News Archives: August, 2012
ICI's latest monthly asset flow numbers verify that money fund assets increased in July 2012. The latest monthly "Trends in Mutual Fund Investing: July 2012" showed that money market mutual fund assets rose by $35.2 billion in July to $2.549 trillion. Money fund assets still account for 20.7% of overall mutual fund assets. Bond fund assets again surged higher, rising by $73.7 billion to $3.243 trillion, or 26.3% of assets. ICI's "Month-End Portfolio Holdings of Taxable Money Market Funds shows Repurchase Agreements continuing to surge in July and Government Agencies continues to decline.
ICI's July "Trends" says, "The combined assets of the nation's mutual funds increased by $161.5 billion, or 1.3 percent, to $12.338 trillion in July, 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.... Money market funds had an inflow of $34.69 billion in July, compared with an outflow of $46.40 billion in June. Funds offered primarily to institutions had an inflow of $33.40 billion. Funds offered primarily to individuals had an inflow of $1.29 billion."
ICI's latest weekly "Money Market Mutual Funds Assets" says, "Total money market mutual fund assets decreased by $2.55 billion to $2.571 trillion for the week ended Wednesday, August 29, the Investment Company Institute reported today. Taxable government funds increased by $3.96 billion, taxable non-government funds decreased by $3.76 billion, and tax-exempt funds decreased by $2.75 billion. ."
In August, month-to-date through 8/29, assets have increased by another $20.6 billion, according to Crane Data's Money Fund Intelligence Daily. YTD, we show asset declines of $117.8 billion, or 4.6%. Our daily series shows the rebound in Prime Institutional funds continued in August; they've regained $22.8 billion month-to-date.
ICI's Portfolio Holdings series shows Repurchase Agreements jumped in July after falling in June (and rising in April and May). Repos remain the largest portfolio holding among taxable money funds with 25.0% of assets. Treasury Bills & Securities remained the second largest segment at 19.2%; holdings in T-Bills and other Treasuries rose by $313 million to $454.2 billion. Holdings of Certificates of Deposits, which rank third among portfolio holdings, increased by $4.2 billion to $394.0 billion (17.3%).
U.S. Government Agency Securities fell by $13.5 billion and dropped into fifth place among taxable money fund portfolio holdings with $328.0 billion, or 14.4% of assets. Commercial Paper inched higher by $1.3 billion to $334.5 billion, which bumped CP up to the fourth largest composition sector with 14.7% of assets. Notes (including Corporate and Bank) accounted for 5.3% of assets ($120.6 billion), while Other holdings accounted for 3.5% ($80.2 billion).
The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds decreased to 25.25 million from 25.26 million the month before, while the Number of Funds grew by 2 to 415. The Average Maturity of Portfolios shortened by one day to 45 days in July. (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 July 31, 2012. We revise these following the monthly publication of our Money Fund Portfolio Holdings data.)
Finally, Fitch writes in a separate survey of July holdings ("U.S. Money Fund Exposure and European Banks: Shift to Japan Continues"), "U.S. prime money market funds (MMF) continued to increase their exposure to Japanese banks, which as of end-July represent 12.3% of total MMF holdings or a 118% increase on a dollar basis since end-May 2011.... This exposure exceeds aggregate MMF allocations to eurozone banks, which increased moderately since the prior reporting period and now constitute 8.5% of total MMF assets, still 76% below end-May 2011 levels on a dollar basis. This "disengagement" between MMFs and eurozone banks appears to be persisting, as MMF risk aversion continues and both eurozone banks and their regulators seem cautious towards this potentially volatile form of funding. Aggregate MMF allocations to European banks outside of the eurozone also grew with allocations to Nordic, Swiss, and U.K. banks all rising since end-June on a dollar basis. Outside of Europe, MMF allocations to Canadian banks declined slightly, while exposures to Australian banks remained constant over the same period."
Late Tuesday, SEC Commissioners Daniel Gallagher and Troy Paredes, two of the three that voted against releasing money market fund reform proposal, released a "Statement on the Regulation of Money Market Funds that blasts Chairman Mary Schapiro, defends their position, and proposes a less damaging way forward for changing money fund regulations. They write, "We were dismayed by the Chairman's August 22, 2012, statement on the proposal she advanced to restructure money market funds. The current discourse about the Commission's regulation of money market funds is rife with misunderstandings and misconceptions. This joint statement is intended as one step in setting the record straight. Our colleague, Commissioner Luis Aguilar, has already responded separately, and we respect the views presented in his response. We also commend Commissioner Aguilar for his efforts to engage in a constructive dialogue on money market fund reform."
Gallagher and Paredes say, "The Chairman has recommended that the Commission approve a regulatory proposal that would have altered several fundamental features of money market funds. After careful consideration, we determined that the changes the Chairman advocated were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation's financial system. As an initial matter, the Chairman's statement creates the misimpression that three Commissioners -- a majority of the Commission -- are not concerned with, or are somehow dismissive of, the goal of strengthening money market funds. This is wholly inaccurate."
They continue, "The truth is that we have carefully considered many alternatives, including the Chairman's preferred alternatives of a "floating NAV" and a capital buffer coupled with a holdback restriction, and we are convinced that the Commission can do better. Our view of the complex issues involved has been informed by the input of a range of market participants, including the many retail and institutional investors who have implored the Commission not to deprive them of the choice to invest in money market funds, as well as the interests of states, municipalities, and businesses that rely on money market funds as a key source of financing. We have also considered various pronouncements by other regulators on the topic."
The two say, "Our decision not to support the Chairman's proposal, based on the data and analysis currently available to us, has also been informed by our concern that neither of the Chairman's restructuring alternatives would in fact achieve the goal of stemming a run on money market funds, particularly during a period of widespread financial crisis such as the nation experienced in 2008. The Reserve Primary Fund did not "break the buck" in a vacuum, but rather in the midst of a financial crisis of historic proportions. Since the Commission adopted Rule 2a-7, the principal rule that governs money market funds, the Commission on multiple occasions has reviewed the efficacy of the rule and has adopted amendments to make improvements. Most recently, in 2010, the Commission adopted changes to Rule 2a-7 that have improved the liquidity and transparency of money market funds and decreased the credit risk of their portfolios with the objective of making such funds more resilient."
They add, "We want to emphasize that, just as the Chairman's proposal reflects the Chairman's good faith view as to what is best, our inability to support her proposal reflects what we believe is best for investors, issuers, the financial system, and the nation's economy at this time. In our judgment, the Chairman's proposal is flawed because it is premised on an incomplete perspective on the 2008 financial crisis -- the effects of which both of us confronted directly at the SEC at the time and continue to grapple with today -- and on the drivers of a financial run occurring in the midst of a crisis. Although there is a great deal to say about this, we will touch on just two points in this statement."
The comment states, "First, the Commission's 2010 money market fund reforms have not been shown to be ineffective in enabling money market funds to satisfy large redemptions and to remain resilient in the face of a sharp increase in withdrawals. In fact, the empirical evidence we have so far, such as the performance of money market funds during the ongoing Eurozone crisis and the U.S. debt ceiling impasse and downgrade in 2011, suggests just the opposite -- that money market funds can meet substantial redemption requests, in large part, we have heard, because of the 2010 reforms. Second, the necessary analysis has not been conducted to demonstrate that a floating NAV or capital buffer coupled with a holdback restriction would be effective in a crisis. Indeed, both alternatives disregard the predominant incentive of investors in a crisis to flee risk and move to safety. Reason indicates that such behavior -- the "flight to quality" -- is likely to overwhelm the buffer proposed by the Chairman and swamp the effect of a holdback. As for the floating NAV proposal, even if there is no stable $1.00 NAV -- i.e., even if, by definition, there is no "buck" to break -- investors will still have an incentive to flee from risk during a crisis period such as 2008, because investors who redeem sooner rather than later during a period of financial distress will get out at a higher valuation. Thus, if neither the floating NAV proposal nor the capital-buffer-with-holdback proposal will solve the money market fund run problem, then neither proposal will foreclose the possibility that policymakers might once again face the prospect of supporting the commercial paper market in response to a widespread financial crisis."
Gallagher and Paredes continue, "Furthermore, we are concerned that the Chairman's proposal would, at a minimum, severely compromise the utility and functioning of money market funds, which would inflict harm on retail and institutional investors who have come to rely on money market funds for investing and as a means of cash management and on states, municipalities, and businesses that borrow from money market funds. Such adverse outcomes would undercut the SEC's mission. There is no consensus of support among stakeholders for what the Chairman has offered. Instead, there is a serious debate over the appropriateness of those measures and the extent to which they would even achieve their primary objective. We agree with Commissioner Aguilar that even just proposing rule amendments that advance the Chairman's alternatives at this time could have harmful consequences."
They tell us, "Although we cannot support the Chairman's specific proposals, we are not opposed to further improvements to the Commission's oversight and regulation of money market funds. But further action must be advanced on the basis of data and rigorous analysis showing that any such changes to our existing rules would be workable, would be effective in achieving their purpose, and would not unwisely disrupt the functioning of money market funds and short-term credit markets. Ultimately, there must be a reasonable basis to conclude that the benefits of any new initiatives justify their costs, a straightforward premise that the Chairman herself espoused when committing the SEC to a thoughtful standard of economic analysis earlier this year."
The two continue, "We believe we share a common goal with other members of the Commission and other financial regulators. We have urged that the Chairman take a different way forward for strengthening the resiliency of money market funds. This approach would (i) empower money market fund boards to impose "gates" on redemptions; (ii) mandate enhanced disclosure about the risks of investing in money market funds; and (iii) conduct a searching inquiry into, and a critical analysis of, the issues raised by the questions we pose below. In particular, it would be useful to receive comment on a proposal that would permit money market fund boards, as they deem appropriate and consistent with their fiduciary obligations to investors and without having to seek an exemptive order from the Commission, to "gate" redemptions to stave off a run and to allow the fund manager time to mitigate the concerns of investors who otherwise may be inclined to redeem. The Commission's 2010 amendments allowed boards to unilaterally suspend redemptions if the fund is put into liquidation. At that time, the Commission received input recommending that the Commission allow boards to impose a gate when they deemed appropriate, consistent with the boards' fiduciary duties to the fund's shareholders."
They say, "Discretionary gating directly responds, we believe, to run risk, both as to an individual fund and across multiple funds, as well as to the potential disparate treatment between retail and institutional investors. This should have the effect of addressing the conditions that gave rise to certain forms of governmental support in 2008, when money market funds had to sell portfolio assets to meet redemptions and scaled back their participation in short-term credit markets. These significant benefits of discretionary gating could be achieved by a straightforward amendment to the Commission's rules to expand a money market fund board's authority to impose gates, a change that would build on the 2010 reforms."
The statement explains, "Such a proposal would, of course, require enhanced disclosures to investors that would clearly explain the liquidity and principal reduction risks that could accompany a fund board's discretionary gating authority. Beyond that, we would recommend other disclosure enhancements that may be warranted to clear up any misunderstandings investors may have as to the riskiness of their money market fund holdings."
Gallagher and Paredes state, "Regrettably, the Chairman dismissed this approach. Instead, the draft release presented to the Commission relegates gating to a limited discussion of options that are implied to be inferior to the Chairman's preferred alternatives. Gating is never considered as a standalone proposal, but instead is coupled with a capital buffer."
