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The March issue of Money Fund Intelligence, which went to subscribers on April 7, featured the article, "​Plaze Says Doing Nothing Better Than SEC Proposals." We excerpt the first half of the piece below (​and will excerpt the second half tomorrow).... This month MFI interviews Robert Plaze, a Partner at Stroock & Stroock & Lavan LLP, and the former Deputy Director of the Division of Investment Management at the U.​S. Securities & Exchange Commission. Plaze, who left the SEC in early 2013, has been involved in regulatory issues involving money market mutual funds for three decades. He is partially responsible for writing much of the existing Rule 2a-​7 regulations. Our Q&​A follows.

MFI: How long have you been involved in money fund issues? Plaze: I first got involved in the late 1980'​s. I was there when the first bailout requests came in to the Division. I was in the room when more senior Division Staff were trying to figure out how to deal with them, and I saw the look of concern on everyone'​s faces. No one knew what might happen if a fund broke the buck, and no one wanted to find out. It was the closest thing I had ever seen at the time to a crisis, because everyone was extraordinarily worried about the prospect of a fund breaking the dollar. Shortly after, I became an Assistant Director in the Division and went on to draft the 1991, 1996, and the 2010 Amendments to 2(​a)-​7. During that period my staff and I handled all requests for no-​action by fund sponsors to bailout their money market funds.

I did this for about 25 years, so it gave me quite a perspective on the development of the money market fund industry and how it dealt with periodic market stresses. On perhaps the most memorable day of my career, I took the call from the lawyer representing Reserve Primary Fund who told me that the Primary Fund would break the buck, and later that day had to try to explain to the chairman of the SEC what was about to happen. Stroock has been around for over 100 years, and has represented money market funds and their boards from the earliest days of money market funds. Today some of the better known fund groups with money market funds we work with include UBS, Bank of America, Dreyfus, and Goldman Sachs. In some cases we represent the board, in some cases we represent the funds, and in others we represent the fund adviser.

MFI: What are you working on now? Plaze: I periodically answer rule 2a-​7 questions from clients, which I find quite enjoyable. The rule is a puzzle at times, but one I know. I'​ve also spent a bit of time with fund managers and fund boards trying to help them understand the implications of the current SEC money market fund proposals, as well as what is happening at the Financial Stability Oversight Counsel (​FSOC).

MFI: What do you think will happen? Plaze: Predictions are dangerous in this space, because I don'​t think anyone at the SEC yet knows what it'​s going to do. Right now, it appears that the SEC Staff is trying to develop some a consensus among the Commissioners without a lot of commitment to a particular approach. I think that'​s going to be a challenge. Everyone tends to think they'​re an expert on money market funds, but the real experts are deeply divided and understand the implications of getting it wrong. Regulation is like medicine where the rule is (​or should be) "​first do no harm." And the most powerful law governing money market funds is not the Investment Company Act, but the law of unintended consequences. So you come up with a solution that solves for one problem. But if it begets two or three other problems, the result might be worse than the problem you are trying to fix. So that'​s what makes the rulemaking such a challenge for the Commission. That they are trying to solve the problem in an extremely low interest rate environment exacerbates the difficulty.

The ultimate solution -- and there is not only one possible solution -- has to involve requiring money market funds to internalize the cost of risks that are currently borne by the markets. This means that money market funds' yield advantage over other short-​term alternatives is going to shrink. If policy-​makers want to make money market funds a riskless investment (​which is how investors perceive them) then it'​s going to be difficult for funds to pay a yield that is much more than the risk-​free yield. If policymakers conclude that an investment in money market funds should continue to bear risks, then the risks need to be explicitly allocated so that no one is surprised when losses are incurred and that the consequences are not destabilizing to the larger economy. Today, as a practical matter, advisers bear the risk of loss (​because of the compelling business need to bail out the funds). But they are not required [​to] have the resources sufficient to absorb losses -- hence the Reserve Primary Fund. A move to a floating NAV is essentially a move to push the risk to investors.

I'​m always surprised when people assume that when at the SEC I always favored a floating NAV. But I think those who promote the floating NAV would really like to turn back time. If the SEC had never permitted money market funds to use a stable NAV, and there wasn'​t a 25 year history of bailouts, investors would never have become conditioned to treat money market funds cash. In a floating NAV world, early redeemers would no longer be able to capture the spread between the $​1.​00 share price and the shadow price. But a floating NAV would not eliminate an investor'​s interest in avoiding potentially larger losses in the future as the fund is forced to sell of increasingly less liquid investments to meet redemptions. Nor would it eliminate investor fear that it could lose liquidity. (​Indeed, the second alternative would exacerbate that fear.) There would be a lot of costs involved in moving to a floating NAV. It strikes me that if it'​s not going to fix the problem, then those costs are not well spent.

MFI: Will they actually float? Plaze: Well, if you go back to 1970'​s when you had substantial interest rate fluctuations, you might have seen daily or weekly NAV changes. But not in today'​s interest rate environment. The SEC'​s answer is to require funds to price out to additional decimal places. But they seem to be using equity fund pricing as a model where actual prices for real transactions feed into the NAV. Market-​based NAV is largely based on mark-​to-​model prices where fine pricing differences are largely a function of the model or inputs, not real prices. So it'​s not at all clear to me that a floating NAV would send the market-​clearing signals that the SEC economists seem to think.

Moreover, the SEC proposal for a floating NAV gives fund managers an opportunity to manage the NAV if it strays from a narrow band. By permitting fund managers to continue to bail out their funds, the SEC proposal actually cuts against the success of the floating NAV. Investor'​s expectations are less likely to change if they continue to expect sponsors to step up. I think the SEC also undercuts its floating NAV proposal by proposing that institutional investors to continue to hold money market funds as cash on their balance sheets. So I don'​t believe moving to a floating NAV would solve the problem in 2014. It might have been a good idea in 1983.... But we are where we are, and you can'​t turn back time.

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Federated Investors released its First Quarter Earnings last week, and held its quarterly earnings call on Friday. J. Christopher Donahue, president & CEO, commented, "​Looking now at money markets, period-​end money market fund assets decreased by about $​13 billion from year-​end, while average money market fund assets increased slightly compared to the prior quarter. Our market share is approximately 8.​7%. Consistent with the industry, we saw money fund redemptions during the second half of the quarter. We think that elevated tax payments and other uses of cash were factors in these redemptions. And in the seasonal redemptions, we'​ve seen this month around April 15."

Donahue continued, "On the regulatory front, in March, the SEC released four memos on various attributes related to money market funds and opened a new 30-​day common period that ended this week. We are filing separate comments on each of the topics that were raised. We continue to advocate for pro-​investor and capital market positions. The comments to the SEC proposal, and indeed the SEC itself acknowledged that floating the NAV would not stop a run during periods of extraordinary market distress. On the other hand, redemption gates have been demonstrated to work. In our experience, investors, once they understand the structure and remote possibility of a gate being imposed, prefer gates and/​or fees by a wide margin when compared to floating the NAV, which ruins the fund'​s cash management appeal each and every day."

He said, "Surveys of investors indicate that they will reduce or eliminate their usage of money funds as subjected to a multitude of legal, tax, record-​keeping and operational issues that would be brought along with a floating NAV. Investors will likely move to cash -- move their cash to government securities, government money funds or to the biggest banks as they believe are too big to fail. For issuers, the impact of a floating NAV will be an increase in their funding cost, loss of efficiency and market flexibility. The costs of this artificial floating NAV are real, material and damaging to investors in the capital markets. The benefits are illusory and nominal at best. We are optimistic that sound policy will win out and that floating NAV should not be imposed on any funds or investors."

CFO Tom Donahue told us, "​Looking at money fund minimum yield waivers, the impact to pre-​tax income in Q1 was $​29.​7 million. Based on current assets and assuming overnight repo rates for treasury and mortgage-​backed securities run at roughly 5 to 6 basis points over the quarter, the impact of these waivers to pre-​tax income in Q2 would be about $​29 million. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 45%, and a 25 basis point increase would reduce the impact by about 70%. Multiple factors impact waiver levels and we expect these factors and their impact to vary."

During the Q&​A section, one questioned asked about MMF Reform, "​I think one of the things that Chris said in his prepared remarks or in his comments is that he is hopeful that good policy will open the day here and prevail. My question, which individuals or groups at this point are most vocal about the desirability of a floating NAV? And why are you confident that it won'​t be the outcome?" Chris Donahue responded, "`​Well, the groups that are most attentive to the floating NAV are those basically who want to end the money market fund, and that has been their heritage. So they are very, very few. If you look at the comments, of the 1,​400 comments, high 90-​percent were against the floating NAV. So there are very, very few people who are articulating for the floating NAV, but they are a powerful and notable minority."

He added, "There are some in the media who are propounding for as well and some in the industry who see the beauty of floating the other guy'​s NAV as the solution to the problem. But as to what my confidence level is and to what the SEC will do, I think I use the word what they should do. I don'​t know what they are going to do and it'​s hard for me to characterize the level of confidence in what the SEC will do. They should not do it and I would expect that they would allow good policy to win out here again. The biggest vote going on really -- I'​ve talked about the comments, I'​ve talked about the way this business works -- but the biggest comment really is that you have $​2.​7 trillion worth of voters in the marketplace deciding that these funds are the way they want to manage their cash."

Finally, Donahue added, "​And that'​s despite the fact that alongside of them, they could buy and roll US government securities, they could invest into big-​to-​fail banks and they could invest in our or others' ultra-​short funds with very modest fluctuations in the NAV, and yet tens, if not, scores of basis points more in return. And the reason is because of the efficiency and beauty of the money market fund product. So it'​s hard to say what exactly they are going to do or when they are going to do it, but I don'​t think that there is a good case been made for floating the NAV on these funds."

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Just 10 letters have been posted so far in response to the SEC'​s "​Comments on Proposed Rule: Money Market Fund Reform" website commenting on the SEC'​s "​Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform". Today, we excerpt from three letters -- J. Charles Cardona, Jr. of The Dreyfus Corporation, Barbara G. Novick and Richard K. Hoerner of BlackRock, and Lu Ann S. Katz of Invesco. Dreyfus' letter comments, "Overall, Dreyfus welcomes the Staff'​s analysis of each of these various, important aspects of MMF reform, but we are concerned generally with the conclusions reached in these respective Analyses and with how these conclusions might inform final rulemaking."

It explains, "​We believe the substance of the Liquidity Cost Analysis is consistent with the views Dreyfus expressed in its September l7th comment letter. We read the Liquidity Cost Analysis and interpret the average spread calculations contained therein to support a Default SLF of 1% and not 2%, as proposed. As we noted in our September 17th letter, a Default SLF that is too high poses significant hurdles for the MMF and for their respective boards. If the Default SLF is too high the fund will over-​withhold on a shareholder'​s redemption proceeds, which might unjustly enrich the fund and non-​redeeming shareholders as well as create an overly large pool of unused capital that might negatively impact fund management. This issue is compounded by statements in the Proposing Release that will place a heavy burden on MMF boards that might seek to set a SLF rate that is lower than the Default SLF."

Dreyfus continues, "[​T]​he Liquidity Cost Analysis reaffirms our view that, if the Commission adopts the "​Fees and Gates" alternative as a stand-​alone option, MMF boards must be empowered to act in the best interest of shareholders. In our September l7th letter, we supported an Objective Trigger only as a "​floor" for MMFs and their boards to act upon.... Dreyfus supports boards having the flexibility to apply an SLF and define the applicable SLF rate pursuant to the board'​s general fiduciary standard, protected by the business judgment rule, and before any Objective Trigger is activated. We continue to support these broader powers for MMF boards to act in order to increase the effectiveness of Fees and Gates as a stand-​alone option for reducing systemic risk, consistent with the Policy Goals.... A MMF board, in our view, cannot effectively protect shareholder interests without the authority to be able to impose SLFs earlier than any Objective Trigger otherwise will require."

The Cardona letter adds, "We recognize that the Government MMF Analysis is intended to help define the "​Government MMF" exclusion from any proposed structural reforms that may be adopted. However, for the reasons discussed below, we caution that the focus in the Government MMF Analysis on current allocations to "​Other Securities" in Government MMFs could lead to unnecessary or misdirected conclusions. In proposing the Government MMF exclusion, the Commission noted that a Government MMF invests at least 80% of its assets in U.​S. Government securities. However, we read the Government MMF Analysis to (​1) suggest that a constant net asset value ("​CNAV"} Government MMF should not, or does not need to, have the flexibility to invest up to 20% of its assets in "​Other Securities" simply because Government MMFs currently do not take full advantage of that flexibility."

He writes, "If the Commission adopts a variable net asset value ("​VNAV") for Prime MMFs, the investor'​s decision-​making process will change dramatically. MMF providers can be expected to offer products that meet investor demand as well as close products that no longer meet investor demand. So, in a dual CNAV/​VNAV MMF universe, we cannot say with certainly that investor'​s would not consider a hybrid CNAV Government/​Prime MMF for investment just because they do not consider such a fund for investment currently. The Government MMF Analysis is inadequate, in our view, because it should have focused on assessing the potential systemic risk posed by a hybrid fund.... We believe the Safe Assets Analysis has numerous shortcomings and should not be relied on by the Commission to justify adopting a VNAV structure. We believe the definition of "​safe assets" put forth in the Safe Assets Analysis is inadequate. We also believe the Safe Assets Analysis relies too heavily on opinion and supposition and does not provide the requisite quantitative evidence to demonstrate that the U.​S. Treasury market will not suffer substantial and long-​term harm from the permanent migration of assets from Prime MMFs to Government MMFs if a VNAV for Prime MMFs is adopted."

Dreyfus concludes, "Overall, we are not persuaded that these unsubstantiated opinions justify adopting a VNAV structure for Prime MMFs on a cost-​benefit basis, nor are we persuaded that the Safe Assets Analysis fairly addresses the likelihood that the global supply of safe assets in fact will provide reasonable alternatives for Prime MMF investors. Accordingly, Dreyfus cannot support an economic analysis on this issue that does not recognize the capacity constraints and performance impact (​from a supply and yield perspective) on U.​S. Government/​Treasury MMFs that are posed by the VNAV alternative."

BlackRock'​s comment says, "BlackRock, Inc. ("​BlackRock") is pleased to have the opportunity to review and provide comments to the Securities and Exchange Commission (​the "​Commission") on the four reports (​the "​Reports") prepared by the staff of the Division of Economic and Risk Analysis ("​DERA") of the Commission released on March 25, 2014 related to money market fund reform. BlackRock previously submitted a comment letter ("​Original Response Letter") to the Commission in September of 2013 on the Commission'​s proposal for Money Market Reform (​the "​Proposed Rule") and submitted a joint comment letter with a number of other asset managers in October of 2013 regarding the definition of retail money market funds. This letter addresses the DERA Reports in light of some of the comments we made in our Original Response Letter and, in some instances, addresses issues that were not originally covered by our Original Response Letter but are raised directly in the Reports."

It tells us, "We agree, that today, Government MMFs are essentially "​all government"; they don'​t widely use "​Other Securities" and when they do use these securities, they represent a very small portion of those MMFs' assets. We also agree that during the financial crisis in 2008, there were enough U.​S. government securities for Government MMFs to invest in, even without having a 20% basket of "​Other Securities" available to them. However, it is important to note that we believe this was due in part to the U.​S. Treasury issuing additional Treasury bills under the Supplementary Financing Program. This additional influx of bills, in our opinion, aided the ability of Government MMFs to accommodate the additional flows during the 2008 financial crisis."

