​

The ICI released its October 2012 statistics late Thursday, which showed money fund assets flat as repo holdings surged. (​See our previous news on the repo jump, Nov. 12'​s "​Repo Rebounds to Record in Oct.; European Holds Highest Since 5/​12".) Money funds will likely show big asset increases in November, according to Crane Data'​s MFI Daily, after being down fractionally in October. ICI'​s "Trends in Mutual Fund Investing: October 2012" shows that money market mutual fund assets were again basically flat, falling a mere $​3.​2 billion in October after falling $​3.​8 billion in Sept. to $​2.​5481 trillion. Money fund assets continue to lose share to bond fund assets, which rose by $​44.​3 billion to $​3.​3791 trillion. ICI'​s "Month-​End Portfolio Holdings of Taxable Money Market Funds shows Repurchase Agreements surging in October while Government Agencies, Treasuries and CDs all fell.

ICI'​s October "​Trends" says, "The combined assets of the nation'​s mutual funds decreased by $​43.​5 billion, or 0.​3 percent, to $​12.​711 trillion in October, according to the Investment Company Institute'​s official survey of the mutual fund industry.... Bond funds had an inflow of $​34.​37 billion in October, compared with an inflow of $​29.​18 billion in September.... Money market funds had an outflow of $​3.​55 billion in October, compared with an outflow of $​3.​44 billion in September. Funds offered primarily to institutions had an outflow of $​2.​94 billion. Funds offered primarily to individuals had an outflow of $​609 million."

So far in November, month-​to-​date through 11/​28, assets have decreased by $​74.​9 billion, according to Crane Data'​s Money Fund Intelligence Daily. Prime Institutional funds are seeing large inflows in November, up $​44.​3 billion, perhaps a reflection of investors moving cash ahead of the expected year-​end expiration of the "​TAG" unlimited FDIC insurance program. (​Though this may be extended -- see Wednesday'​s "​Link of the Day". We expect an extension.) But money fund assets are up modestly across all other categories too in November.

ICI'​s latest weekly "Money Market Mutual Fund Assets" also shows assets increasing for the third straight week. It says, "Total money market mutual fund assets increased by $​10.​09 billion to $​2.​612 trillion for the week ended Wednesday, November 28, the Investment Company Institute reported today. Taxable government funds increased by $​1.​39 billion, taxable non-​government funds increased by $​9.​45 billion, and tax-​exempt funds decreased by $​760 million."

The ICI'​s Portfolio Holdings for October 2012 shows Repurchase Agreements jumped sharply after falling in September. Repos hit record levels in October, solidifying their position as the largest portfolio holding among taxable money funds with 26.​5% of assets and $​603.​8 billion (​up $​80.​5 billion in Oct.). Treasury Bills & Securities remained the second largest segment at 19.​7%; holdings in T-​Bills and other Treasuries fell by $​16.​3 billion to $​449.​1 billion. Holdings of Certificates of Deposits, which rank third among portfolio holdings, decreased by $​24.​4 billion to $​415.​3 billion (​18.​2%).

Commercial Paper took back the fourth largest spot from U.​S. Government Agency Securities; CP fell by $​10.​7 billion to $​315.​1 billion (​13.​8% of assets) but Agencies fell by $​24.​1 billion to $​313.​8 billion (​13.​7% of taxable assets). Notes (​including Corporate and Bank) rose by $​2.​8 billion to $​97.​7 billion (​4.​3% of assets), and Other holdings accounted for 3.​7% ($​85.​3 billion).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 86.​85K to 24.​39 million, while the Number of Funds fell by one to 405. The Average Maturity of Portfolios remained at 49 days in October. Since October 2011, WAMs of Taxable money funds have lengthened by 8 days. (​Note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- now has Portfolio Composition and Maturity Distribution totals updated as of Oct. 31, 2012. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.)

Finally, ICI'​s Paul Schott Stevens writes a letter to the The Wall Street Journal editors entitled, "​Ill-​Advised '​Reform' of Money Funds Will Harm Savers". He says, "The Journal continues its efforts to tar money-​market funds with the stigma of "​bailout" and to impose a solution that will destroy a product that plays a key role in financing the economy ("​Liberating Money Funds," Review & Outlook, Nov. 19). There is little evidence to support the Journal'​s claims that its favored proposal for money-​market funds -- forcing them to float their per-​share price -- would enhance financial stability. As the financial crisis demonstrated, floating-​value funds aren'​t immune to runs. Instead, this "​solution" would deprive investors and the economy of an efficient, diversified, well-​regulated and transparent tool for cash management, and a crucial channel for financing businesses, state and local governments and nonprofit institutions. Little wonder that hundreds of organizations from these sectors have registered their opposition to forcing money-​market funds to float."

​

The U.​S. Department of the Treasury has posted a "​Note" entitled, "Five Questions on the FSOC'​s Proposed Recommendations for Money Market Mutual Fund Reform," which says, "Earlier this month, the Financial Stability Oversight Council (​the Council) voted unanimously to advance proposed recommendations for money market mutual fund (​MMF) reform for public comment. Here are five frequently asked questions about MMFs." We excerpt the Q&​A below, and we also cite a recent paper, "Do Money Market Funds Require Further Reform?," that argues against further reform due to the lack of any incentive to run (​or "​first-​mover advantage") and it argues for splitting retail and institutional share classes into separate funds.

The Treasury'​s "​Five Questions" explains, "What are MMFs? MMFs are mutual funds that offer individuals, businesses, and governments a means of pooled investing in money market instruments. MMFs are a significant source of short-​term funding for businesses, financial institutions, and governments, as MMFs had approximately $​2.​9 trillion in assets under management as of September 30, 2012. However, the 2007–​2008 financial crisis demonstrated that MMFs are susceptible to runs that can have destabilizing implications for financial markets and the economy."

It continues, "Why do MMFs need to be reformed? In the days during September 2008, after Lehman Brothers Holdings, Inc. failed and an MMF "​broke the buck," investors redeemed more than $​300 billion from prime MMFs, and commercial paper markets shut down for even the highest-​quality issuers. Government intervention was needed to help stop the run on MMFs during the financial crisis. While the Securities and Exchange Commission (​SEC) took important steps in 2010 by adopting regulations to improve the resiliency of MMFs, these reforms did not address the structural vulnerabilities of MMFs that leave them susceptible to destabilizing runs."

Treasury writes, "This structural vulnerability to runs is driven by the "​first-​mover advantage," which provides an incentive for investors to redeem their shares at the first indication of any perceived threat by allowing investors who redeem first to do so at the customary share price of $​1.​00, even if the fund'​s assets are worth slightly less. Because MMFs lack any explicit capacity to absorb losses in their portfolio holdings without depressing the market-​based value of their shares, even a small threat to an MMF can start a run."

They ask, "Why is the Financial Stability Oversight Council involved if they don'​t regulate MMFs? The broader financial regulatory community has focused substantial attention on MMFs and the risks they pose. The SEC, by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that MMFs present to the economy and financial markets. However, as the SEC has not been able to move forward with MMF reform, Secretary Geithner urged the Council to take up these important reforms using the Council'​s authority under Section 120 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act."

Treasury'​s Amias Gerety tells us, "Section 120 of the Dodd-​Frank Act is an authority given to the Council to help it carry out its financial stability mission. It enables the Council to issue recommendations to primary financial regulatory agencies to apply "​new or heightened standards and safeguards" for a financial activity or practice conducted by bank holding companies or nonbank financial companies under the agency'​s jurisdiction."

The piece says, "What are the Financial Stability Oversight Council'​s proposed recommendations for MMF reform? The Council is proposing three alternatives, which are not mutually exclusive and could be implemented in combination: 1. Floating net asset value, which would remove a special exemption under SEC rules that allows MMFs to maintain a stable net asset value per share.... 2. Stable NAV with a NAV buffer and minimum balance at risk, which would require MMFs to build a buffer of up to 1 percent of assets to absorb day-​to-​day fluctuations in value. This would be paired with a "minimum balance at risk".... 3. Stable NAV with a NAV buffer and other measures, which would require MMFs to build a buffer of 3 percent of assets, and that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. To the extent that these other measures complement the NAV buffer and further reduce the vulnerabilities of MMFs, the size of the NAV buffer could be reduced. Additionally, the Council recognizes that there may be other reforms that could achieve similar outcomes, so the Council is seeking comment on other potential reforms of MMFs that meet the objectives of addressing the structural vulnerabilities inherent in MMFs and mitigating the risk of runs."

Finally, Treasury writes, "What happens now that these proposed recommendations have been released? A 60-​day public comment period began November 19, 2012, when the proposed recommendations were published in the Federal Register. During the comment period, all stakeholders -- including institutional and individual investors, industry participants, municipalities, and other interested parties – are welcome to submit their comments. Once the public comment period closes on January 18, 2013, the Council will carefully consider the comments and plans to issue a final recommendation to the SEC. Under the Dodd-​Frank Act, the SEC will be required to implement the recommended standards, or similar standards that the Council deems acceptable, or explain in writing within 90 days why it has determined not to follow the recommendation. However, if the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its Section 120 process, it is expected that the Council would not issue a final recommendation to the SEC."

In other news, a recent paper, entitled, "​Do Money Market Funds Require Further Reform?", written by Robert Comment, says, "The merit of further reform of money market funds by the SEC hinges on the extent to which runs on prime funds pose an investor-​protection problem. Reformers assume that the many runs on prime funds in 2008 reflected rational inter-​shareholder opportunism, but there is no evidence that retail investors need more protection from this. Notably, the non-​redeeming shareholders of the Reserve Primary Fund were the only fund shareholders damaged in the runs on prime funds in 2008, and their avoidable loss amounted to just 1/​3rd of one percent of their investment. Still, one-​quarter of prime funds in 2008 had a mix of retail and (​run-​prone) institutional shareholders in the same fund. As the rest did not, this hypothetical hazard is unnecessary and the industry should act voluntarily to eliminate mixed-​clientele prime funds."

Comment explains, "The case for more SEC regulation hinges substantially on whether the runs on prime funds in 2008 posed, and by projection future runs will pose, an investor-​protection problem stemming from rational, incentive-​driven opportunism.... The likelihood that the runs on prime funds in 2008 were irrational undermines the argument that runs on prime funds are incentivized by funds' stable-​NAV policies, and this possibility undermines the remaining reform agenda."

He tells us, "​The rationality of fund runs is questionable as theory for the same reason the prisoners' dilemma is broken when the prisoners all are represented by the same defense attorney. The proposition that fund shareholders can expect to benefit from gaming fund accounting rests on a presumed absence from the game of a player empowered to serve as agent for the non-​redeeming shareholders.... Regarding empowerment, the boards of funds that use amortized-​cost accounting are required, by SEC Rule 2a-​7, to "​promptly consider what action, if any, should be initiated by the board of directors" if the deviation between shadow, mark-​to-​market NAV and amortized-​cost NAV should exceed 1/​2 of 1 percent (​or $​0.​005 per share). A board is required to take remedial action when such a deviation "​may result in material dilution or other unfair results to investors or existing shareholders".... `​Decisive board action to protect the interest of continuing shareholders is not what happened at the Reserve Primary Fund, but the Reserve example is not generalizable due to the outstanding ineptitude of this fund'​s board."

Comment concludes, "It would be a mistake for the SEC to adopt the contemplated further reform of money market funds. The SEC'​s regulatory thicket, nearly impenetrable already, ought not to be expanded to serve the aims of central bankers, as laudable as those aims may be. The further reform contemplated by the SEC is only tenuously related to investor protection but poses a tangible threat to a product attribute (​stable NAV) that is prized by consumers."

​

The Investment Company Institute, which represents the mutual fund industry, released its 2012 Annual Report to Members this week. It contains a section entitled, "Standing Up for Money Market Funds and Their Investors," that reviews events of the past year and the current debate over money market fund regulatory reforms. It says, "Money market fund investors contended with a difficult environment in 2012, marked by record low interest rates, ongoing financial turmoil in Europe, and a high-​profile global debate over the merits of potentially disruptive regulatory changes for these funds. Yet in this challenging setting, investors continued to demonstrate their reliance on money market funds -- and to show strong support for preserving these funds' current features under a robust regulatory structure. Their support played a crucial role as ICI and others -- political leaders, investors, and issuers in state and local governments, businesses, and nonprofit institutions -- raised their voices in the regulatory debate."

ICI explains, "​That debate, of course, had been underway for several years. Since the financial crisis, ICI and its members have worked constructively with regulators from the Securities and Exchange Commission (​SEC), Department of the Treasury, and the Federal Reserve System to pursue ideas that could strengthen the resiliency of money market funds without undermining their core features, their value to investors and the economy, or the competitive market that allows funds and sponsors to provide a wide range of choices to investors. The fruits of that work were evident in the substantial reforms to Rule 2a-​7 governing money market fund regulation adopted in January 2010 -- reforms that were tested and proven in the European and U.​S. debt crises during the summer of 2011."

They write, "Despite this success, regulators continued to press for another round of rulemaking. In November 2011, SEC Chairman Mary Schapiro announced that the Commission would pursue two alternative proposals for "​structural" change: money market funds would be required either to abandon stable net asset values, or to maintain capital buffers and to impose redemption "​holdbacks" that would deny redeeming shareholders full access to their cash for as long as 30 days."

ICI'​s Annual Report continues, "As they advanced these ideas, Chairman Schapiro and others -- primarily current and former banking regulators -- made speeches, gave media interviews, and published commentaries supporting the SEC'​s contemplated proposals. Federal Reserve officials were particularly active in promoting the notion that additional regulations for money market funds were necessary to address risks to the financial system. ICI and its members responded with empirical analysis and vigorous outreach to investors. The Institute made the case that either of the SEC'​s contemplated alternatives would render money market funds useless as cash-​management vehicles for many individual and institutional investors. The proposals would increase costs for funds, intermediaries, and investors sharply; fail to address issues of financial stability; and drive hundreds of billions of dollars out of well-​regulated money market funds into less-​regulated, less-​transparent alternatives."