They tell us, "Before the Commission intervenes in a way that threatens to jeopardize a $2.5 trillion sector of the economy -- one that has efficiently facilitated capital formation for governmental and corporate issuers, as well as proven to be an attractive investment for investors and means of cash management -- it is only reasonable to ask that the Commission have the best possible understanding of what is likely to happen. We have consistently stressed that we should obtain the required data and undertake a rigorous analysis to determine whether any remaining risks associated with money market funds warrant fundamental structural changes like the ones the Chairman has urged. At present, we lack satisfactory answers to many crucial questions, including, but not limited to, the following: During the peak of the financial crisis, in September 2008, investors redeemed assets from prime money market funds and, to a great extent, reinvested those assets into Treasury money market funds with the same structural features as prime money market funds. Do the sizeable inflows into Treasury money market funds during this period belie the claim that investors fled prime money market funds because of any structural flaws of money market funds? Did investors instead behave this way for another reason, such as a general aversion to risk or a "flight to quality" during the crisis?"
The pair add, "Regulatory intervention into a $2.5 trillion industry -- an industry that is integral to meeting the funding needs of major American institutions, both public and private -- must not be done on the basis of incomplete data and analysis, including a less than up-to-date understanding of the efficacy of the Commission's 2010 money market fund reforms. To date, no convincing evidence has been produced demonstrating that the fundamental restructuring of money market funds that the Chairman urges would be the appropriate means for addressing any remaining risks. To the contrary, what we have been shown tells us that the Chairman's proposal risks effectively ending prime money market funds as we know them, a result that cannot be justified given the significant doubt that the Chairman's alternatives would be effective in halting a run during another financial crisis and our present view that targeted reforms, such as the approach we outline above, would strike a better balance between costs and benefits."
Finally, they add, "We wish to stress that money market funds are squarely within the expertise and regulatory jurisdiction of the SEC. We do not intend to abdicate our responsibility to regulate money market funds, which would be unjustified and at the expense of our mission to oversee the securities markets. Accordingly, in the spirit of moving the agenda forward so that there can be constructive dialogue and engagement in this area, we ask that the Commission's staff of economists conduct detailed research and analysis on money market funds, including the staff's best efforts to answer the questions we have listed above, as well as others that are germane. We look forward to reviewing the results of the work of the Commission staff in response to our request and to a constructive dialogue with the staff, our fellow Commissioners, and other regulators and stakeholders on what additional measures might warrant further consideration."
Fitch Ratings published a new report yesterday entitled, "MMFs Demonstrate Ample Liquidity," which examines liquidity, maturities, shadow NAVs and portfolio practices over the past two years. Fitch's press release on the report, entitled, "Fitch: Stability Holds for U.S. Money Market Funds Despite Market Volatility," says, "U.S. prime institutional money market funds (MMFs) remain focused on high quality assets and relatively short duration amid ongoing market uncertainties, according to Fitch Ratings. Since May 2011, U.S. prime MMFs have been affected by cash outflows related to MMFs' exposure to eurozone financial institutions. Rated MMFs have been able to handle these outflows with available liquidity without reliance on secondary market liquidity. In addition, shadow net asset values (NAV) remain stable despite market uncertainties associated with the European sovereign debt crisis."
The release adds, "Fitch attributes this stability to conservative portfolio management practices exhibited by Fitch-rated prime MMFs, which are managed with substantial liquidity cushions relative to Fitch rating criteria and regulatory requirements. For example, as of July 2012, MMFs invested conservatively in daily and weekly liquid assets at the levels of 20% and 46% of their assets, respectively. On average, MMFs' weighted average maturity and weighted average life equaled 44 and 67 days, respectively. The eurozone crisis, negative credit migration among global financial institutions, and longer term U.S. fiscal trends will further challenge MMFs. Fitch believes MMFs will need to continue to focus on conservative liquidity, interest rate and spread-risk management to position their funds as investors react to market events."
The full report comments, "Shadow NAVs have remained stable despite market uncertainties associated with the European sovereign debt crisis. Fitch attributes this stability to conservative portfolio management practices exhibited by its universe of rated prime MMFs, which currently are managed with a substantial liquidity cushion relative to the agency's rating criteria and regulatory requirements." (The report shows a chart of shadow NAVs, which clearly have not budged.)
Fitch continues, "MMFs remain relatively well positioned for potential withdrawals. In particular, during summer 2011, when investors' concerns about Eurozone banks resurfaced, prime MMFs accommodated cash outflows of approximately $135 billion within July and August of 2011, or 8.2% of their assets as of June 2011 (source: iMoneyNet). The chart ... indicates that despite these outflows, the worst-case shadow NAV decline did not exceed 10 basis points. The short duration of MMFs' holdings further supports stable NAV as assets mature at par."
It adds, "Continuing deleveraging of the banking system and a lack of corporate issuance of MMF-eligible securities has contributed to decreasing availability of short-term high quality assets. Together with the persistently low interest rate environment, these developments resulted in higher demand for existing yield producing assets and their price appreciation. The chart ... illustrates the increase in shadow NAV as reflected by their maximum values during the last two years.... During the last two years, U.S. prime MMFs have been consistently focused on maintaining high levels of available liquidity given continuing market volatility associated with the lack of convincing steps toward a resolution of the Eurozone crisis."
Finally, Fitch writes, "During the last two years, prime MMFs have remained conservatively positioned with respect to interest rate and spread risks as reflected by their average WAM and WAL. WAM measures the funds' sensitivity to interest rate risk, while WAL indicates the funds' exposure to spread risk mainly related to volatility of credit assets. Amendments to Rule 2a-7, which governs activities of U.S. MMFs, implemented in May 2010 restricted maximum funds' WAM to 60 days and introduced a limit on WAL at 120 days. In line with rating criteria, 'AAAmmf' rated funds manage their portfolios within the same WAM and WAL parameters."
Crane Data, publisher of this website and newsletter Money Fund Intelligence, has partnered with German conference producer IQPC to launch European Money Fund Summit, a 2-day event scheduled for Nov. 19-20, 2012 in Frankfurt, Germany. European Money Fund Summit (www.moneyfundsummit.com) will be hosted by our Peter Crane and by Federated Investors' Debbie Cunningham, and will feature presentations and panels by the world's foremost authorities on European and global money market mutual funds. Speakers will include new IMMFA Chairman and HSBC Global CIO of Liquidity Jonathan Curry, JP Morgan Asset Management's Bob Deutsch and Jim Fuell, Goldman Sachs Asset Management's Kathleen Hughes, BVI and EFAMA's Rudolf Siebel, and Pyramis' (Fidelity Investments') Peter Knight, among others.
The conference's introductory letter states, "The European Money Market Mutual Fund landscape is challenging at the moment to say the least. A shifting regulatory landscape, ultra-low and zero interest rates, and concerns over European banks and credit make managing and marketing money funds more difficult than ever. But opportunities remain in the money markets for the bold. Can money market funds domiciled in Europe and denominated in Europe survive in the current rate and regulatory environment? While all is not lost, the challenges are myriad. Benefit from the following key discussions: Impact of Eurozone Troubles; Regulatory Issues: SEC Proposals, ESMA Guidelines, IOSCO, Shadow Banking; Investor Trends, Concerns & Requirements; Rating Process & Rating Methodologies; Distribution Tactics in Different European Markets. Join us in Frankfurt in November to learn more about these issues and to discover strategies for investing and positioning products in various European markets."
Conference sessions on day one will include: State of the European Money Fund Industry (IMMFA's Curry); State of the U.S. Money Fund Industry (and its Implications for Europe) (Crane and ICI's Sean Collins); U.S. & Global Money Fund Regulations: Rule 2a–7 and Beyond (Federated's Cunningham and JPM's Deutsch), Update on European Regulations Impacting Money Funds (Dan Morrissey of William Fry); The Shadow Bank Debate and its Impact on Money Market Funds(BVI's Siebel); `Mutual Funds & Money Markets in Germany & Continental Europe (Rainer Habisch of Deutsche Asset Management); Money Market Issues in France (Dr. Silvain Broyer of Natixis Global Asset Management); Money Funds Navigating the European Debt Crisis: Moody's Perspective (Moody's Yaron Ernst); and, Sovereign Risk within European Money Market Funds (Andrew Paranthoiene, S&P).
Day two's topics feature: Mutual Funds Go Global: Developments in Europe & Beyond (Pyramis' Knight); Enhanced Cash: Ultra Short Options and Separate Accounts; Distributing Money Funds in Europe (Goldman's Kathleen Hughes and BNY Mellon's Justine Mizrahi); Money Fund Managers on Major Issues; Wholesale funding from international money market funds - an issuer's perspective (Michael Schneider of DZ Bank AG and Jean-Luc Sinniger of Citi); MMFs Instruments, New Securities & Supply (David Hynes of Northcross Capital and Kieran Davis of Barclays); and Portals & The Transparency Arms Race (Peter McHugh of State Street's FundConnect).
Sponsors to date include Federated Investors, Moody's Investors Service, BlackRock and Crane Data. Visit http://www.moneyfundsummit.com for more details or call (508-439-4419) or e-mail Pete Crane with any questions or to request the full conference brochure. We hope to see you in Frankfurt! Finally, note too that the agenda has been released and registrations are being accepted for Crane's Money Fund University, which will be Jan. 24-25, 2013, at The Roosevelt Hotel in New York City, and that the preliminary agenda for next year's Crane's Money Fund Symposium (Baltimore, June 19-21, 2013) is being prepared currently.
The surprise announcement last week by SEC Commissioner Luis Aguilar that he would not support releasing a proposal on radical money market fund reforms is still reverberating across the cash investment world. Opinions vary on whether this likely means that money market funds have dodged the bullet of radical change or whether this opens the door to action by the Financial Stability Oversight Council, the Fed, or other regulars. But early reports indicate that it is more of the former than the latter. We cite some of the early discussions below.
Barron's writes "Money-Market Impasse Is 'Major' Plus For Asset Managers, Citi Says", saying, "The asset-management industry lobbied hard against SEC Chair Mary Schapiro's money-market overhaul. It got what it wanted. This week, the SEC shelved a vote on the plan. Some analysts are predicting good things for asset-management stocks, even though it's not clear that the industry is out of the woods. Citigroup brokerage analyst William Katz calls this week's money-market impasse "a major structural positive" for the affected fund providers. In a note headlined "Money Market Reform Risk(s) Evaporate(s)," he upgraded his investment rating on Federated Investors (FII) to "buy" from "neutral" and raised his price target to $25, from $22. Katz also boosted price targets for BlackRock (BLK), Invesco (IVZ), Legg Mason (LM) and Charles Schwab (SCHW)."
The New York Times' Dealbook, however, comments in a story "In Effort to Curb Money Market Funds, a Plan B Is Considered," "After the failure of one effort to overhaul a major part of the mutual fund industry, top government officials worked on Thursday to find alternative ways to rein in what they see as a systemic threat to the financial system. Treasury Secretary Timothy F. Geithner and other top regulators were given sweeping powers after the 2008 financial crisis that would allow them to force new rules on money market funds, a popular type of mutual fund that has taken some of the blame for the crisis. On Wednesday evening, the head of the Securities and Exchange Commission, Mary L. Schapiro, announced unexpectedly that she was calling off her agency’s long-running effort to change rules for money funds."
