market Committee (FOMC) meeting ... to address the market dislocation. In a separate action, we also expect the FOMC to lower the fed funds target range to 1.75% to 2%." J.P. Morgan Securities' Alex Roever also commented on the spike yesterday, in a brief entitled, "Repo: What just happened?" He writes, "US funding markets were shocked this week as a combination of factors reduced the amount of cash available to fund securities positions. Repo rates surged in response, prompting the Fed to inject liquidity via an open market operation. A combination of factors have caused the securities financing markets to grow by a third over the past year. Although they have generally become safer and more diverse in recent years, they remain susceptible to temporary mismatches in the demand for funding and the availability of cash." Finally, see the Wall Street Journal's update, "Fed Intervenes to Curb Soaring Short-Term Borrowing Costs."

Bloomberg writes "Repo Market Chaos Signals Fed May Be Losing Control of Rates." The article says, "One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal Reserve is having trouble controlling short-term interest rates. Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing. It came back down to 2.50%, still up 23 basis points for the day.... While the spike doesn't necessarily mean credit markets are seizing up or a financial calamity is imminent, it could hamper the Fed's ability to steer the economy. As the Federal Open Market Committee meets this week, this surge could force yet another tweak to the central bank's interest on excess reserves rate to help ensure its main tool for guiding the economy -- the fed funds rate -- stays within policy makers' preferred band." Bloomberg quotes Bank of America's Mark Cabana, "The Fed has lost control of funding." The piece adds, "A combination of factors are behind the latest drive higher, including the settlement of the mid-month Treasury coupon auctions that pushed more collateral into the repo market. At the same time, cash is leaving the funding space as corporations withdraw from banks and money-market funds to make their quarterly tax payment.... The drop-off in reserves and fund outflows are driving up funding rates and starting to spill into the fed funds market because repo's attractive yields can draw some lenders away from the unsecured market." BMO Capital Markets's Jon Hill comments, "Secured funding markets are clearly not functioning well."

A press release entitled, "Ally Bank Surpasses $100 Billion in Retail Deposits in Just 10 Years," tells us, "Ally Bank, the customer-obsessed banking arm of Ally Financial Inc. (ALLY), announced a major milestone today, surpassing $100 billion in retail deposits. The news comes just months after the bank celebrated its 10th anniversary. Ally Bank's 1.9 million retail deposit customers have demonstrated strong loyalty over its 10-year history, where retention levels have remained consistently above 90%. This has been driven by Ally Bank's commitment to customer service and personalization of the banking experience, and consistently competitive rates on deposit products. Through the first half of 2019, Ally grew retail deposits by $9.5 billion and added more than 200,000 customers." CEO Jeffrey Brown comments, "We're very proud to move through the $100 billion mark in retail deposits, a significant achievement in our journey to be the leading digital bank in the U.S. Our relentless focus on our customers and strategic approach to offering innovative digital products, reinforces our view that consumers are increasingly seeking a differentiated banking experience." The release also comments, "Ally Bank launched in 2009 under the premise that customers didn't need another bank, they needed a better bank, which is reflected in the company's "Do It Right" mantra. Ally Bank is an all-digital platform, providing 24/7 customer service and consistently competitive rates, with no monthly maintenance fees or minimum balance requirement on deposit accounts." President of Consumer & Commercial Banking Products Diane Morais adds, "Our customer-first mindset, differentiated products and services, matched with our exceptional 24/7 customer service is what we attribute this milestone to. We could not have reached $100 billion in retail deposits without our customers." (Ally is currently paying 1.90% on its Online Savings, one of the highest rates available.)

Bloomberg writes "The Fed Doesn't Want Negative Interest Rates Even Though Trump Does," which briefly mentions money market funds. The article says, "Federal Reserve Chairman Jerome Powell and his colleagues are loath to follow Europe and Japan into negative interest rate territory -- no matter what President Donald Trump might want or how bad the U.S. economy might get. Not only could such a move be deemed illegal, it's also unclear how much of an economic gain it would yield given the likely disruption it could cause to banks and money market funds." It explains, "Money-market funds would also be squeezed by negative rates, though reforms unveiled by the Securities and Exchange Commission in 2014 mean that some are less vulnerable than they were before. If rates fall below zero, the funds' first line of defense against investors yanking out their money would be to reduce the fees that the managers charge." Bloomberg quotes Peter Crane, president of Crane Data, "If rates don't go too far negative, the playbook says suck it up and survive on lower fees.... If you go too negative like you see in Europe, then you need another plan." The piece adds, "The Fed is in the midst of a wide-ranging strategic study of ways it can tackle what Powell has called the 'key question' facing it: How can it best manage the ups and downs of the economy in a world of permanently lower interest rates. But negative rates don't seem to be high on the agenda." In other news, website AssetTV features a video from MetLife, which discusses, "Stable Value in Target Date Funds." MetLife National Sales Director for Stable Value Markets Warren Howe, says, "It's very interesting because if you look at stable value now, it's about $820 billion or so ... that we see for the size of the asset class. And, if you went back 10-15 years, stable value got the predominant amount of default investments, if you will." Howe continues, "But, then target dates have come along and over a 10 year period they've gone from virtually zero to somewhere north of a trillion dollars. They have grown dramatically.... Because they're mutual funds, stable value has not been a component of that."