BlackRock'​s letter continues, "Importantly, we do not yet know how the final MMF rule from the Commission will change Prime MMFs, and consequently, we also don'​t know how clients will react to the final rule. In the event the final rule leads to significant outflows from Prime MMFs into Government MMFs, we anticipate two issues. First, in the absence of additional Treasury bill issuance, Government MMFs may be challenged to find sufficient supply of eligible securities. Second, if there is no 20% basket, there may be significant overhang of supply of commercial paper causing corporate funding problems. Given that some clients need "​all Government securities", we anticipate that MMFs sponsors may offer both "​traditional government MMFs" and "​hybrid MMFs" which use the 20% basket. Once new rules are adopted, the Commission should review the data around Government MMFs and commercial paper again."

It adds, "​The Liquidity Cost Report analyzes the spread between same day buy and sell transaction prices for Tier 1 and Tier 2 securities from January 2, 2008 through December 31, 2009. While we think a report like this could be helpful in analyzing the appropriate liquidity fee, we think the methodology used in the Liquidity Cost Report was not the appropriate methodology to measure the true cost of liquidity in MMFs.... [​I]​n our opinion, the security transactions recorded by TRACE were the least liquid of securities held in MMFs, and represented the smallest portfolio allocation. We also believe that the size of the trades in TRACE are much smaller than the size of the trades that MMFs typically participate in, skewing the results in the Liquidity Cost Report.... We recommend that the final rule continue to allow a 25% basket for concentration limits for Municipal MMFs."

Finally, Invesco'​s letter focuses on the "​Safe Assets" study and the "​Liquidity Cost" study. It tells us, "We believe that this discussion regarding global safe assets is not directly relevant to Government and Treasury MMFs operating in compliance with Rule 2a-​7 of the 1940 Act, as amended ("​Rule 2a-​7"), because most of the "​safe assets" are not eligible investments for these funds.... It is difficult to estimate the amount of money that might shift from Prime MMFs into Government and Treasury MMFs. Assuming that 20% of the assets under management ("​AUM") in Prime MMFs migrated to Government and Treasury MMFs, the total of safe assets required would be approximately $​290 billion. This amount, combined with the existing outstanding AUM for Government and Treasury MMFs (​approximately $​918 billion), would total $​1.​2 trillion. The $​1.​2 trillion would absorb 60% of the approximately $​2 trillion total outstanding 2a-​7 Government and Treasury MMFs' eligible securities. Importantly, this does not consider the other investors demanding these securities, including but not limited to, banks, insurance companies and pension funds."

It adds, "The combination of limited supply and increased demand for these securities has potential negative ramifications and could push government securities' yields down dramatically to zero (​and possibly even into negative yields) in secondary markets, even when short-​term interest rates begin to rise. In addition, if Government MMFs are the only stable NAV MMFs remaining, then these funds, which have traditionally been quite stable, will become far more volatile since they will be the sole MMF option for institutional cash management needs."

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Another batch of "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" has been posted to the SEC'​s website on Money Market Fund Reform. This time, the comments are in response to the SEC'​s 4 "​mini" March 24 studies, "Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform." The comments overall appear to be critical of the works, and they take particular aim at the SEC'​s "​Safe Assets" study. Below, we excerpt from Wells Fargo Funds Management'​s letter, written by President Karla Rabusch, which says the SEC'​s methodology and studies "​miss the mark" and are inadequate to support several possible proposed changes. Rabusch writes, "On behalf of Wells Fargo & Company and its subsidiaries, Wells Fargo Funds Management, LLC appreciates the opportunity to comment on the analyses of money market fund-​related data and economic literature conducted by the staff of the Securities and Exchange Commission'​s Division of Economic and Risk Analysis ("​DERA") and issued on March 24, 2014 ("​Analyses")."

She tells us, "As the ninth largest money market fund provider in the industry, with over $​110 billion in money market fund assets under management as of March 31, 2014, we have a significant interest in the continued strength and viability of money market funds, which are an invaluable investment option for retail and institutional investors alike, and a critical source of short-​term financing for American businesses, states, and municipalities. For this reason, we carefully reviewed the money market fund rule proposal issued by the Securities and Exchange Commission ("​Commission") in 2013, and submitted a detailed comment letter in response. In that letter, we supported those proposals with demonstrable benefits and reasonable costs to shareholders and other stakeholders, but opposed those that fail to meet the same criteria."

Wells explains, "Because we strongly believe a robust, informed, and objective cost-​benefit analysis is critical to effective regulation, we are pleased to now have the opportunity to address certain of the Analyses. While we recognize the Analyses represent the work of the staff, and not the Commission itself, we assume that these Analyses, and public comments in response, will inform Commission decision-​making with respect to any final rule. In fact, each of the Analyses appears intended to support a particular regulatory outcome or conclusion. As discussed below, we believe the Analyses are inadequate to support certain of these outcomes and conclusions. In particular, we do not believe the Analyses adequately support the following: (​i) ending a tax-​exempt (​or "​municipal") money market fund'​s flexibility to invest up to 25% of its total assets in securities subject to guarantees or demand features of a single institution ("​25% Basket"); (​ii) modifying the proposed flexibility for a government money market fund to invest in non-​government securities; and (​iii) quelling legitimate concerns voiced in public comments on the Proposal that government money market funds may not have capacity to accept assets leaving institutional prime money market funds due to imposition of a variable net asset value ("​NAV") requirement on those funds."

The letter continues, "In response to the Commission'​s proposed variable NAV requirement for institutional prime money market funds, we questioned the capacity of government money market funds to accept assets migrating from institutional prime money market funds. We pointed out that supply of U.​S. Government securities and repurchase agreements collateralized by U.​S. Government securities has declined in recent years. The Safe Assets Analysis appears intended to address concerns about government money market fund capacity to accept substantial inflows from institutional prime money market funds. However, as discussed in greater detail below, we believe that the Safe Assets Analysis misses the mark and fundamentally fails to address the capacity question. In citing an abundant supply of foreign safe assets, the Analysis does not take into account that non-​U.​S. safe assets are ineligible investments for both government money market funds and many other investors in domestic government securities in light of associated foreign currency risks and the typically long-​dated maturities of these assets. In addition, the study does not quantify or qualitatively assess the supply of assets that must make up most or all of government money market fund portfolios -- U.​S. Government securities and repurchase agreements collateralized by U.​S. Government securities."

It adds, "The Safe Assets Analysis provides statistical information and analysis about the demand and supply of "​safe assets," defined as debt securities with virtually no default risk. The analysis focuses on the availability of both domestic government securities and global safe assets, rejecting the prediction of an International Monetary Fund ("​IMF") report that the global economy will experience a shortfall of safe assets. In discussing the potential impacts of changes to money market fund regulation, the Safe Assets Analysis correctly notes that a significant portion of prime money market fund investors could shift investments into government money market funds, increasing demand for domestic government securities and safe assets in the economy."

Wells continues, "However, it goes on to suggest that an ample supply of safe assets would meet increased demand for government securities precipitated by such a shift. Specifically, the Analysis contends that the market contains, or will contain, an adequate supply of portfolio securities necessary to allow government money market funds to absorb assets leaving institutional prime money market funds due to a potential variable NAV requirement. In support of this assertion, the Safe Assets Analysis explains that a hypothetical $​357 billion shift from prime money market funds to government money market funds, based on a 20% shift, would be unlikely to create a problem given the estimated amount of $​74 trillion in global safe assets."

But, they say, "The availability of global safe assets, regardless of their total magnitude, is simply not germane to of the question of government money market funds' ability to absorb assets shifting from prime money market funds in the event the Commission imposes a variable NAV requirement on institutional prime money market funds. As noted in footnote 25 of the Safe Assets Analysis, a government money market fund must invest at least 80% of its total assets in cash, government securities as defined in section 2(​a)(​16) of the 1940 Act, or repurchase agreements that are collateralized with cash or government securities ("​80% Test"). The 1940 Act defines a government security as "​any security issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing." Foreign safe assets, for example, are not eligible to satisfy a government money market funds' 80% Test."

Rabusch states, "The Safe Assets Analysis appears to be suggesting that even if foreign safe assets are not eligible to meet the 80% Test, their availability to other investors seeking greater yields may draw other investors to those opportunities, thereby ameliorating domestic government security supply concerns for government money market funds. In this vein, the analysis baldly asserts that the fungibility and substitutability of global safe assets for non-​money market funds would free up the supply of domestic government securities for government money market funds absorbing assets from prime money market funds. The Analysis contains no data, analysis or citation to other publications that supports the contention that foreign safe assets are fungible or substitutable for investors in domestic government securities. If fact, no qualitative or quantitative data is provided about the identities of other investors in domestic government securities, their past investment behaviors, legal restrictions on their investment mandates, their ability to assume associated foreign currency risks or invest in longer-​dated securities or other salient characteristics. For example, accepting exposure to volatility in foreign currency exchange rates may be legally impermissible for certain investors in domestic government securities, or may present unacceptable risks because currency related losses may wipe out all, or in some cases more than all, of the income earned on foreign safe assets. In addition, other investors in government securities may be restricted to those instruments by governing documents, guidelines or other agreements. Thus, by assuming its conclusion with respect to fungibility and substitutability of global safe assets, the Safe Assets Analysis fails to affirmatively support the conclusion that the impacts of changes to money market fund regulation will be mitigated by the availability of alternative assets worldwide."

Finally, Wells adds, "The assets that are eligible to meet a government money market fund'​s 80% Test constitute less that 10% of the $​74 trillion figure cited in the IMF estimate of total safe assets. Moreover, as noted above, the supply of short-​term treasury securities, short-​term federal agency securities and repurchase agreements available to government money market funds is declining due, in part, to evolving regulatory standards and other government actions. And, as noted in our previous Comment Letter, increased demand resulting from adoption of a variable NAV rule may push yields on short-​term treasury securities into negative territory for a considerable time, which, in turn, may limit the ability of government money market funds to absorb assets from prime money market funds. Displaced assets from prime money market funds may instead gravitate to alternative vehicles that are less regulated than money market funds, offer less reporting and transparency, and may entail greater idiosyncratic, counter-​party and non-​diversification risks."

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Fidelity Investments, the largest manager of money market mutual funds in the U.​S. and the world, released a comment letter in response to the SEC'​s request for feedback on its "Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform." (​Comments were due yesterday.) It has yet to be posted on the SEC'​s webpage, "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF, but we excerpt from the comment below. Fidelity Senior Vice President & General Counsel Scott Goebel writes, "Fidelity Investments ("​Fidelity") appreciates the opportunity to provide comments to the Securities and Exchange Commission ("​SEC" or "​Commission") on the four reports it released on March 24, 2014 (​the "​Reports") related to its proposed rule "​Money Market Fund Reform; Amendments to Form PF" (​the "​Proposed Rules"). This letter supplements our September 16, 2013 submission in response to the Proposed Rules (​the "​September 2013 Letter")."

He explains, "We are well positioned to provide feedback and commentary on the Reports because of our experience and expertise in the money market mutual fund ("​MMF") industry, as well as our active engagement in MMF reform efforts over the past several years. Our position, as stated in our comment letters, is that the SEC should analyze the costs and benefits of any additional MMF reform. The SEC should narrowly tailor targeted reform to address the SEC'​s concern about the risk of runs that exists only in the institutional prime segment of the MMF industry. Additionally, the SEC should define retail MMFs based on natural persons and should treat both retail prime and municipal MMFs the same as Treasury and government MMFs -- meaning that the SEC should exclude these types of MMFs from structural changes, including the floating NAV and fees and gates proposals, because none of these MMFs experienced significant outflows during times of market stress."

Fidelity says, "We recognize and value the analytical and empirical approach that the Division of Economic and Risk Analysis ("​DERA") took in preparing the Reports. As discussed in greater detail in the remainder of this letter, we highlight some additional information and analysis that is intended to assist the Commission as it considers final rules on MMF reform."

They continue, "​We encourage the SEC to consider the following: 1. The data support an exemption from structural reform for government MMFs. The SEC appropriately exempted both Treasury and government MMFs from proposed fundamental structural changes because these MMFs are not susceptible to the risks of mass redemptions during periods of market stress. Both the Safe Asset Supply Study and the Government MMF Study provide further data to support this conclusion."

Fidelity tells us, "​2. The SEC should limit any government MMF exemption from structural changes to those government MMFs that hold exclusively government securities. This approach aligns with investors' expectations that government MMFs are composed of only government securities. The Government MMF Study shows that only a few government MMFs make investments in nongovernment securities."

They add, "​3. If the SEC proceeds with the liquidity fee and redemption gates alternative for institutional prime MMFs, the SEC should set the redemption fee rate at one percent. Both the Liquidity Cost Study and our analysis comparing DERA'​s work to the market conditions Fidelity observed during the 2008 financial crisis support this recommendation."

Finally, Fidelity comments, "​4. The SEC should not eliminate the "​25 percent basket" and, instead, should reduce the 25 percent basket to a 15 percent basket for MMFs. DERA'​s analysis in the Muni MMF Guarantor Study supports this position and demonstrates that there would be real costs to MMFs if the SEC either eliminates the 25 percent basket or reduces it by too much."

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The Federal Reserve Bank of New York'​s Liberty Street Economics blog features a new "Introduction to the Floating-​Rate Note Treasury Security," which describes the Treasury'​s new Floating Rate Note (​FRN) program. It says, "The U.​S. Department of the Treasury (​Treasury) auctioned its first floating-​rate note (​FRN) on January 29, 2014. With this auction, Treasury introduced the first new marketable debt instrument since Treasury inflation-​protected securities (​TIPS) in 1997. The new two-​year FRN is a fixed-​principal security with quarterly interest payments and interest rates indexed to the thirteen-​week Treasury bill. In this post, we will discuss Treasury'​s reasons for adopting an FRN as well as the existing FRN markets, expected FRN market participants, and results of the first FRN Treasury security auction."

The NY Fed blog explains, "​Treasury generally seeks to minimize the long-​run cost of issuing government debt. By adding a new product to the existing offering of marketable debt securities, Treasury expects that the investor base will expand, which will serve to lower Treasury'​s borrowing cost. Recently, Treasury has also been extending the maturity of its debt portfolio as part of its strategy to control the overall cost of financing in a way that remains resilient during periods of market volatility and to lower the risk of a failed auction."

It tells us, "From an investor perspective, FRNs have less exposure to rising rates because of the frequent rate resets, and they pay interest more frequently than current coupon two-​year securities. At the same time, FRNs may offer investors a slightly higher yield and fewer transaction costs than consistently rolling over a position in the thirteen-​week bill, despite providing nearly identical cash flows."

The blog continues, "Treasury first considered issuing FRNs, as well as TIPS, in 1994 as part of a plan to broaden its portfolio and investor base. In 1997, Treasury opted to introduce only TIPS and made no subsequent public mention of FRNs until 2011, when a Treasury Borrowing Advisory Committee (​TBAC) presenter suggested that a floating-​rate note could play a role in a maturity extension program. Since then, Treasury has worked over an extended period with the public and TBAC to design the eventual structure of the FRN."