The Times commentary adds, "The most obvious next step would be for a council of top regulators, the so-called Financial Stability Oversight Council, to vote on designating money market funds as systemically important, which would pave the way for stricter regulations.... But now that the council is confronted with the possibility of an actual vote, the difficulty of forcing changes on the funds is becoming clearer to advocates and opponents alike. The problem with the option of designating the money fund industry as systemically important and therefore deserving of regulation is that it would send the issue back to the S.E.C. to draw up new regulations. The commissioners could still fail to agree on rules. Alternatively, the council has the power to designate specific money funds or fund managers as systemically important. That would shift regulation of those funds to the Federal Reserve. Any decision could take three to four months, and once approved, a fund manager could ask for a judicial review. This timing could stretch the process past the November elections, which may put new regulators into power."
Also, MarketWatch's Chuck Jaffe writes "Money-market fund reform is dead"." This article says, "Recognizing she did not have enough support to secure a victory, Schapiro last week canceled a vote on proposals for reforming the money-market business, but vowed to keep fighting. She should spend her time more productively. Schapiro and some regulators wanted the changes to go further, and the fund industry vehemently wanted to maintain the new status quo. Loathe as I am to agree with the honchos of the fund business, they got this one right."
Jaffe adds, "With that in mind, Schapiro needs to give up the quest. There is no way to eliminate all potential troubles, even in the safest of asset classes. At some point -- as with the proposals she was floating -- the cure is worse than the disease."
The piece quotes Peter Crane of Crane Data, "The thought that you can make anything perfectly safe and remove risk is ridiculous. The options they have been talking about would not have held up for 10 seconds during the Lehman Brothers meltdown. They might make you feel good until there was a crisis and they failed. Money funds have always been safe, and they're definitely safer now than in 2008, but sometimes people just all decide to run at once, and stuff happens. You can't regulate that out of the market."
Though the future of money market fund regulation remains unclear, money fund providers and investors continue to celebrate the sudden death of the SEC's floated money fund reform proposals. Today, we excerpt from Commissioner Aguilar's statement, from others' comments on the news, and we also excerpt more from SEC Chairman Mary Schapiro's statement. Swing vote Commissioner Luis Aguilar explains his decision in a "Statement Regarding Money Market Funds. He says, "Having reviewed the Chairman's proposal on money market funds, it is clear to me that there is much to be investigated related to the cash management industry, as a whole, before a fruitful discussion can be initiated as to whether additional structural changes should be made to only one segment of the cash management industry -- SEC-registered money market funds."
Aguilar explains, "The cash management industry is a large industry that includes many pooled vehicles exempted from registration and largely excluded from regulatory oversight. There are larger macro questions and concerns about the cash management industry as a whole that must be considered before a specific slice of that industry -- money market funds -- is fundamentally altered. To move forward without this foundation is to risk serious and damaging consequences in contravention of the Commission's mission."
He continues, "I am, and continue to be, supportive of the Commission putting forward a thoughtful and deliberative concept release that asks serious and probing questions about the cash management industry as a whole to diagnose its frailties and assess where reforms are required. This release should include all pooled cash management mechanisms so that the Commission is knowledgeable about how trillions of dollars are managed and understands how this money is able to move from the regulated, transparent money market fund market to the opaque, unregulated markets."
Aguilar states, "One section of this release would have to be devoted to a study of the Commission's 2010 money market amendments ("2010 Amendments") to gather data and ascertain their effectiveness. Money market fund investors have said that they appreciate the greatly enhanced transparency after the Commission's 2010 Amendments and have put it to great use. To date, neither the Commission nor the staff has undertaken a thorough and comprehensive study of the 2010 Amendments. A critical analysis of the efficacy of the 2010 Amendments would be a necessity to analyze what, if any, additional steps are required. This critical analysis must precede any proposals to further amend our rules, and in this instance, it is particularly necessary that this study inform any proposal, not merely accompany it."
He comments, "I remain concerned that the Chairman's proposal will be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the dark, opaque, unregulated market. Currently, in addition to all the prescriptive conditions applicable to SEC-registered money market funds, these funds are also highly transparent to investors and regulators in a way that other cash management vehicles are not. Many large investors in SEC-registered money market funds have made this point, and they have emphasized that the mere publication of this SEC proposal would be the trigger for the movement of monies. Such transfers could cause significant damage to the country's short-term capital markets."
Aguilar continues, "While such concerns are often expressed in connection with any regulatory action and can veer into hyperbole, this is different. Here, investors are speaking out about their own investments. It is their money that is invested in money market funds, and they can easily direct these monies to other investments. I am also concerned that, given the current volatility of the capital markets and the fragile state of the economy, the timing of this proposal and its collateral consequences could be needlessly harmful."
He says, "Thus, a concept release to study the cash management industry as a whole would provide a foundation to understand the role, and relative size, of SEC-registered money market funds in that overall industry. The information gathered in response to the concept release would provide the foundation to support any proposed changes to the entire cash management industry. Unfortunately, the lack of a foundation for and the rush to act on the proposal are also illustrated in the letters the Commission has received within the last week questioning the accuracy, veracity, and credibility of an SEC staff list of 300 money market funds that received sponsor support. The Commission was never given the chance to assess the staff's underlying methodology to understand how the list was compiled. Now, the Commission is receiving letters stating that there are serious discrepancies with the list. This list has been touted publically as a prime example of why additional reform is needed. Now, the credibility of that list is in doubt. It is impossible to understand what is true, and this demands more time to sort out the facts."
Finally, Aguilar adds, "There is a way forward to tackle the issues that matter to investors and the public interest. I remain supportive of an effort that analyzes the cash management industry as a whole and the effects of the 2010 Amendments. These findings should inform further actions. As an SEC Commissioner, it is important to me that all of the Commission's actions are predicated on a solid foundation of credible information, and this is no different. At a time when there are still outstanding issues regarding Dodd-Frank rulemaking, market structure, broker-dealer custody, and other matters of imminent concern to investors, I am ready to act to do what is in the best interests of investors and the public interest."
The New York Times, in an article entitled, "S.E.C. Calls Off Vote on Fund Regulation", was the first to alert us of the failure of the SEC to issue a new money fund regulation proposal. It says, "Attempts to make sweeping changes to a popular type of mutual fund that played a destabilizing role in the 2008 financial crisis have been derailed. The chairwoman of the Securities and Exchange Commission, Mary L. Schapiro, had wanted to bring her vision for regulating money-market mutual funds to a vote, as early as next week, but two of the five members of the commission opposed it. Luis A. Aguilar, the commissioner seen as the swing vote, told The New York Times on Wednesday that he would feel comfortable voting only after significant further study of the industry and the limited regulations that were adopted in 2010." (See the full `SEC Statement from Mary Schapiro here.)
A "Statement of SEC Chairman Mary L. Schapiro on Money Market Fund Reform" released to Reuters says, "Three Commissioners, constituting a majority of the Commission, have informed me that they will not support a staff proposal to reform the structure of money market funds. The proposed structural reforms were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts. I -- together with many other regulators and commentators from both political parties and various political philosophies -- consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis."
It continued, "While as Commissioners, we each have our own views about the need to bolster money market funds, a proposal would have given the public the chance to weigh in with their views as well. However, because three Commissioners have now stated that they will not support the proposal and that it therefore cannot be published for public comment, there is no longer a need to formally call the matter to a vote at a public Commission meeting. Some Commissioners have instead suggested a concept release. We have been engaging for two and a half years on structural reform of money market funds. A concept release at this point does not advance the discussion. The public needs concrete proposals to react to."
Schapiro adds, "The declaration by the three Commissioners that they will not vote to propose reform now provides the needed clarity for other policymakers as they consider ways to address the systemic risks posed by money market funds. I urge them to act with the same determination that the staff of the SEC has displayed over the past two years."
The Times reported Wednesday night, "Informed of Mr. Aguilar's comments, Ms. Schapiro said in a statement Wednesday evening that she was calling off the vote. She commented to the Times, "The declaration by the three commissioners that they will not vote to propose reform now provides the needed clarity for other policy makers as they consider ways to address the systemic risks posed by money market funds."
The piece adds, "The Federal Reserve and the Treasury Department, which support Ms. Schapiro's plan, had anticipated that the financial industry might succeed in scuttling any new regulations. They have discussed the possibility of using new powers to move regulation of money-market funds to the Federal Reserve, according to people with knowledge of their thinking."
The article also says, "Money-market funds, which until the financial crisis had been considered a dull, low-return corner of the markets, are at the center of one of the most intense lobbying battles in recent years over financial reform. The nation's top financial regulators have been proclaiming their support for new regulations of the funds and fund companies. The companies, in turn, have enlisted a chorus of supporters from the U.S. Chamber of Commerce to 105 House members and 10 state treasurers."
It adds, "Mr. Aguilar said in an interview Wednesday afternoon that the S.E.C. staff had not adequately studied the issue before pushing for a vote." He told the Times, "There's a lot that we know we don't know.... It would make sense for us to get a handle on those before we do a proposal."
Finally, the Times says, "Another commissioner who previously stated his opposition to Ms. Shapiro's proposal, Dan Gallagher, said on Wednesday that Ms. Schapiro and the S.E.C. staff had been unwilling to consider alternatives that he and others had presented. The blow to an overhaul is a significant victory for the financial companies that have lobbied hard against them."
J.P. Morgan Securities published a "Short-Term Market Research Note: Money fund reform FAQ" yesterday, which says, "Over the past several months, SEC Chairman Mary Schapiro and other financial regulators have been building a very public case for a substantive restructuring of money market mutual funds (MMF), which they argue currently pose an unacceptable level of systemic risk. Regulators' arguments have proven controversial, drawing resistance from investors, fund sponsors and others. In spite of the controversy, Schapiro is pushing SEC commissioners to hold a vote in the coming weeks to release draft proposals and related questions for public comment." (Note that contrary to some reports, the SEC has not released an agenda for next Wednesday's Open Meeting yet.)
The piece, written by Alex Roever, Teresa Ho and Chong Sin, explains, "Pushing for this vote now is politically risky as Schapiro may not have the support she needs. The vote could pass or it could fail. A failure could mark the moment reform efforts hit a political wall. Alternatively, the failure might serve as a rallying point for further attempts at reform either by the SEC or the FSOC. While it is not clear whether the majority of SEC commissioners will support the MMF release, the process has definitely generated many questions from market participants. What follows are some of the more common questions we have received along with our answers."
JPM's Q&A asks, "Why are additional money fund regulations being considered now? <b:>`_" They answer, "Four years after the Reserve Primary Fund broke the buck in the midst of the most volatile financial crisis in US history, US regulators may be on the verge of proposing fundamental changes to how MMFs operate. We believe the prospective regulations would force some MMFs to choose between converting to a floating NAV business model and having to hold capital and requiring shareholders to have a fraction of their shares subject to temporary holdbacks at liquidation. Although no MMF has broken the buck since the Reserve suffered a run following Lehman Brothers' bankruptcy in September 2008, the memory of that run both haunts and motivates fund shareholders, fund sponsors and regulators."
It continues, "Proponents of regulation, including the SEC chairman and the presidents of the New York and Boston Federal Reserve Banks, argue that MMFs remain systemically risky, and that their constant NAV makes them particularly vulnerable to runs. They say that although the Fed and Treasury were able to provide emergency support to the money funds following the run on the Reserve, the Dodd-Frank Act (DFA) would prohibit similar moves in the future. Because of the DFA, they argue that systemic costs of a broken buck have increased. Recently, both the SEC and the Fed have conducted studies that conclude that there would have been more MMFs breaking the buck absent liquidity injections into funds via various methods. While the SEC claims sponsors have provided support to funds over 300 times since the 1970's (over 100 of these were in September 2008), a more detailed Boston Fed working paper concluded 21 funds would have broken the buck from 2007-11, absent sponsor support."