They explain, "​As ICI made its case, it began where it always has: with the facts. Following clear and rigorous methodologies, ICI researchers shed light on the substantial flaws of the ideas under consideration at the SEC. In May, ICI published The Implications of Capital Buffer Proposals for Money Market Funds, which found that requiring fund sponsors to provide capital would change advisers' business models fundamentally and probably would drive advisers to offer less-​regulated products or exit the cash-​management business altogether. ICI followed in June with Operational Impacts of Proposed Redemption Restrictions on Money Market Funds, which concluded that redemption holdbacks would drive up costs for funds, intermediaries, and investors. With surveys of investors showing that these restrictions also would shrink the market for money market funds, many advisers or intermediaries likely would decide that the product was uneconomical, and cease to offer it."

The report adds, "​ICI Research also heavily informed the Institute'​s congressional testimony. In June 2012, Stevens had the opportunity to appear before the Senate Banking Committee to discuss money market funds. His 62-​page written statement provided lawmakers with a thorough airing of the issues surrounding money market funds and solid data vividly illustrating how the 2010 amendments, such as new minimum liquidity requirements, have had, in Stevens'​s words, "​a transformative effect on money market funds." Infusing the public discourse with solid facts was all the more important given the news media'​s troubling level of incorrect or incomplete reporting. All too often, news stories and commentary wrongly recast money market funds as a primary cause of the financial crisis; overstated the size of the government'​s temporary guarantee program for money market funds during the crisis; or failed even to mention the SEC'​s 2010 reforms."

It says, "​To counter the misinformation, ICI made full use of its communications capability. The Institute'​s media relations team engaged continuously with journalists, providing facts and perspective. Upon publication of inaccurate reporting or commentary, ICI responded not only with conventional letters to the editor but also through social media, rapid-​response comments to websites, and analyses posted to ICI Viewpoints. From September 2011 through September 2012, ICI Viewpoints published 46 items on money market funds. Beyond communicating its own positions, ICI also endeavored to make sure that the public and policymakers were aware of the remarkable array of citizens, businesses, local chambers of commerce, nonprofit institutions, and government officials who have voiced consistent support for money market funds. ICI showcased the depth and breadth of these views at its dedicated website, www.​PreserveMoneyMarketFunds.​org."

ICI tells us, "​All this material, in turn, aided ICI'​s Government Affairs Department as it engaged in its dialogue with members of Congress. Fortunately, many lawmakers proved willing to listen to the voices of the economy. More than 100 members of the House and Senate, hailing from across the country and from across the political spectrum, expressed their concerns that the SEC'​s contemplated changes could destroy the value of money market funds for their constituents. Though Chairman Schapiro persisted in pursuing structural changes, she could not persuade a majority of the five-​member Commission to issue the proposals as a potential rulemaking. In late August, Schapiro called off an expected SEC meeting to consider the staff proposal. In statements explaining their views, the three dissenting Commissioners all cited the need to study the impact of the 2010 reforms carefully. They also expressed concern that Chairman Schapiro'​s ideas might harm money market funds severely, to the detriment of investors and issuers."

They explain, "At the close of fiscal year 2012, however, the discussion around money market funds showed no sign of abating. In late September, Treasury Secretary Timothy F. Geithner wrote to members of the Financial Stability Oversight Council, which he chairs, urging it to use its authority to recommend that the SEC proceed with money market fund reform. Shortly thereafter, underscoring the global nature of this issue, the International Organization of Securities Commissions issued a number of recommendations, some of which mirrored those under consideration at the SEC."

Finally, ICI'​s annual report adds, "With the help of members and allies, ICI will remain highly engaged on money market funds in the coming year. "​As we have for more than four years, ICI will continue to present empirical analysis to inform this regulatory debate, in the hopes that regulators will take an objective, fact-​based view of the issues," Stevens said in September. "The role that money market funds play in the U.​S. economy is far too important to proceed on any other basis."

​

The U.​S. Securities & Exchange Commission said yesterday, "After nearly four years in office, SEC Chairman Mary L. Schapiro today announced that she will step down on Dec. 14, 2012. Chairman Schapiro, who became chairman in the wake of the financial crisis in January 2009, strengthened, reformed, and revitalized the agency." A statement by President Obama commented, "​Today, the President issued the following statement on the announcement by Mary Schapiro, the Chairman of the Securities and Exchange Commission, that she will be leaving her post. The President also announced that he intends to designate Elisse Walter, a current Commissioner, as Chair upon Ms. Schapiro'​s departure next month." While the money market mutual fund industry certainly won'​t miss Schapiro, it'​s unclear whether Walter will be any more kind to the cash management industry.

Schapiro commented in her statement, "It has been an incredibly rewarding experience to work with so many dedicated SEC staff who strive every day to protect investors and ensure our markets operate with integrity. Over the past four years we have brought a record number of enforcement actions, engaged in one of the busiest rulemaking periods, and gained greater authority from Congress to better fulfill our mission."

The release adds, "Chairman Schapiro is one of the longest-​serving SEC chairmen, having served longer than 24 of the previous 28. She was appointed by President Barack Obama on Jan. 20, 2009, and unanimously confirmed by the Senate. During her tenure, Chairman Schapiro worked to bolster the SEC'​s enforcement and examination programs, among others. As a result of a series of reforms, the agency is more adept at pursing tips and complaints provided by outsiders, better able to identify wrongdoers through vastly upgraded market intelligence capabilities, and more strategic, innovative and risk-​focused in the way it inspects financial firms."

Among Schapiro'​s accomplishments, the SEC refers to the 2010 Rule 2a-​7 amendments. A statement says that she, "Adopted widely-​hailed rules to enhance the resiliency of money market funds -- The SEC adopted rules to make money market funds more resilient by strengthening credit quality, liquidity and maturity standards, as well as introducing stress testing requirements and mandating new reporting of money market fund holdings. In addition, the SEC made available to investors the detailed information about a fund'​s investments and the market-​based price of its portfolio known as its "​shadow NAV" (​net asset value) or mark-​to-​market valuation. The Chairman also called upon the Financial Stability Oversight Council to act to make such funds less susceptible to destabilizing runs like occurred during the credit crisis."

The SEC'​s release adds, "​Chairman Schapiro previously served as a commissioner at the SEC from 1988 to 1994. She was appointed by President Ronald Reagan, reappointed by President George H.​W. Bush in 1989, and named Acting Chairman by President Bill Clinton in 1993. She left the SEC when President Clinton appointed her as chairman of the Commodity Futures Trading Commission, where she served until 1996. She is the only person to have ever served as chairman of both the SEC and CFTC. As SEC chairman, Schapiro also serves on the Financial Stability Oversight Council, the FHFA Oversight Board, the Financial Stability Oversight Board, and the IFRS Foundation Monitoring Board."

President Obama commented in his statement, "I want to express my deep gratitude to Mary Schapiro for her steadfast leadership at the Securities and Exchange Commission. When Mary agreed to serve nearly four years ago, she was fully aware of the difficulties facing the SEC and our economy as a whole. But she accepted the challenge, and today, the SEC is stronger and our financial system is safer and better able to serve the American people -- thanks in large part to Mary'​s hard work. I am also pleased to designate Elisse Walter as SEC Chairman after Mary'​s departure. I'​m confident that Elisse'​s years of experience will serve her well in her new position, and I'​m grateful she has agreed to help lead the agency."

ICI President & CEO Paul Schott Stevens issued the statement, "​SEC Chairman Mary Schapiro has led the SEC during a critical time for the agency, the financial industry and America'​s investors. We are grateful for her dedication to strengthening protections for investors and the functioning of markets, particularly in the challenging task of implementing the Dodd-​Frank Act. Chairman Schapiro also brought a welcome focus to improving the management of the Commission, reorganizing, hiring needed industry expertise, and employing technology to enhance its effectiveness."

He added, "While we disagreed with Chairman Shapiro on some issues, we have immense respect for her commitment to public service and the interests of investors. We wish Chairman Schapiro well in the future. As the next SEC Chairman, SEC Commissioner Elisse Walter brings an extraordinary record of accomplishment in service to investors at both the SEC and the Financial Industry Regulatory Authority. We look forward to continuing to work closely with her and her fellow commissioners on a wide range of issues."

For a look at SEC Commissioner Elyse Walter'​s speech on money fund reform early this year, see Crane Data'​s March 20 News "​SEC Commissioner Walter Asks Fund Companies to Re-​Engage at MFIMC". She said then, "Simply put: the regulatory process is better with you as a part of it. I have always appreciated the views and involvement of the industry, and believe that your engagement is essential to reaching optimal answers to the important questions posed in securities regulation. The topic of money market funds, in particular, is just too important to let the dialogue play out through a public volley of slogans. I'​ll say at the outset that I'​m not here to talk about my position on the need for any further reform.... Before formulating a definitive position, my plan is to continue to discuss these critical questions with the staff, my fellow commissioners, the Chairman, members of the public, and those of you who are interested in that dialogue."

​

As we wrote almost two weeks ago (​see our Nov. 14 Crane Data News, "​FSOC Approves Proposal to Recommend Money Fund Reforms to SEC"), the Financial Stability Oversight Council approved its "Proposed Recommendations Regarding Money Market Mutual Fund Reform." While no Comment Letters have been posted yet, we thought we would review the proposals themselves in more detail (​for those that haven'​t had time to read the whole 73-​page document). The FSOC writes on the "Proposed Recommendations," "The Council seeks comment on proposed recommendations to the SEC to address the structural vulnerabilities of MMFs discussed in Section IV. In particular, the Council aims to address the activities and practices of MMFs that make them vulnerable to destabilizing runs: (​i) the lack of explicit loss-​absorption capacity in the event of a drop in the value of a security held by an MMF, and (​ii) the first-​mover advantage that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to an MMF'​s value or liquidity."

They explain, "In considering options for further reform, the Council notes three key features of MMFs that make them appealing to investors: the stability of principal associated with the funds' stable $​1.​00 per share NAV; liquidity through shares that can be redeemed on demand; and market-​based yields that often exceed those of short-​term Treasury securities and rates on FDIC-​insured bank deposits. The activities and practices of MMFs that have made them appealing to investors also contribute to their vulnerability to runs. For example, both MMFs' reliance on rounding to maintain stable NAVs and the liquidity of MMF shares contribute to a first-​mover advantage for redeeming investors. MMFs' practice of investing in short-​term securities with interest-​rate and credit risk to boost yields, without explicit loss-​absorption capacity, makes them more vulnerable when losses do occur."

FSOC writes, "Therefore, reforms that would provide meaningful mitigation of the risks posed by MMFs would likely reduce their appeal to investors by altering one or more of their attractive features. The first proposed alternative would require funds to have a floating NAV by removing the valuation and pricing provisions in rule 2a-​7 that currently allow funds to maintain a stable, rounded $​1.​00 NAV. Alternatives Two and Three would preserve, and potentially bolster, the principal stability that investors currently enjoy by preserving the stable NAV, but would likely reduce the higher yields and/​or the liquidity that MMFs offer to investors. These reform alternatives, therefore, present trade-​offs between stability, yield, and liquidity. Different MMF investors may have different preferences. Accordingly, it may be optimal to offer both floating NAV funds and stable NAV funds with enhanced protections and to allow investors to determine which they prefer. The Council seeks comment on the merits of adopting such a flexible approach as well as the merits of recommending a single structural reform alternative."

On the Floating NAV Proposal (​Alternative I), they say, "This reform alternative would require MMFs to have a floating NAV instead of a stable NAV. The price per share would fluctuate based on small changes in the value of the MMF'​s portfolio, rather than remaining at $​1.​00 absent a break the buck event. As such, the value of MMFs' shares would reflect the market value of the underlying portfolio holdings, consistent with the valuation requirements that apply to all other mutual funds under the Investment Company Act.... [​A] requirement that MMFs use floating NAVs could make investors less likely to redeem en masse when faced with the prospect of even modest losses by eliminating the "​cliff effect" associated with breaking the buck. Regular fluctuations in MMF NAVs likely would cause investors to become accustomed to, and more tolerant of, fluctuations in NAVs. A floating NAV would also reduce the first-​mover advantage that exists in MMFs today because investors would no longer be able to redeem their shares for $​1.​00 when the shares' market-​based value is less than $​1.​00. This alternative does not contemplate requiring funds to have an NAV buffer."

FSOC continues, "Under this alternative, each floating-​NAV MMF would re-​price its shares to $​100.​00 per share (​or initially sell them at that price) to be more sensitive to fluctuations in the value of the portfolio'​s underlying securities than under a $​1.​00 share price. For example, a 5 basis point loss would not move the share price of a floating-​NAV MMF with a share price of $​1.​00.... To reduce potential disruptions and facilitate the transition to a floating NAV for investors and issuers, existing MMFs could be grandfathered and allowed to maintain a stable NAV for a phase-​out period, potentially lasting five years.... This would discourage significant and sudden investor redemptions that could occur out of fear that a fund would force existing shareholders to incur a loss immediately upon the fund'​s transition to a floating NAV."