It explains, "In December 2012, Treasury proposed an actual FRN security structure and requested comments on the design. While the commenters generally agreed on most parameters, there was disagreement on which benchmark rate to use. Treasury proposed using either the thirteen-​week Treasury bill rate or a Treasury general collateral overnight repurchase agreement rate (​GC rate).... In the end, Treasury decided to benchmark the FRNs to the thirteen-​week bill in light of its long history and high liquidity. The final structure is detailed in the table below, and the interest rate on the first FRN can be tracked in the following chart."

On floating rate notes in general, the NY Fed writes, "FRNs are commonly issued by the corporate sector as well as by government-​sponsored entities (​GSEs) such as Fannie Mae and Freddie Mac. A few foreign governments also issue FRNs, although they are much less common than fixed-​rate or inflation-​indexed notes.... In the most general terms, a floating-​rate note will attract note investors wishing to hedge against expected future interest rate increases. In order to effectively manage this risk, many investors look to shorter-​term securities so as not to be locked into any one rate for too long, but this strategy increases rollover costs. Foreign central banks already manage portfolios with large shares of bills, and must roll over their holdings frequently. As such, they may prove to be active market participants."

They add, "Money market funds may be attracted to even a modest yield pickup over Treasury bills, and although they are bound by their statutory weighted-​average life of 120 days, most are currently well below this cap. Banks, on the other hand, are less likely users of FRNs, as they can currently leave excess reserves at the Federal Reserve and earn a return of 25 basis points, while FRN'​s currently trade with a total return around 10 basis points (​discount margin + current reference rate). However, Basel requirements may encourage banks to invest in short-​duration, high-​quality instruments such as FRNs when pricing conditions become more attractive."

Finally, the blog says, "The following figure shows the investor class auction allotments of the most recently auctioned FRN, along with the average results from the previous five thirteen-​week bills and two-​year notes. [​The chart shows 55% of FRNs going to dealers/​brokers, 18% going to investment funds, and 25% going to foreign/​international.] The initial FRN auction on January 29, 2014, was well received as were the subsequent February and March reopenings. While the initial auction sizes of $​15 billion, $​13 billion, and $​13 billion are modest, FRNs may well become an important component for Treasury offerings in the future." Note that Crane Data'​s latest Money Fund Portfolio Holdings dataset (​as of 3/​31/​14) shows money market funds holding $​4.​9 billion of Treasury FRNs with Goldman, Northern and Western holdings the largest positions.

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Assets in "​offshore" money market mutual funds, U.​S.-​style funds domiciled in Dublin, Luxemburg or the Cayman Islands, marketed to multinational corporations and subsidiaries outside the U.​S. and denominated in USD, Euro and GBP (​sterling), rose by $​33.​7 billion to $​712.​9 billion in the first quarter of 2014. U.​S. Dollar (​USD) funds (​142) tracked by Crane Data'​s Money Fund Intelligence International account for over half ($​385.​9 billion, or 54.​1%) of the total, while Euro (​EUR) money funds (​98) total E72.​0 billion (​about $​99.​0 in USD) and Pound Sterling (​GBP) funds (​95) total L136.​8 ($​227.​9 in USD). Offshore USD MMFs yielded 0.​03% on average as of March 31, 2014, while EUR MMFs yielded 0.​07% and GBP MMFs yielded 0.​28% (​our Crane MFII 7-​Day Yield Indexes). We review the latest MFI International Money Fund Portfolio Holdings below for the three major currencies, and we also give details on our second annual European Money Fund Symposium (​Sept. 22-​23 in London). Note: Offshore money market funds are not available for sale to U.​S. investors.

The USD funds tracked by MFI International contain, on average 24.​6% in Certificates of Deposit (​CDs), 24.​1% in Commercial Paper (​CP), 16.​9% in Treasury securities, 15.​7% in Other securities (​primarily Time Deposits), 14.​5% in Repurchase Agreements (​Repo), 3.​7% in Government Agency securities and 0.​5% in VRDNs (​Variable-​Rate Demand Notes). USD funds have on average 28.​5% of their portfolios maturing Overnight, 7.​2% maturing in 2-​7 Days, 18.​1% maturing in 8-​30 Days, 24.​6% maturing in 31-​90 Days, 15.​9% maturing in 91-​180 Days, and 5.​7% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (​32.​6%), France (​13.​8%), Canada (​8.​7%), Japan (​8.​4%), Sweden (​7.​0%), Great Britain (​6.​0%), Germany (​5.​6%), Australia (​4.​8%), Netherlands (​4.​5%), and Switzerland (​2.​6%).

The 20 Largest Issuers to "​offshore" USD money funds include: the US Treasury with $​76.​0 billion (​16.​6% of total portfolio assets), Credit Agricole with $​21.​4B (​4.​7%), the Federal Reserve Bank of New York with $​18.​0B (​3.​9%), Bank of Tokyo-​Mitsubishi UFJ Ltd with $​15.​2B (​3.​3%), BNP Paribas with $​14.​7B (​3.​2%), Natixis with $​12.​8B (​2.​8%), Bank of Nova Scotia with $​11.​2B (​2.​4%), Barclays PLC $​10.​5B (​2.​3%), Svenska Handelsbanken with $​10.​4B (​2.​3%), Skandinaviska Enskilda Banken AB (​SEB) with $​10.​0B (​2.​2%), `​Sumitomo Mitsui Banking Co with $​9.​2B (​2.​0%), Rabobank with $​8.​8B (​1.​9%), JP Morgan with $​8.​5B (​1.​9%), Deutsche Bank AG with $​8.​2B (​1.​8%), HSBC with $​7.​6B (​1.​7%), RBC with $​7.​4B (​1.​6%), Toronto-​Dominion Bank with $​7.​3B (​1.​6%), Wells Fargo with $​7.​2B (​1.​6%), Federal Home Loan Bank with $​7.​1B (​1.​5%), and Nordea Bank with $​7.​0B (​1.​5%).

The EUR funds tracked by MFI International contain, on average 38.​9% in CDs, 24.​4% in CP, 17.​8% in Other (​primarily Time Deposits), 9.​8% in Repo, 5.​3% in Agency securities, 3.​4% in Treasury securities, and 0.​3% in VRDNs. Euro funds have on average 25.​2% of their portfolios maturing Overnight, 6.​7% maturing in 2-​7 Days, 19.​4% maturing in 8-​30 Days, 29.​5% maturing in 31-​90 Days, 16.​0% maturing in 91-​180 Days, and 3.​3% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (​30.​4%), Germany (​15.​9%), Netherlands (​11.​8%), Great Britain (​9.​2%), Japan (​6.​9%), Sweden (​6.​7%), US (​5.​9%), Belgium (​2.​3%), Finland (​2.​1%), and Austria (​1.​4%).

The 15 Largest Issuers to "​offshore" EUR money funds include: BNP Paribas with E5.​3B (​7.​4%), FMS Wertmanagement with E4.​7B (​6.​5%), Republic of France with E3.​5B (​4.​8%), Rabobank with E3.​1B (​4.​3%), HSBC with E2.​8B (​3.​9%), Societe Generale with E2.​6B (​3.​6%), Credit Agricole with E2.​4B (​3.​3%), Barclays PLC with E2.​0B (​2.​8%), ING Bank with E2.​0B (​2.​8%), Credit Mutuel with E2.​0B (​2.​8%), Svenska Handelsbanken with E1.​9B (​2.​7%), Nordea Bank with E1.​7B (​2.​4%), Bank of Tokyo-​Mitsubishi UFJ Ltd with E1.​6B (​2.​2%), Pohjola Bank PLC with E1.​5B (​2.​1%), and JP Morgan with E1.​5B (​2.​1%).

The GBP funds tracked by MFI International contain, on average 32.​2% in CP, 29.​6% in Other (​Time Deposits), 25.​5% in CDs, 7.​2% in Repo, 2.​9% in Treasury, 2.​2% in Agency, and 0.​4% in VRDNs. Sterling funds have on average 27.​1% of their portfolios maturing Overnight, 4.​3% maturing in 2-​7 Days, 19.​7% maturing in 8-​30 Days, 31.​2% maturing in 31-​90 Days, 14.​0% maturing in 91-​180 Days, and 3.​6% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: Great Britain (​19.​1%), France (​16.​8%), Germany (​10.​7%), Netherlands (​9.​4%), Japan (​8.​2%), Sweden (​8.​0%), US (​6.​2%), Switzerland (​4.​6%), Australia (​4.​0%), and Canada (​3.​7%).

The 15 Largest Issuers to "​offshore" GBP money funds include: Lloyds TSB Bank PLC with L5.​7B (​5.​4%), BNP Paribas with L4.​8B (​4.​5%), FMS Wertmanagement with L4.​7B (​4.​5%), Nordea Bank with L4.​3B (​4.​1%), Rabobank with L4.​1B (​3.​9%), Credit Agricole with L4.​0B (​3.​8%), Standard Chartered Bank with L3.​6B (​3.​4%), ING Bank with L3.​4B (​3.​2%), UK Treasury with L3.​3B (​3.​1%), Bank of Tokyo-​Mitsubishi UFJ Ltd with L3.​3B (​3.​1%), HSBC with L3.​3B (​3.​1%), Sumitomo Mitsui Banking Co with L3.​1B (​2.​9%), Barclays PLC with L3.​0B (​2.​8%), Oversea-​Chinese Banking Co with L2.​9B (​2.​7%), and JP Morgan with L2.​9B (​2.​7%). (​E-​mail us at info@​cranedata.​com (​or call 508-​439-​4419) to request a copy of our latest MFI International or MFII Portfolio Holdings.)

Finally, Crane Data has published the preliminary agenda and is now accepting registrations for its second annual European Money Fund Symposium, which will take place Sept. 22-​23, 2014, at the London Tower Hilton in London, England. (Visit www.​euromfs.​com for details.) Our inaugural European event last September in Dublin attracted over 100 money fund professionals, and we expect this year'​s event to be even bigger and better. Sponsorships and a handful of speaking slots are still available. Contact us for the full brochure and for more details.

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Recently, attorneys Melanie Fein and Raymond Natter wrote a memo on behalf of Federated Investors to the Board of Governors of the Federal Reserve System entitled, "Regulation YY - Request for Determination that Federated U.​S. Treasury Cash Reserves, Federated Treasury Obligations Fund, and Federated Government Obligation Fund are Highly Liquid Assets." They comment, "We are writing on behalf of Federated Investors, Inc. to request a determination by the Board of Governors that shares of the following money market funds sponsored and advised by Federated Investors, Inc. are "​highly liquid assets" for purposes of the liquidity buffer required to be maintained by large bank holding companies and foreign banking organizations with U.​S. operations under sections 252.​35(​b) and 252.​157(​c) of Regulation YY: Federated U.​S. Treasury Cash Reserves which holds only U.​S. Treasury securities; Federated Treasury Obligations Fund which holds only U.​S. Treasury securities and repurchase agreements collateralized by such securities; and Federated Government Obligations Fund which holds only U.​S. Treasury securities, securities issued or guaranteed by U.​S. government agencies and government-​sponsored enterprises, and repurchase agreements collateralized by such securities. The Funds are managed by Federated Investors, Inc., one of the largest investment managers in the United States with $​376.​1 billion in assets under management as of December 31, 2013."

The letter says, "The enclosed memorandum demonstrates how the Funds satisfy the purposes and requirements of the liquidity buffer in Regulation YY. It shows that, because of the Funds' essential features and regulation under the Investment Company Act of 1940, shares of the Funds are among the most highly liquid of assets available in the financial marketplace. It shows that the shares are treated as cash equivalents under generally accepted accounting principles and as highly liquid for a variety of regulatory purposes. Finally, it shows that the Funds are as liquid if not more liquid than many of the other instruments contemplated as highly liquid assets under Regulation YY."

It continues, "Regulation YY contemplates that a covered company will demonstrate to the Board'​s satisfaction that a particular asset is "​highly liquid" for purposes of the liquidity buffer. The regulation does not preclude such a determination based on information provided by the issuer of the asset. We believe a Board determination with respect to the Funds is appropriate in order to broaden the types of liquid assets eligible to be included in the liquidity buffer and to facilitate compliance with the regulation."

Finally, the letter adds, "Based on the information and analysis in the attached memorandum, we respectfully request a determination by the Board that shares of the Funds are "​highly liquid assets" eligible to be included in a covered company'​s liquidity buffer for purposes of Regulation YY. We also request the opportunity to meet with the Board'​s staff to discuss this matter."

The full memo explains, "​The Board of Governors on February 18, 2014, adopted amendments to Regulation YY that establish enhanced prudential standards for bank holding companies with consolidated assets of $​50 billion or more and foreign banking organizations with combined U.​S. assets of $​50 billion or more (​referred to herein as "​covered companies") pursuant to Section 165 of the Dodd-​Frank Act. Among other things, the amended regulation at 12 C.​F.​R. SS 252.​35(​b) and 252.​157(​c) requires such companies to maintain a buffer of unencumbered "​highly liquid assets." The regulation defines such assets to include cash, U.​S. government and agency securities, and "​any other asset" that a covered company demonstrates to the satisfaction of the Board meets certain liquidity requirements."

It tells us, "This memorandum is submitted in support of a request for a determination by the Board that shares of the following money market funds qualify as "​highly liquid assets" for purposes of the liquidity buffer requirement in sections 252.​35(​b) and sections 252.​157(​c) of Regulation YY: Federated U.​S. Treasury Cash Reserves which holds only U.​S. Treasury securities; Federated Treasury Obligations Fund which holds only U.​S. Treasury securities and repurchase agreements collateralized by such securities; and Federated Government Obligations Fund which holds only U.​S. Treasury securities, securities issued or guaranteed by U.​S. government agencies and U.​S. government-​sponsored enterprises, and repurchase agreements collateralized by such securities."

It adds, "Regulation YY, as amended, requires each covered company to maintain a liquidity buffer sufficient to meet its projected net cash-​flow needs over a 30-​day period under different stress scenarios, effective June 1, 2014. The liquidity buffer must consist of highly liquid assets that are unencumbered."

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Money market mutual fund assets declined sharply following the April 15 tax payment date, as funds showed their 7th weekly decline in a row. ICI'​s latest "Money Market Mutual Fund Assets" says, "Total money market fund assets decreased by $​35.​02 billion to $​2.​58 trillion for the week ended Wednesday, April 16, the Investment Company Institute reported today. Among taxable money market funds, treasury funds (​including agency and repo) decreased by $​11.​37 billion and prime funds decreased by $​18.​54 billion. Tax-​exempt money market funds decreased by $​5.​11 billion." Year-​to-​date, money fund assets have declined by $​142 billion, or 5.​2%.

ICI'​s weekly explains, "Assets of retail money market funds decreased by $​5.​33 billion to $​912.​96 billion. Treasury money market fund assets in the retail category decreased by $​1.​21 billion to $​201.​49 billion, prime money market fund assets decreased by $​1.​51 billion to $​520.​10 billion, and tax-​exempt fund assets decreased by $​2.​61 billion to $​191.​37 billion." Retail money fund assets account for 35.​4% of all money fund assets with Prime Retail totaling 20.​2%, Treasury (​including agency and repo) totaling 7.​8%, and Tax-​exempt Retail totaling 7.​4%.