Roever writes, "Opponents of further regulation argue that much has changed since the Reserve. The deleveraging resulting from the financial crisis forced the riskiest issuers and securities out of the money markets, eliminating the proximate market risks that fostered the crisis. In addition, opponents argue that new rules governing MMFs introduced by the SEC in 2010 have reduced risk, increased liquidity, transparency and fund stability."
The JPM piece also comments, "Press reports suggest that the five SEC commissioners are split on the need for further MMF rules at this time. Chairman Mary Schapiro (I) and Commissioner Elise B. Walter (D) are in favor of additional reforms, while the two Republican commissioners, Troy A. Parades and Daniel M. Gallager are opposed. Commissioner Luis A. Aguilar (D) is viewed as the swing vote, but he has not embraced the need for additional reforms, and is thought to be against the SEC proposing new MMF rules at this time."
It adds, "Reportedly, the SEC staff has drafted a 337-page document containing proposals and questions for public comment that so far has been circulated only to the commissioners and their staffs. For the proposal to be officially released to the public, 3 of the 5 commissioners would have to vote to approve a release. Schapiro is said to be targeting a public vote of the commissioners for this purpose as soon as August 29, although that date might drift if she cannot lock down a majority until then."
Finally, the piece says, "Proceeding with a vote to release a proposal without a majority is politically risky. On the one hand, a vote would put all of the commissioners on record for or against reform, perhaps allowing for more direct political pressure to be applied on the opponents. Even if there were a 3-2 vote against releasing the current proposals, it may be possible to revisit the reforms in the future if the commissioners' views, or the commissioners themselves, change. On the other hand, the SEC is busy with many issues besides MMFs. With the Dodd-Frank rule writing woefully behind schedule, pursuing these same proposals after a negative vote borders on quixotic, and may draw unwelcome political pressure from Congress and others."
On Monday, BofA Global announced the closing and liquidation of its Bank of America Global Liquidity Euro Fund, a Dublin-domiciled fund investing in Euro money market instruments and offered to European and "offshore" investors. A statement sent to shareholders, entitled, "Banc of America Capital Management (Ireland) to Close Bank of America Global Liquidity Euro Fund," says, "Responding to challenging market conditions in Europe, Banc of America Capital Management (Ireland), Limited (the "Manager") announced today that it will close the Bank of America Global Liquidity Euro Fund (the "Euro Fund"). The Irish-domiciled fund will be closed through an orderly liquidation that the Manager, acting on behalf of the Euro Fund, expects to complete on or about 21 September 2012 (the "Closure Date")."
BofA's communication continues, "The decision to close the Euro Fund follows the European Central Bank's July 5th rate cut, which reduced its benchmark interest rate to a record low of 0.75% and the rate on overnight deposits to 0.00%. The resulting yield pressure on Euro-denominated short term debt makes it difficult to manage the Euro Fund within its investment guidelines without having a negative effect on the value and yield of the Euro Fund. Based on this outlook, the Euro Fund's Manager and Directors believe the closure of the Euro Fund to be in the best interest of the existing shareholders."
It adds, "Investors in the Euro Fund may choose to redeem their investments at any time prior to the Closure Date. Any shares of the Euro Fund outstanding as of the Closure Date will be compulsorily redeemed as of close of business on the Closure Date, and proceeds will be distributed to investors in cash. Consistent with the investment objectives and policies outlined in the Euro Fund's prospectus, the Euro Fund will continue to seek to maintain its net asset value (NAV) of E1.00 per share. The NAV remains at E1.0000 per share today. Importantly, the Manager and BofA Advisors, LLC1 (the "Investment Manager"), have agreed to waive all management fees during the closure period. No new subscriptions will be accepted by the Euro Fund effective immediately."
The shareholder piece says, "Michael Pelzar, President of BofA Global Capital Management, emphasized that the decision to liquidate the Euro Fund reflects challenges specific to the markets in which the Euro fund invests. The decision does not reflect a shift in the firm's business strategy, nor does it affect the Bank of America Global Liquidity U.S. Dollar Fund, which will remain open as an investment solution for our clients."
It quotes Pelzar, "The decision to close the Euro Fund was driven solely by the low rate environment in Europe, the likelihood that rates there will remain low for the foreseeable future, and the relatively small size of the Euro Fund. It does not reflect a change either in our business model or in our commitment to providing high-quality cash asset management products and services to non-U.S. investors."
BofA Global ranks 17th out of 19 managers of Euro money market mutual funds with E639 million in assets and ranks 19th out of 20 managers of International or "offshore" money market funds with $2.775 billion in USD and Euro combined assets as of August 17, 2012, according to our Money Fund Intelligence International.
Below, we excerpt from the article "Nutter's Hunt on Regulations, Europe, Waivers," which was featured in the August issue of MFI. It reads: This month, Money Fund Intelligence interviews attorney John Hunt, a Partner in the Business Department at the law firm of Nutter McClennen & Fish LLP. Hunt recently joined Nutter from his own firm McLaughlin & Hunt LLP, and he specializes in Rule 2a-7, offshore money market funds, and other types of cash management products. (Hunt also will again lead the "Money Fund Regulations: 2a-7 Basics & History" session at Crane's Money Fund University, which will next be held Jan. 24-25, 2013, at The Roosevelt Hotel in New York.) We discuss recent regulatory and other issues in our Q&A below.
MFI: Tell us a little bit about your own history in the money fund space? My introduction with money market funds began with the amendments to Rule 2a-7 in the mid-1990s. At the time, I was as an associate with another law firm, and none of the other associates at that firm seemed interested in learning the complexities of the rule. After that, I became the "go-to" person for questions involving money market and other types of cash management funds, and relished the role.
MFI: What's been your biggest challenge recently? The biggest challenge is answering the questions of what will be in the new money market regulations and when will they be proposed. The problems are that first, a number of government agencies are weighing in on potential money market regulations, each with a different approach to new regulation. Before, you just had to read the tea leaves coming from the SEC. Now, there is the President's Working Group, the Financial Stability Oversight Counsel, and the Federal Reserve Bank of Boston. Second, there seems to be a number of rumors of what could be in new regulations. All of this is increasing the anxiety of fund sponsors. Third, the suggestions coming from regulators all appear to be adding significant costs to running a money market fund. In light of the Fed's low interest policies, most fund sponsors are concerned whether money market funds, if they survive the regulatory gauntlet, will be too costly to operate.
MFI: What are your thoughts on pending regulatory changes? I hate guessing at what regulators are going to propose. But if I have to, I would say that the SEC will take action before any other regulator. From what I understand, the SEC Staff would like to propose rules that, if adopted, would give money market funds a choice -- either float their NAVs or include some sort of liquidity facility. Whether the SEC actually adopts new rules along those lines, or any rule for that matter, is a different thing. Any proposed regulations would bring hundreds of comments, from fund sponsors and investors. It would take time for the SEC to sort them out and respond. By that time, there could be a different President bringing a different approach to regulation, who could elect to throw out these proposed rules and start all over.
In regulating money market funds, the biggest issue to me is whether the SEC, the Fed and others will accept that an investment in a money market fund includes a risk of losing money and that that risk is in line with investor expectations. If regulators will accept that risk, there is little reason to pile on more regulation. If they do not accept that risk, money market funds, as we currently know them, will no longer exist for retail investors, and only will exist overseas and in the private funds available to large institutional investors. That, to me, would be a loss for investors.
MFI: Do you expect to see any other changes in money fund regulations outside of the main ones? If the SEC proposes new rules, I do not see other regulators proposing additional regulations, at least for awhile. While a number of regulators have expressed concern over money market funds and their potential impact on the financial markets, those regulators would have to approach regulating the market differently than the SEC's approach. For example, banking regulators only have the tools of bank regulation to regulate money market funds, not the tools that the SEC has for regulating investment companies and the offering of securities. If Rule 2a-7 isn't complex enough, Rule 2a-7 plus bank regulations would be a nightmare. (Look for more excerpts from this article in coming days.)
Consulting firm Treasury Strategies recently posted a letter to New York Fed President William Dudley entitled, "Response to Federal Reserve Bank of New York Paper, "Proposal to Mitigate the Systemic Risks Posed by Money Market Funds"." The comment says, "We believe the paper makes a number of questionable and simplistic assumptions in an effort to address the problem of a run on money market funds. The proposed solution creates myriad additional problems that would effectively dismantle the nearly $3 trillion money fund industry -- which has demonstrated remarkable stability throughout its history."
The letter says, "We are writing in response to a Federal Reserve staff research paper recently released by the Federal Reserve Bank of New York (FRBNY) entitled The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds (the Staff Research Paper or Paper). Treasury Strategies, Inc. (TSI) would like to contribute the following information and views on the Paper for your consideration.... The Paper attempts to address a problem, a run, which is arguably not a problem. It attempts to do it in a way that creates myriad additional problems. Although it has demonstrated remarkable stability, the nearly $3 trillion MMF industry is in danger of being dismantled by such draconian "solutions" as proposed in the Paper."
It continues, "We believe the Paper reflects a number of questionable and overly simplistic assumptions. The Paper proposes that each MMF shareholder maintain a minimum balance at risk (MBR) of, for example, 5%. This amount is essentially a holdback of an individual shareholder's investment balance that would be retained in the fund if the shareholder sought to redeem more than 95% of his/her account. Every MBR would be in a subordinated position; aggregate MBRs would be first to absorb losses if the fund broke the buck within the 30-day period following redemption. The Paper claims an MBR approach would minimize the possibility of a run on MMFs, in the rare event that an MMF experiences distress that could lead it to break the buck. The Paper also claims this approach would increase fairness to shareholders, particularly retail investors, who may be slow to redeem shares in such a rare event –- fairness which the authors apparently believe is lacking now. TSI disagrees with both claims, as we discuss below."
Treasury Strategies tells us, "Significantly, the Paper minimizes the very real possibility that institutional investors would abandon MMFs en masse as a cash management tool if the proposed MBR concept were adopted. The Paper does not adequately consider potential damage to short-term liquidity markets, investors, or the financial system as a whole that would result if MMF assets shrank drastically."
They add, "In this submission, we urge you to consider the following: A subordinated holdback or MBR is unlikely to "brake" a run by MMF investors amidst a crisis. The MBR would create a first mover advantage that may precipitate a run. "First mover advantage" is an inherent characteristic of any financial market. Attempting to penalize the first mover flies in the face of market logic. The proposed MBR arrangement punishes the diligent investor.... The Paper overlooks the incentive of institutional investors to move into omnibus accounts and other critical problems, such as reduced liquidity. The MBR provision introduces complex and undefined accounting treatment for cash as well as the call option inherent in the subordination feature. The MBR proposal is not substantially different from other holdback concepts that have been criticized as flawed and unworkable. MMFs have performed flawlessly through severe market turmoil, including the recent Eurozone uncertainty."