They describe the NAV Buffer and Minimum Balance at Risk Alternative as, "A second regulatory reform alternative would mandate that most MMFs: (​i) maintain an NAV buffer, which would be a tailored amount of assets of up to 1 percent in excess of those needed for a fund to maintain its $​1.​00 share price and which would absorb day-​to-​day fluctuations in the value of the fund'​s portfolio securities; and (​ii) require that 3 percent of any shareholder'​s highest account value in excess of $​100,​000 during the previous 30 days (​the MBR) be available for redemption with a 30-​day delay. The MBR requirement would have no effect on any redemptions that leave an investor'​s remaining balance at least as large as the MBR; only redemptions of the MBR itself would be delayed. In the event that an MMF suffers losses that exceed its NAV buffer, those losses would be borne first by the MBRs of shareholders who have recently redeemed. These requirements would not apply to Treasury MMFs, and investors with balances of less than $​100,​000 would not be subject to the MBR requirement."

FSOC adds, "The NAV buffer and the MBR would be designed to reduce MMFs' susceptibility to runs by allowing a fund to absorb day-​to-​day fluctuations in the value of its portfolio securities, providing a disincentive for shareholders to redeem in times of stress, and allocating more fairly the costs to the fund that can result when shareholders do redeem. This alternative would be designed to address the structural vulnerabilities of MMFs while also allowing them to continue to maintain a stable NAV under most conditions."

They write on the "NAV Buffer and Other Measures," "This alternative would incorporate a larger risk-​based NAV buffer than Alternative Two, of 3 percent, that could be combined with other measures to enhance MMFs' loss-​absorption capacity and mitigate the run vulnerabilities that would be addressed by the MBR in Alternative Two. To the extent that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and reduce MMFs' vulnerabilities, the Council could include them in its final recommendation. These measures could serve to reduce the size of the NAV buffer required under this alternative accordingly. The Council requests comment on how the other measures might be structured; how, if at all, they could complement the NAV buffer and reduce the vulnerabilities described in Section IV; and whether more stringent investment diversification requirements, alone or in combination with other measures, would increase MMFs’ resiliency sufficiently to warrant a smaller NAV buffer requirement."

Finally, FSOC adds, "The policy alternatives discussed in the proposed recommendations described above aim to address the structural vulnerabilities inherent in MMFs and reduce their susceptibility to runs. The alternatives are not mutually exclusive but could potentially be implemented in combination. For example, sponsors could manage funds that have floating NAVs as well as stable NAV funds with the appropriate enhanced structural protections. The Council recognizes that there may be other reforms it could consider that are not mentioned above that may mitigate risks to financial stability by providing a substantial reduction in the susceptibility of MMFs to runs. Accordingly, in addition to the request for feedback on the proposed recommendations above, the Council also solicits comment on other possible reforms of MMFs that the Council should consider for its final recommendation."

​

Charles Schwab Corp., the 5th largest manager of money market funds with $​154 billion, appears to have broken ranks with most other major money fund managers and endorsed a compromise involving a floating NAV for Prime Institutional money funds. In a Friday Wall Street Journal Opinion piece entitled, "Time for Compromise on Money-​Market Reform," and subtitled, "​Not all money-​market funds are created equal. The riskier '​prime' ones should be subject to a variable net-​asset value," President & CEO Walt Bettinger writes, "​It is time to address the challenges that the country faces in a spirit of collaboration and compromise. As a firm serving the needs of millions of individual investors, Charles Schwab believes this includes compromise on money-​market fund reform. A thoughtful and responsible compromise will help restore trust and confidence in our financial markets -- and set an example for other urgent changes that are needed in Washington, D.​C."

Bettinger explains, "​Money-​market funds are a critically important tool for investors to manage their cash. Our firm has vigorously opposed "​reform" proposals that would, in effect, put an end to them. Still, there are reasonable arguments in favor of change. After more than two years of debating the merits of various regulatory proposals, Charles Schwab believes that requiring certain money-​market funds to have a variable net-​asset value is the right thing to do to bring the debate to closure -- and to provide clarity for millions of investors who depend on these financial products."

He says, "​A money-​market fund faces two different kinds of risk. The first is "​breaking the buck" -- when the net-​asset value of its investments falls below $​1. The second kind of risk is a run -- when investors race for the exit by redeeming their shares. Significantly, these two problems are characteristics of prime money-​market funds and, more specifically, prime money markets in which institutions invest.

Bettinger continues, "As far as risk goes, not all money-​market funds are alike. A prime money-​market fund invests in short-​term, fixed-​income securities issued by entities other than U.​S.-​based governments, such as corporations, banks, foreign governments and the like. The problem here is fairly obvious: If a company gets into trouble, a money-​market fund'​s assets can decline and the value of its holdings may no longer equal $​1 per share. But nonprime money-​market funds invest exclusively in securities issued by U.​S.-​based governments -- Treasury bills, U.​S. government agency debt and sometimes debt issued by state governments. These entities present far less risk."

He tells the Journal, "​Now consider the risk of a run. A run occurs when many investors all want out of a fund at the same time, right? Wrong. A run occurs when many investors who also represent a large percentage of the fund'​s total assets all want out of the fund at the same time. In the 2008 financial crisis, there was no evidence -- none -- that retail investors ran from their money-​market funds. Institutional investors did run from their money-​market funds -- thus adding to the financial crisis."

Bettinger adds, "Mary Schapiro, chairman of the Securities and Exchange Commission, explained the problem neatly a few months ago in testimony before Congress. "​Early redeemers tend to be institutional investors with substantial amounts at stake who can commit resources to watch their investments carefully and who have access to technology to redeem quickly," she said. "​This can provide an advantage over retail investors who are not able to monitor the fund'​s portfolio as closely. As a consequence, a run on a fund will result in a wealth transfer from retail investors (​including small businesses) to institutional investors.""

He explains, "When you lay out these facts, the solutions are pretty simple. Most objective observers would say that money-​market funds investing exclusively in U.​S. Treasury instruments, U.​S. government agency paper or debt issued by states have minimal credit risk. These "​nonprime" money-​market funds should continue to operate as they do now with careful oversight, transparency, regulation by the SEC and a stable $​1 per share net-​asset value. But prime money-​market funds do have a degree of potential credit risk that could arise in extreme capital-​market credit crises. And the reaction of institutional investors in these funds to this credit risk creates a potential for runs."

Bettinger writes, "Retail and institutional prime funds should be treated in ways that reflect their risk. Institutional prime money-​market funds -- meaning any fund in which a shareholder owns more than a defined percentage of the fund -- should be subject to a variable net-​asset value that would immediately reflect losses from credit events. The defined percentage should be determined after careful analysis. The fund'​s price should be reported at the end of the day, just like other kinds of mutual funds."

He adds, "But resolving the tax and accounting issues that arise upon switching to a variable net-​asset value system is critical. In today'​s environment, operating at a static $​1 net-​asset value, investors can sell shares as often as they need from a money-​market fund each day without creating taxable events. This simplicity is central to a money-​market fund'​s usefulness. Variable net-​asset valuation creates taxable events for every transaction, adding enormous complexity."

Finally, Bettinger writes, "Retail prime money-​market funds, in which all shareholders have less than a determined percentage of shares, should be permitted to maintain their stable $​1 per share price. But they should be subject to additional oversight, including enhanced transparency and disclosure standards. As a manager of both types of funds, Charles Schwab realizes this will considerably complicate the business model. But the company believes it is manageable -- and a compromise on the issue of variable net-​asset value is necessary for the good health of our industry and the economy."

​

At this week'​s European Money Fund Summit, which took place in Frankfurt, Germany on Monday and Tuesday, Moody'​s Investors Service unveiled an update entitled, "JPMorgan Liquidity Funds: Launch of Share Class aims to Manage Low/​Negative Yields." The piece says, "In response to the European Central Bank'​s decision to lower its deposit facility rate to zero in July, and the potential risk of further rate cuts, JPMorgan Asset Management has launched a new type of share class in two of its Euro-​denominated money market funds (​MMFs) replacing the existing distributing share class. The new flex distributing share class will be introduced in two sub-​funds of the JPMorgan Liquidity Funds umbrella: the Euro Liquidity Fund (​rated Aaa-​mf) and the Euro Government Liquidity Fund (​rated Aaa-​mf) and will effectively replace the Funds' distributing share class. The existing distributing share classes in the Euro Government Liquidity Fund will close on 19 November and on 19 December for the Euro Liquidity Fund."

Moody'​s explains, "Current shareholders of the existing distributing share class are offered the following choices (​1) switch into the new flex distributing share class; (​2) switch into the existing accumulating share class; or (​3) redeem their shares. Based on the current portfolio characteristics of the Funds, we rate the Funds Aaa-​mf. The ratings on the Funds are not expected to be changed solely due to the Share Conversion, based on: 1. The Funds' offer to their current distributing class shareholders to redeem their shares at par before the S hare Conversion date; 2. JP Morgan Asset Management'​s plan to maintain sufficient liquidity to ensure that all redemption requests from investors of the distributing share class can be settled timely at par; and 3. JP Morgan Asset Management'​s commitment to maintain a portfolio credit profile and a portfolio stability profile consistent with Aaa-​mf characteristics throughout the Share Conversion process. Until the Share Conversion takes place, we will closely monitor the Funds' liquidity position and out flows to detect any liquidity pressure that might impact the Funds' ratings."

The update continues, "[​O]​ver the past two years, the persistently low yields offered by high-​quality, short-​term investments have remained a challenge for MMF managers seeking to generate a positive yield whilst maintaining a stable NAV and providing daily liquidity for their investors. The ECB'​s decision to lower its deposit rate to 0.​00% on 5 July 2012 has driven yields on high-​quality, short-​term cash instruments into negative territory in Europe. This movement of yields on high-​quality, short-​term investments into negative territory has exerted further pressure on MMF managers to maintain investor principal, whilst also providing them with access to daily liquidity and exposure to the lowest overall credit risk."

Moody'​s adds, "To date, the Funds have not invested in securities with a negative yield and JPMorgan Asset Management is targeting to keep the gross yields of the Funds above zero after the introduction of the new share class unless a trigger event pushes levels further down. In response to this anticipated negative-​yield environment, MMF managers have started taking various actions -- beyond fee waivers -- that include restricting subscriptions, restructuring or closing down funds."

The piece says, "In this context, JPMorgan Asset Management, amongst other fund managers such as Goldman Sachs Asset Management, BlackRock, and others, decided to restrict subscriptions into its two Euro-​denominated MMFs in July, whereby no new investments would be accepted, whether from new or existing shareholders. This strategy deferred the impact of low yields by reducing the immediate need to buy into the very-​low-​yield market environment."

Finally, Moody'​s Vanessa Roberts and Yaron Earnt write, "Furthermore, in anticipation of the potential risk that the ECB might make further rate cuts, JPMorgan Asset Management announced on 17 October that the structure of these two Funds will be changed with the introduction of a new share class with a reduced-​share mechanism and the closure of the existing distributing share class. The share class closure will be effective on 19 November for the Euro Government Liquidity Fund and 19 December for the Euro Liquidity Fund." (​See also our Crane Data Oct. 19 News "​World Turned Upside Down: JPM Flex Class For Negative Euro Rates".)

​

The Financial Stability Board (​FSB), which was "​established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability," published "an initial integrated set of policy recommendations to strengthen oversight and regulation of the shadow banking system. The documents include "An Integrated Overview of Policy Recommendations; a Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities; and Policy Recommendations to Address Shadow Banking Risks in Securities Lending and Repos. The FSB also issued a Global Shadow Banking Monitoring Report 2012 "​analysing recent trends and risks in the shadow banking system," says a statement.

The FSB'​s Overview says, "The Financial Stability Board (​FSB) is seeking comments on consultative documents on Strengthening Oversight and Regulation of Shadow Banking. The FSB has focused on five specific areas in which the FSB believes policies are needed to mitigate the potential systemic risks associated with shadow banking: (​i) to mitigate the spill-​over effect between the regular banking system and the shadow banking system; (​ii) to reduce the susceptibility of money market funds (​MMFs) to "​runs"; (​iii) to assess and mitigate systemic risks posed by other shadow banking entities; (​iv) to assess and align the incentives associated with securitisation; and (​v) to dampen risks and pro-​cyclical incentives associated with secured financing contracts such as repos, and securities lending that may exacerbate funding strains in times of "​runs"."

The FSC says, "The "​shadow banking system" can broadly be described as "​credit intermediation involving entities and activities (​fully or partially) outside the regular banking system" or non-​bank credit intermediation in short. Such intermediation, appropriately conducted, provides a valuable alternative to bank funding that supports real economic activity. But experience from the crisis demonstrates the capacity for some non-​bank entities and transactions to operate on a large scale in ways that create bank-​like risks to financial stability (​longer-​term credit extension based on short-​term funding and leverage). Such risk creation may take place at an entity level but it can also form part of a complex chain of transactions, in which leverage and maturity transformation occur in stages, and in ways that create multiple forms of feedback into the regulated banking system."

It continues, "Like banks, a leveraged and maturity-​transforming shadow banking system can be vulnerable to "​runs" and generate contagion risk, thereby amplifying systemic risk. Such activity, if unattended, can also heighten procyclicality by accelerating credit supply and asset price increases during surges in confidence, while making precipitate falls in asset prices and credit more likely by creating credit channels vulnerable to sudden losses of confidence. These effects were powerfully revealed in 2007-​09 in the dislocation of asset-​backed commercial paper (​ABCP) markets, the failure of an originate-​to-​distribute model employing structured investment vehicles (​SIVs) and conduits, "​runs" on MMFs and a sudden reappraisal of the terms on which securities lending and repos were conducted. But whereas banks are subject to a well-​developed system of prudential regulation and other safeguards, the shadow banking system is typically subject to less stringent, or no, oversight arrangements."

The Policy Framework explains, "The objective of the FSB'​s work is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-​like risks to financial stability emerging outside the regular banking system while not inhibiting sustainable non-​bank financing models that do not pose such risks. The approach is designed to be proportionate to financial stability risks, focusing on those activities that are material to the system, using as a starting point those that were a source of problems during the crisis. It also provides a process for monitoring the shadow banking system so that any rapidly growing new activities that pose bank-​like risks can be identified early and, where needed, those risks addressed. At the same time, given the interconnectedness of markets and the strong adaptive capacity of the shadow banking system, the FSB believes that proposals in this area necessarily have to be comprehensive."