It tells us, "Assets of institutional money market funds decreased by $​29.​69 billion to $​1.​66 trillion. Among institutional funds, treasury money market fund assets decreased by $​10.​16 billion to $​693.​42 billion, prime money market fund assets decreased by $​17.​03 billion to $​897.​63 billion, and tax-​exempt fund assets decreased by $​2.​50 billion to $​73.​06 billion." Institutional money fund assets account for 64.​6% of the total with Prime Inst totaling 34.​8%, Treasury (​and agency) totaling 26.​9%, and Tax-​exempt Inst totaling just 2.​8%.

The report adds, "ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website."

Money fund assets have fallen noticeably in the first 5 months of the year the past 3 years, but they'​ve recovered these declines in the second half of the year to end slightly positive in both 2012 and 2013. The drops in 2013 are slightly larger than the past two years (​down $​142 billion this year vs. down $​110 billion through April 17 in 2013 and down $​112 billion through April 18 in 2012). Assets should continue declining for the next week or two also as the IRS takes time to sort through and deposit its mountain of last-​minute payments.

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ICI released its latest monthly summary of "Money Market Fund Holdings, March 2014" yesterday, the latest edition of its new series that tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (​WAM and WAL) for Prime and Government money market funds (​as of March 31, 2014). The release was also accompanied by a comment entitled, "Seasonality, U.​S. Money Market Funds, and the Borrower of Last Resort from Economist Chris Plantier. Plantier writes in ICI'​s "​Viewpoint", "The March money market fund holdings data indicate a large drop in the share of fund assets allocated to European counterparties and a large increase in the share of fund assets allocated to U.​S. counterparties. This shift is likely temporary and reflects reduced willingness of European banks to borrow from money market funds at the end of the quarter, rather than reduced demand from money market funds. Also, the increase in lending to U.​S. counterparties is almost entirely due to the large increase in money market fund lending to the Federal Reserve via its overnight reverse-​repo (​repurchase agreement) facility." (​See Crane Data'​s April 10 News, "​March MF Holdings Show Fed Repo Skyrockets, Other Securities Plummet".)

He explains, "The monthly declines partly reflect a reduction in supply from European banks, but they also are related to the introduction and expansion of the Federal Reserve'​s overnight reverse-​repo facility over the past year. In 2013, in an effort to gradually implement and expand its ability to absorb excess liquidity from the financial system, the Federal Reserve began engaging in a new program of fixed-​rate, full-​allotment, overnight reverse repurchase agreements. Money market funds have been among the counterparties to this new program, and have actively participated in it. In early March, the Federal Reserve increased the effective size of its fixed-​rate reverse-​repo operations, allowing each counterparty to lend the Fed up to $​7 billion overnight. It subsequently increased this maximum amount to $​10 billion in early April."

Plantier adds, "​Though the overnight reverse-​repo operation is technical in nature, its primary purpose is to put a floor under short-​term interest rates so that the Fed can better control short-​term interest rates. In practical terms, however, the Fed has become the borrower of last resort in short-​term liquidity markets, sucking up excess liquidity via its reverse-​repo operation, especially near the end of the quarter. On March 31, 2014, the Fed allotted $​242.​1 billion in reverse repos (​the highest amount ever), of which at least $​175 billion was allotted to money market funds, according to ICI'​s analysis of N-​MFP data."

ICI'​s "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets table shows Prime Money Market Funds' Daily liquid assets at 26.​0% as of March 31, 2014, up from 23.​8% on 2/​28/​14. "​Daily liquid assets" were made up of: "​All securities maturing within 1 day," which totaled 19.​0% (​vs. 17.​0% last month) and "​Other treasury securities," which added 7.​0% (​vs. 6.​8% last month). Prime funds' Weekly liquid assets totaled 35.​9% (​vs. 37.​3% last month), which was made up of "​All securities maturing within 5 days" (​27.​9% vs. 29.​4% in Feb.), Other treasury securities (​7.​0% vs. 6.​8% in Feb.), and Other agency securities (​1.​1% vs. 1.​0% a month ago).

Government Money Market Funds' Daily liquid assets total 62.​4% in March vs. 61.​9% in February. All securities maturing within 1 day totaled 22.​0% vs. 22.​9% last month. Other treasury securities added 40.​3% (​vs. 39.​0% in Feb.). Weekly liquid assets totaled 85.​6% (​vs. 84.​5%), which was comprised of All securities maturing within 5 days (​33.​8% vs. 33.​5%), Other treasury securities (​37.​5% vs. 37.​8%), and Other agency securities (​14.​3% vs. 13.​2%).

ICI'​s "​Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 48.​1% in the Americas (​vs. 42.​4% last month), 18.​7% in Asia Pacific (​vs. 18.​9%), 32.​9% in Europe (​vs. 38.​4%), and 0.​3% in Other and Supranational (​vs. 0.​3%). Government Money Market Funds held 89.​3% in the Americas (​vs. 84.​5% last month), 0.​4% in Asia Pacific (​vs. 0.​6%), 10.​2% in Europe (​vs. 14.​9%), and 0.​1% in Supranational (​vs. 0.​1%).

The table, "Prime and Government Money Market Funds' WAMs and WALs shows Prime MMFs WAMs shortened by one day and WALs remaining unchanged from last month (​at 47 and 83 days, respectively) and Government MMFs' WAMs shortened by two days to 45 days and their WALs increased by one day to 69 days. ICI'​s release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission'​s Form N-​MFP data, which many fund sponsors provide directly to the Institute. ICI'​s data report for February covers funds holding 94 percent of taxable money market fund assets." Note: ICI doesn'​t publish individual fund holdings.

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Crane Data'​s most recent monthly Money Fund Intelligence Family & Global Rankings, which rank the asset totals and market share of managers of money funds in the U.​S. and globally, shows asset declines by the majority of major money fund complexes in March and over the past quarter. (​These "​Family" rankings are available to our Money Fund Wisdom subscribers. SSgA, Western, First American and Deutsche showed some of the few gains in March, rising by $​4.​1 billion, $​2.​5 billion, $​390 million and $​229 million, respectively, while Morgan Stanley, SSgA, Northern, and T. Rowe Price led the increases over the 3 months through March 31, 2014, rising by $​3.​1B, $​2.​9B, $​2.​8B and $​379M. Money fund assets overall fell by $​25.​9 billion in March, and fell by $​69.​5 billion in the first quarter of 2014 (​according to our Money Fund Intelligence XLS).

Our latest domestic U.​S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $​415.​4 billion, or 16.​3% of all assets (​down $​4.​7 billion in March, down $​12.​9B over 3 mos. and up $​4.​5B over 12 months), followed by JPMorgan'​s $​243.​7 billion, or 9.​6% (​down $​5.​7B, down $​8.​1B, and up $​6.​8B for 1-​month, 3-​months and 12-​months, respectively). Federated Investors ranks third with $​216.​4 billion, or 8.​5% of assets (​down $​2.​0B, down $​12.​7B, and down $​13.​6B), BlackRock ranks fourth with $​197.​2 billion, or 7.​7% of assets (​down $​4.​3B, down $​11.​0B, and up $​2.​0B), and Vanguard ranks fifth with $​174.​0 billion, or 6.​8% (​up $​26M, down $​1.​7B, and up $​7.​6B).

The sixth through tenth largest U.​S. managers include: Schwab ($​164.​7B, 6.​5%), Dreyfus ($​163.​8B, or 6.​4%), Goldman Sachs ($​135.​7B, or 5.​3%), Wells Fargo ($​110.​7B, or 4.​3%), and Morgan Stanley ($​100.​2B, or 3.​9%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: SSgA ($​82.​7B, or 3.​2%), Northern ($​76.​8B, or 3.​0%), Invesco ($​59.​9B, or 2.​4%), BofA ($​49.​1B, or 1.​9%), Western Asset ($​42.​1B, or 1.​7%), UBS ($​41.​6B, or 1.​6%), First American ($​37.​8B, or 1.​5%), Deutsche ($​35.​1B, or 1.​4%), RBC ($​20.​0B, or 0.​8%), and Franklin ($​18.​5B, or 0.​7%). Crane Data currently tracks 75 managers, unchanged from last month and up one from last quarter.

Over the past year, Morgan Stanley showed the largest asset increase (​up $​16.​5B, or 18.​5%), followed by Dreyfus (​up $​16.​2B, or 10.​6%) and SSgA (​up $​10.​4B, or 16.​0%). Other big gainers since March 31, 2013, include: Vanguard (​up $​7.​6B, or 4.​6%), JP Morgan (​up $​6.​8B, or 2.​8%), Schwab (​up $​6.​8B, or 4.​3%), Fidelity (​up $​4.​5B, or 1.​1%), and Reich & Tang (​up $​4.​5B, or 56.​6%). The biggest declines over 12 months include: Federated (​down $​13.​6B, or 5.​8%), UBS (​down $​9.​6B, or 18.​1%) and Deutsche (​down $​7.​6B, or 17.​1%). (​Note that money fund assets are very volatile month to month.)

When "​offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.​S. list, except for BlackRock moving up to No. 3, Goldman moving up to No. 5, and Western Asset appearing on the list at No. 9. (​displacing Wells Fargo from the Top 10). Looking at these largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (​domestic U.​S.) and our MFI International ("​offshore), we show these families: Fidelity ($​421.​2 billion), JPMorgan ($​370.​3 billion), BlackRock ($​303.​0 billion), Federated ($​225.​9 billion), and Goldman ($​203.​4 billion). Dreyfus ($​191.​1B), Vanguard ($​174.​0B), Schwab ($​164.​7B), Western ($​142.​0B), and Morgan Stanley ($​116.​2B) round out the top 10. These totals include offshore US dollar funds, as well as Euro and Sterling funds converted into US dollar totals.

In other news, our April 2014 MFI and MFI XLS show that both net and gross yields remained at record lows for the month ended March 31, 2014. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 841), remained at a record low of 0.​01% for both the 7-​Day and 30-​Day Yield (​annualized, net) averages. (​The Gross 7-​Day Yield was also unchanged at 0.​13%.) Our Crane 100 Money Fund Index shows an average yield (​7-​Day and 30-​Day) of 0.​02%, also a record low, and down from 0.​04% a year ago. (​The Gross 7- and 30-​Day Yields for the Crane 100 remained unchanged at 0.​16%.) For the 12 month return through 3/​31/​14, our Crane MF Average returned a record low of 0.​02% and our Crane 100 returned 0.​03%.

Our Prime Institutional MF Index yielded 0.​02% (​7-​day), the Crane Govt Inst Index yielded 0.​01%, and the Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.​01%. The Crane Tax Exempt MF Index also yielded 0.​01%. (The Gross Yields for these indexes were: Prime 0.​19%, Govt 0.​10%, Treasury 0.​06%, and Tax Exempt 0.​13% in March.) The Crane 100 MF Index returned on average 0.​00% for 1-​month, 0.​00% for 3-​month, 0.​00% for YTD, 0.​03% for 1-​year, 0.​04% for 3-​years (​annualized), 0.​07% for 5-​year, and 1.​64% for 10-​years.

​

Moody'​s Investors Service published a "Sector Comment on European Money Market Funds" entitled, "Cancellation of European Parliamentary Vote Gives Temporary Reprieve to CNAV Fund Managers." It tells us, "On 10 March 2014, the European Parliament'​s Economic and Monetary Affairs Committee (​ECON) decided to cancel a much anticipated vote on proposed changes to money market fund (​MMF) regulation because of persisting disagreements between members of the European parliament (​MEPs). The vote cancellation is at least a temporary positive reprieve for constant net asset value (​CNAV) MMF managers. It gives them more time to prepare their clients and adjust their product strategy to the likely outcome of the regulatory reform. Most of the measures contemplated by the proposed regulations would reduce CNAV funds' attractiveness and likely cause investors to move some of their monies to other products."

Moody'​s adds, "Driven by concerns about the MMF market'​s systemic importance and key vulnerabilities, especially structural susceptibility to runs, regulators in both Europe and the US have proposed reforms, including the possible elimination of CNAV funds or the creation of a capital buffer for CNAV MMFs. The discussions within the European Parliament (​EP) are now on hold for several months pending the EP elections in late May."

They comment on the "Implications of the Proposals," "​Much of the regulatory debate focuses on the elimination or the severe alteration of the CNAV funds framework in a way which might significantly reduce the product'​s attractiveness to investors. Variable net asset value (​VNAV) structures would be less attractive to institutional investors under current tax and accounting rules. Shares in CNAV funds are typically bought and sold at the same price. Shareholders do not realize capital gain or loss upon a redemption and all of the fund'​s returns are ordinary income to its shareholders. The stable value of a CNAV fund also eliminates the need to consider the timing of sales and purchases of fund shares. From an accounting perspective, CNAV funds meet the characteristics of a "​cash equivalent"."

Finally, Moody'​s adds, "If a 3% capital buffer was imposed, CNAV MMFs would become a non-​economically viable product, at least in the current interest-​rate environment. The application of such a buffer would potentially result in the elimination of CNAV funds, as managers would be forced to convert their funds to VNAV structure to avoid the buffer. Capital buffers and/​or redemption limits will also cause investors' interest in MMFs to diminish, as at least some of the capital costs will likely be passed over to them, and redemption limits will alter the very nature of MMFs as a same-​day liquidity instrument. MEPs decided on 10 March to give more time to the consideration of these matters and to postpone the discussions to the next European Parliament, which will be elected in May."

The Federal Reserve Bank of New York'​s Liberty Street Economics website posted "Liquidity Risk, Liquidity Management, and Liquidity Policies," "[​T]​he first in a series of six Liberty Street Economics posts on liquidity issues." Written by Tobias Adrian and Joao Santos, it says, "During the 2007-​09 financial crisis, banks experienced widespread funding shortages, with shortfalls even hindering adequately capitalized banks. The Federal Reserve responded to the funding shortages by creating liquidity backstops to insulate the real economy from the banking sector'​s liquidity crisis. The regulatory reforms initiated by the Dodd-​Frank Act and Basel III introduced systematic liquidity risk management into bank regulations. In the past year, research economists from the Federal Reserve Bank of New York have undertaken a number of research projects to further the conceptual and empirical understanding of banks' role in liquidity creation and to guide the design of arrangements to minimize the impact of liquidity shortages on financial stability and the real economy. On the Liberty Street Economics blog this week, we will publish a series of posts summarizing this work. This post provides an overview of the research projects."

The blog explains, "​In "Depositor Discipline of Risk-​Taking by U.​S. Banks," Stavros Peristiani and Joao Santos examine how depositors responded to the amplified risks of bank failure over the last three decades, motivated by the large rise in the number of bank failures since the 2007-​09 financial crisis. The authors show that uninsured depositors discipline troubled banks by withdrawing their funds well in advance of bank failures. Focusing on the recent financial crisis, the authors find that banks experienced an outflow of uninsured time deposits after the near-​failure of Bear Stearns and bankruptcy of Lehman Brothers. Depositors became less risk sensitive after the Federal Deposit Insurance Corporation (​FDIC) introduced the Transaction Guarantee Account Program in October 2008, which raised the maximum deposit insurance limit from $​100,​000 to $​250,​000."

It continues, "​In "The Liquidity Stress Ratio: Measuring Liquidity Mismatch on Banks' Balance Sheets," Dong Beom Choi and Lily Zhou present a liquidity stress indicator that measures the potential for illiquidity in the banking sector. They note that while maturity transformation -- funding long-​term assets with short-​term liabilities -- is a key function of banks, this liquidity mismatch exposes banks to liquidity risk. This risk was clearly demonstrated in the 2007-​09 financial crisis when banks' funding liquidity dried up and their market liquidity evaporated. Since the crisis, liquidity risk management has become one of the top priorities for regulators. Choi and Zhou introduce the Liquidity Stress Ratio as a new measure of liquidity mismatch, analyze how it has evolved for large banks, and study the correlation between the Liquidity Stress Ratio and key bank characteristics over time."