Finally, TSI writes, "We conclude that the subordinated holdback MBR concept discussed in the Staff Research Paper will not only fail to achieve the regulatory objective of preventing a run on MMFs (a rare occurrence to begin with), but will significantly hamper or destroy the $2.6 trillion market for MMFs in the process, creating a huge vacuum in the short-term credit markets. Furthermore, Treasury Strategies believes the MBR proposal will have severe negative consequences for investors, short-term borrowers, banks, businesses of all sizes, and the broader global economy. We do not believe the MBR concept in the Paper should be considered a serious proposal for addressing what in any case is not a serious problem."
Federated Investors took the lobbying over possible money market mutual fund reform proposals to the next level this week with a direct plea to investors and friends of the firm and the launch of a new website to write comments to U.S. Securities and Exchange Commission Chairman Mary Schapiro and Assistant to the President for Economic Policy Gene Sperling, Save Money Market Funds. Judging from the comment letters beginning to appear on the SEC's "President's Working Group Report on Money Market Fund Reform (Request for Comment)" website page, it appears to be having some impact. The e-mail letter from Federated President & CEO J. Christopher Donahue says, "Dear Financial Professional, Over the past 40 years, money market funds have become a staple of the US economy, used by millions of investors, businesses, state/local governments and non-profit organizations as a stable, efficient and liquid cash management vehicle. Unfortunately, if Securities and Exchange Commission Chairman Schapiro has her way, that may not be the case for much longer, as the SEC is poised to consider a set of proposals that would be the death knell for money market funds."
He continues, "Federated has been very active in the battle to save money market funds and I am pleased to report that we are not alone. In addition to a host of financial services companies, hundreds of corporations, business groups, state/local governments and non-profits have written to the SEC to express their support for money market funds and to oppose Chairman Schapiro's proposals."
Donahue explains, "There are three proposals being promoted by Chairman Schapiro and other Washington regulators -- a floating NAV, redemption restrictions and capital requirements -- each of which would destroy the very foundations that make money market funds so effective and popular. Replacing the stable $1.00 net asset value, which has been the hallmark of money funds, with a floating rate NAV would create accounting nightmares for all users, requiring the tracking and reporting of fractional changes in share price each time shares are bought or sold. Instituting redemption restrictions would prohibit money fund users from having full access to their investments when they want it or need it. Such a freeze would also cripple sweep accounts, check-writing and a number of others features that money market fund users depend on. Requiring money market funds to maintain "capital buffers" or reserves would further limit the attractiveness of money market funds, particularly in the current low interest rate environment."
Finally, he goes on to say, "It is crunch time. The SEC is getting ready for a public meeting on these proposals. We need the help of everyone who knows the benefits of money market funds and their importance to the economy. Federated has developed a website that provides you the ability to contact the SEC and other officials to let your voice be heard in support of money market funds. You can visit www.savemoneymarketfunds.org to tell the Washington regulators not to destroy money market funds. I truly appreciate our relationship and your consideration of helping Federated and money fund users everywhere in this important matter."
The pre-packaged SEC letter available through the SaveMoneyMarketFunds.org website says, "Dear Chairman Schapiro: As someone who has depended on the utility, stability and liquidity of money market funds (MMFs), I am writing to express my strong opposition to the various regulatory proposals being considered by the SEC. Each would destroy a fundamental reason why the funds have become such a popular and useful cash management product. Contrary to what some regulators may want us to believe, the vast majority of users well understand that MMFs are investments which are not guaranteed by the government or anyone else. I have found that only money market funds sold by bank brokerage affiliates seem to do a less than stellar job of explaining money market funds. This should be focused upon separately and apart from this unnecessary regulation attempt."
It continues, "One of the hallmarks of MMFs is the stable, $1.00 net asset value. A move to adopt a floating NAV would create accounting nightmares for users, requiring us to track increases or decreases (literally fractions of a penny) in share price each time shares are bought or sold. The liquidity of MMFs is an equally important aspect of their utility. Instituting redemption restrictions of any kind, at any time, is just a bad idea. I know of no other widely used cash management vehicle that tells customers that they may not have full access to their investments when they want it or need it. Such a freeze would also cripple sweep accounts, fiduciary accounts and a number of other popular money market fund benefits. Finally, any proposal to require money market funds to maintain "capital buffers" or reserves would further limit the attractiveness of the investment. This would only serve to decrease the yield on the fund while such a buffer was being built. In the current rate environment such a concept seems untenable and to fail even the most rudimentary cost/benefit analysis."
Finally, the standard comment adds, "Given the significant negative impact that any of these proposals will have on those who rely on money market funds, I hope that the SEC will take my views into consideration. I ask you to look closely at the fallout that would ensue and abandon the effort to regulate MMFs out of existence. Money market funds are working well and none of the alternatives available provide the same flexibility, yield and value."
Crane Data's latest Money Fund Portfolio Holdings dataset shows money market securities held by Taxable U.S. money funds rose by $62.0 billion in July to $2.283 trillion, with over half of the increase ($31.2 billion) coming from increases in Treasury Repo and another $17.8 billion coming from Government Repo. Funds also increased their allocations to Treasury Debt and CP in July, but reduced their holdings in Agency securities and VRDNs. Taxable money funds returned to European-affiliated holdings in July, rising from 27.0% to 29.1% of securities. (Crane Data counts repo, ABCP and anything related to a European parent as "Europe".) European-affiliated holdings accounted for 31.7% of Prime funds (22.1% excluding Repos), and Eurozone-affiliated holdings accounted for 13.3% of Prime fund holdings, or 9.2% excluding Repos.
Repo remains the largest segment of money fund holdings at 25.1%, or $572.6 billion. This is comprised of 13.6% Government Agency Repurchase Agreements ($309.4 billion), 8.5% Treasury Repurchase Agreements ($193.9 billion), and 3.0% of Other Repurchase Agreements ($69.3 billion). Treasury Debt is the second largest holding segment at 20.2% ($460.8 billion), followed by Certificates of Deposit (CDs) at 17.7% of holdings ($403.4 billion) and CP at 15.1% ($345.2 billion). Commercial Paper is the combined total of Financial Company Commercial Paper's 8.2% ($187.7 billion), Asset Backed Commercial Paper's at 4.6% ($105.0 billion), and Other Commercial Paper's 2.3% ($52.5 billion). Government Agency Debt totals $318.3 billion in taxable MMF portfolios, or 13.9%, Other securities (Other Instruments, Other Time Deposits and Other Debt) total $121.6 billion, or 5.3%, while VRDNs (including Other Muni Debt) total $61.5 billion (2.69%).
The 20 largest Issuers to taxable money market funds as of July 31, 2012, include US Treasury (21.8%, $460.8 billion), Federal Home Loan Bank (7.3%, $152.9 billion), Barclays Bank (4.0%, $83.6B), Credit Suisse (3.6%, $75.7B), Deutsche Bank AG (3.5%, $73.8B), Federal Home Loan Mortgage Co (3.2%, $68.1B), Bank of America (3.2%, $67.8B), Federal National Mortgage Association (3.0%, $64.1B), Bank of Tokyo-Mitsubishi UFJ Ltd (2.5%, $53.1B), Citi (2.4%, $49.7B), Sumitomo Mitsui Banking Co (2.3%, $48.1B), `Bank of Nova Scotia (2.3%, $47.9B), RBC (2.2%, $46.0B), JP Morgan (2.1%, $45.0B), Societe Generale (2.1%, $44.0B), National Australia Bank Ltd (2.0%, $42.0B), BNP Paribas (1.8%, $37.9B), HSBC (1.8%, $37.5B), Mizuho Corporate Bank Ltd (1.7%, $34.8B), and Goldman Sachs (1.6%, $32.6B).
The United States remains the largest segment of country-affiliations with 51.2%, or $1.169 trillion, while Canada (7.7%, $174.9B), the UK (7.3%, $166.2B), Japan (6.9%, $157.7B), and France (5.5%, $125.1B) round out the five largest countries. Australia (4.6%, $104.4B), Germany (4.5%, $103.4B), Switzerland (4.5%, $103.0B), Sweden (3.3%, $74.8B), and the Netherlands (2.8%, $64.5B) ranked sixth through 10th. France (up $20.5B), the UK (up $19.5B), and Germany (up $17.7 billion) showed the largest gains in July. `China continues to grow and now ranks 14th with 0.5% ($1.1B); it broke above $1 billion debt held by money funds for the first time ever two months ago.
Taxable money funds now hold 26.9% of their assets in securities maturing overnight (Prime funds hold 23.6%), and another 12.5% in securities maturing in 2-7 days (Prime funds hold 13.3%). Another 20.7% matures in 8-30 days (21.7% for Prime), while 23.5% matures in the 31-90 day period (25.7% for Prime). The next bucket, 91-180 days, holds 11.7% of taxable securities (11.7% for Prime), and 4.8% matures beyond 180 days (4.0% for Prime).
Finally, note that Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Friday, while our MFI International "offshore" Portfolio Holdings were updated Monday and our Tax Exempt MF Holdings were updated yesterday. Call us at 508-439-4419 for a look at the full data series or for trial access.
The battle over what happened during the bouts of money fund bailouts escalated again yesterday as the Federal Reserve Bank of Boston released a study claiming that a number of money funds would have "broken the buck" during the latest crisis. A press release entitled, "Boston Fed Report Finds at Least 21 Money Market Mutual Funds Would Have "Broken the Buck" Absent Sponsor Support during the Financial Crisis," says, "A report released today by the Federal Reserve Bank of Boston highlights the significant role of sponsor support in maintaining the perception of stability in money market mutual funds (MMMFs). The authors focus on support observed through the recent financial crisis and itemize it in detail -- and they assert that such support has obscured the degree of credit risk that is taken by these funds. The report, "The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011," uses information gleaned from audited financial statement filings with the U.S. Securities and Exchange Commission (SEC). The authors examined these public records for 341 prime MMMFs, and provide in the report a complete data set of the direct support instances and related amounts."
The release explains, "The authors find that 78 prime MMMFs disclosed support received from their sponsors -- in the form of a cash contribution, or the purchase of securities at an amount in excess of fair market value -- during the period 2007 to 2011. Of the 78 MMMFs that received this form of sponsor support, by conservative measure at least 21 MMMFs would have "broken the buck" (meaning their net asset value per share would fall below $1) without support from sponsoring firms, parents, and affiliates. In these 21 cases the support received in a single year was significant enough relative to assets under management to show that the MMMFs would have broken the buck, absent the support. These 21 cases involve support exceeding 0.5% of the fund's assets under management.... In short, from 2007 to 2011, sponsor support was frequent, and was significant to many funds. These examined forms of support alone totaled at least $4.4 billion."
The release continues, "Support detailed in the paper was largely necessitated by the funds' holdings of defaulted structured investment vehicles (SIVs) and Lehman Brothers obligations in 2007 and 2008. But the authors note that MMMFs are still susceptible to risks related to permissible portfolio holdings that may be vulnerable to downgrades or defaults -- even subsequent to 2010 SEC rule changes. Given the credit risk that is still permitted within MMMFs, and the possibility that sponsor support might not be possible in some circumstances, the authors call the current model "concerning.""
It adds, "The report is co-authored by Steffanie Brady, Ken Anadu, and Nathaniel Cooper (Brady and Anadu of the Risk and Policy unit of the Supervision, Regulation, and Credit function at the Federal Reserve Bank of Boston; Cooper formerly of the unit and Northeastern University).... The link to the report is: http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1203.htm.... The report complements and documents the analysis and observations in public remarks by Boston Fed president Eric Rosengren, made on April 11 and June 29, 2012 (and available, respectively, on the Bank's website at http://www.bostonfed.org/news/speeches/rosengren/2012/041112/index.htm and at http://www.bostonfed.org/news/speeches/rosengren/2012/062912/index.htm.