The document adds, "Policy recommendations for MMFs are have been developed by a separate FSB shadow banking workstream (​WS2) led by IOSCO. See http://​www.​iosco.​org/​library/​pubdocs/​pdf/​IOSCOPD392.​pdf."

The FSC Repo document comments, "Based on the initial recommendations to strengthen oversight and regulation of the shadow banking system as set out in its report submitted to the G20 in October 20114, the Financial Stability Board (​FSB) set up the Workstream on Securities Lending and Repos (​WS5) to assess financial stability risks and develop policy recommendations, where necessary, by the end of 2012 to strengthen regulation of securities lending and repos. In April 2012, WS5 published its interim report Securities Lending and Repos: Market Overview and Financial Stability Issues which provided an overview of the securities lending and repos markets, described their location in the shadow banking system, and discussed the financial stability issues arising from practices in these markets. Comment letters were received from 17 respondents including trade associations representing both securities borrowers and lenders, intermediaries in the securities lending and repo markets, and asset managers. In general, the respondents supported the FSB'​s efforts to address risks that are inherent in the securities lending and repo markets, but asked for care in weighing the pros and cons as well as assessing the potential impact of any policy measures that might be introduced and existing regulations that may mitigate potential financial stability concerns."

They add, "In developing its policy recommendations, WS5'​s focus was on addressing the financial stability issues as described in Section 1. They are based on issues discussed in the interim report but with more focus on shadow banking risks so as to have a clear mapping to policy recommendations. WS5 has endeavoured to ensure that its recommendations minimise the risk of regulatory arbitrage as well as undue distortion of markets, and are consistent with other international regulatory initiatives."

The Overview adds, "The FSB welcomes comments on these documents. Comments should be submitted by 14 January 2013 by email to fsb@​bis.​org or post (Secretariat of the Financial Stability Board, c/​o Bank for International Settlements, CH-​4002, Basel, Switzerland). All comments will be published on the FSB website unless a commenter specifically requests confidential treatment. The FSB expects to publish final recommendations in September 2013.

​

A statement entitled, "Sen. Toomey Criticizes FSOC Recommendations On Money Market Funds was released by Senator Pat Toomey'​s office last week. The release says, "U.​S. Senator Pat Toomey (​R-​Pa.) criticized the proposed money market fund regulations released by the Financial Stability Oversight Council (​FSOC) today." Toomey says, "FSOC'​s proposed regulations are a mistake, just as they were when SEC Chairwoman Mary Schapiro proposed them. Some regulators mistakenly believe that it is their responsibility to make it impossible for any money market fund to '​break the buck.' But it should not be the goal of government regulators to overregulate for the sake of trying to prevent any and all risks. Regulation should instead focus on limiting systemic risk and providing adequate disclosure to investors, while allowing individual investors to make their own choices about where to invest their money and the risk they want to assume."

He explains, "​Furthermore, money market funds offer investors and borrowers a stable and highly liquid financial instrument that plays an important role in our economic system. Money market funds play a critical role in meeting the short-​term capital needs of American businesses, from small manufacturers to large corporations. Also, many households in Pennsylvania and across the country use these funds to earn a modest return on their money. The proposed regulations would significantly shrink the industry and would result in less borrowing, less economic growth, less investment options for households, and ultimately fewer jobs."

Toomey adds, "I urge FSOC to follow the SEC'​s bipartisan lead in eschewing these proposed regulations. The SEC has overseen the regulation of money market funds for four decades, and it understands the product best. I also urge the Senate Banking Committee to convene a hearing to review the cost-​benefit of these proposals before moving forward. I look forward to questioning Secretary Geithner, Chairman Bernanke, Chairwoman Schapiro and other members of FSOC on whether these fundamental changes are in the best interest of investors and the economy as a whole."

The release tells us, "Sen. Toomey has been at the forefront of the debate over the new regulations, joining with Sens. Michael Bennet (​D-​Colo.), Mike Crapo (​R-​Idaho), Mark Kirk (​R-​Ill.), Bob Menendez (​D-​N.​J.) and Jon Tester (​D-​Mont.) to send a bipartisan letter to SEC Chairwoman Mary Schapiro urging caution in moving forward with the proposed regulations. The senator also met with SEC commissioners, arguing that the money market fund industry is a stable and important financial instrument that has thrived for decades."

In other news, the Investment Company Institute posted a new "Viewpoint" piece last week entitled, "Do U.​S. Banks Rely Heavily on Money Market Funds? No." ICI Economists Sean Collins and Chris Plantier write, "​Money market funds provide important short-​term funding for the U.​S. economy: these funds hold a total of $​2.​5 trillion in Treasury and agency securities, repurchase agreements, and other financial instruments. In part, money market funds provide funding to the U.​S. economy indirectly by providing funding to banks, both those domiciled in the U.​S. and in Europe. These banks in turn may make loans to borrowers who need dollars."

They explain, "The extent to which money market funds provide funding to banks has become a key topic in the debate about money market funds and systemic risks to the financial system. Experts have offered widely varying estimates on this issue, based on different approaches. In this post, we'​ll take a closer look at two approaches, focusing on U.​S. banks."

ICI says, "Some observers estimate that money market funds represent a substantial source of U.​S. bank funding -- on the order of 25 percent.... It is unclear, however, that the first approach can meaningfully add to the debate about money market funds and systemic risks to the financial system. The reason is that U.​S. banks are not particularly dependent on wholesale dollar funding. U.​S. banks obtain funding in a number of other important ways, notably from a large base of retail deposits. Broadening U.​S. banks' funding base to include all of their liabilities -- commercial paper, certificates of deposit, repurchase agreements, federal funds, demand deposits, capital, small time and savings accounts, and other miscellaneous liabilities -- we calculate that money market funds contributed just 2.​1 percent to U.​S. banks' total funding. In other words, money market funds' holdings of bank instruments made up 2.​1 percent of banks' total liabilities."

Finally, they add, "Money market funds did provide more than $​900 billion in short-​term dollar financing to foreign banks in June 2012 -- a considerable amount, but only a small percentage of the total size of foreign banks. This funding supports lending that benefits the U.​S. economy. For example, more than half of the primary dealers in U.​S. Treasury debt auctions are foreign banks, many of which rely on money market fund financing to help them purchase U.​S. government debt. Moreover, large global banks -- including European ones -- play a vital role in financing U.​S. exports, traditionally a key priority for the U.​S. government. Global banks also help in providing and structuring financing for U.​S. state and local governments. It is worth keeping these benefits in mind when discussing the impact of further money market fund reforms."

Note: ICI'​s Sean Collins will join Crane Data'​s Peter Crane Monday, November 19, in Frankfurt to speak on the "State of the U.​S. Money Fund Industry (​and its implications for Europe)" at the European Money Fund Summit.

​

While money fund investors have yet to be heard from, money market analysts and managers continue to ponder, analyze, and comment on the Financial Stability Oversight Council'​s recent "​Proposed Recommendations Regarding Money Market Mutual Fund Reform". Yesterday, two more opinions were published, a "​Short-​Term Fixed Income Markets Research Note" from J.​P. Morgan Securities ("​Money fund reform: Enter the FSOC") and an update from Moody'​s Investors Service, "​Financial Stability Oversight Council Recommendations are Credit Negative for MMF managers, Positive for Investors"). J.​P. Morgan'​s Alex Roever writes, under "Try, try again," "​On Tuesday, November 13, the Financial Stability Oversight Council (​FSOC) met to discuss the case for further reforms for money market funds (​MMFs). After a brief meeting, the FSOC voted unanimously to release "​Proposed Recommendations Regarding Money Market Fund Reform", outlining possible reforms alternatives. The FSOC is seeking public comment on its proposals over the next 60 days. Following the public comment period, the FSOC will then consider the comments and may issue a final recommendation to the SEC, which, pursuant to the Dodd-​Frank Act, would be required to impose the recommended standards, or similar standards that the FSOC deems acceptable, or explain in writing to the FSOC within 90 days why it has determined not to follow the recommendation."

Roever, and fellow authors Teresa Ho and Chong Sin, explain, "​Having followed the MMF reform saga for years, we have no doubt that the FSOC will, after receiving and digesting public comment, send an official recommendation to the SEC. We suspect its recommendation will look a lot like the just published alternatives. While we believe the FSOC will diligently review what the public has to say, they have been listening to the public on these issues for at least two years (​since October 2010 when the SEC issued a formal request for public comment on the MMF reform whitepaper produced by FSOC'​s earlier incarnation, the President'​s Working Group on Financial Reform). They have likely heard it all before, and their accumulated understanding of the issues is reflected in these published alternatives."

They add, "We interpret the FSOC'​s actions as an attempt to get the SEC, in its role as the primary regulator of MMFs, to affect further reforms. These actions will increase political pressure on the three SEC commissioners that voted against the public release of these proposals, or proposals very much like these, in August. It is currently unclear whether any of the three dissenters (​Republicans Troy Paredes and Daniel Gallagher, as well as Democrat Luis Aguilar) have changed their position since August. Aguilar released a statement on August 23, explaining his reasons for resisting Shapiro'​s proposal, including a need to better understand the impact the 2010 amendments to Rule 2a-​7 have already had on the stability of MMFs. Parades and Gallagher jointly released a statement on August 29 detailing their objections against what are essentially these same reforms proposed in the FSOC release."

Finally, Roever and Co. comment, "As all of this suggests, even if the FSOC'​s proposal can get through the SEC, it will be months before any changes become effective.... The process is potentially lengthened this time by the SEC'​s 90-​day response window. But even assuming the process gets through, the scale of reforms proposed in the FSOC'​s release will take many months to implement. For example, developing, testing and implementing the systems necessary to convert MMF from stable to variable NAV could conceivably take a year, or maybe more. As a consequence, we doubt there will be floating MMF NAV conversions in 2013. Of course, there is also the possibility that SEC commissioners continue to resist these reforms. With everything else that the Dodd-​Frank Act put on the SEC'​s plate, we wonder if MMF reform will become a policy litmus test for commissioner candidates during Senate confirmations."

A press release announcing Moody'​s update, entitled, "Moody'​s: Financial Stability Oversight Council recommendations are credit negative for MMF managers, positive for investors, explains, "The Financial Stability Oversight Council'​s (​FSOC) proposals, if adopted, would structurally reform US money market funds (​MMFs) impacting profitability and shrinking assets under management, says Moody'​s Investors Service in its new sector comment, entitled "​Financial Stability Oversight Council Recommendations are Credit Negative for MMF managers, Positive for Investors". The three options include (​1) the introduction of a floating net asset value (​NAV), (​2) the use of a small capital buffer while limiting investor redemptions, and (​3) a larger capital buffer without limitation on redemptions. While credit negative for MMF managers, Moody'​s says that MMF investors will benefit from stronger fund stability during times of stress."

Moody'​s continues, "These reforms are aimed at addressing the structural vulnerabilities that leave MMFs susceptible to destabilizing runs, and apply to prime, US government and tax-​free MMFs, but not to US Treasury funds. Certain reforms in 2010 to Rule 2a-​7 in the US, and similar reforms in Europe improved MMFs' resilience and transparency but did not resolve entirely regulator concerns about the systemic risk of runs in times of stress, says Moody'​s."

VP & Senior Analyst Michael Eberhardt, says, "The FSOC proposals are credit negative for MMF managers at a time when the economics of managing a MMF are already challenged by the present low yield environment. But for investors, the FSOC proposals offer safeguards beyond the SEC'​s 2010 reforms; further insulating investors from potential losses and reduction of the run risk in a pooled MMF."

The release adds, "Although a credit positive for investors, this safety comes at investors' expense in the case of stricter redemption limits and added costs passed on by MMFs, added Eberhardt. Limitations on investor ability to fully redeem investments will likely cause lower investment in MMF'​s, reducing industry AUM, while the additional infrastructure required by a floating NAV requirement will increase costs, says Moody'​s."

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Negative reaction continues over the release of the Financial Stability Oversight Council'​s "​Proposed Recommendations Regarding Money Market Mutual Fund Reform". We mentioned the ICI'​s response in yesterday'​s "Link of the Day," but the Chamber of Commerce also released a statement. Entitled, "U.​S. Chamber Warns Against Flawed FSOC Process, Recommendations on Money Market Regulation," and subtitled, "'​FSOC should allow SEC to consider other approaches that would strengthen rather than severely weaken money market mutual funds' Hirschmann Says." The Chamber explain, "David Hirschmann, president and chief executive officer of the U.​S. Chamber'​s Center for Capital Markets Competitiveness, today issued the following statement on the release from the Financial Stability Oversight Council (​FSOC) of draft recommendations to the Securities and Exchange Commission (​SEC) to advance additional reforms to money market mutual funds."

He says, "The FSOC is repeating the SEC'​s same flawed process by outlining proposals that would tear down a vital source of financing for American companies, cities and states. Once again, regulators have put the cart before the horse -- proposing solutions without clearly defining the specific problems they are addressing, without studying the impact of sweeping reforms already adopted by the SEC in 2010, and without examining the impact of their proposals on corporate, state and municipal funding. Regulators have repeatedly indicated they agree that money market funds are an essential source of financing for companies, cities, and states, and yet they have focused all their attention on a narrow group of proposals that would fundamentally make the product unusable."