​

Another comment letter has appeared on the SEC'​s Money Market Fund Reform Proposal. The latest, from A Hester Peirce, Senior Research Fellow, and Robert Greene, Project Coordinator, The Mercatus Center at George Mason University, Arlington, Virginia, includes a paper, "​Opening the Gate to Money Market Fund Reform," which supports the `​emergency "​gates" and fees alternative. It says, "​On September 17, 2013, we submitted a public interest comment on the Security and Exchange Commission'​s (​SEC) proposed rulemaking "Money Market Fund Reform; Amendments to Form PF." We argued that allowing a MMF'​s board of directors to discretionarily gate the MMF when the board deems that doing so is in the best interest of the fund more adequately meets the SEC'​s objectives than either of its two June 2013 proposed reforms. The attached working paper examines the rationale for, mechanics, benefits, and drawbacks of our discretionary gating proposal in more detail. We urge the SEC to review the paper'​s findings before finalizing its rulemaking for further MMF regulatory reform. Thank you for reviewing our proposal as the SEC considers this important next step in MMF regulatory reform."

Peirce and Greene'​s Abstract says, "​For decades, money market funds (​MMFs) were thought to be safe, low-​risk investments. The financial crisis of 2007–​2009 cast MMFs in a new, less favorable light, which prompted calls for reform. Our paper offers a reform alternative that builds on MMF boards of directors and their well-​established responsibility for making key decisions for MMFs. After a brief overview of the regulatory history of MMFs, we describe the responsibilities that boards have under current law, the problems MMFs encountered during the crisis, and market and government responses to these problems. Evidence shows that during the crisis, investors were discerning in deciding whether and when to run; more risky, less liquid funds experienced higher volumes of redemptions. This finding, along with our assessment of funds' boards of directors' responsibilities, helps to lay the groundwork for considering the various options for addressing problems still facing MMFs, including our proposal to allow boards to gate their funds when faced by potentially destabilizing redemption pressures."

It explains, "​Over the last several years, the roughly $​2.​7 trillion money market fund (​MMF) industry has found itself the uncomfortable object of attention from regulators and academics. One of these funds -- the Reserve Primary Fund -- notoriously could not pay investors during the crisis, a virtually unprecedented event in the stable world of money market funds. A run on certain MMFs ensued, and the government set up a number of programs to prop up MMFs and the entities that rely on them for funding. Although the focus on MMFs and the potential instability brought to light by the last crisis is warranted, the nature of the reforms being considered is not."

The paper tell us, "In this article, we propose an alternative reform that centers on having MMF boards of directors, rather than regulators, make critical decisions on behalf of the fund during times of crisis. Specifically, we propose that an MMF board of directors be permitted to gate redemptions at the board'​s sole discretion for any length of time without any conditions other than an affirmative board vote -- including a vote of the majority of the fund'​s disinterested directors -- that suspending redemptions is in the best interests of the fund and is necessary to protect the fund'​s stable net asset value (​NAV) and to ensure the equitable treatment of fund shareholders. This proposal is a natural extension of the existing responsibilities of MMF boards of directors."

It explains, "An MMF is a mutual fund -- a collectively owned pool of assets -- that typically invests in low-​risk securities, such as high-​grade commercial paper, government securities, and certificates of deposit. The Securities and Exchange Commission (​SEC) regulates MMFs under the Investment Company Act of 1940 ("​Investment Company Act" or "​Act"). MMF shares generally are bought and sold at $​1.​00 per share. This feature, together with the ease with which shares can be bought and sold, allows MMFs to serve as the functional equivalent of a bank account in the eyes of many investors. MMFs are an important cash management tool for corporate treasurers and a vital source of short-​term funding for banks, municipalities, and corporations. MMFs cater to both institutional and retail investors and come in several different forms: government MMFs, which invest in Treasury securities and agency securities; prime MMFs, which invest in government securities and in other short-​term securities such as commercial paper; and tax-​exempt MMFs, which invest in municipal securities."

The George Mason pair continue, "​The SEC adopted reforms to the regulation of MMFs in 2010 that the agency viewed as a first step toward revamping MMF regulation in response to the crisis. The reforms being considered for the second step have been the subject of heated debate by industry, regulators, MMF investors, and academics. Many of the suggested reforms are unworkable or threaten the core of the industry. This paper argues for a more measured reform that offers the promise of addressing the issues that MMFs encountered during 2008 without eliminating a useful investment and funding mechanism."

They state, "Our proposal relies on MMF boards to freeze redemptions whenever and for as long they determine is in the best interests of the fund. This approach would entrust boards with a responsibility that is consistent with other responsibilities they exercise, would serve as a stark reminder to investors that MMFs are not equivalent to bank accounts, and would give MMF advisers, boards, and investors an incentive to limit MMF risk-​taking in order to safeguard ready redeemability."

The paper says, "This article proceeds as follows. Part I outlines briefly the background of MMFs. Part II discusses the role of the board of directors in governing MMFs, a role upon which our proposal would build. Part III discusses MMF-​related events during the financial crisis of 2007–​2009 and describes the government'​s response to these events. Part IV describes the reforms the SEC instituted in 2010. Part V outlines options for further reform. Part VI outlines and discusses benefits and drawbacks of our proposed solution -- unrestricted discretionary gating by fund boards. Part VII concludes."

The comment concludes, "​The events of 2008 demonstrated weaknesses in the MMF model and the unwillingness of the government to let the market exert its discipline. Accordingly, it is time to take another look at how MMFs can be made stronger. Unfortunately, many of the suggested regulatory reforms for MMFs are operationally unfeasible and could unnecessarily deprive corporations, individuals, and institutional investors of a useful cash management tool. Worse, some proposals could exacerbate the chance or severity of another run on MMFs."

Finally, it adds, "On the other hand, our proposal to allow MMF boards to discretionarily gate their funds would reduce the likelihood and the severity of runs while maintaining most of the desirable features of MMFs. By placing this key strategic decision in the hands of the board of directors, it builds naturally on the already extensive protective responsibilities Congress and the SEC have entrusted to fund boards. Discretionary gating could encourage prudent risk management by MMFs and careful investment decisions by shareholders. The liquidity risk associated with gating will cause investors and managers alike to think twice about yield chasing. Gating will enable funds to avoid asset fire sales in times of crisis, which can harm funds. Our proposal equips fund boards with a powerful tool to ensure the equitable treatment of shareholders. It relies on the existing fiduciary responsibility of boards and on the unique insights of board members about how best to maintain the stability of individual funds. In doing so, our proposal offers a viable solution to make MMFs more resilient without undermining the useful role they play in the financial system."

​

After several months of minimal feedback, the SEC has posted a number of "​Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" over the past month. A recent letter comes from David F. Freeman, Jr., Arnold & Porter LLP, on behalf of Federated Investors, Inc., which explains, "Enclosed for filing in the above-​referenced comment docket is a copy of a comment letter that we submitted to the Financial Stability Board/​IOSCO on their Consultation Report on "​Assessment Methodologies for Identifying Non-​Bank Non-​Insurer Global Systemically Important Financial Institutions (​BIS Ref. 1/​2014)." The enclosed letter to the Financial Stability Board, International Organization of Securities Commissions, c/​o Secretariat of the Financial Stability Board Bank for International Settlements addresses "Proposed Assessment Methodologies for Identifying Non-​Bank Non-​Insurer Global Systemically Important Financial Institutions (​Ref no: 112014)."

The letter says, "We are writing on behalf of Federated Investors, Inc. and its subsidiaries ("​Federated") to comment on the Consultative Document Assessment Methodologies for Identifying Non-​Bank Non-​Insurer Global Systemically Important Financial Institutions (​NBNI G-​SIFis), published by the Financial Stability Board (​FSB) and the International Organization of Securities Commissions (​IOSCO). The Consultative Document ("​Consultation") poses a number of questions regarding the assessment methodologies that should be used to identify NBNI G-​SIFis -- those institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity."

Freeman writes, "​The Consultation requests comments on detailed NBNI financial sector-​specific methodologies for finance companies, broker-​dealers, and investment funds. The investment funds sector is designed to cover authorised/​registered open-​end schemes that redeem their units or shares (​whether on a continuous or periodic basis), as well as closed-​end ones. The Consultation states that, by way of example, the methodology applicable to investment funds "​would therefore cover disparate fund categories, from common mutual funds (​including subcategories thereof such as money market funds (​MMFs) and exchange-​traded funds (​ETFs) to private funds (​including hedge funds, private equity funds and venture capital).""

The letter explains, "Our comments will address the various questions posed, based on the application of the methodologies to investment funds and, in particular, money market mutual funds-​particularly European "​short-​term" money market mutual funds that conform to CESR/​ESMA guidelines, and U.​S. money market mutual funds that meet the requirements of Securities and Exchange Commission ("​SEC") Rule 2a-​7 (​MMFs). In brief: Federated agrees with the approach of the Consultation of developing specific, measurable, published criteria for use in designating NBNI G-​SIFis; Federated agrees with the Consultation that, to the extent the proposed methodologies are applied to the investment fund sector, it is appropriate to focus on individual funds and not investment managers or fund families; Federated further agrees with the Consultation'​s analysis regarding certain key aspects of investment funds (​and MMFs in particular) that weigh strongly against listing them as NBNI G-​SIFis, including their lack of leverage and their substitutability, simplicity and transparency, as well as applicable legal requirements and practices designed to mitigate risk; and Using the methodologies presented in the Consultation, properly applied, we do not believe that any MMF should be listed as an NBNI G-​SIFI."

Federated'​s comment continues, "​In the context of mutual funds and other regulated investment companies, the absence of material amounts of leverage or derivatives, the detailed regulatory program applicable to regulated funds, the many competing funds and other institutional investors in the relevant markets, and the small percentage any one fund owns of the relevant portfolio asset market, in combination, suggest that a regulated investment company, even a large one, is unlikely to be systemically important. In the specific case of MMFs, an unlevered fund which invests only in short-​term, highly liquid, high credit quality fixed income instruments, as part of a very large market for an investment category (​the general U.​S. money market is well over $​12 trillion in assets) with many competing investors (​not only other MMFs, but also other types of investment funds as well as banks, insurance companies, governments, corporate treasurers and pension plans all investing directly in money market instruments) is far less likely to be systemically important at $​100 billion in net assets under management ("​AUM") than is a more highly levered fund or other entity with $​100 billion in net AUM that is investing in more idiosyncratic assets in less liquid, smaller, and less active markets. In other words, if $​100 billion in net AUM is a threshold number for an investment fund generally, a much larger number would be appropriate for judging whether a MMF is an NBNI G-​SIFI, due to the large size of the portfolio asset class in which MMFs invest, the low risk of that asset class, the absence of meaningful debt or other leverage, derivatives or counterparty exposures, and the well-​developed regulatory framework that governs MMFs."

It tells us, "​In addition, the indirect consequences of designating a firm as an NBNI G-​SIFI must be considered in establishing the criteria as well as in determining whether to designate a particular firm as an NBNI G-​SIFI. For example, if a consequence of such designation would be the imposition of bank-​like capital or other regulatory requirements on a mutual fund such that the fund would no longer be attractive to investors or economic to operate, the consequence would be an exit of large funds from the markets. The assets would move somewhere else -- either to the balance sheets of already too-​big-​to-​fail banks, or smaller funds, to less-​regulated private funds, or to direct investment by individual corporate treasurers in money market or other safe assets -- but this change would not in any way reduce the risks inherent in the financial system. Instead, it potentially would increase them."

Federated adds, "​Notably, the European Parliament'​s Committee on Economic and Monetary Affairs recently issued a report on systemic risk issues associated with various types of non-​bank financial firms, including asset management firms. The Report called upon the European Commission to take into account whether the firms "​trade on their own account and are subject to requirements regarding the segregation of the assets of their clients," noted that asset management firms' "​client assets are segregated and held with custodians, and that therefore, the ability for these assets to be transferred to another asset manager is a substantial safeguard" and stated the committee'​s belief that "​an effective securities law regime may mitigate many of the issues involved in the case of a large cross border asset manager." The European Parliament committee report further stated that "[​t]​he size and business model of the asset management sector does not typically present systemic risk."

The letter also says, "In the MMF subcategory of investment funds, the same investment manager may advise many different MMFs with different investment focuses. Regardless of what specific investments are in a particular MMF, each MMF portfolio stands alone. The liabilities (​if any) and shareholder interests of one MMF do not have a claim on the portfolio assets of another MMF, even if they are invested in the same issuers. The portfolio of each MMF is diversified by issuer and maturity, resulting in limited exposure to any one issuer or group of issuers."

It states, "​Because MMFs hold only very short-​term money market instruments, the portfolio composition of every fund is continuously changing, with the great majority of the assets turning over every two or three months. MMFs managed by the same investment manager may invest in many of the same issuers, but at different times with different maturity dates, such that the performance and payment on the two investments will differ and will not necessarily bear the same risks or market values. MMF investment managers select portfolio investments for the funds through extensive and on-​going credit review of issuers, which results in a list of permitted issuers and instruments, and the maximum portfolio investment in each fund. To this is applied a matrix of the maturity profile required to meet the liquidity and return objectives of the fund and other investment and diversification requirements. The portfolio manager and traders then select particular investments from the approved list that meet the requirements of the matrix as they become available, depending on price, market outlook on the issuers and instruments, and other considerations, seeking to pick the best of the available investments to optimize the MMFs performance within the criteria set forth in the matrix. For these reasons, Federated believes it would not be appropriate to aggregate MMFs in a fund family for purposes of applying the methodologies, to focus on asset managers on a standalone entity basis, or to focus on asset managers and their funds collectively."

They write, "Using leverage to enhance return generally is not an investment strategy for mutual funds; it is categorically not an investment strategy for MMFs. MMFs have no debt or leverage and are 100% equity. MMFs do not use or invest in derivatives to any material degree. Due to the absence of borrowed funds and derivatives, MMFs cannot transmit portfolio losses to lenders or derivatives counterparties, as they have none to speak of. These characteristics of MMFs are addressed in more detail in the discussion of the "​Interconnectedness" indicator further below."

Arnold'​s Freeman continues, "In addition, investors in MMFs are equity investors who bear the risk of losses which, in view of the high credit quality and liquidity of MMF portfolios, generally would be very minimal. The potential loss to shareholders of a MMF are far too low to transmit systemic risk from the MMF to investors. For example, in the United States, only two MMFs have ever "​broken the buck," or failed to maintain a constant net asset value ("​CNAV") of $​1 dollar per share, in the more than 40 years that MMFs have been in operation. In one case, investors received more than 96 cents back on the dollar, in the other, more than 99 cents on the dollar, and in each case at no cost to the government. In the second case -- the failure of the Reserve Primary Fund to maintain a CNAV of $​1 per share during the height of the Financial Crisis in September 2008 -- more than 800 U.​S. MMFs in operation at the time were able to maintain CNAV of $​1 per share. In contrast, over this same period nearly 3,​000 U.​S. government-​insured banks failed, causing losses of nearly $​200 billion to the deposit insurance funds."