The paper's summary says, "It is commonly noted that in the history of the Money Market Mutual Fund (MMMF) industry only two MMMFs have "broken the buck," or had the net asset value per share (NAV) at which they transact fall below $1. While this statement is true, it is useful to consider the role that non-contractual support has played in the maintenance of this strong track record. Such support, which has served to obscure the credit risk taken by these funds, has been a common occurrence over the history of MMMFs. This paper presents a detailed view of the non-contractual support provided to MMMFs by their sponsors during the recent financial crisis based on an in depth review of public MMMF annual SEC financial statement filings (form N-CSR) with fiscal year-end dates falling between 2007 and 2011. According to our conservative interpretation of this data, we find that at least 21 prime MMMFs would have broken the buck absent a single identified support instance during the most recent financial crisis. Further, we identify repeat instances of support (or significant outflows) for some MMMFs during this period such that a total of at least 31 prime MMMFs would have broken the buck when considering the entirety of support activity over the full period."
On Friday, the Investment Company Institute released a response to the SEC's recent media campaign to highlight past instances of money fund sponsor support, and Sunday ICI posted yet another paper attacking the "myths" regulators are spreading about money market funds. The first "Viewpoints" piece, "The SEC's Data Dump on Money Market Funds Is Misleading, from Paul Schott Stevens, says, "The Securities and Exchange Commission (SEC) has finally delivered on Chairman Mary Schapiro's June promise to give Congress data to back up her claim that money market fund sponsors "have voluntarily provided support to money market funds on more than 300 occasions." Regrettably, the full list exposes just how flimsy the SEC's claims are. The tabulation reveals that the dramatic figure -- previewed in an interview with the Wall Street Journal two days before the hearing -- was more showmanship than science. After the figure was disclosed with such fanfare, it took the SEC fully six weeks to provide any documentation. Even so, the final list lacks crucial detail and appears concocted to create a misleading impression on a vital matter of public policy."
Stevens explains, "To make matters worse, the SEC frames the list as representing that "sponsor support" was necessary in each instance to rescue a fund on the brink of failure. In Chairman Schapiro's own words: "We know that funds come close to breaking the buck and that's why so many times sponsor support has been needed." That contention takes on added weight with regulators' frequent suggestion that any incident of breaking the dollar is likely to set off a destabilizing run on all money market funds."
He continues, "We're still in the preliminary stages of our analysis. Our lawyers and economists are chasing down SEC filings and calling fund sponsors for details to test the SEC's allegations -- in short, doing the work that the SEC staff should have done before giving the number to the media, making it the centerpiece of the Chairman's Senate testimony, and providing this data to the Senate Banking and House Financial Services committees. But we have already uncovered many, many problems."
Stevens writes, "The first: numerous incidents on the list don't match the claim that sponsors "provided support" to their funds. In at least 60 cases during the 2007–2008 financial crisis, funds applied for and received permission to provide sponsor support -- but never put a dime into their funds. Those funds don't belong on a list of sponsor support -- particularly not a list in which every fund was inaccurately portrayed as on the brink of breaking the dollar.... In fact, in September and October 2008, the SEC staff encouraged ICI to inform sponsors that the agency would grant liberal permission to support their money market funds in the face of unprecedented market illiquidity."
He says, "Now, the relief that the SEC staff so liberally afforded to funds is being used as a hammer to bludgeon our industry. That's a pattern throughout this list. It includes sponsors that faced heavy pressure from senior SEC officials to "top up" their funds before new portfolio disclosures were unveiled in early 2011. And the list is padded with funds whose sponsors were virtually ordered in 1994 to buy out specific securities -- "interest rate floaters" -- after the SEC declared those securities inappropriate holdings."
Stevens adds, "As those examples show, even when funds got actual support, the reason for the support often had little to do with any risk that the fund might break the dollar. Just take the six funds listed as receiving support in 2010. In three cases, the sponsor bought downgraded securities out of the funds' portfolios to maintain the funds' AAA ratings. In three other cases, the sponsor bought the funds' holdings of British Petroleum securities to limit risks to investors in the middle of the Deepwater Horizon oil spill. None of those six funds was in danger of breaking the dollar."
Finally, he says, "Yes, in some instances sponsor support does prevent a fund from breaking the dollar. But there are two key things to remember. First, the fact that one fund breaks the dollar isn't likely to set off destabilizing runs -- just as the failure of a fund in 1994 had no impact at all on other funds. Second, the sponsors who provided liquidity for their money market funds in 2008 helped keep the financial crisis from getting even worse.... [O]ne thing is clear. Such slipshod data provides no basis for the sort of drastic changes in money market funds that Chairman Schapiro has been urging."
In another "Viewpoint" piece, ICI's Mike McNamee writes "Correcting the Record on Money Market Funds, "Bad information can't give rise to good policy. Unfortunately, the regulators who are campaigning for structural changes in money market funds are building their case on information that is deeply flawed at best. In testimony, speeches, and other statements, officials from the Securities and Exchange Commission (SEC), the Federal Reserve, and other agencies have made assertions about money market funds that distort the record, exaggerate the impact of these funds on the financial crisis, and reveal profound misunderstandings about money market funds, their investors, and their role in the financial markets. These misstatements aren't just incidental mistakes -- they're the foundation of the regulators' case for fundamental changes to a vital financial product. As scores of comments filed with the SEC have documented, those changes would severely damage the value of money market funds for investors and the economy."
He explains, "Because we believe the truth can trump misinformation, we're going to use this space to correct the record, focusing primarily on SEC Chairman Mary Schapiro's latest testimony before the Senate Banking Committee. Sadly, there are a lot of misstatements. Let's start with the myth that money market funds are "susceptible" to runs.... In the 40-year history of money market funds, two funds have "broken the dollar," or failed to maintain their stable $1.00 net asset value. In one case -- in September 2008 -- investors did pull back from other prime money market funds. In the other -- in 1994 -- the world yawned because there was no impact on other funds or the markets. That 50/50 record hardly suggests that money market fund investors are prone to running. Something else must have happened in 2008."
Fidelity Investments ranked as the largest manager of money market mutual funds worldwide in July, surpassing J.P. Morgan Asset Management for the first time since we've been tracking global market share, according to totals from Crane Data's Money Fund Intelligence XLS and Money Fund Intelligence International. Fidelity ran a total of $413. 6 billion in money funds worldwide, with $406.1 billion in U.S. money market funds and $7.5 billion in "offshore" money market funds as of July 31, 2012, while J.P. Morgan ran $394.3 billion ($241.2 billion in U.S. and $153.1 billion "offshore"). JPMorgan remains by far the largest manager of money funds outside the U.S. while Fidelity continues to dominate the market share rankings inside the U.S. MFI XLS tracks U.S. money market mutual funds, while MFI International tracks offshore and European money funds registered in Dublin, Luxembourg and elsewhere and denominated in USD, Euro and Pound Sterling currencies (totals are translated into dollars). (E-mail Pete to request our full "Family Rankings" tables.)
Federated Investors ranked third among global money fund managers tracked by Crane Data with $237.2 billion ($226.6 billion in U.S. MMFs and $10.5 billion outside the U.S.), while BlackRock ranked fourth with $232.7 billion. BlackRock is the second largest manager of money funds outside the U.S. with $91.4 billion, and is the largest manager of Sterling money funds with L30.4 billion (they run $141.3 billion in the U.S.; totals include the former Barclays Global and Merrill Lynch money fund assets). `Goldman Sachs is the fifth largest global manager of money funds with $210.6 billion ($133.5 billion U.S. and $77.2 billion offshore).
The sixth through 10th largest money fund managers worldwide include: Dreyfus (BNY) with $183.8 billion ($150.1 billion U.S. and $33.7 billion elsewhere); Vanguard with $159.7 billion (all U.S.); Schwab with $152.0 billion (all U.S.); Western Asset with $114.5 billion ($43.3 billion U.S. and $71.2 billion in offshore USD, Euro and Sterling); and Wells Fargo with $105.0 billion (all U.S.). SSgA ($91.8B), Morgan Stanley ($90.0B), DB Advisors ($80.1B), Northern ($77.4B), and Invesco ($61.7B) rank 11-15, while `HSBC ($53.3B), UBS ($47.8B), BofA ($47.0B), First American ($40.6B), and SWIP ($27.3B) round out the Top 20 money fund managers globally.
In other news, J.P. Morgan released its "Update on prime money fund holdings for July 2012 yesterday, saying, "Prime MMF AUM rebounded by $30bn (2.2%) in July, recovering almost all of the seasonal outflows experienced in June. Prime MMF balances have been fairly stable year-to-date and even more so for government MMFs, which have benefited from elevated short-term rates. Total bank exposures increased by about $45bn according to our estimates, mostly driven by increases in unsecured CP/CD and repo exposures. Exposures increased across all regions but fund managers continued to be conservative as increased net exposures to Eurozone banks were primarily through overnight repo and time deposits while increased net exposures to non-Eurozone banks were mostly through term unsecured CP/CDs."
They add, "Eurozone bank exposures increased by $14bn, driven by increases to repo and time deposits (most of which are overnight in maturity) by $14bn and $5bn, respectively offset by reductions to unsecured CP/CD and ABCP by $4bn and $1bn, respectively. July's increase marks a partial return of the $47bn of prime MMF cash that left Eurozone banks last month, reflecting the still cautious stance most fund managers have adopted towards the Eurozone banks."
Note to Subscribers: Crane Data's Money Fund Portfolio Holdings dataset with holdings as of July 31, 2012, will be sent to subscribers this morning, and our new Money Fund Portfolio Laboratory will also be updated then. Look for our Reports & Pivot Tables e-mail later Friday morning.
A new comment letter was posted on the SEC's President's Working Group Report on Money Market Fund Reform website by J. Charles Cardona, President of The Dreyfus Corporation. Cardona's letter says, "Chairman Shapiro's Congressional testimony on June 21, 2012 piqued the interest of the financial services industry when she stated that money market mutual fund ("money fund") sponsors "have voluntarily provided support to money market mutual funds on more than 300 occasions since they were first offered in the 1970s." Eyebrows were raised not only over the Chairman referencing time periods that pre-date the adoption of Rule 2a-7, but also over the total number of instances cited, which exceeded substantially those previously reported by independent services such as Moody's that had tallied "over 200" instances of sponsor support of money funds in both Europe and the U.S. for the period 1972-2008 (and with only 62 of those instances occurring as a result of the 2007-2008 financial crisis). We were not surprised, then, that certain Congressmen requested that the Commission provide the data and any related analyses that supported this tabulation."
He explains, "However, we were disappointed to learn the actual methodology used to calculate the number of occasions of money fund sponsor support. Contrary to the information provided in footnote two of the Chairman's published testimony, the methodology for the tabulation includes (and without any related analytics) every money fund that obtained no-action relief from the Staff of the Division of Investment Management in 2008. In fact, that relief was sought by many money funds as a precautionary measure in order to improve their flexibility to deal with the then-prevailing, historically severe, market illiquidity. Recognizing that the need for relief could arise quickly given the unpredictability of the markets, the SEC Staff readily granted such relief both to funds that had a current need for sponsor support and to funds that sought relief solely as a precautionary measure. Thus, by focusing on all funds that sought relief, rather than on those funds that actually relied on such relief, the methodology included in its tabulation many money funds that neither needed nor received sponsor support."