Federated Investors' Head of Government Liquidity Sue Hill writes in an update entitled, "SOFR, so good" that, "Libor's heir apparent is making progress but daunting issues remain." She explains, "With a market footprint of more than $200 trillion, the London interbank offered rate (Libor) has been referred to by some as 'the world's largest number.' It is a benchmark rate -- technically a series of rates across five currencies and seven maturities -- used for many financial instruments, including derivatives, securitizations, floating-rate notes and bank loans. But caught up in scandal and weakened by reforms on financial institutions and money markets that led to a drop in assets referencing it, Libor’s days are, well, numbered. U.K regulators have announced their intention to phase it out by the end of 2021." She tells us, "The magnitude of the obstacles to do away with Libor is enormous. It is estimated that in 2016 there was $200 trillion in exposure to financial instruments tied to some measure of Libor, with the majority of that in derivative contracts. While 82% of this exposure, including most money market funds at present, is estimated to mature by the end of 2021, roughly $35 trillion, such as loans and floating-rate notes, have maturities beyond that date. This staggering amount of legacy contracts presents significant legal, operational, accounting and investment challenges." Hill continues, "In 2014, the Federal Reserve formed a committee to find a replacement. It recommended the Secured Overnight Financing Rate (SOFR), an index based on transactions in the market for overnight repurchase agreements collateralized by Treasury securities.... It isn't as simple as switching one rate for another, unfortunately. Daunting questions must be addressed, including when and how the switch takes place and how to account for the difference in economic value at the time of transition. While the risk-free nature of the rate makes it desirable for hedging, SOFR lacks a credit component and term structure, which is an issue for products such as floating-rate securities. Because most money funds do not currently have Libor exposure beyond 2021, the money market industry has the luxury of time to create strategies to address issues." Finally, she adds, "To date, issuance of SOFR-based floating-rate securities has exceeded $200 billion and the volume of trading and open interest in SOFR futures continues to grow. But far before SOFR is ready to take over for Libor, cash managers and investors need a game plan for current and new exposure. 2021 may seem a long way away, but it's never too soon to start."

Just over year ago, we wrote in our daily Crane Data News, the article "DWS ESG Liquidity Goes Live," which marked the debut of the first "ESG" money market fund. As we wrote in our August 13, 2018 News, "DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering," the manager formerly known as Deutsche just converted an existing fund into an "ESG" money market fund. A press release put out in September 2018, entitled, "DWS launches first ESG money market fund in the U.S.," tells us "DWS Group today announced the launch of DWS ESG Liquidity Fund (ESGXX), the first money market fund available in the U.S. to apply ESG (Environmental, Social and Governance) criteria. The fund will invest in high-quality, short-term, U.S. dollar-denominated money market instruments paying a fixed, variable or floating interest rate while also filtering for various ESG factors using DWS's proprietary software -- the ESG Engine." Sonelius Kendrick-Smith, Head of Liquidity Solutions, Americas, comments, "As a global asset manager, it is crucial for DWS to enable our clients to invest in a sustainable future by incorporating ESG factors into their global investment process across asset classes. Through the DWS ESG Liquidity Fund, investors will now be able to take advantage of our proprietary ESG Engine software while effectively managing their liquidity." Fiona Bassett, Global Co-Head of Products, tells us, "DWS has more than 20 years of experience as a leader and innovator in the field of sustainable, responsible and impact investing. The launch of the DWS ESG Liquidity Fund, the first ESG money market fund available for investors in the U.S., offers investors the opportunity to gain best-in-class ESG exposure for their liquidity needs and help invest in a sustainable future." For more recent news on ESG funds, see these Crane Data News articles: MFI Intl: European Money Fund Assets Surge Too; BlackRock LEAF; EMFS (8/15/19), August MFI: Assets Surging; Northern's Peter Yi; Confusion Over ESG (8/7/19), Federated Earnings Call Discusses Big MMF Inflows, Rate Cuts and ESG (7/29/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19), Money Fund Assets Up 13th Week Straight; Fitch on ESG in Money Funds (7/19/19) and SSGA Goes Live with ESG Money Market Fund; Fitch on Prime MF Inflows (7/3/19).