He adds, "The magnitude of shareholder losses on MMFs are simply too small as a percentage matter, and too infrequent, to be a means of transmission of systemic risk from MMFs to shareholders and beyond. MMF investors are able to absorb such small and infrequent losses; a MMF' s portfolio losses could not be transmitted to other financial institutions or pose a threat to financial stability."

Finally, the Federated letter comments, "The contention that a MMF may transmit risk to financial institutions and markets through the liquidation channel is based on the overreliance of some banks on short-​term funding and the fact that MMFs (​and all other non-​sovereign lenders) may not renew maturing funding to troubled banks in a crisis, resulting in a liquidity issue at these banks. In some cases, the pressure not to roll over short-​term investments is applied by regulators, as in the 2011 European debt crises, when U.​S. regulators pressured U.​S. MMFs not to renew funding to European banks. SIFI designation will not change this behavior by regulators or the underlying economic incentives involved. However, Basle III requirements (​in the U.​S., the proposed liquidity coverage ratio rule applicable to banks) will regulate this issue directly by regulating bank liquidity and reliance on short-​term funding. If bank regulators implement those rules properly, MMFs cannot transmit liquidity risk to banks because banks will not be allowed to depend upon short-​term funding. Regulating MMFs as a way to prevent banks' circumvention of the new bank liquidity rules is unnecessary."

​

That giant sucking sound you heard at month-​end in March was money market investments leaving everywhere else and moving to the Federal Reserve Bank of New York'​s reverse repo program. Crane Data released its April Money Fund Portfolio Holdings yesterday afternoon, and our latest collection of taxable money market securities, with data as of March 31, 2014, shows a huge jump in Repo with the New York Fed and big declines in overall holdings, Time Deposits (​the SEC'​s "​Other" category), CDs and CP. Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) decreased by $​43.​0 billion in March to $​2.​431 trillion. Portfolio assets decreased by $​32.​7 billion in February and by $​258 million in January, after an increase of $​55 billion in December. CDs remained the largest holding among taxable money funds, followed closely by Repo, then by Treasuries, CP, Agencies, Other, and VRDNs. Money funds' European-​affiliated holdings plummeted again at quarter-​end on the shift from dealer repo and time deposits into Fed repo; European holdings are now below 25% of holdings (​down from 29.​8% last month). Below, we review our latest portfolio holdings statistics.

Among all taxable money funds, Certificates of Deposit (​CD) fell again in March, decreasing $​22.​9 billion to $​543.​1 billion, or 22.​3% of holdings. Repurchase agreement (​repo) holdings jumped by $​55.​1 billion to $​534.​0 billion, or 22.​0% of fund assets. (​Money funds' repo at the NY Fed more than doubled, surging from $​91.​8 billion to $​203.​1 billion, though non-​Fed repo plunged by $​56.​1 billion to $​330.​9 billion, or 62.​0% of total repo. Money funds accounted for 84% of the Fed'​s $​242 billion in total repo assets; see our April 2 Link of the Day, "​Fed Repo Sets Record at Quarter End") Treasury holdings, the third largest segment, increased by $​7.​5 billion to $​474.​1 billion (​19.​5% of holdings). Government Agency Debt continued its slide, falling by $​10.​1 billion. Agencies now total $​330.​5 billion (​13.​6% of assets). Commercial Paper (​CP), the fifth largest segment, decreased by $​21.​4 billion to $​380.​8 billion (​15.​7% of holdings). Other holdings, which include Time Deposits, dropped sharply (​down $​49.​0 billion) to $​136.​6 billion (​5.​6% of assets). VRDNs held by taxable funds dropped by $​2.​3 billion to $​32.​0 billion (​1.​3% of assets). (​Crane Data'​s Tax Exempt fund data will be released in a separate series late Thursday and our "​offshore" holdings will be released Friday.)

Among Prime money funds, CDs still represent over one-​third of holdings with 35.​2% (​down from 36.​0% of a month ago), followed by Commercial Paper (​24.​7%, down from 25.​6%). The CP totals are primarily Financial Company CP (​14.​8% of holdings) with Asset-​Backed CP making up 5.​7% and Other CP (​non-​financial) making up 4.​2%. Prime funds also hold 5.​2% in Agencies (​down from 5.​7%), 6.​6% in Treasury Debt (​up from 6.​5%), 5.​2% in Other Instruments, and 5.​1% in Other Notes. Prime money fund holdings tracked by Crane Data total $​1.​542 trillion (​down from $​1.​573T), or 63.​4% (​down from 63.​6%) of taxable money fund holdings' total of $​2.​431 trillion.

Government fund portfolio assets totaled $​434.​3 billion, down from $​443.​8 billion last month, while Treasury money fund assets totaled $​454.​7 billion, down slightly from $​457.​8 billion at the end of January. Government money fund portfolios were made up of 56.​8% Agency securities, 19.​5% Government Agency Repo, 8.​0% Treasury debt, and 15.​2% Treasury Repo. Treasury money funds were comprised of 74.​2% Treasury debt and 24.​5% Treasury Repo.

European-​affiliated holdings declined sharply, down $​137.​4 billion in March to $​599.​9 billion (​among all taxable funds and including repos); their share of holdings is now 24.​7%. Eurozone-​affiliated holdings also plunged (​down $​79.​8 billion) to $​347.​9 billion in March; they now account for 14.​3% of overall taxable money fund holdings. Asia & Pacific related holdings fell by $​10.​7 billion to $​284.​0 billion (​11.​7% of the total), while Americas related holdings jumped $​104.​4 billion to $​1.​545 trillion (​63.​6% of holdings).

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $​76.​1 billion to $​300.​8 billion, or 12.​4% of assets, Government Agency Repurchase Agreements (​down $​21.​8 billion to $​148.​8 billion, or 6.​1% of total holdings), and Other Repurchase Agreements (​up $​894 million to $​84.​4 billion, or 3.​5% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $​14.​6 billion to $​227.​5 billion, or 9.​4% of assets), Asset Backed Commercial Paper (​down $​3.​1 billion to $​88.​4 billion, or 3.​6%), and Other Commercial Paper (​down $​3.​6 billion to $​64.​9 billion, or 2.​7%).

The 20 largest Issuers to taxable money market funds as of March 31, 2014, include: the US Treasury ($​474.​1 billion, or 19.​5%), Federal Reserve Bank of New York ($​203.​1B, 8.​4%), Federal Home Loan Bank ($​197.​2B, 8.​1%), BNP Paribas ($​65.​0B, 2.​7%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​62.​8B, 2.​6%), Bank of Nova Scotia ($​61.​0B, 2.​5%), JP Morgan ($​54.​6B, 2.​1%), RBC ($​50.​8B, 2.​1%), Credit Agricole ($​50.​6B, 2.​1%), Federal Home Loan Mortgage Co ($​49.​8B, 2.​1%), Sumitomo Mitsui Banking Co ($​48.​1B, 2.​0%), Credit Suisse ($​47.​6B, 2.​0%), Citi ($​46.​8B, 1.​9%), Wells Fargo ($​46.​0, 1.​9%), Bank of America ($​43.​5B, 1.​8%), Federal National Mortgage Association ($​43.​5B, 1.​8%), Barclays Bank ($​39.​8B, 1.​6%), Deutsche Bank AG ($​39.​2B, 1.​6%), Toronto-​Dominion Bank ($​37.​3B, 1.​5%), and Federal Farm Credit Bank ($​37.​0B, 1.​5%).

In the repo space, Federal Reserve Bank of New York'​s RPP program issuance (​held by MMFs) remained the largest program by far with 38.​0% of the repo market. The 10 largest Repo issuers (​dealers) (​with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($​203.​1B, 38.​0%), BNP Paribas ($​36.​3B, 6.​8%), Bank of America ($​33.​6B, 6.​3%), Barclays ($​25.​9B, 4.​8%), Goldman Sachs ($​22.​4B, 4.​2%), Citi ($​20.​6B, 3.​9%), Credit Suisse ($​19.​8B, 3.​7%), Wells Fargo ($​19.​4B, 3.​6%), JP Morgan ($​18.​2B, 3.​4%), and RBC ($​17.​4B, 3.​3%). Crane Data shows 79 money funds buying the Fed'​s repos, with just 4 funds -- Federated Govt Obligations, JP Morgan Prime MM, Morgan Stanley Inst Liq Govt, and Western Asset Inst Liq Reserves -- maxing out the previous $​7 billion limit.

The 10 largest CD issuers include: Bank of Tokyo-​Mitsubishi UFJ Ltd ($​43.​8B, 8.​1%), Sumitomo Mitsui Banking Co ($​42.​0B, 7.​8%), Bank of Nova Scotia ($​35.​6B, 6.​6%), Toronto-​Dominion Bank ($​31.​1B, 5.​8%), Bank of Montreal ($​30.​1B, 5.​6%), Rabobank ($​24.​5B, 4.​5%), Mizuho Corporate Bank Ltd ($​23.​3B, 4.​3%), Credit Suisse ($​20.​0B, 3.​7%), BNP Paribas ($​18.​5B, 3.​4%), and Wells Fargo ($​18.​3B, 3.​4%).

The 10 largest CP issuers (​we include affiliated ABCP programs) include: JP Morgan ($​23.​4B, 7.​1%), Westpac Banking Co ($​15.​8B, 4.​8%), Commonwealth Bank of Australia ($​13.​6B, 4.​1%), RBC ($​11.​7B, 3.​5%), FMS Wertmanagement ($​11.​4B, 3.​4%), HSBC ($​10.​9B, 3.​3%), Skandinaviska Enskilda Banken AB ($​10.​1B, 3.​0%), Barclays PLC ($​9.​5B, 2.​9%), National Australia Bank Ltd ($​9.​2B, 2.​8%), and BNP Paribas ($​9.​1B, 2.​8%).

The largest increases among Issuers include: the Federal Reserve Bank of New York (​up $​111.​2B to $​203.​1B), the US Treasury (​up $​7.​5B to $​474.​1B), Bank of Nova Scotia (​up $​3.​8B to $​61.​0B), Toronto-​Dominion Bank (​up $​2.​8B to $​37.​3B), and Federal Home Loan Mortgage (​up $​2.​5B to $​49.​8B). The largest decreases among Issuers of money market securities (​including Repo) in March were shown by: Lloyd'​s TSB Bank PLC (​down $​15.​9B to $​10.​6B), Societe Generale (​down $​15.​6B to $​29.​2B), BNP Paribas (​down $​15.​5B to $​65.​0B), Federal Home Loan Bank (​down $​14.​0B to $​197.​2B), DnB NOR Bank ASA (​down $​13.​0B to $​15.​8B), and Deutsche Bank (​down $​13.​0B to $​39.​2B).

The United States remained the largest segment of country-​affiliations; it now represents 54.​5% of holdings, or $​1.​326 trillion. Canada (​9.​0%, $​217.​9B) moved into second place ahead of France (​7.​9%, $​191.​6B), and Japan (​7.​3%, $​178.​3B) remained the fourth largest country affiliated with money fund securities. The UK (​3.​7%, $​90.​3B) remained in fifth place, and Sweden (​3.​5%, $​84.​6B) remained in sixth. Australia (​3.​2%, $​78.​9B) moved up to seventh while Germany (​3.​1%, $​74.​8B) dropped to 8th. The Netherlands (​3.​0%, $​73.​4B) was ninth and Switzerland (​2.​5%, $​61.​1B) was tenth among country affiliations. (​Note: Crane Data attributes Treasury and Government repo to the dealer'​s parent country of origin, though money funds themselves "​look-​through" and consider these U.​S. government securities. All money market securities must be U.​S. dollar-​denominated.)

As of March 31, 2014, Taxable money funds held 22.​8% of their assets in securities maturing Overnight, and another 12.​1% maturing in 2-​7 days (​34.​8% total in 1-​7 days). Another 21.​6% matures in 8-​30 days, while 25.​8% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 14.​0% of taxable securities, and just 3.​7% matures beyond 180 days.

Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated yesterday, and our MFI International "​offshore" Portfolio Holdings will be updated Friday (​the Tax Exempt MF Holdings will be released late today). Visit our Content center to download files or visit our Portfolio Laboratory to access our "​transparency" module. Contact us if you'​d like to see a sample of our latest Portfolio Holdings Reports or our new Reports Issuer Module.

​

The Investment Company Institute published a press release entitled, "​ICI: G-​SIFI Designation of Regulated Funds Unnecessary and Inappropriate, Would Harm Investors", which says, "Designation of regulated funds like US mutual funds as "​global systemically important financial institutions" (​G-​SIFIs) is neither necessary nor appropriate, ICI says in a comment letter to the Financial Stability Board. The consequences of designating such funds "​would be highly adverse to the designated fund, its investors, the overall fund marketplace and fund investing at large," ICI says." The FSB proposed a threshold of $​100 billion in assets for SIFIs, which would currently include just three money market funds -- Vanguard Prime MMF (​VMMXX) at $​130.​7 billion, Fidelity Cash Reserves (​FDRXX) at $​116.​4 billion, and JPMorgan Prime MM (​CJPXX) at $​110.​9 billion as of March 31 (​according to Crane Data'​s MFI XLS).

The release continues, "The ICI letter explains that the methodology proposed by the FSB for assessing investment funds, based on a per se threshold of US$​100 billion in assets, would lead to 14 regulated US funds being ultimately put on the path for designation by the US Financial Stability Oversight Council (​FSOC) as "​systemically important financial institutions" (​SIFIs). National authorities in other jurisdictions could set their own thresholds and sweep in more funds for enhanced regulation."

It adds, "The ICI letter explains how the existing regulation and defining characteristics, as well as the historical experience, of regulated US stock and bond funds make designation inappropriate. ICI President and CEO Paul Schott Stevens submitted the letter on behalf of the Institute'​s entire fund membership, including US and global funds."

ICI President and CEO Paul Schott Stevens comments, "The FSB'​s consultation seems to reflect an inclination on the part of some regulators to paint the entire canvas of the financial system with a single broad brush and to dramatically expand bank regulatory standards to other types of financial institutions, regardless of how they are structured, operated, and currently regulated. We urge the FSB, as well as the FSOC, to adopt procedures that assure greater transparency and that promote greater public and industry confidence."

The release continues, "​ICI suggests that a better way to protect investors and address regulators' concerns about potential risks is through an activity-​based approach to regulation. The approach that US and European Union regulators currently are taking on money market funds is an example of an activity-​based approach to risk-​mitigating regulation, the letter says. The letter explains that, in isolation, the size of an investment fund -- in contrast to the size of a bank -- reveals very little about whether that fund could pose risk to the financial system. ICI urges that any initial threshold used by the FSB for evaluating investment funds should include a measure of leverage -- the essential fuel for financial crises."

It adds, "The FSB'​s proposed "​materiality threshold" of US$​100 billion in assets is at odds with the FSB'​s stated goal of consistent treatment for different types of financial institutions. The 14 regulated US funds that meet the threshold are "​orders of magnitude smaller than global systemically important banks (​G-​SIBs)," the letter states. "​Far from promoting consistency, the consultation in fact proposes to apply a unique and more sweeping standard to investment funds, without any justification for this difference in treatment.""