Cardona continues, "We also are concerned that the overstatement of 300+ instances of sponsor support was delivered as testimony to inform Congress and to influence it on the ongoing money fund reform debate. We believe that the Chairman's testimony, at a minimum, demonstrates a lack of appreciation for the circumstances surrounding the no-action relief provided by the Staff during the 2008 crisis. We further believe that this disconnect compromises that aspect of the testimony, which spoke to instances of sponsor support provided (i.e., in the past tense that, in plain English, is read to mean instances of support actually provided) and not instances where sponsors were not called upon to support their funds."
Finally, he adds, "While the Commission has pursued reform proposals in the name of improving "the susceptibility of money funds to destabilizing runs," we believe the need for reform should be assessed in light of those past instances of actual net asset value distress for money funds, and the market, economic, or structural conditions that might have given rise to those circumstances. In this context, merely obtaining 60-day no action relief that the SEC Staff was readily granting during a historic liquidity crisis simply does not equate with "occasions of sponsor support voluntarily provided."
The Wall Street Journal wrote Wednesday in an article entitled, "SEC-Money Fund Showdown: Aug. 29," "After months of wrangling in Washington, U.S. regulators are planning to vote later this month on a proposal to tighten rules governing the $2.6 trillion money-market mutual-fund industry. Securities and Exchange Commission Chairman Mary Schapiro has waged a public campaign this year to rein in money funds. Her goal: to avoid a repeat of 2008, when a run on one fund threatened to destabilize the financial system. But the proposal has faced stiff opposition from the mutual-fund industry, which argues that the rules effectively would kill their businesses."
The Journal says, "The SEC has set a public vote for Aug. 29 in an effort to force all five commissioners to take a public position, according to SEC officials. The 337-page proposal would require money funds to allow their net-asset values to float instead of remaining fixed at $1 per share, or set aside capital to protect against losses while holding back a portion of shareholders' cash for 30 days when they seek to withdraw all of their money. SEC officials have said the capital buffers would be less than 1% of a fund's assets, but could vary depending on the types of investments held by a fund."
The piece explains, "Ms. Schapiro's proposal has been months in the making. It was initially anticipated to be released in early spring, but was pushed back when she failed to win majority support among the commissioners.... Industry representatives had been willing to support a rule that would charge investors in money-market funds a fee to withdraw money during a "liquidity event" such as the 2008 financial crisis. But the talks fell apart."
The Journal adds, "One stumbling block has been Ms. Schapiro's insistence on including a stipulation that investors be able to redeem only 95% to 97% of their holdings at once, with the rest payable after 30 days, in order to prevent a stampede, SEC and industry officials said. Another sticking point has been the floating-net-asset-value idea. Money funds peg their net asset value to $1 and seek to maintain it every day, but during choppy markets the net asset value can fall slightly below $1. A floating net asset value would give investors a truer picture of a fund's value at any given time. The industry says such a provision could lead to more volatility."
Finally, they write, "SEC officials said the Aug. 29 date could be delayed as Ms. Schapiro works to gain support. While the SEC announced last week that Robert Plaze, the lead agency staffer working on the proposal, plans to retire at the end of August, Mr. Plaze said he would remain at the commission until a vote is held. If a majority of commissioners support the proposals, the changes would be subject to a round of public comments. The agency then would have to vote again, likely next year, to implement any changes."
While we haven't been a fan of their recent editorials, yesterday's Wall Street Journal featured an Review & Outlook piece entitled, "The Latest Big Bank Bailout." The commentary takes aim at the possible extension of the TAG (transaction account guarantee) program that was extended in Dodd-Frank to offer unlimited FDIC insurance to noninterest bearing accounts through the end of 2012. The Journal says, "[B]anks have been lobbying to extend a deposit insurance program that was sold as a temporary response to the financial crisis in 2008. It's called the Transaction Account Guarantee (TAG). Whereas traditional insurance from the Federal Deposit Insurance Corporation now covers up to $250,000 per account, TAG provides unlimited coverage for non-interest-bearing transaction accounts. These are typically checking and payroll accounts for corporations and municipalities, as well as some large personal accounts. Taxpayers now stand behind more than $1.3 trillion of TAG deposits."
The editorial explains, "TAG is scheduled to expire at the end of this year. But four years after the crisis, some bankers can't seem to wean themselves off government assistance.... Like all government deposit insurance, TAG rewards poorly run banks at the expense of well-run institutions, distorts the allocation of capital, and is used to justify additional regulation. And of course it puts taxpayers on the hook for private risk-taking. While it creates the veneer of safer banking, TAG also sows the seeds of future instability. Hard as it may be for some youngsters to believe, interest rates normally don't stay near zero. When rates inevitably rise, expect a lot of cash to exit non-interest-bearing accounts for better returns."
The Journal adds, "The immediate danger to taxpayers is a back room deal on Capitol Hill. As lawmakers draft a continuing resolution to keep the government open past September, a TAG extension could be slipped into the legislative text at the last minute before taxpayers notice. TAG has largely flown under the media radar because some of its most prominent backers have often postured as opponents of the giant banks. Congressman Barney Frank (D., Mass.) promised "death panels" for too-big-to-fail banks, but his 2010 Dodd-Frank law quietly extended TAG for two years."
Finally, it says, "Lawmakers should consider how far they can stretch that net before taxpayers simply cannot cover the tab for Washington's moral hazard. A 2010 report from the Federal Reserve Bank of Richmond found that from 1999 to 2009 the coverage provided by the federal safety net surged to 59% from 45% of all liabilities at financial firms. Moving that number much closer to zero over the next decade should be high on Mr. Romney's agenda."
See also the article "Trillion dollar bank insurance program may sneak into legislation" in The Dailer Caller. It says, "A little-known bank insurance program implemented in 2008 at the height of the financial crisis may quietly slip into legislation and become permanent. The Transaction Account Guarantee program was implemented in 2008 and provides unlimited FDIC insurance to deposits for all non-interest-bearing transaction accounts above the limit of $250,000. Today, more than $1.3 trillion in deposits are covered by the program. As a part of the Dodd-Frank Act, TAG initially was to be phased out at the end of 2012, however, now there is a lobbying push in Congress to keep the program permanent, by way of a stealth amendment."
The August issue of Crane Data's Money Fund Intelligence was sent to subscribers Tuesday morning, along with our July 31, 2012 monthly performance data and rankings. Our Money Fund Intelligence XLS monthly spreadsheet, our Money Fund Wisdom database query website and our Crane Index money fund averages series were also released and updated. (The monthly Money Fund Portfolio Holdings with 7/31/12 data will be distributed on the 8th business day, August 10.) Our latest edition of MFI features the articles: "Still Waiting for Schapiro; Cash Remains King w/Corps," which discusses money fund reforms and corporate cash; "Nutter's Hunt on Regulations, Europe, Waivers," which interviews Rule 2a-7 attorney John Hunt; and, "Repo & Treasury Lead MM Supply Recovery," which reviews the recent stabilization in the supply of money market securities.
Our monthly "profile" on Hunt says, "John Hunt, a Partner in the Business Department at the law firm of Nutter McClennen & Fish LLP ... recently joined Nutter from his own firm McLaughlin & Hunt LLP, and specializes in Rule 2a-7 and offshore money market funds and other types of cash management products. (Hunt also will again lead the "Money Fund Regulations: 2a-7 Basics & History" session at Crane's Money Fund University, which will next be held Jan. 24-25, 2013, at The Roosevelt Hotel in New York.) We discuss recent regulatory and other issues in our Q&A below."
Hunt tells MFI, "The biggest challenge is answering the questions of what will be in the new money market regulations and when will they be proposed. The problems are that first, a number of government agencies are weighing in on potential money market regulations, each with a different approach to new regulation. Before, you just had to read the tea leaves coming from the SEC. Now, there is the President's Working Group, the Financial Stability Oversight Counsel, and the Federal Reserve Bank of Boston. Second, there seems to be a number of rumors of what could be in new regulations. All of this is increasing the anxiety of fund sponsors."
Our Supply update says, "While money market mutual fund distributors worry about regulatory changes and zero yields, money fund managers continue to fret mainly over the lack of product or supply. Though the money markets remain dramatically below their peak levels of early 2008, supply does appear to have stabilized."
The August 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).
We learned from mutual fund news website ignites.com that BlackRock has filed to launch a new "enhanced cash" fund and an ultra-short bond fund -- BlackRock Ultra-Short Obligations Fund and BlackRock Short Obligations Fund. (See the SEC filing here.) While it's been a number of months since we've seen new entrants in the space beyond money funds, there have been a flurry over the last several years. (See our April 2011 MFI article, "Comeback? Enhanced Cash Returns", and previous Crane Data News updates on the "enhanced cash" or "money fund plus" market: "JPMorgan Rolls Out Ultra-Short Money Mkt Fund, Enhanced Cash Fund" (10/1/10), "Fidelity Launches Conservative Income Bond Fund; New Enhanced Cash" (3/14/11), "Oppenheimer Short Duration Fund Launches; Dreyfus Closes Enhanced" (4/26/11), "Guggenheim Launches Enhanced Ultra-Short Bond ETF, Latest Cash+" (6/3/11) and "Putnam Enters MMF-Plus Space, Launches Short Duration Income Fund" (11/3/11).
The objective of the BlackRock Ultra-Short Obligations Fund "is to seek current income consistent with preservation of capital" and its expense ratio will be 0.25% (after a 0.17% waiver). Ultra-Short Obligations Fund invests in a broad range of U.S. dollar-denominated money market instruments, including government, U.S. and foreign bank and commercial obligations and repurchase agreements. In addition, the Fund may also invest in mortgage- and asset-backed securities, short-term obligations issued by or on behalf of states ... and derivative securities such as beneficial interests in municipal trust certificates, and partnership trusts. Securities purchased by the Fund (or the issuers of such securities) will carry a rating in the highest two rating categories, A-2, P-2 or F2 or better by Standard & Poor's Ratings Services, Moody's Investors Service, Inc., or Fitch Ratings, respectively, or the equivalent by another nationally recognized statistical rating organization, or if such investments are unrated, determined to be of comparable quality by BlackRock, at the time of investment. The Fund invests in a portfolio of securities maturing in 397 days or less from the date of purchase (with certain exceptions) and will maintain a dollar-weighted average maturity of 90 days or less. The Fund may invest in variable and floating rate instruments and when-issued and delayed delivery securities." The PMs will be Thomas Kolimago and Eric Hiatt. Both funds will have $5 million minimum investments.
The objective of the BlackRock Short Obligations Fund "is to seek current income consistent with preservation of capital" and its expense ratio will be 0.30% (after a 0.15% waiver). The prospectus says, "Under normal market conditions, Short Obligations Fund will invest in U.S. dollar denominated investment grade fixed and floating rate debt securities maturing in three years or less (with certain exceptions) and will maintain a dollar-weighted average maturity of 180 days or less and a dollar-weighted average life of 365 days or less.... [T]he Fund may invest in corporate securities, mortgage- and asset-backed securities, and money market instruments, including government, U.S. and foreign bank and commercial obligations ... and derivative securities such as beneficial interests in municipal trust certificates, and partnership trusts, and repurchase agreements. Investment grade securities purchased by the Fund (or the issuers of such securities) will carry a rating of BBB-, or equivalent, or higher by at least one nationally recognized statistical rating organization ("NRSRO") and short-term investments will carry a rating in the highest two rating categories of at least one NRSRO (e.g., A-2 or higher by Standard & Poor's Ratings Services or P-2 or higher by Moody's Investors Service, Inc.), or if such investments are unrated, determined to be of comparable quality by BlackRock, at the time of investment. The Fund may invest in variable and floating rate instruments and when-issued and delayed delivery securities." The PMs will be Michael Evan and Richard Mejzak.