Morningstar U.K. asks, "Should You Park Cash in a Money Market Fund?" They begin, "With interest rates at rock bottom, Money Market funds offer limited returns, but investors are flocking to them anyway.... On the face of it, there is little reason to invest in a Money Market fund. After all, why would you pay a fund manager to put your money in a savings account when you could easily do that for yourself? ... According to Morningstar data, some £2.8 billion has been invested into Money Market funds over the past year and the category has experienced positive inflows for the past six months in a row. Yet the returns are meagre at best ... so why would you choose one?" The article, which contains a table of Sterling Money Market Fund performance, explains, "It's a very stressful time for investors -- Brexit, a US-China trade war, uncertainty in Europe where an election is on the cards in Italy and a recession looms in Germany -- there is much to be nervous about. As well as that, many stock markets are trading at all-time highs, leaving many fearful of a sudden correction. With such a fraught backdrop, it's not surprising that many investors are increasing their allocation to cash.... You can squirrel money away quite literally under the mattress at home, find a high street savings account or choose a Money Market fund." The piece adds, "The benefits of the latter are liquidity (your money is not tied in for a set period as it might be with a savings account) and diversification (a money market fund will spread your cash across a number of different deposits rather than leave it all in one place)." They quote David Callahan, head of Money Market at Lombard Odier, on credit research, "We establish a universe of eligible issuers, based on internal credit assessments, as well as external agency rating. `People may not want the concentration risk of having their money sitting with just on or two banks." It also says, "Another benefit of Money Market funds is that they can reduce interest rate risk.... Not only has that made it harder for savers to find an inflation-beating interest rate on the high street but it has forced bond yields down as more money has flowed into fixed interest. In recent weeks the bond yield has even inverted, meaning that investors are being better rewarded for lending their money to the government for two years rather than, say, 30 years." Finally, Morningstar quotes Royal London's Craig Inches, "A cash rate of 0.75% looks very attractive when the alternative is locking into a negative rate of interest for years to come."

Bloomberg writes, "World's No. 1 Money-Market Fund Shrinks by $120 Billion in China." The article says, "The world's biggest money-market fund, which once offered annualized returns of nearly 7%, is on track to lose its crown after shrinking by more than $120 billion in just over a year. Known as Yu'E Bao, the Chinese fund operated by an affiliate of Alibaba Group Holding Ltd. had 1.03 trillion yuan in assets under management at the end of June, or an equivalent of $144 billion based on current exchange rates, down from a peak of $270 billion on March 31, 2018. It's on course to fall behind the JPMorgan U.S. Government Money Market Fund, which has been hovering around $150 billion level since 2017, and Fidelity Government Cash Reserves fund, according to figures compiled by Bloomberg." (Crane Data shows the JPM portfolio currently at $149.9 billion and the Fidelity fund, FDRXX, at $147.4B as of 8/31/19.) Bloomberg continues, "Since its inception in 2013, Yu'E Bao has lured more than 600 million Chinese investors. The fund is owned by Alibaba affiliate Ant Financial and is available through the tech giant's Alipay platform.... In response to regulatory pressure, the fund in 2017 cut the maximum amount individuals could invest and took other steps to limit inflows. Ant Financial said in a statement that the Yu'E Bao fund is just one of the 24 money-market funds on Alipay's Yu'E Bao spare cash management platform. Its assets fluctuation doesn't reflect the overall performance of the Yu'E Bao platform, the firm said." The article adds, "Yu'E Bao returns have fallen to an annualized rate of 2.29%, according to latest figures, compared with 6.7% in 2014. Yields from Chinese banks' wealth management products were more than 4% in July, figures from research firm PY Standard show." For more on Chinese MMFs, see these Crane Data News articles: Worldwide MMF Assets Break $6.1 Trillion in Q1'19 on China, US Inflows (7/1/19), ICI's 2019 Fact Book Reviews Money Funds Globally, MMFs vs. Deposits (5/1/19) and China's Yu'e Bao No Longer World's Largest MMF; Repo Cap? Fed Minutes (4/11/19).

The Federal Deposit Insurance Corporation published its latest "Quarterly Banking Profile," which reviews the second quarter of 2019 in the banking industry in the U.S. A press release entitled, "FDIC-Insured Institutions Report Net Income of $62.6 Billion in Second Quarter 2019," states, "For the 5,303 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC), aggregate net income totaled $62.6 billion in second quarter 2019, an increase of $2.5 billion (4.1 percent) from a year earlier. The improvement in net income is attributable to a $4.9 billion (3.7 percent) increase in net interest income. Financial results for second quarter 2019 are included in the FDIC's latest Quarterly Banking Profile released today." The release also tells us, "Net interest income rose by $4.9 billion (3.7 percent) from a year earlier to $139 billion in second quarter 2019. Slightly more than three out of four banks (75.1 percent) reported a year-over-year increase in net interest income. The average net interest margin remained stable from a year earlier at 3.39 percent." The full "Quarterly Banking Profile" report adds, "Total deposit balances increased by $114 billion (0.8 percent) from the previous quarter, as deposits in foreign offices increased by $51.3 billion (4.1 percent) and domestic office deposits rose by $62.7 billion (0.5 percent). Domestic deposits in noninterest-bearing accounts rose by $37.2 billion (1.2 percent), while interest-bearing deposits increased by $25.5 billion (0.3 percent). Nondeposit liabilities increased by $25.1 billion (1.2 percent) from the previous quarter, as other liabilities rose by $25.2 billion (6.2 percent)."

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