Hirschmann continues, "Instead of acting now and simply re-​hashing the same proposals that were not supported by a bipartisan majority of the SEC, members of the FSOC should have allowed the SEC to consider other approaches that would strengthen rather than severely weaken money market mutual funds. Failure to consider and study options that would strengthen rather than destroy the product is regulatory malpractice. This action reinforces to investors and issuers that regulators simply want to fundamentally alter the structure and use of money market mutual funds until they are no longer a viable investment tool. What they should be doing is preserving the utility and strengthening the resiliency of this product that is a vital means of cash management for millions of investors -- including retirees, universities, state and local governments, and businesses -- and borrowers."

He adds, "We are deeply disappointed that the FSOC chose to ignore very serious, legal procedural issues raised in recent letters and proceed prematurely with recommendations. The FSOC interjecting itself in an investment security issue that is clearly under the SEC'​s jurisdiction sets a troubling precedent for any independent agency. All five SEC Commissioners have indicated that they are willing to consider additional regulations."

Finally, Hirschmann says, "With legislatively mandated rules grossly behind schedule and unprecedented fiscal cliff negotiations and uncertainty pressing, it seems the FSOC members have taken their eye off the ball by focusing on unnecessary, additional regulations on a vital, transparent and resilient investment product."

In other news, the SEC has once again begun posting Comment Letters to the President'​s Working Group Report on Money Market Fund Reform (​Request for Comment) after a 2-​month hiatus. Among the serious new additions are Scott Goebel of Fidelity Investments' letter to the European Commission on UCITS and money funds and John Hawke of Arnold Porter on the adverse consequences of a floating NAV.

Fidelity writes, "Enclosed is a copy of comments that Fidelity Investments submitted to the European Commission on its consultation document on Undertakings for Collective Investment in Transferable Securities; Product Rules, Liquidity Management, Depositary, Money Market Funds, Long-​term Investments. The Consultation Document sought comment on a variety of topics, including possible reforms to money market funds, much like the President'​s Working Group Report on Money Market Fund Reform, but on a global level. As we have outlined in the attached letter, U.​S. money market mutual funds currently are subject to a comprehensive regulatory framework and to oversight by the Commission. We believe that the Commission'​s robust regulation and oversight of money funds has been very successful and the Commission'​s 2010 amendments to its rules governing money funds have made them even more liquid, transparent and stable than ever before."

He adds, "We believe that some minimum international standard must exist for consistent treatment and management of money market funds under a global regulatory framework. However, we realize that money market fund regulation has developed in different markets based on differences in relative size and maturity of national economies. It is important for regulators to recognize these differences within their jurisdictions, which may necessitate varying regulation. Accordingly, our recommendation to the EC and other regulators globally is to consider certain key features and principles that offer the greatest protections to investors while enabling money market funds to play an important role in the capital markets. These practices include constraints on the liquidity, maturity, diversification, and credit quality of money market funds, as well as transparency and clear governance requirements, all of which have proven effective in increasing the resilience of money market mutual funds in the U.​S."

Hawke'​s letter says, "Attached is an analysis of the potential adverse economic consequences of proposals to require money market mutual funds to "​float" their net asset values (​NAVs). This analysis is derived principally from letters, surveys, reports and other data submitted to the Commission through its comment file on the President'​s Working Group Report on Money Market Mutual Fund Reform Options and its comment file on the 2010 amendments to Rule 2a-​7."

​

On Tuesday, the Financial Stability Oversight Council issued a "Proposed Recommendations Regarding Money Market Mutual Fund Reform." The 72-​page document says, "Reforms to address the structural vulnerabilities of money market mutual funds ("​MMFs" or "​funds") are essential to safeguard financial stability. MMFs are mutual funds that offer individuals, businesses, and governments a convenient and cost-​effective means of pooled investing in money market instruments. MMFs are a significant source of short-​term funding for businesses, financial institutions, and governments. However, the 2007–​2008 financial crisis demonstrated that MMFs are susceptible to runs that can have destabilizing implications for financial markets and the economy." (See the FSOC Meeting webinar here.)

It explains, "The Securities and Exchange Commission ("​SEC") took important steps in 2010 by adopting regulations to improve the resiliency of MMFs (​the "​2010 reforms"). But the 2010 reforms did not address the structural vulnerabilities of MMFs that leave them susceptible to destabilizing runs. These vulnerabilities arise from MMFs' maintenance of a stable value per share and other factors as discussed below. MMFs' activities and practices give rise to a structural vulnerability to runs by creating a "​first-​mover advantage" that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to an MMF'​s value or liquidity. Because MMFs lack any explicit capacity to absorb losses in their portfolio holdings without depressing the market-​based value of their shares, even a small threat to an MMF can start a run. In effect, first movers have a free option to put their investment back to the fund by redeeming shares at the customary stable share price of $​1.​00, rather than at a price that reflects the reduced market value of the securities held by the MMF."

The FSOC proposal continues, "The broader financial regulatory community has focused substantial attention on MMFs and the risks they pose. Both the President'​s Working Group on Financial Markets ("​PWG") and the Financial Stability Oversight Council ("​Council") called for additional reforms to address the structural vulnerabilities in MMFs, through the PWG'​s 2010 report on Money Market Fund Reform Options and unanimous recommendations in the Council'​s 2011 and 2012 annual reports, respectively. In October 2010, the SEC issued a formal request for public comment on the reforms initially described in the PWG report, and in May 2011 the SEC hosted a roundtable on MMFs and systemic risk in which several Council members and their representatives participated. However, in August 2012, SEC Chairman Schapiro announced that the SEC would not proceed with a vote to publish a notice of proposed rulemaking to solicit public comment on potential structural reforms of MMFs."

It adds, "Under Section 120 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act (​the "​Dodd-​Frank Act"), if the Council determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of a financial activity or practice conducted by bank holding companies or nonbank financial companies could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, the financial markets of the United States, or low-​income, minority, or under-​served communities, the Council may provide for more stringent regulation of such financial activity or practice by issuing recommendations to a primary financial regulatory agency to apply new or heightened standards or safeguards. The recommended standards and safeguards are required by Section 120 to take costs to long-​term economic growth into account, and may include prescribing the conduct of the activity or practice in specific ways, such as applying particular capital or risk-​management requirements."

FSOC writes, "The Council is proposing to use this authority to recommend that the SEC proceed with much-​needed structural reforms of MMFs. There will be a 60-​day public comment period on the proposed recommendations. The Council will then consider the comments and may issue a final recommendation to the SEC, which, pursuant to the Dodd-​Frank Act, would be required to impose the recommended standards, or similar standards that the Council deems acceptable, or explain in writing to the Council within 90 days why it has determined not to follow the recommendation."

They say, "Pursuant to Section 120, the Council proposes to determine that MMFs' activities and practices could create or increase the risk of significant liquidity, credit, and other problems spreading among bank holding companies, nonbank financial companies, and U.​S. financial markets. This is due to the conduct and nature of the activities and practices of MMFs that leave them susceptible to destabilizing runs; the size, scale, and concentration of MMFs and the important role they play in the financial markets; and the interconnectedness between MMFs, the financial system and the broader economy that can act as a channel for the transmission of risk and contagion and curtail the availability of liquidity and short-​term credit."

FSOC explains, "Based on this proposed determination, the Council seeks comment on the proposed recommendations for structural reforms of MMFs that reduce the risk of runs and significant problems spreading through the financial system stemming from the practices and activities described above. The Council is proposing three alternatives for consideration: Alternative One: Floating Net Asset Value. Require MMFs to have a floating net asset value ("​NAV") per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/​or penny rounding to maintain a stable NAV. The value of MMFs' shares would not be fixed at $​1.​00 and would reflect the actual market value of the underlying portfolio holdings, consistent with the requirements that apply to all other mutual funds."

They continue, "Alternative Two: Stable NAV with NAV Buffer and "​Minimum Balance at Risk." Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-​to-​day fluctuations in the value of the funds' portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would have an appropriate transition period and could be raised through various methods. The NAV buffer would be paired with a requirement that 3 percent of a shareholder'​s highest account value in excess of $​100,​000 during the previous 30 days -- a minimum balance at risk (​MBR) -- be made available for redemption on a delayed basis. Most redemptions would be unaffected by this requirement, but redemptions of an investor'​s MBR itself would be delayed for 30 days. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, creating a disincentive to redeem and providing protection for shareholders who remain in the fund. These requirements would not apply to Treasury MMFs, and the MBR requirement would not apply to investors with account balances below $​100,​000."

They continue, "Alternative Three: Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-​based NAV buffer of 3 percent to provide explicit loss-​absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The NAV buffer would have an appropriate transition period and could be raised through various methods. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, the Council could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly."

FSOC explains, "These proposed recommendations are not necessarily mutually exclusive but could be implemented in combination to address the structural vulnerabilities that result in MMFs' susceptibility to runs. For example, MMFs could be permitted to use floating NAVs or, if they preferred to maintain a stable value, to implement the measures contemplated in Alternatives Two or Three. Other reforms, not described above, may be able to achieve similar outcomes. Accordingly, the Council seeks public comment on the proposed recommendations and other potential reforms of MMFs. Comments on other reforms should consider the objectives of addressing the structural vulnerabilities inherent in MMFs and mitigating the risk of runs. For example, some stakeholders have suggested features that only would be implemented during times of market stress to reduce MMFs’ vulnerability to runs, such as standby liquidity fees or gates. Commenters on such proposals should address concerns that such features might increase the potential for industry-​wide runs in times of stress."

Finally, FSOC adds, "The Council recognizes that regulated and unregulated or less-​regulated cash management products (​such as unregistered private liquidity funds) other than MMFs may pose risks that are similar to those posed by MMFs, and that further MMF reforms could increase demand for non-​MMF cash management products. The Council seeks comment on other possible reforms that would address risks that might arise from a migration to non-​MMF cash management products. Further, the Council is not considering MMF reform in isolation. The Council and its members intend to use their authorities, where appropriate and within their jurisdictions, to address any risks to financial stability that may arise from various products within the cash management industry in a consistent manner. Such consistency would be designed to reduce or eliminate any regulatory gaps that could result in risks to financial stability if cash management products with similar risks are subject to dissimilar standards. In accordance with Section 120 of the Dodd-​Frank Act, the Council has consulted with the SEC staff. In addition, the standards and safeguards proposed by the Council take costs to long-​term economic growth into account."

The announcement also says, "Interested persons are invited to submit comments on all aspects of Proposed Recommendations Regarding Money Market Mutual Fund Reform according to the instructions below. All submissions must refer to docket number FSOC-​2012-​0003. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at http://​www.​regulations.​gov. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt, and enables the Council to make them available to the public. Comments submitted electronically through http://​www.​regulations.​gov can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically."

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Another batch of filings to liquidate money funds appeared recently, including the Pyxis Money Market Fund and several small Dreyfus State Muni money funds, we learned from mutual fund news source ignites. Pyxis, formerly the Highland (​and previously GE retail) funds, ranks 72 out of 73 money fund managers tracked by Crane Data'​s Money Fund Intelligence XLS with just $​76 million, including the $​60 million Pyxis Money Market II A (​HAHXX) and $​16 million Pyxis Money Market II Inst (​HIHXX). Dreyfus will liquidate several of its smallest municipal funds, including the $​96 million Dreyfus MA Muni Money Market Fund (​DMAXX), the $​126 million Dreyfus PA Muni MMF (​DPAXX) and the $​50 million Dreyfus Basic NJ Muni MMF (​DBJXX). Finally, BNY Mellon has announced the pending liquidation of its "​offshore" Euro Liquidity Fund.

The Pyxis Prospectus Supplement says, "On October 25, 2012, the Board of Trustees of Pyxis Funds II, on behalf of Pyxis Money Market Fund II, a series of Pyxis Funds II, upon the recommendation of the Fund'​s adviser, Pyxis Capital, L.​P., approved a plan to liquidate the Fund, such liquidation to take place on or about December 21, 2012. Any shares of the Fund outstanding on the Liquidation Date will be automatically redeemed on that date.... It is expected that, on or about December 21, 2012, the cash proceeds of the liquidation will either be distributed to shareholders of the Fund at $​1.​00 per share in a complete redemption of their shares or, for investors that hold shares of the Fund through a Pyxis Funds Individual Retirement Account, reinvested in an equivalent amount of shares at $​1.​00 per share in the Pyxis Money Market Fund (​Bedford Shares of the Money Market Portfolio of the RBB Fund, Inc.)."

The Dreyfus MA Muni filing explains, "The Board of Trustees of Dreyfus Massachusetts Municipal Money Market Fund has approved the liquidation of Fund, effective on or about December 19, 2012. Accordingly, effective on or about November 26, 2012, 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 The Dreyfus Corporation and established the Fund as an investment option in the plan before the Closing Date."

The PA Muni filing comments, "The Board of Trustees of Dreyfus Pennsylvania Municipal Money Market Fund has approved the liquidation of Fund, effective on or about December 20, 2012. Accordingly, effective on or about November 26, 2012, 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 The Dreyfus Corporation and 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, except that subsequent investments made by check or pursuant to Dreyfus TeleTransfer or Dreyfus Automatic Asset Builder no longer will be accepted after November 29, 2012."

Dreyfus BASIC NJ Muni MMF'​s filing says, "The Board of Directors of Dreyfus Municipal Funds, Inc. has approved the liquidation of Dreyfus BASIC New Jersey Municipal Money Market Fund, a series of Dreyfus Municipal Funds, Inc., effective on or about December 21, 2012. Accordingly, effective on or about November 26, 2012, 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 The Dreyfus Corporation and established the Fund as an investment option in the plan before the Closing Date."