ICI explains, "Regulated funds also contrast sharply with banks in their use of leverage. The balance sheet leverage ratio of the 14 regulated US funds averages 1.​04, as compared to an average of 10.​7 for US G-​SIBs. At this rate, for a regulated US fund to achieve the same dollar amount of indebtedness as the smallest US G-​SIB, the fund would have to hold US$​5.​4 trillion in assets under management -- 17 times greater than the world'​s largest regulated fund."

Finally, the release tells us, "Regulators already are making notable use of both new and existing authorities to address risks where they arise. For example, in addition to money market fund reform efforts by US and international regulators, US regulators are also continuing to address specific concerns with securities lending, repurchase agreements, and swaps trading, clearing, and settlement. The US Securities and Exchange Commission is working to strengthen its oversight of US asset managers and regulated funds -- an effort that ICI welcomes and is supporting. In addition, ICI'​s Board of Governors has endorsed a voluntary industry initiative to shorten settlement cycles for a range of securities. ICI and its members in many jurisdictions are engaging across this range of initiatives to help advance efforts to make markets and market participants more resilient to future shocks, without imposing undue costs and burdens on regulated funds and their investors."

​

Twenty-​two U.​S. Senators wrote a letter to SEC Chair Mary Jo White to urge the Commission to exempt Tax Exempt money funds from the floating NAV proposal, we learned from advocacy group PreserveMoneyMarketFunds.​org. The letter says, "We write to you as former state and local officials who are concerned about a Securities and Exchange Commission ("​SEC" or "​Commission") regulatory proposal that would have a deleterious effect on the nation'​s states and municipalities. The proposal would subject municipal money market funds (​MMFs) to a new round of significant reforms and impair the vital role that such funds have played in providing low-​cost financing for state and local governments for some 40 years."

It continues, "​Together, the signatories of this letter have decades of municipal and local governance experience, so we know very well how important it is for states and municipalities to have ready access to the capital markets. Municipal MMFs play a primary role in providing such access in a cost-​efficient manner for low-​cost borrowing needs -- for example, to help fund such important local projects and services as schools, hospitals, water treatment plants, public power facilities, highways. and mass transit systems. Municipal MMFs provide more than two-​thirds of the short-​term funding for such projects and services, making them the largest purchaser of short-​term municipal debt. The SEC'​s proposed regulations will shrink this critical source of funding, leading to significantly higher borrowing costs for states and municipalities -- or a reduction of projects and services, with a corresponding decline in the quality of life -- or even both."

The Senators explain, "​We note that in 2010 the Commission implemented an extensive array of reforms that substantially improved the resiliency, safety and transparency of all MMFs. The Commission proposed another round of reforms in 2013 involving structural changes that would either require certain funds to abandon their stable $​l net asset value (​NAV) and move to a floating NAV or impose redemption restrictions on investors under specified circumstances. The proposal exempts all Treasury and U.​S. government MMFs from these proposed structural changes. However, municipal MMFs were not exempted from the proposal even though these funds -- like Treasury and U.​S. government MMFs -- did not exhibit signs of stress during the 2008 crisis. In fact, municipal MMFs remained remarkably stable during the financial crisis of 2008, with only modest outflows."

The letter tells us, "Municipal MMFs have extraordinary levels of liquidity, short maturities and high credit quality -- just like Treasury and U.​S. government funds -- and should receive the same exemption from structural reforms. Moreover, municipal MMFs hold only about $​270 billion of assets -- a very small fraction of the $​2. 7 trillion MMF industry. They simply do not pose a systemic risk to the financial system."

The Senators add, "Subjecting municipal MMFs to a floating NAV or redemption restrictions would diminish the desirability of such funds by investors, who value the stability and liquidity they offer. Surveys have found that investor demand for municipal MMFs would decline significantly, setting in motion a series of negative consequences. The amount of short-​term municipal debt that MMFs would be able to purchase would dwindle, and there is no readily apparent substitute purchaser for these securities. Debt issuance costs would rise significantly -- by a multiple of five or even more, according to some municipal treasurers. Subjecting municipal MMFs to burdensome new regulations will directly -- and quite literally -- affect Main Street. We have heard directly and loudly from state and local officials in our states about these concerns."

Finally, they write, "Municipal MMFs have provided generous economic benefits to states, towns, cities and taxpayers alike, without imposing undue risks to the financial system. We are concerned the proposed regulation will place additional stress on municipal budgets by making it more expensive and difficult to raise capital to meet short-​term borrowing needs. We ask the Commission to carefully consider the costs of its proposed regulations on state and local governments and whether these costs outweigh any perceived benefit. Thank you for your attention to these important issues."

The letter is signed by Robert P. Casey. Jr., Michael B. Enzi, Michael F. Bennet, John Boozman, Cory A. Booker, Saxby Chambliss, Susan M. Collins, Martin Heinrich, John Hoeven, Joe Donnelly, Mike Johanns, James M. Inhofe, Johnny Isakson, Tim Kaine, Angus S. King Jr., Joe Manchin III, Claire McCaskill, James E. Risch, Marco Rubio, Tim Scott, Jeanne Shaheen, and Mark R. Warner.

​

The April issue of Crane Data'​s Money Fund Intelligence was sent out to subscribers on Monday morning. The latest edition of our flagship monthly newsletter features the articles: "More Talk, No Action Yet on Pending MMF Reforms," which reviews recent SEC speeches and comments on pending regulations; "Plaze Says Doing Nothing Better Than SEC Proposals," which interviews Stroock Partner and former SEC Deputy Director Bob Plaze; and, "Global MF Growth Led by China, US; EU Buffer Dies," which reviews the growth of global money fund markets. We also updated our Money Fund Wisdom database query system with March 31, 2014, performance statistics and rankings this morning, and we sent out our MFI XLS spreadsheet earlier. (MFI, MFI XLS and our Crane Index products are available to subscribers at our Content center.) Our March 31 Money Fund Portfolio Holdings data are scheduled to go out on Wednesday, April 9.

The latest MFI newsletter'​s lead article comments, "The debate over pending money market fund regulatory reforms escalated over the past month, as the SEC, media outlets and mutual fund companies all weighed in again on the matter. SEC Chair Mary Jo White made some comments and the SEC staff released a set of studies on technical issues, while fund companies and consultants added more comment letters to the SEC'​s website. Plus, The Wall Street Journal appeared to tweak banking regulators by claiming that the SEC would widely broaden exemptions from the floating NAV. While nobody knows when we'​ll get the final rules and what form they'​ll take yet, recent comments indicate that they aren'​t yet imminent."

The article explains, "SEC Chair White'​s most recent comments on the topic gave little indication of when we might see pending money market fund reforms and what form they might take. White was asked about money fund reform at a Chamber of Commerce event two weeks ago. She commented, "[​W]​e are ... actively involved and proceeding to the adopting phase. We have taken a very in-​depth look at all the impacts of the two alternative proposals that we can proceed with, or in combination. We have gotten extensive, invaluable comments on this. We are very sensitive to preserving the product as part of this process. But what we are obviously focused on is what happened during the financial crisis and the heightened redemptions in prime institutional funds."

The "​profile" with Stroock'​s Plaze says, "This month MFI interviews Robert Plaze, a Partner at Stroock & Stroock & Lavan LLP, and the former Deputy Director of the Division of Investment Management at the U.​S. Securities & Exchange Commission. Plaze, who left the SEC in early 2013, has been involved in regulatory issues involving money market mutual funds for three decades. He is partially responsible for writing much of the existing Rule 2a-​7 regulations. Our Q&​A follows."

We ask Plaze, "MFI: How long have you been involved in money fund issues? Plaze: I first got involved in the late 1980'​s. I was there when the first bailout requests came in to the Division. I was in the room when more senior Division Staff were trying to figure out how to deal with them, and I saw the look of concern on everyone'​s faces. No one knew what might happen if a fund broke the buck, and no one wanted to find out. ​It was the closest thing I had ever seen at the time to a crisis, because everyone was extraordinarily worried about the prospect of a fund breaking the dollar. Shortly after, I became an Assistant Director in the Division and went on to draft the 1991, 1996, and the 2010 Amendments to 2(​a)-​7. During that period my staff and I handled all requests for no-​action by fund sponsors to bailout their money market funds. (​Watch for excerpts of this interview later this month, or write us to request the full article.)

The February MFI article on Global MF Growth Led by China, US; EU Buffer Dies explains, "Last Wednesday, the ICI released its latest data on "​Worldwide Mutual Fund Assets," which shows that global money market mutual fund assets grew by $​67.​4 billion in Q4'​13 to $​4.​760 trillion. This follows a sharp rebound in Q3'​13, when "​cash" funds grew by $​197.​9B. (​MMF assets have declined by $​33.​4 billion over the past year, though.) The latest quarterly growth was led by large increases in Chinese and U.​S. MMFs.."

Crane Data'​s April MFI with March 31, 2014 data shows total assets falling by $​25.​9 billion (​falling by $​44.​9 billion last month) to $​2.​574 trillion (​1,​238 funds, the same number as last month. Our broad Crane Money Fund Average 7-​Day Yield and 30-​Day Yield remained at a record low 0.​01% while our Crane 100 Money Fund Index (​the 100 largest taxable funds) yielded 0.​02% (​7-​day and 30-​day). On a Gross Yield Basis (​before expenses were taken out), funds averaged 0.​13% (​Crane MFA, unchanged) and 0.​16% (​Crane 100) on an annualized basis for both the 7-​day and 30-​day yield averages. (Charged Expenses averaged 0.​12% and 0.​14% for the two main taxable averages.) The average WAM for the Crane MFA and the Crane 100 were 43 and 46 days, respectively, down 2 days and one day, respectively. (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

​

U.​S. Securities & Exchange Commission Commissioner Luis Aguilar spoke Wednesday at a mutual fund director'​s event on "Taking an Informed Approach to Issues Facing the Mutual Fund Industry," and he criticized FSOC and the OFR, and defended the SEC'​s turf overseeing mutual funds and money market funds. Aguilar comments, "There are a number of issues that are important to the asset management industry, including the Commission'​s recently proposed reforms to money market funds.... However, today I would like to focus my remarks on the following topics: First, the need to utilize the Commission'​s expertise in overseeing the asset management industry, including evaluating the risks that the industry may pose to our financial markets."

He says, "​To name just a few examples in the rulemaking space, in the last few years the Commission has adopted rules to enhance the custody practices of investment advisers, rules to prohibit pay-​to-​play activities in the investment advisory industry, amendments enhancing Commission oversight of certain private fund advisers, and, in 2010, the Commission significantly reformed money market funds. Moreover, as is well known, we are currently considering additional reforms to money market funds."

Aguilar tells us, "The Commission has also been active in bringing various enforcement actions. For example, over the past three years, the SEC has brought more than 430 cases relating to investment advisers and investment companies, some of which involved mutual funds and their advisers. For example: In November 2013, the SEC brought fraud charges against Ambassador Capital Management, an investment advisory firm, and a portfolio manager for misleading the trustees of a money market fund, and for failing to comply with rules that limit risk in a money market fund'​s portfolio."

He talks about "FSOC and OFR'​s Recent Foray into the Money Market Fund and Mutual Fund Industry," saying, "Recently, however, the Commission'​s authority in the mutual fund industry -- an industry in which the SEC has capably served as the primary regulator for almost 75 years -- has been undercut by the activities of the Financial Stability Oversight Council ("​FSOC") and its research arm, the Treasury Department'​s Office of Financial Research ("​OFR"). In particular, FSOC has focused its sights on various aspects of the asset management industry. Obviously, this is an area where the SEC has a great deal of expertise."

Aguilar continues, "Initially, FSOC focused on money market funds. FSOC'​s attention to this issue began in 2010, shortly after FSOC was created by the Dodd-​Frank Act. Specifically, FSOC called for reforms to address what it viewed as structural vulnerabilities in money market funds that left them susceptible to shareholder runs. As this group knows, the financial crisis of 2008 put pressure on various money market funds, with the most public example being The Reserve Fund "​breaking the buck" in September 2008. `​In response, in 2010, the Commission acted to adopt amendments to make money market funds more resilient to short-​term market risks and provide greater protections for investors."

He adds, "​In late 2011 and early 2012, the SEC began to consider further money market reforms. However, at that time, a majority of the Commission felt it was appropriate, and responsible, to study the effects of the Commission'​s 2010 amendments regarding money market funds before taking additional action. Also at that time, the SEC staff informed the Commission that it could complete such a study in only five to six weeks. For reasons I have never understood, the SEC staff was not authorized to do the study until late in 2012, and the study was not made available to the Commissioners until November 30, 2012, after the announcement of the then-​Chairman'​s departure."

Aguilar tells us, "However, after receiving this study, and the data it contained, the Commissioners began productive discussions that led to a set of proposals to further reform the money market fund industry. The full Commission unanimously approved these proposals on June 5, 2013. The SEC staff continues to work on this matter and, just last week, published additional data analyses relating to money market fund reform. I am hopeful that the final rules will soon come to a vote. It is important for the Commission to bring closure to this issue and I am pleased that real data is being utilized in the process."

He continues, "More recently, FSOC and OFR have focused on a wider swath of the asset management industry. In particular, FSOC charged OFR with studying the activities of asset management firms in order to aid FSOC in deciding whether to subject certain aspects of the industry to enhanced prudential standards and supervision. In September 2013, OFR published what it considered a study of the asset management industry. I recommend that you read the report in its entirety; however, in sum and substance, the report concluded that asset management firms and their activities "​introduce vulnerabilities that could pose, amplify, or transmit threats to financial stability.""

Aguilar states, "​The report should not take you very long to read. The OFR report, which purported to analyze the risks posed by the entire multi-​faceted asset management industry, is only 34 pages long, and the report virtually ignored the hedge fund industry and the private equity industry. By contrast, the SEC staff'​s November 30, 2013 study, which focused only on certain aspects of money market funds, was 98 pages long. Although neither FSOC nor the OFR chose to solicit public comment on the report, the report was posted on the SEC'​s website and public comments were solicited. Subsequently, OFR'​s report received near universal criticism from academics, investor advocates, lawmakers, asset management firms, industry groups, and others. The criticisms generally referred to the report'​s quality, research, and analysis."

He adds, "However, rather than continuing to discuss the merits of the research and analysis -- or lack thereof -- in OFR'​s report, I would simply note that there needs to be a mechanism by which the full Commission, not just the Chair and SEC staff, provide meaningful input and coordinate with the leadership of FSOC and OFR.... Let me be clear, the work of FSOC and OFR to identify and mitigate systemic risk is important. However, there is real danger in that work being compromised if the full five-​member Commission is cut out of the process. The SEC and our fellow regulators should assist FSOC'​s efforts in a thorough and objective manner. My interest is in making sure that the full expertise and judgment of the Commission -- and all the Commissioners -- is being utilized, and that our authority and expertise are not being undercut. For the protection of our economy, financial regulators across the U.​S. federal government have to work together to address risks and threats to the stability of our financial markets."

Finally, Aguilar says, "Before leaving the subject of the OFR report, I note that just last Friday, the Department of the Treasury announced that FSOC will hold a conference in May on the asset management industry and its activities. While I welcome the effort to better understand the asset management industry, this does not address the issues arising from the criticisms of the OFR report'​s quality, research, and analysis, or the issues that arise when the SEC'​s decision makers are excluded from the process. FSOC and OFR should acknowledge the Commission'​s -- and, in particular, the Commissioners' -- role as the primary regulator of the asset management industry."