Website ignites comments in its August 2 story, "BlackRock Preps Ultra-Shorts as Rates Cripple Money Funds, "Ultra-short funds may appeal to investors seeking more than money funds' abysmally low 0.06% average yield, says Peter Crane, CEO and president of Crane Data. The funds may also serve as a kind of "hedging strategy" for firms, he says, in case the SEC does pass rules that dramatically alter the current structure of money market funds."
They quote Crane, "It's surprising that there haven’t been more ultra-short or enhanced cash launches. If money funds get uglier, everything around them is going to get better looking."
Ignites adds, "Fidelity, Putnam and OppenheimerFunds are among the firms that have added new ultra-short funds to their product lineups since early 2011. The Fidelity Conservative Income Bond fund has gathered $1.6 billion in assets since launching in March 2011, while the Oppenheimer Short Duration fund , rolled out in April 2011, now has $209 million and the Putnam Short Duration Income fund, on the market since October 2011, has $181 million, according to Morningstar data. As a whole, ultra-short bond funds stand at $40.7 billion in assets, as compared to about $26 billion at the end of 2007. Their year-to-date inflows are $2.6 billion."
The SEC's Bob Plaze, who has been regulating money market mutual funds for the majority of their 40-year existence, announced his pending retirement yesterday. A press release entitled, "Deputy Director of Division of Investment Management Robert E. Plaze Retiring After Almost 30 Years at SEC," says, "The Securities and Exchange Commission today announced that Robert E. Plaze, the Deputy Director of the Division of Investment Management, is retiring from public service at the end of August after almost 30 years at the SEC. Mr. Plaze has been a key architect of the rules governing investment advisers, investment companies, and private fund advisers. He joined the SEC in 1983 as an attorney in the Division of Investment Management, which oversees the multi-trillion dollar investment management industry, and went on to become a Special Counsel, Assistant Director, Associate Director for Regulatory Policy, and Deputy Director."
SEC Chairman Mary L. Schapiro comments, "Few people have had as great an impact shaping the regulatory landscape for the benefit of individual investors. Bob's keen intellect and passion for investor protection have been central to virtually every significant rule affecting mutual funds and investment advisers for more than a generation."
Norm Champ, new Director of the Division of Investment Management, adds, "Bob has been instrumental in the creation of the regulatory regime for investment advisers and investment companies. He has worked in numerous capacities in the division and has had a long and distinguished career working on behalf of investors."
The release adds, "Mr. Plaze was most recently responsible for rulemaking for money market mutual funds and to implement a Dodd-Frank Act requirement for hedge fund and other private fund advisers to register with the SEC. He also played a critical role in rulemaking to improve mutual fund governance practices, to include fee tables in mutual fund prospectuses, to standardize the method of calculating mutual fund performance used in advertisements, to require mutual funds and investment advisers to adopt compliance programs, to require investment advisers to deliver a plain-English brochure to clients, and to protect pension funds and other investors from "pay to play" practices."
Plaze says. "It's been an honor and privilege to work at the Commission. When I began, I expected to stay a few years, but I found that the issues were so engaging and the work so important that I remained here for nearly three decades." The release adds, "Among his many accomplishments, Mr. Plaze is a past recipient of the SEC's Distinguished Service Award, and twice received the agency's Law and Policy Award. He is a graduate of Georgetown University and Georgetown University Law Center."
In other news, on Wednesday the U.S. Treasury commented on floating rate notes and negative interest rates. It issued a statement entitled, "Treasury Acting Assistant Secretary for Financial Markets Matthew Rutherford August 2012 Quarterly Refunding Statement, saying, "Treasury plans to develop a floating rate note (FRN) program to complement the existing suite of securities issued and to support our broader debt management objectives. The first FRN auction is estimated to be at least one year away. The timeframe reflects Treasury's best estimate for implementing required auction regulations and IT systems modifications. In the coming quarters, Treasury will provide additional information on the details of the program."
It adds, "Treasury is in the process of building the operational capabilities to allow for negative rate bidding in Treasury bill auctions, should we make the determination to allow such bidding in the future. Treasury encourages market participants to study their systems and report any operational issues that could arise from Treasury bill auctions settling at negative rates."
Fitch Ratings released a study entitled, "Repos: A Deep Dive in the Collateral Pool" yesterday, which discusses structured finance repo and a number of other aspects of the repurchase agreement market. It says, "Repurchase agreements (repos), a core part of the "shadow banking" system, are increasingly in the spotlight, given both their importance as a funding mechanism and their role in past episodes of market distress. This study updates Fitch Ratings' earlier report, "Repo Emerges from the 'Shadow,'" dated Feb. 3, 2012, which highlighted the post financial crisis resurgence in the use of structured finance collateral within triparty repo markets."
The ratings agency writes, "As revealed through Fitch's analysis of the 10 largest U.S. prime money market funds' (MMFs) disclosures, structured finance repos are typically collateralized by pools of securities that are of lower credit quality (e.g. 'CCC' and below), deeply discounted, and small in size. Additionally, while Treasurys and agencies represent a significant majority of collateral, repos are also used to finance corporate debt, gold, and equity securities. Funding relatively less liquid, more volatile assets through repos (which are effectively short-term loans) creates potential liquidity risks for both repo borrowers and the underlying assets."
The paper explains, "Triparty markets are used to finance roughly $90 billion of structured finance securities, based on estimates from Federal Reserve Bank of New York (FRBNY) data (see table, Structured Finance Repo Collateral: A Drill-Down). As context, average daily trading volumes for non-agency residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) combined is about $6 billion, according to SIFMA. Fitch's sample, which captures $21.2 billion or almost one quarter of the structured finance securities funded through triparty repo, reveals the potential liquidity risks inherent in much of this collateral. These liquidity risks stem from both the small size of many of these securities.... For example, roughly 50% of this sample consists of legacy CDOs and subprime and Alt-A RMBS, much of which was originated by financial institutions that experienced severe distress related to their securitization and mortgage-related exposures during the U.S. credit crisis."
Finally, Fitch adds, "Despite the extensive interest in repo markets, data is relatively scarce. This study helps to fill that gap by analyzing disclosures of the 10 largest U.S. prime money funds. MMF disclosures provide the most detailed publicly available historical information on repo haircuts, pricing, collateral, and counterparties. Based on these disclosures, Fitch has been able to construct a time series of repo attributes back to end-2006, capturing trends before, during, and after the U.S. credit crisis.... The recently developed SEC Form N-MFP is an unparalleled source of granular, security-level repo information, including issuers and valuations, enabling Fitch to take a more in-depth view of the collateral pool. This detailed analysis complements the aggregated, high-level data provided by the FRBNY, which offers a comprehensive summary of the triparty repo market as a whole."
In other news, Bloomberg writes "Money Funds Seen Failing in Crisis as SEC Bows to Shadow Lobby". The oddly-titled article says, "Money-market fund companies have doubled lobbying efforts to convince regulators and lawmakers that they aren't a threat to the financial system. The money may have been well-spent. The 10 biggest money-fund managers and the Investment Company Institute trade group reported combined lobbying spending of $16 million in the first half of 2012 and $31.6 million last year in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. That compares with $16.7 million in all of 2010."
It adds, "The companies are seeking to block new rules championed by Securities and Exchange Commission Chairman Mary Schapiro that are headed for a vote before a divided commission as soon as this month. The proposal would force funds to abandon their fixed $1 share price or introduce withdrawal limits and capital buffers. Schapiro can count on only one supporting vote from the other four commissioners, even as Federal Reserve officials have said that failure to enact tougher rules will leave the $2.5 trillion industry vulnerable to investor runs and threaten global credit markets."
Attorney Melanie Fein has posted another paper to the President's Working Group Report on Money Market Fund Reform (Request for Comment) web page. This one, entitled, "The Latest Fallacy About Money Market Funds," says, "A number of falsehoods have emerged during the past two years concerning money market funds ("MMFs") and their role in the financial system. This paper examines the latest fallacy and explains why it is false.... The latest fallacy about MMFs claims that MMFs can cut off the supply of funds to the banking system and thereby imperil the ability of banks to provide loans to the economy. Therefore, supporters of this fallacy argue, MMFs are a source of systemic risk and should be subject to structural changes to ensure that they provide a continuous supply of credit to the banking system, even during times of financial stress and market instability."
She explains, "Proponents of the fallacy have said that MMFs have the capacity to "bring down" the financial system by creating "systemic funding difficulties" for large banks. The fallacy is premised on the following claims: "[L]arge banks depend on MMFs for short-term funding." MMFs are "a critical source of short-term, wholesale funding for large, global banks." "MMFs shareholders can pull their funds on demand, and have done so en masse when risk is amplified. This in turn creates systemic funding difficulties for large banks that rely on MMFs for their funding." "[P]rime MMFs essentially collect funds from individuals and firms to provide financing to large banks, which in turn use the proceeds to buy securities and make loans." Institutional investors in MMFs "threaten the ability of MMFs to fund the activities of the banking sector"."
Fein's latest paper continues, "These ominous claims and forebodings have little basis in reality. They overlook key facts regarding the multitude of diverse sources of funding and liquidity available to banks. They ignore federal regulations making it impossible for MMFs to act as a source of guaranteed finance for the banking system. They disregard complex economic, regulatory and other factors influencing credit availability."
She adds, "The latest MMF fallacy has been promoted in testimony and submissions to Congress and the Securities and Exchange Commission primarily by a group of academic economists. Interestingly, almost all of these academics have ties with the Fed. The academic proponents of the fallacy have used it as a rational to advance a proposal they have propounded to impose a capital buffer requirement on MMFs. The capital buffer concept has been discredited elsewhere as impractical, ineffective, and inappropriate for MMFs. This paper explains why the rational for the capital buffer concept is misguided and wrong."
Fein states, "The view that MMFs threaten the ability of banks to make loans to the economy reflects unawareness of the regulatory limits under which MMFs operate as well as the way that banking organizations fund their activities and manage their liquidity risk. Banks do not rely on MMFs as a primary source of funding for loans because they have ample other funding sources and because MMFs are not structured for that role.
She concludes, "Claims by academics that MMFs threaten the economy by destabilizing the ability of banks to supply credit are fallacious. It is not true that "large banks depend on MMFs for short-term funding" or that MMFs are "a critical source" of funding for large banks. One need only look at the annual reports filed by bank holding companies with the SEC, which are available on the SEC's website, to see that this claim is unfounded. Public company filings show that banking organizations have access to a variety of funding sources and are subject to numerous liquidity risk factors having nothing to do with MMFs."
Finally, Fein says, "Imposing a capital buffer requirement on MMFs, as academic proponents of the latest MMF fallacy have proposed, would do nothing to improve funding and liquidity risk management at banks. To the contrary, it would more likely encourage the erroneous view that MMFs are a stable source of funding for bank loans and thereby subvert prudent liquidity management at banks."