Euro money market funds continue to shrink too -- Moody'​s also recently noted that BNY Mellon Euro Liquidity Fund has announced its liquidation. It says in a release, "​Moody'​s has affirmed the Aaa-​mf rating assigned to BNY Mellon Euro Liquidity Fund, a Short Term Money Market Fund, which is a sub-​fund of BNY Mellon Liquidity Funds plc, an open ended umbrella type investment company which is authorized by the Central Bank of Ireland, pursuant to the UCITS Regulations. The Fund has announced a plan to redeem all shareholder interests and close on 26 November 2012. The Moody'​s affirmation is based on the expectation that the Fund, as currently structured and managed, will meet all shareholder redemption requests in full prior to and upon the closure of the Fund. This action follows the 8 November 2012 announcement that the Fund'​s board of directors, in concert with the investment advisor of the Fund, The Dreyfus Corporation, has decided to close the Fund, having determined that it is no longer economically viable to continue to operate the Fund under current market conditions following the European Central Bank'​s decision to cut its deposit interest rate to zero in July 2012."

For the last article on consolidation, see our Crane Data Oct. 25 News "​Reich and Tang Acquires Value Line US Government Money Market Fund". We'​ve also written about liquidations in the Euro money market space -- see our August 21 News "​BofA to Close and Liquidate Global Liquidity Euro Money Fund".

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Crane Data'​s latest Money Fund Portfolio Holdings dataset, with data as of October 31, 2012, were released to Money Fund Wisdom subscribers Friday. Our latest collection shows money market securities held by Taxable U.​S. money funds increased by $​31.​0 billion in October to $​2.​304 trillion. Following last month'​s quarter-​end plunge (-$​67.​9 billion), Repurchase Agreements held by money funds soared $​81.​0 billion to $​595.​5 billion, a record-​high 25.​9% of assets (​up 3.​2% in overall share). Also, reversing their quarter-​end increases, Government Agency Debt fell by $​20.​4 billion to $​305.​0 billion (​13.​2% of assets, down 1.​1% of share) and Certificates of Deposit (​CDs) fell by $​21.​7 billion to $​413.​6 billion (​18.​0% of assets, down from 19.​2%). European-​affiliated holdings (​includes repo) jumped in October, rising $​56.​4 billion to $​700.​8 billion, or 30.​4% of securities, and Eurozone-​affiliated holdings also jumped by $​53.​9 billion in October and now account for 15.​1% of overall taxable money fund holdings ($​347.​6 billion). The largest increases among Issuers of money market securities (​including Repo) were shown by Societe Generale (​up $​24.​3 billion to $​55.​6 billion), Deutsche Bank (​up $​19.​0B to $​80.​0B), and BNP Paribas (​up $​14.​3B to $​47.​8B), while Federal Home Loan (​down $​14.​6B to $​142.​8B), Barclays Bank (​down $​14.​6B to $​69.​8B) and Bank of Montreal (​down $​11.​1B to $​23.​2B) all showed sharp declines in issuance.

Repo widened its lead as the largest segment of taxable money fund holdings in October 2012; total repo was comprised of 13.​9% (​of total holdings) Government Agency Repurchase Agreements ($​321.​1 billion), 8.​4% Treasury Repurchase Agreements ($​193.​7 billion), and 3.​6% of Other Repurchase Agreements ($​81.​7 billion). Treasury Debt remains the second largest holding though it fell by $​3.​8 billion (​0.​4%) to $​459.​5 billion (​19.​9% of taxable assets). Certificates of Deposit (​CDs) remain the third largest segment; they fell by $​21.​7 billion (-​1.​2%) to $​413.​6 billion (​18.​0% of taxable holdings). Commercial Paper still ranks fourth, with the combined total of Financial Company Commercial Paper'​s 8.​1% ($​185.​9 billion), Asset Backed Commercial Paper'​s 4.​6% ($​105.​6 billion), and Other Commercial Paper'​s 2.​2% ($​51.​5 billion). Government Agencies are the fifth-​largest portfolio composition segment at 13.​2% ($​305.​0B), "​Other" Instruments (​including Time Deposits and Other Notes) are the sixth largest sector with $​126.​6 billion (​5.​5%) and VRDNs (​including Other Muni Debt) were the smallest segment with $​59.​8 billion (​2.​6% of holdings) in October.

The 20 largest Issuers to taxable money market funds as of Oct. 31, 2012, include the US Treasury (​20.​0%, $​459.​7 billion), Federal Home Loan Bank (​6.​2%, $​142.​8 billion), Deutsche Bank AG (​3.​5%, $​80.​0B), Barclays Bank (​3.​0%, $​69.​8B), Credit Suisse (​2.​9%, $​67.​7B), Bank of America (​2.​9%, $​66.​7B), Federal Home Loan Mortgage Co (​2.​9%, $​65.​6B), Federal National Mortgage Association (​2.​8%, $​65.​1B), Bank of Tokyo-​Mitsubishi UFJ Ltd (​2.​5%, $​56.​6B), Societe Generale (​2.​4%, $​55.​6B), Sumitomo Mitsui Banking Co (​2.​3%, $​53.​4B), `​RBC (​2.​2%, $​51.​6B), Bank of Nova Scotia (​2.​1%, $​49.​2B), BNP Paribas (​2.​1%, $​47.​8B), JP Morgan (​2.​1%, $​47.​2B), RBS (​1.​9%, $​43.​8B), Citi (​1.​8%, $​40.​5B), Goldman Sachs (​1.​7%, $​39.​3B), Mizuho Corporate Bank Ltd (​1.​5%, $​35.​2B), and Rabobank (​1.​5%, $​34.​8B).

Looking only at Repurchase Agreements, the 20 largest dealers as of 10/​31 include: Bank of America ($​63.​0B), Deutsche Bank AG ($​60.​8B), Barclays Bank ($​47.​4B), Credit Suisse ($​47.​0B), BNP Paribas ($​40.​9B), RBS ($​39.​7B), Goldman Sachs ($​39.​1B), Societe Generale ($​29.​8B), Citi ($​25.​8B), JP Morgan ($​23.​5B), RBC ($​20.​2B), Credit Agricole ($​19.​3B), Morgan Stanley ($​17.​7B), HSBC ($​17.​5B), Wells Fargo ($​16.​1B), UBS AG ($​15.​1B), ABN Amro Bank ($​13.​8B), Bank of Nova Scotia ($​13.​4B), Mizuho Corporate Bank Ltd ($​11.​1B), and ING Bank ($​10.​6B).

The United States is still the largest segment of country-​affiliations with 50.​0%, or $​1.​152 trillion. Canada (​8.​0%, $​184.​6B), Japan (​7.​2%, $​165.​1B), the UK (​7.​0%, $​162.​1B), and France (​6.​6%, $​151.​4B) remain ranked second through fifth among the largest countries affiliated with U.​S. money fund securities. Germany (​5.​2%, $​118.​6B) jumped ahead of Switzerland (​4.​3%, $​98.​6B), as Deutsche Bank'​s repo rebounded. `​Australia (​4.​0%, $​92.​4B), Netherlands (​3.​2%, $​74.​7B) and Sweden (​3.​1%, $​72.​4B) remained ranked eighth through 10th.

As of Oct. 31, Taxable money funds hold 27.​2% of their assets in securities maturing Overnight, and another 12.​7% maturing in 2-​7 days (​39.​9% total in 1-​7 days). Another 18.​8% matures in 8-​30 days, while 20.​9% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 15.​6% of taxable securities, and just 4.​9% matures beyond 180 days. Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated Friday, while our MFI International "​offshore" Portfolio Holdings and our Tax Exempt MF Holdings will be updated this Wednesday. (​Visit our Content center to download files or visit our Money Fund Portfolio Laboratory to access our "​transparency" module.)

As we mentioned last month, Crane Data is pleased to announce the availability of a new Weekly Money Fund Portfolio Holdings module, a data set of institutional money market funds that provide daily, weekly or twice-​monthly portfolio holdings reports to investors. Let us know if you'​d like to see this new collection, or if you'​d like to see our latest monthly "​Reports & Pivot Tables" Holdings file which the above information is based upon. Finally, for any financial advisors attending Charles Schwab'​s IMPACT Conference in Chicago this week, our Peter Crane will be speaking with Schwab'​s Rick Holland on "What'​s in Your Wallet? Understanding Money Funds."

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A Media Advisory released by the Treasury Department says, "​On Tuesday, November 13, 2012, Treasury Secretary Tim Geithner will preside over an open session of the Financial Stability Oversight Council (​Council). The Council will discuss, among other topics, proposed recommendations regarding money market mutual fund reform pursuant to the Council'​s authority under section 120 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act." The Wall Street Journal broke the news Thursday afternoon in its story, "Money Funds' Plan Falls Flat." The FSOC meeting will be Webcast live at 2:​30pm EST on Nov. 13 (​click here to access). (​Note too that funds will be closed Monday for Veteran'​s Day.)

The Journal says, "A bid by money funds to head off substantial new regulations to safeguard funds during times of financial stress is receiving a chilly reception from federal regulators. Several fund firms in the $​2.​6 trillion industry have backed a plan to penalize customers who try to pull cash out of the funds during a crisis. Funds would take on no new safeguards during ordinary times under the proposal, which was made at a recent meeting with Securities and Exchange Commission officials."

The article explains, "​But people close to the SEC say the proposal doesn'​t go far enough and that it could even trigger the type of destabilizing runs on money markets seen most recently during the collapse of Lehman Brothers Holdings Inc.... Money funds are seeking to avoid sanctions from the Financial Stability Oversight Council, a board of top regulators established by the Dodd-​Frank financial overhaul that potentially could bring the largest fund companies under the purview of the Federal Reserve. The council is scheduled to advance its own set of proposed money-​fund rule changes on Tuesday, officials said. Meanwhile, the fund industry is seeking a deal with the SEC, seen by many in the industry as a friendlier regulator."

The Journal adds, "In September, Treasury Secretary Tim Geithner, who also serves as chairman of FSOC, sent a letter to fellow members of the council urging that it put pressure on the SEC to pass reforms on the industry. One idea in Mr. Geithner'​s letter that calls for "​liquidity fees or temporary '​gates' on redemptions" is similar to the circuit-​breaker concept. A spokesman for the Treasury Department declined to comment. Temporarily halting redemptions also mirrors a so-​called "​gating" idea favored by at least two Republican SEC members, Dan Gallagher and Troy Paredes. Another proposal to safeguard money markets involves "​floating" their share prices, like other mutual funds. Money funds currently calculate their net asset values at $​1 a share, despite small fluctuations in the values of their holdings, and much of the industry has opposed changing this system."

Geithner'​s Sept. 27 letter to FSOC says, "As its Chairperson, I urge the Council to use its authority under section 120 of the Dodd-​Frank Act to recommend that the SEC proceed with MMF reform. To do so, the Council should issue for public comment a set of options for reform to support the recommendations in its annual reports. The Council would consider the comments and provide a final recommendation to the SEC, which, pursuant to the Dodd-​Frank Act, would be required to adopt the recommended standards or explain in writing to the Council why it had failed to act. I have asked staff to begin drafting a formal recommendation immediately and am hopeful that the Council will consider that recommendation at its November meeting."

The Secretary explains, "The proposed recommendation should include the two reform alternatives put forward by Chairman Schapiro, request comment on a third option as outlined below, and seek input on other alternatives that might be as effective in addressing MMFs' structural vulnerabilities. Option one would entail floating the net asset values (​NAYs) of MMFs by removing the special exemption that allows them to utilize amortized-​cost accounting and rounding to maintain stable NAVs. Instead, MMFs would be required to use mark-​to-​market valuation to set share prices, like other mutual funds. This would allow the value of investors' shares to track more closely the values of the underlying instruments held by MMFs and eliminate the significance of share price variation in the future."

Geithner continues, "Option two would require MMFs to hold a capital buffer of adequate size (​likely less than 1 percent) to absorb fluctuations in the value of their holdings that are currently addressed by rounding of the NAV. The buffer could be coupled with a "​minimum balance at risk" requirement, whereby each shareholder would have a minimum account balance of at least 3 percent of that shareholder'​s maximum balance over the previous 30 days. Redemptions of the minimum balance would be delayed for 30 days, and amounts held back would be the first to absorb any losses by the fund in excess of its capital buffer. This would complement the capital buffer by adding loss-​absorption capacity and directly counteract the first-​mover advantage that exacerbates the current structure'​s vulnerability to runs."

Finally, Geithner'​s letter adds, "Option three would entail imposing capital and enhanced liquidity standards, potentially coupled with liquidity fees or temporary "​gates" on redemptions that may be imposed as an alternative to a minimum balance at risk requirement. We should also be open to alternative approaches that satisfy the critical objectives of reducing the structural vulnerabilities inherent in MMFs and mitigating the risk of runs. We should use this opportunity to seek informed perspectives on the extent to which any mix of the specific reforms described above or other reforms would achieve the same level of protection for investors and the broader economy. The Council should engage with key stakeholders as part of this overall process."

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A recent posting on the Federal Reserve Bank of New York'​s Liberty Street Economics Blog entitled, "Federal Reserve Liquidity Facilities Gross $​22 Billion for U.​S. Taxpayers," says that the Commercial Paper Funding Facility was responsible for over $​6 billion of more than $​22 billion in profits to taxpayers from a series of emergency programs put in place in 2007 and 2008. Author Michael Fleming, vice president in the Capital Markets Function of the New York Fed'​s Research and Statistics Group, says, "During the 2007-​09 crisis, the Federal Reserve took many measures to mitigate disruptions in financial markets, including the introduction or expansion of liquidity facilities. Many studies have found that the Fed'​s lending via the facilities helped stabilize financial markets. In addition, because the Fed'​s loans were well collateralized and generally priced at a premium to the cost of funds, they had another, less widely noted benefit: they made money for U.​S. taxpayers. In this post, I bring information together from various sources and time periods to show that the facilities generated $​21.​7 billion in interest and fee income."