​

On Wednesday, the Investment Company Institute released its latest data on "Worldwide Mutual Fund Assets and Flows (​Fourth Quarter 2013," which shows that global money market mutual fund assets grew strongly in Q4'​13. This follows a sharp rebound in Q3'​13, when "​cash" funds grew by $​197.​9B. (​ICI began publishing their Worldwide statistics in 2004.) The latest data show worldwide money market mutual fund assets rising by $​67.​4 billion, led by large increases in Chinese and U.​S. MMFs, in Q4'​13. But MMF assets declined by $​33.​4 billion over the past year (​through 12/​30/​13) to $​4.​760 trillion. Crane Data excerpts from ICI'​s latest release and analyzes the money fund portion of the ICI'​s latest global statistics, below.

ICI'​s latest Worldwide Funds release says, "Mutual fund assets worldwide increased 4.​0 percent to $​30.​05 trillion, an all-​time high, at the end of the fourth quarter of 2013, and rose $​3.​2 trillion over the year due primarily to strong capital appreciation in equity and balanced/​mixed fund categories. Worldwide net cash flow to all funds was $​252 billion in the fourth quarter, compared to $​191 billion of net inflows in the third quarter of 2013. Flows into long-​term funds increased to $​203 billion in the fourth quarter from an inflow of $​90 billion in the previous quarter, and long-​term mutual funds received a record inflow of $​955 billion in 2013. Equity funds worldwide had net inflows of $​145 billion in the fourth quarter, up from $​77 billion of net inflows in the third quarter. Outflows from bond funds totaled $​15 billion in the fourth quarter, down from net outflows of $​55 billion in the third quarter. Inflows into money market funds were $​49 billion in the fourth quarter of 2013, somewhat lower than the $​101 billion inflow recorded in the third quarter of 2013."

The quarterly statement explains, "The Investment Company Institute compiles worldwide statistics on behalf of the International Investment Funds Association, an organization of national mutual fund associations. The collection for the fourth quarter of 2013 contains statistics from 45 countries."

ICI continues, "The growth rate of total mutual fund assets reported in U.​S. dollars was made larger by U.​S. dollar depreciation. For example, on a U.​S. dollar–​denominated basis, mutual fund assets in Europe increased by 4.​8 percent in the fourth quarter, compared with an increase of 2.​6 percent on a Euro-​denominated basis. On a U.​S. dollar–​denominated basis, equity fund assets increased 7.​2 percent to $​13.​3 trillion at the end of the fourth quarter of 2013, and accounted for over three-​quarters of the $​1.​2 trillion quarterly increase in global mutual fund assets. Bond fund assets were steady at $​7.​1 trillion in the fourth quarter. Balanced/​mixed fund assets rose 5.​2 percent in the fourth quarter, accounting for 15 percent of the global increase in assets, while money market fund assets rose 1.​5 percent."

The release adds, "Money market funds worldwide experienced a net inflow of $​49 billion in the fourth quarter of 2013 after registering a net inflow of $​101 billion in the third quarter of 2013. The global inflow from money market funds in the fourth quarter was driven by inflows of $​37 billion in the Americas and $​41 billion in the Asia and Pacific region. Money market funds in Europe posted outflows of $​28 billion in the fourth quarter."

According to Crane Data'​s analysis of ICI'​s data, the U.​S. maintained its position as the largest money fund market in Q4'​13 with $​2.​718 trillion (​down to 57.​9% of all worldwide MMF assets); assets increased by $​37.​8 billion in Q4'​13 (​they were up by $​24.​8B in the past year). France remained a distant No. 2 to the U.​S. with $​436.​6 billion (​9.​3% of worldwide assets, down $​6.​0 billion in Q4, down $​43.​3B over 1 year, and down a shocking $​256.​6 billion since the end of 2009). This was followed by Ireland ($​367.​5 billion, or 7.​8% of total assets, up $​4.​5B in Q4 and down $​11.​9B over 12 months). Australia remained in 4th place in the latest quarter, though it saw a drop of $​4.​8 billion in the quarter and $​6.​2B over the past year to $​338.​6B (​7.​2%), and Luxembourg remained in 5th place with $​320.​7B, or 6.​8% of the total (​down $​925 million in Q4 and down $​21.​7B for 1 year).

China continued its dramatic money fund growth in Q4 of 2013. The 6th largest money fund country saw assets jump again; China now reports $​123.​5B in total, up a massive $​43.​6 (​54.​6%) in Q4 (​after rising $​30.​4B in Q3) and up $​31.​7 billion in 2013. See our March 10 Link of the Day, "​WSJ on Chinese Online '​Money Funds'". (​The WSJ article said, "Online money-​market funds, which aren'​t subject to the limits, have been able to offer substantially higher returns.... Chinese e-​commerce giant Alibaba Group Holding Ltd. launched an online money-​market fund called Yu'​e Bao last June, and the fund had attracted more than 400 billion yuan ($​65.​4 billion) as of the mid-​February. Savings accounts offer a minuscule interest rate of 0.​35% a year while a one-​year fixed deposit can pay 3.​3%. Yu'​e Bao and other similar products provided by tech companies are offering about 6% a year.")

The latest Worldwide statistics also show Korea ($​63.​9B, down $​5.​0B and up $​3.​8B on the quarter and year, respectively), Mexico ($​52.​9B, down $​3.​0B and down $​3.​2B), and Brazil ($​46.​6B, down $​4.​2B and up $​2.​2B) remaining in the 7th through 9th largest money fund market spots. But India rebounded to 10th place with a jump of $​9.​8B (​to $​29.​3B), moving ahead of Taiwan ($​27.​6B) and Canada ($​26.​3B). South Africa, Chile, Switzerland, Japan, Sweden, Finland, Italy, and Norway also ranked among the 20 largest countries that have money market mutual funds.

Ireland and Luxembourg'​s totals are primarily "​offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. (​Crane Data believes that some of these countries, like France and Italy, do not have true "​money market funds" due to their lack of strict guidelines and "​accumulating" NAVs instead of stable NAVs. Contact us if you'​d like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet based on ICI'​s data.)

​

A press release entitled, "Fitch: Reduced ABCP Supply Drives Decline in Money Fund Commercial Paper Holdings" tells us, U.​S. money market fund (​MMF) investments in commercial paper (​CP) have declined at a moderate but steady rate over the past year, driven by declines in asset-​backed commercial paper (​ABCP) and nonbank CP, according to a Fitch Ratings report. As of end-​Feb. 2014, the combined share of CP holdings among the top-​10 U.​S. MMFs was 20.​2%, a decline from 23.​9% in Feb 2013. On a dollar basis during the same period, CP holdings were approximately $​137 billion compared with $​160 billion a year earlier, a 14% decline." We review the Fitch report, and also quote from a new Comment Letter on the SEC'​s Money Fund Reform Proposal from Treasury Strategies ("Proposed Money Market Fund Regulation: A Game Theory Assessment"), below.

Fitch explains, "​This shift has been partly driven by a reduction in ABCP investments. Relative to the year-​earlier period, outstanding amounts of ABCP as of end-​February 2014 were 22% lower. Fitch believes regulatory uncertainty surrounding bank sponsors' future liquidity support for ABCP programs appears to be contributing to the continuing shrinkage of that market. The Basel III liquidity coverage ratio (​LCR), which banks must meet by 2019, is leading some sponsors of traditional multi-​seller ABCP programs to re-​assess the impact of liquidity support for these vehicles."

The report explains, "Steady Fall in MMF CP Holdings: Money market fund (​MMF) investments in commercial paper have fallen at a moderate but steady pace over the past year, driven primarily by declines in holdings of asset-​backed CP (​ABCP) and nonbank CP. Data gathered from a survey of the 10 largest prime MMFs indicate that CP'​s relative importance in money fund portfolios declined over the last year, with its share of combined MMF assets dropping to 20.​2% at Feb. 28, 2014, from 23.​9% a year earlier."

It adds, "Survey Mirrors Broader Market: The Fitch Ratings prime MMF survey findings mirror broader CP market trends evident in Federal Reserve data, which point to an ongoing contraction in the total amount of ABCP outstanding. Our data show that bank-​related CP issuance, still the biggest driver of overall market activity, remains relatively stable. Bank-​related CP'​s share of MMF assets in our survey stood at 13.​3% as of Feb. 28, essentially unchanged from the year before."

The new Treasury Strategies Comment says, "​We submit as commentary on the proposed Reform the attached paper: "​Proposed Money Market Fund Regulation: A Game Theory Assessment <​b:>`​_." This paper presents a game theory analysis of the SEC'​s June 2013 proposals for reform of Money Market Funds (​the "​Release"). Game theory is relevant to this policy debate as regulators, particularly FSOC, have depicted investor behavior using terminology of shareholder runs and first mover advantage -- a framework classically employed in game models of bank runs."

It continues, "​The paper is responsive to various questions raised in the Release. We demonstrate that when implemented properly, the Fee/​Gate alternative would effectively halt and even prevent runs from taking place. However, the alternative of moving to a fluctuating net asset value would neither halt nor prevent runs. The alternative of combining Fees/​Gates with a fluctuating net asset value is found to be inferior to Fees/​Gates alone because it would create an economically inferior product that would inevitably promote regulatory arbitrage without materially reducing run risk beyond the features of the Fee/​Gate alternative."

Authors Tony Carfang and Cathryn Gregg write, "The paper describes these issues in detail, both with regard to framing the final rule and in stating the requisite powers and responsibilities of directors. We believe that the current policy debate inside the Commission needs to reflect this perspective on the ability of Fees/​Gates to provide a robust policy solution and adequately protect investors from first mover risks."

Finally, the paper'​s "Abstract" explains, "This paper presents a game theory analysis of the SEC'​s June 2013 proposals for reform of Money Market Funds (​MMFs). Game theory is relevant to this policy debate as regulators have depicted investor behavior using terminology of shareholder runs and first mover advantage -- a framework classically employed in game models of bank runs. The paper demonstrates that when implemented properly, the Fee and/​or Gate alternative would effectively halt and even prevent runs from taking place. However, the alternative of moving to a fluctuating net asset value would neither halt nor prevent a run."

​

Below, we excerpt the second half of our March Money Fund Intelligence "​profile" (​originally published 3/​7), which interviews Federated Investors' Debbie Cunningham.... MFI: Can you comment on the pending SEC reforms? Cunningham: We believe that the ancillary items -- the different types of stress-​testing and disclosure enhancements, etc. -- with modest modification make a lot of sense. When you look at the two broad proposals: floating NAV vs. gates and fees, obviously we think the gates and fees is workable, especially [​with the] discretion from a fund Board perspective and definitely in the context of our own experience [​with Putnam]. On the other hand, we think that for customers, the floating NAV has many negative aspects associated with it and are convinced that imposition of it would be a game changer, [​compromising] the efficiency of the product and [​changing] how it looks going forward. Now we are confident that cash is a necessary investment class, so it doesn'​t go away. It doesn'​t reduce the cash management need; it just potentially changes the vehicle that is most efficient in currently delivering that product.

We'​re optimistic that we are headed [​for] the proposal that'​s more viable and stands a better change of maintaining the efficiency of the industry, which is the gates and fees option. But we will prepare for the worst, if that'​s what comes forward, to be able to provide our customers still with the cash management process that they need on a day-​to-​day basis. Timing-​wise, I think there was a placeholder -- the October 2014 date -- that was published as part of the SEC'​s 2014 calendar.... [​There were] some statements made by Chairman White, as well as some of the other commissioners, about making this a priority item.... [​But] we'​ve seen some updated statements that no longer cast it in the '​Top 3' from a priority list item. So I guess maybe something that'​s in-​between -- mid-​year, end of the second/​beginning of the third quarter -- is something that might be reasonable. But, honestly, it'​s like putting a finger up in the air and trying to figure out which way the wind is blowing on any given day.

MFI: What about modifications to the amortized cost proposal or a dual NAV? Cunningham: I think the modification ideas have good potential. You don'​t want to close the door on any one [​of these options] versus just 4-​digit pricing to the 100th of a penny and transacting at that calculation. But there have been discussions from our perspective around transacting at the amortized cost value and verifying with nightly pricing ... publishing of the nightly pricing out to the 4 digits if that'​s what'​s deemed the best disclosure. Certainly the industry has been doing that on its own for over a year now at this point anyway. But it'​s been a pretty benign marketplace, so moving one-​100th of a penny every 2 months probably doesn'​t get too many people riled up or get the attention of any investors. If we were in a rate environment like 1994 you'​d actually see changes on a regular daily basis. I believe there are compromises and modifications that can occur.

Part of the problem with associating daily pricing in a money fund is that money funds transact all day long and these are same day transactions. Notwithstanding that practice, there is no intraday pricing for money market securities. So, again, maybe being able to transact at the last calculated price at the end of every day, throughout the next day to allow same day settlement [​would work], as long as there are no extraneous events that are taking place. [​This is] akin to the way the rule works now, except that funds are allowed to rely on the amortized cost pricing methodology rather than involving mark-​to-​model pricing from vendors. As a possible modification, you'​d be relying on the last mark-​to-​market pricing from the prior day, but that at least reduces the problem of same day transactions in the portfolio. So we think that there are compromises along those lines, none of which are as good as what exists today in the amortized cost pricing methodology process today, but that potentially could work.

MFI: What about the FSOC? Cunningham: I think it [​FSOC stepping in] is a concern to the SEC.... This is probably to a large degree why they'​re doing as much due diligence and homework as they possibly can prior to coming up with any finalization of these rules.... The SEC needs to be certain every rock is turned over so that, if what they end up with on a rulemaking basis is different from what the FSOC group would want, they have firm conviction as to why they have made the correct but different decision.

MFI: Tell us about Europe. Cunningham: We were ecstatic [​on Feb. 17] when the MEPs, the European Parliament, postponed their vote on the September 2013 [​money fund reform] proposals. We'​re hearing only good things about why that postponement occurred.... There'​s so much consternation about the constant NAV being tied to capital.... So we were pleasantly surprised. We'​re gaining some comfort that we won'​t end up with a product that'​s called a '​money market fund,' but that has drastically different characteristics depending on the part of the world in which you operate. We think consistency is important and we were uncomfortable heading down a path that might have resulted in less consistency. But with the delay of that vote and the potential for a more reasonable compromise, I think we'​re heading down the right path there too.

MFI: What is your outlook overall? Cunningham: I look forward to finalization of these regulations. Ultimately, we are optimistic that we end up with something that doesn'​t drastically change the complexion of the product. But in the end if that in fact does occur, we don'​t think it changes our customer'​s underlying need for cash management. And so our ability to be flexible and provide as efficient a vehicle as we can within the constraints of whatever regulatory changes are imposed upon us is something that we'​ll continue to undertake.

Finally, back to what I consider to be the biggest problem in the marketplace at this point, the abysmally low rate environment. I feel that we are making headway towards getting out of that too. I think the Fed facility and the reverse repo side exercise helps. All the treasury issuance as well as the beginning of the tapering process have provided for improvements in supply which have been helpful. I think that although we'​ve hit a little bit of a roadblock with weather related stagnation, we should continue to move forward from an economic standpoint [​and] in the second half of the year, start to experience a steeper money market yield curve. Now that doesn'​t necessarily mean that that'​s exactly when the Fed starts to raise rates. But at least there is an anticipation of it and a reflection in the yield curve that provides you with a little bit of extra return.

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