Fleming writes, "​As explained in its February 2009 Monetary Policy Report to the Congress, the Fed responded to the crisis by introducing or expanding liquidity facilities, providing support to specific institutions, and engaging in direct purchases of assets. With the facilities, the Fed initially addressed liquidity pressures facing depository institutions by changing its discount window program in August 2007 to reduce the institutions’ uncertainty about the cost and availability of funding. Then, between December 2007 and November 2008, the Fed launched a range of new facilities to address liquidity pressures experienced by securities dealers and other market participants, as well as depository institutions."

He explains under "Stabilizing Effects of Liquidity Facilities," "There is considerable evidence (reviewed in this recent paper) that the Fed'​s facilities promoted financial stability. To take one example, the Term Securities Lending Facility (​TSLF) was created to promote liquidity in the secured funding markets relied on by securities dealers. As explained in this study of the TSLF, the launch of the facility was associated with an immediate narrowing of financing spreads between less-​liquid agency mortgage-​backed security collateral and more-​liquid Treasury collateral. This paper shows that the relationship between the provision of liquid collateral via the TSLF and the narrowing of financing spreads is statistically significant."

Fleming tells us, "Not only were the facilities effective at promoting financial stability, but they also made money for U.​S. taxpayers. The table below brings together information from annual reports of the Board of Governors of the Federal Reserve, the Fed'​s Monthly Report on Credit and Liquidity Programs and the Balance Sheet, and an article on the income effects of the Fed'​s liquidity facilities. It shows that the gross interest and fee income generated by the facilities totaled $​21.​7 billion. Not surprisingly, most of the income was generated in 2008 and 2009, although the discount window, central bank liquidity swaps, and outstanding loans under the TALF (​Term Asset-​Backed Securities Loan Facility) continued to generate income into 2012."

He adds, "The biggest money makers were the Commercial Paper Funding Facility, central bank liquidity swaps, and the Term Auction Facility, as shown below. This ranking largely reflects the extent of lending under the various facilities, but also variation in the fees and income generated per dollar lent." (​The table shows the CPFF making fee income of $​6.​144 billion and the ABCPMMLF, or Asset-​Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, making $​543 million. The Treasury Guarantee program is not included in these numbers.)

The blog continues, "The gross income figures do not consider the cost of funds. This article on the income effects of the facilities estimates the cost of funds for the facilities through 2009 to be about $​7 billion. Since the facilities generated $​20 billion in interest and fee income over this period, the net contribution from the facilities is estimated to be $​13 billion for this period.... Lending via the facilities did involve some credit risk, so some of the income generated should be considered compensation for that risk. However, the Fed kept credit risk to a minimum by establishing eligibility criteria, by providing short-​term loans, and by requiring adequate collateral. As a result of these measures, as well as the relatively favorable outcome of its lending, the Fed did not bear any credit losses through the facilities."

Finally, Fleming concludes, "​To understand the income effects of all of the Fed'​s actions during the crisis, one also needs to look at its support for specific institutions and its direct purchases of assets. These other measures had different risk characteristics than the liquidity facilities. Moreover, they were not meant to wind down as quickly as the facilities and are thus better evaluated over a longer time period. That said, the liquidity facilities, which made up an important part of the Fed'​s efforts during the crisis, did have a clear positive effect for taxpayers."

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The November issue of Crane Data'​s Money Fund Intelligence was sent to subscribers Wednesday morning, along with our October 31, 2012 monthly performance data and rankings. Our Money Fund Wisdom database query website has been updated, and our Money Fund Intelligence XLS monthly spreadsheet, and Crane Index money fund averages will be released shortly. (​Our next monthly Money Fund Portfolio Holdings with 10/​31/​12 data are scheduled to be released on the 7th business day, Friday, Nov. 9.) The latest edition of MFI features the articles: "MMFs Reopen Talks w/​SEC; Step Up Attacks on FSOC," which discusses recent regulatory rumors and news; "JPM'​s Flex Class Prepares for Negative Yield World," which reviews developments in the Euro money fund marketplace; and, "Higher Repo Rates Lead to Fee Waiver Relief in 2012," which includes some rare good news for money fund providers.

Our MMFs Reopen Talks piece comments, "The regulatory reform saga continues. Bloomberg reported and the ICI confirmed that several large fund companies met recently with the SEC and Treasury Department officials to discuss a possible compromise. Though no details or confirmation of the meeting has been released by regulators, we assume they were being briefed on BlackRock'​s "​standby liquidity fee" and similar "​gating" proposals. At the same time, fund industry supporters have stepped up their attacks on the Financial Stability Oversight Council, or FSOC."

The article adds, "Though the SEC and Treasury haven'​t confirmed the meeting, the ICI issued a brief comment, saying, "​ICI and the fund industry are engaging directly with the Securities and Exchange Commission in a united effort to constructively build on the success of the 2010 reforms." (​ICI'​s Money Market Working Group is also scheduled to meet in Boston this week.)"

Our monthly "​profile" piece says, "Late last month, J.​P. Morgan Asset Management announced the launch of a new "​Flexible Distributing" class for its Luxembourg-​​domiciled Euro-​​denominated money market funds. The "​Flex" shares would allow the funds to maintain a stable NAV in a potential negative yield environment by automatically selling shares to cover expenses and debits from any yields below zero."

Our Waiver Relief article says, "While the party may be over soon, stubbornly high rates on repurchase agreements have been a major factor in providing fee waiver relief to money funds during 2012. We show the DTCC'​s average repo rates (​GCFF Repo Index) (​available via www.​dtcc.​com) for Treasury, Agency and MBS-​backed repo, and we display the average expense ratios for money funds in a chart."

MFI adds, "Repo rates have climbed from averaging 16 to 18 bps during the first quarter of 2012 to averaging 28 to 33 bps during the third quarter of this year. Repo rates have tripled since the DTCC began posting averages on them in December 2011, rising from 0.​08% for Treasuries and 0.​09 for Agencies."

The November MFI also contains monthly News, Indexes, top rankings and extensive performance tables. E-​mail info@​cranedata.​com to request the latest issue. Subscriptions to Money Fund Intelligence are $​500 a year and include web access to archived issues and fund "​profiles". Additional users are $​250 and bulk pricing and "​site licenses" are available. Crane Data'​s other products include: Money Fund Intelligence XLS ($​1K/​yr), MFI Daily ($​2K/​yr), Money Fund Wisdom ($​4K/​yr), MFI International ($​2K/​yr), and Brokerage Sweep Intelligence ($​1K/​yr).

In other news, see also Bloomberg'​s article, "​FSB Sets 2013 Deadline for New Money-​Market Fund Rules". It says, "Global regulators set a September 2013 deadline to present tougher rules for money-​market mutual funds, repurchase agreements and other so-​called shadow banking activities as part of a broader push to reduce risk in the financial system. The Financial Stability Board also said that it would issue draft rules next year targeted at non-​bank institutions whose failure would roil the global economy."

​

In another broadside (​see yesterday'​s "​News") against the Treasury Secretary'​s recent letter to the Financial Stability Oversight Council (​FSOC), the U.​S. Chamber of Commerce extensively critiques Tim Geithner'​s "​mad dash to a predetermined outcome" on money market mutual fund reforms in a letter released yesterday. The Chambers'​s Center for Capital Markets Competiveness writes, "[​T]​he Chamber is concerned by your request that the Financial Stability Oversight Council ("​FSOC" or "​the Council") use its authority, under Section 120 of the Dodd-​Frank Act, to recommend changes to the Securities and Exchange Commission'​s ("​SEC") regulatory regime for money market mutual funds. Such action would create uncertainty, weaken financial regulation, harm investors, and damage the capital formation process needed for businesses to grow and create jobs."

The Chamber'​s David Hirschmann explains, "​Over the past year, the SEC failed to do any of the necessary work to study the impact of prior money market mutual fund reforms and identify any additional needed changes. Because it failed to define the specific areas in need of further reform, it did not even consider options that would have strengthened rather than destroyed the utility of this product. For example, regulators have not studied how the expanded credit and liquidity requirements adopted in 2010 impact fund resiliency and the risk of runs. The SEC did not recommend approaches or even consider the results of the stress tests it began to require of money market mutual funds as part of the 2010 reforms. And, the SEC did not examine the impact of the proposals it was considering on either systemic risk or the continued viability of money market mutual funds."

He continues, "The process you recommend in your letter to the FSOC members would only repeat or exacerbate the flawed approach the SEC has taken over the past year. While you indicate in your letter that you believe FSOC should also consider alternative reform options, you also recommend that the Council rush to endorse recommendations without actually considering any alternatives or even reviewing the impact of the proposals you outlined. The Chamber respectfully requests that you withdraw your request and that the Council refrain from making recommendations, and instead encourage the SEC, an independent regulatory agency, to move forward with a different approach. A majority of Commissioners of the Securities and Exchange Commission have indicated that they are willing to consider options to further strengthen the resiliency of money market mutual funds if such action is justified by a careful examination of the impact of the 2010 reforms to Rule 2a-​7."

The Chamber letter adds, "Doing so will allow the SEC to complete the long-​delayed review and engage in a deliberative decision making process -- free from FSOC interference, which could undermine that process. As the primary regulator of money market mutual funds, the SEC is the only regulatory body that Congress directed to review any recommendations for money market mutual fund reform that the FSOC members could recommend. The actions that you have asked the Council to take would hinder, not help, the SEC as it weighs the likely impacts of potential changes against these and other public policy goals. Instead of allowing the SEC to complete its deliberative process, if the FSOC were to accede to your request, it would be promoting a rush towards what appears to be a predetermined outcome."

It states, "As stated in your September 27th letter to members of FSOC urging the Council to take action on money market mutual funds, "[​t]​he Dodd-​Frank Wall Street Reform and Consumer Protection Act (​Dodd-​Frank Act) gives the Council both the responsibility and authority to take action to address risks to financial stability if an agency fails to do so." Private and public statements by financial regulators appear to confirm that the FSOC is poised to act on money market mutual funds later this month. Such action is inherently premature, irresponsible, and potentially damaging to investors, businesses, state and local governments, and other users of money market mutual funds."

The letter explais, "​SEC Chairman Mary Schapiro withdrew her proposal to modify the regulation of money market funds because of a lack of support in late August. The Schapiro Proposal was withdrawn because of a fundamental disagreement within the Commission on the appropriate course of action to take, and the necessary basis for taking it, rather than an outright refusal to act. While the Schapiro Proposal was never publicly introduced, a bipartisan group of SEC Commissioners, Troy Paredes, Luis Aguilar, and Dan Gallagher, opposed its introduction at that time and they issued statements individually and jointly that expressed deep concern about proceeding down the regulatory path suggested by the Chairman without first evaluating the impact of the 2010 changes to Rule 2a-​7 on investors, issuers, the fund industry, and the economy. These three Commissioners, a bipartisan majority of the independent agency, further stated that a greater understanding of the impact of changes to money market mutual funds to cash management was needed before moving forward with any regulatory action."

It adds, "Importantly, it should also be noted that none of the dissenting Commissioners rejected the notion that further reforms might be appropriate. In fact, the three dissenting Commissioners suggested that a thorough and comprehensive analysis of these funds, under the current regulatory regime and their role in the cash management industry, needs to be completed in order for the SEC to determine the appropriate course of regulatory action regarding money market mutual funds. The Chamber agrees with this prudent approach and believes that an SEC study and a concept release will help inform the Commission of the central role that these funds play in cash management. Such a course of action will help ensure that the needs of investors, businesses, and state and municipal governments are met, that appropriate protections are put in place if needed, and that any unintended consequences are minimized."

The Chamber continues, "The FSOC, by using its Section 120 powers under the Dodd-​Frank Act, may be endangering rather than promoting the safety and soundness of the financial markets. First, prematurely invoking Section 120 under the guise of systemic risk regulation can and will work at cross-​purposes with the SEC'​s mandate to promote capital formation. Second, subjecting money market mutual funds to what amounts to joint oversight by the FSOC, which is over-​populated with bank regulators and unduly influenced by that regulatory perspective, and the SEC will blur the distinction between an investment product and traditional bank deposit products. This is not simply a matter of investor confusion; FSOC oversight of money market mutual funds as deposit-​like products will necessarily foster a view in the marketplace that there is an implied guarantee of these funds. By doing this, FSOC action may blunt market discipline and increase the potential for a run on these funds."

Finally, they say, "​The Chamber understands that the SEC is moving forward with this prudent approach. Reports indicate that the SEC is now embarking on such a study of the 2010 amendments, and after such study is completed, the SEC will decide what action, if any, to take regarding the regulation of money market mutual funds. Only at that time, with a full understanding of the SEC'​s analysis and proposed course of action, should the Council consider using Section 120 of the Dodd-​Frank Act. In short, the Council'​s mad dash to a predetermined outcome not only could jeopardize an important intermediary for investors and state and corporate finances, but it could also unnecessarily compromise the integrity of our regulatory system. We urge you to take these risks into account before hastily interjecting the Council in the money market mutual fund regulatory process. We would be happy to further discuss our concerns with you and your staff."

​

Law firm Dechert LLP posted a press release late last week entitled, "Dechert Submits Letter to Financial Stability Oversight Council Regarding Treasury Secretary Geithner'​s Proposed Agenda for the FSOC to Take Money Market Fund Actions, which said, "Thomas P. Vartanian, chair of Dechert LLP'​s Financial Institutions practice, has sent a letter to the Financial Stability Oversight Council (​FSOC) in regard to Treasury Secretary Geithner'​s September 27, 2012 letter to members of the FSOC concerning recommendations for actions by the FSOC in regard to Money Market Funds (​MMFs), including recommendations to the Securities and Exchange Commission (​SEC) regarding reform of the MMF regulatory structure."

Vartanian commented, "The Secretary'​s proposal seeks to have the FSOC make recommendations to the SEC for MMF reform before it has established a fair process for considering and evaluating such recommendations and without addressing how the statutory requirements for consultation with the SEC, determining eligibility for a recommendation, conducting a comprehensive cost benefit analysis and considering public comments will be satisfied. We have asked the FSOC to act in a careful, deliberate manner in evaluating any possible recommendations to the SEC regarding changes in the regulatory structure for MMFs."

The press release added, "Dechert'​s letter discusses a series of issues that the FSOC must consider in connection with any potential MMF recommendation: What internal agency rules will define the FSOC'​s exercise of its section 120 authority to ensure the appropriateness of the process, and the absence of bias and predisposition of relevant issues? How can the FSOC conclude that MMFs come within its statutory purview over "​nonbank financial companies" when the Board of Governors of the Federal Reserve System has not completed the necessary regulatory action under Dodd-​Frank to define that term? Has the FSOC determined that MMFs are engaged in "​financial activities" that pose the financial stability threat required under section 120? How will the FSOC consult with the SEC commissioners and key SEC staff who are most knowledgeable about how MMFs work and are regulated? What will be the parameters of the required analysis of the costs to long-​term economic growth (​Cost Benefit Analysis) associated with each proposed recommendation? How will the FSOC'​s notice and request for comment on any proposed recommendations address the requirements of the law, including the need for public comment on the Cost Benefit Analysis? How will the FSOC inform the public of its responses to the comments that it receives and of the basis for any final recommendations it may make to the SEC?"

Dechert'​s full 12-​page letter says, "`​On behalf of clients of this Firm that may be impacted by actions of the Financial Stability Oversight Council ("​FSOC"), we are writing to request clarification of, and to comment upon, the Recommendation Letter (​a copy of which is attached), which Secretary ofthe Treasury Timothy F. Geithner (​the "​Secretary") sent to his fellow members of the FSOC in his capacity as Chairman of the FSOC and released to the public."

They explain, "In the Recommendation Letter, the Secretary proposed an agenda for the FSOC in light of the announcement, in August, by the Chairman of the Securities and Exchange Commission ("​SEC") that she would not ask the other SEC Commissioners to vote on an SEC staff proposal for structural reforms of money market funds ("​MMFs") at that time. Among the actions that the Secretary proposed to his fellow FSOC members, he asked them to consider for the first time issuing a recommendation to a primary financial regulatory agency under section 120 of the Dodd-​Frank Act ("​DF A"), by which the FSOC would recommend that such agency (​here, the SEC) fundamentally change the MMF regulatory regime."

Dechert adds, "The Recommendation Letter raises significant legal and regulatory issues of first impression for the FSOC regarding how it will, and must, conduct its business in a manner consistent with the law. Because this is a novel action by a nascent agency and because the potential consequences for the U.​S. economy are so serious, the FSOC must establish processes that follow not only the statutory requirements but also administrative best practices that ensure the accountability and transparency that a recent Government Accountability Office ("​GAO") report calls on the FSOC to provide."

In its "Conclusions," it writes, "There are no clear rules of engagement to guarantee transparency, fairness and accountability in this unprecedented action that the Secretary requests the FSOC to take under section 120 of the DFA. He has asked the FSOC to rush, by any standard of regulatory action, to endorse significant changes in the MMF industry, without first establishing the appropriate process to analyze transparently the purported need for and benefits of regulatory changes and the enormous impact such changes may have on the industry, financial system and U.​S. economy. The Recommendation Letter does not call for the FSOC to establish internal agency rules that would serve as a template to ensure fair, appropriate and consistent evaluation of potential section 120 recommendations, nor has the FSOC established any internal agency rules or procedures to implement the express statutory requirements of section 120. On the contrary, the Recommendation Letter implies that the predicates for a section 120 recommendation regarding MMFs have already been satisfied. For the reasons set forth in this letter, we do not believe that is the case."

Later in the letter, Dechert explains, "FRB Governor Tarullo recently identified several reasons for the FSOC to proceed cautiously in regard to any MMF reform actions. In a speech on October 10, 2012, he observed that the SEC already has ample regulatory authority and is best positioned to address the systemic risk problems that MMFs may present. It should also be noted that the SEC'​s status as the primary and most appropriate regulator of MMFs has not changed simply because Chairman Schapiro could not persuade a bipartisan majority of her fellow Commissioners to support her proposed reform options, on her preferred timeline, without the benefit of the additional analysis that they requested."

They continue, "Regarding the SEC'​s primary role, Governor Tarullo also noted that Congress considered and rejected giving the FSOC the power to override agency action or inaction regarding systemic financial stability. In his opinion, the actions that Congress authorized the FSOC to take, including making recommendations under section 120, are a "​decidedly second-​best alternative" to action by the SEC. He observed that "[​t]​he protective tools available to the Council do not fit the problem precisely and thus will not regulate at the least cost to the [​MMFs] while still mitigating financial risk." Governor Tarullo also noted in his speech that there is little academic, administrative, legislative, or judicial analysis of how financial stability is defined, not to mention threatened, and no official consensus on the subject."

Finally, Dechert writes, "How the FSOC as a body and its individual members respond to the Recommendation Letter and the administrative record that they create to support any recommendation under section 120 will establish important precedents for how the FSOC exercises its authority over a wide range of issues going forward. The large role that MMFs play in the U.​S. economy only raises the stakes and adds a further imperative for the FSOC to consider carefully the need to act and the effects of its actions. A failure by the FSOC and its members to adhere to appropriate legal, administrative and substantive standards of decision-​making could expose the recommendation process to numerous potential challenges, which would only confuse the marketplace and delay the implementation of appropriate policies. We appreciate your and the FSOC'​s consideration of the points contained in this letter as the FSOC evaluates potential actions with respect to MMF reform. Please feel free to contact us if you would like to discuss any of the issues that we have raised."

​

Thursday morning, the U.​S. Chamber of Commerce'​s Center for Capital Markets Competitiveness (​CCMC) hosts a press call to discuss a new study, "Amortized Cost Is "​Fair" for Money Market Funds," The paper "examines more than 30 years of accounting standard setting and Securities and Exchange Commission regulation to support the use of the stable value at which money market funds (​MMFs) trade." Authored by Dennis Beresford, a former chairman of the Financial Accounting Standards Board, it "​diffuses the argument that the long-​standing use of a stable net asset value (​NAV), an essential aspect of MMFs for investors, is simply "​accounting fiction" and must be changed to a floating NAV <​b:>`​_." Beresford, who is the Ernst & Young Executive Professor of Accounting, J.​M. Tull School of Accounting, University of Georgia, is joined by David Hirschmann, President and Chief Executive Officer, Center for Capital Markets Competitiveness; Senior Vice President, U.​S. Chamber of Commerce. (​In other recent news, see WSJ'​s "​Low Yields May Force Money Funds to Get Creative".)

The "Key Points" of "Amortized Cost is Fair for Money Market Funds," include: Amortized cost to account for securities owned by money market mutual funds provides justification for the stable value at which funds trade. Far from "​accounting fiction," amortized cost has been established through nearly 40 years of SEC regulation and accounting rule making to be generally accepted accounting principles (​GAAP) by which these investments must be measured. Current accounting theory further supports amortized cost as GAAP for those investments."

A release discusses Amortized costs' "​History" in the money fund space, explaining, "Accounting Series Release 219 (​ASR 219) issued in May 1977 states that it is appropriate for money market funds to determine the fair value of debt portfolio securities on an amortized cost basis, provided the securities had remaining maturities of 60 days or less. SEC Rule 2a-​7 issued July 1983, which was designed to limit the permissible portfolio of investments of a money market fund seeing to use either penny-​rounding or amortized cost valuation to maintain a stable price per share, became GAAP for money market mutual funds. SEC amended 2a-​7 in January 2010, substantially tightening the conditions under which amortized cost accounting was applied. October 2011 FASB Exposure Draft on Financial Services – Investment Companies concludes that because money market funds are managed to minimize differences between the carrying value and fair value of their investments that the use of amortized cost for reporting is akin to fair value."

The Chamber explains the "Reasons for Use of Amortized Cost Accounting." writing, "Money market funds are managed to minimize the difference between the carrying value and the fair value of their investments to maintain an constant net asset value. Underlying investments by money market funds are short term in nature, of very high quality, and generally held to maturity. If money market funds' market based net asset value deviates more than 1/​2 of 1%, then it must either liquidate or pay out the excess as earnings, thus they will never suffer an impairment in value. Money market funds' amortized cost is the materially the same as fair value in nearly all cases. Securities owned by money market funds are considered GAAP as "​cash and cash equivalents" if they were owned by a commercial entity. Money market funds are required to liquidate at the first sign of not being a going concern; thus, because money market funds are always going concerns, the use of amortized cost method is supported."

The paper'​s Summary explains, "Recent events have caused the U.​S. Securities and Exchange Commission (​SEC) to rethink the long-​standing use of amortized cost by money market mutual funds in valuing their investments in securities. This practice supports the use of the stable net asset value (​a "​buck" a share) in trading shares in such funds. Some critics have challenged this accounting practice, arguing that it somehow misleads investors by obfuscating changes in value or implicitly guaranteeing a stable share price."

The intro explains, "This paper shows that the use of amortized cost by money market mutual funds is supported by more than 30 years of regulatory and accounting standard-​setting consideration. In addition, its use has been significantly constrained through recent SEC actions that further ensure its appropriate use. Accounting standard setters have accepted this treatment as being in compliance with generally accepted accounting principles (​GAAP). Finally, available data indicate that amortized cost does not differ materially from market value for investments industry wide. In short, amortized cost is "​fair" for money market funds."

The paper concludes, "Accounting for investment securities by money market mutual funds appropriately remains based on amortized cost. The amortized cost method of accounting is supported by the very short-​term duration, high quality, and hold-​to-​maturity nature of most of the investments held. The SEC'​s 2010 rule changes have considerably strengthened the conditions under which these policies are being applied. As a result of the 2010 SEC rule changes, funds now report the market value of each investment in a monthly schedule submitted to the SEC that is then made publicly available after 60 days. That provides additional information for investors. And the FASB'​s current thinking articulates this accounting treatment as GAAP."

​

The Investment Company Institute released statistics for September month-​end 2012, showing money fund assets inching lower and repo holdings plunging last month. Money funds will likely show large asset declines in October, according to Crane Data'​s MFI Daily, the majority of it occurring in the last two days. ICI'​s "Trends in Mutual Fund Investing: September 2012" shows that money market mutual fund assets fell by $​3.​8 billion in Sept. to $​2.​551 trillion. Money fund assets continue to lose share to bond fund assets, which rose by $​53.​0 billion to $​3.​341 trillion. ICI'​s "Month-​End Portfolio Holdings of Taxable Money Market Funds shows Repurchase Agreements falling in September while Government Agencies rebounded (​a reversal of the past 2 months).

ICI'​s September "​Trends" says, "The combined assets of the nation'​s mutual funds increased by $​202.​0 billion, or 1.​6 percent, to $​12.​752 trillion in September, according to the Investment Company Institute'​s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."

It explains, "​Bond funds had an inflow of $​29.​29 billion in September, compared with an inflow of $​31.​70 billion in August.... Money market funds had an outflow of $​3.​55 billion in September, compared with an inflow of $​5.​53 billion in August. Funds offered primarily to institutions had an outflow of $​6.​16 billion. Funds offered primarily to individuals had an inflow of $​2.​61 billion."

In October, month-​to-​date through 10/​30, assets have decreased by $​33.​7 billion, according to Crane Data'​s Money Fund Intelligence Daily. Assets decreased by $​39 billion since Friday (​almost all funds were closed on Tuesday, and these numbers don'​t yet reflect Wednesday'​s trading). YTD, we show asset declines of $​133.​6 billion, or 5.​2%.

ICI'​s Portfolio Holdings series shows Repurchase Agreements declined sharply at quarter-​end in September after rising in August, July, April and May. But Repos remain the largest portfolio holding among taxable money funds with 22.​9% of assets and $​523.​3 billion (​down $​61.​7 billion in Sept.). Treasury Bills & Securities remained the second largest segment at 20.​4%; holdings in T-​Bills and other Treasuries rose by $​7.​6 billion to $​465.​4 billion. Holdings of Certificates of Deposits, which rank third among portfolio holdings, increased by $​28.​9 billion to $​439.​6 billion (​19.​2%).

U.​S. Government Agency Securities rose by $​21.​8 billion to $​337.​9 billion, or 14.​8% of assets. Agencies overtook CP to become the fourth largest composition segment of taxable money funds. Commercial Paper dipped again by $​6.​1 billion to $​325.​8 billion, or 14.​3% of assets. Notes (​including Corporate and Bank) accounted for 4.​1% of assets ($​93.​5 billion), while Other holdings accounted for 3.​8% ($​87.​0 billion).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds increased by 34K to 24.​48 million, while the Number of Funds fell by 7 to 406. The Average Maturity of Portfolios lengthened again by two days to 49 days in September. Since September 2011, WAMs of Taxable money funds have lengthened by 10 days from 39 days. (​Note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- now has its Portfolio Composition and Maturity Distribution totals updated as of Sept. 30, 2012. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.)

In other news, see Reuters' "​Big US companies squirreled cash in face of storm". It says, "Corporate treasurers laid in extra cash reserves as the devastating storm Sandy approached the U.​S. East Coast, to ensure they could meet payrolls, buy inventory and contend with other short-​term needs after the storm hit. Acting on lessons learned in previous disasters, big companies that regularly issue commercial paper to fund themselves replenished their coffers last Friday and early Monday after learning that bank dealers might have problems buying and selling the debt."

Money Market News Archive