Federated Hermes filed its latest "10-K Annual Report" with the SEC last Friday, and the 105-page document contains a wealth of information on money market mutual funds, including lengthy discussions on "Regulatory Matters". The report tells us, "Federated Hermes ... is a global leader in active, responsible investing with $757.6 billion in assets under management (AUM or managed assets) at December 31, 2023. Federated Hermes has been in the investment management business since 1955 and is one of the largest investment managers in the United States.... Federated Hermes provides investment advisory services to 180 Federated Hermes Funds as of December 31, 2023.... Of the 180 Federated Hermes Funds, Federated Hermes' investment advisory subsidiaries managed 24 money market funds with $406.2 billion in AUM, 41 equity funds with $42.5 billion in AUM, 56 fixed-income funds with $43.9 billion in AUM, 54 alternative/private markets funds with $12.4 billion in AUM and five multi-asset funds with $2.7 billion in AUM. As of December 31, 2023, Federated Hermes provided investment strategies to $249.9 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or products owned or sponsored by third parties." (Note: Register and make hotel reservations soon for Bond Fund Symposium, Crane Data's ultra-short bond fund conference, which will take place March 25-26 in Philadelphia. We hope to see you next month in Philly!)
It explains, "Federated Hermes, which began selling money market fund products to institutions in 1974, is one of the largest U.S. managers of money market assets, with $560.0 billion in AUM at December 31, 2023. Federated Hermes has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated Hermes also manages retail money market products that are typically distributed through broker/dealers and other financial intermediary customers. At December 31, 2023, Federated Hermes managed money market assets across a wide range of categories: government ($352.1 billion); prime ($195.2 billion); and municipal (or tax-exempt) ($12.7 billion)."
Discussing "Distribution Channels and Product Markets," the 10-K says, "Federated Hermes' distribution strategy is to provide investment management products and strategies to more than 10,000 institutions, financial intermediaries and other customers, including, among others, banks, broker/dealers, registered investment advisors, government entities, corporations, insurance companies, foundations and endowments. Federated Hermes uses its trained sales force of more than 200 representatives and managers, backed by an experienced support staff, to offer its products and strategies, add new customer relationships and strengthen and expand existing relationships. Federated Hermes' investment products and strategies are offered and distributed in three markets. These markets, and the relative percentage of managed assets at December 31, 2023 attributable to such markets, are as follows: U.S. financial intermediary (63%); U.S. institutional (28%); and international (9%)."
They write on "U.S. Financial Intermediaries," "Federated Hermes offers and distributes its products and strategies in this market through a large, diversified group of over 6,300 national, regional and independent financial intermediary customers, including broker/dealers, banks and registered investment advisors. Financial intermediaries use Federated Hermes' products and strategies to meet the needs of their customers, who are often retail investors. Federated Hermes offers a full range of products and strategies to these customers, including Federated Hermes Funds and Separate Accounts (including private funds). As of December 31, 2023, managed assets in the U.S. financial intermediary market included $381.1 billion in money market assets, $51.6 billion in equity assets, $41.5 billion in fixed-income assets, $2.5 billion in multi-asset and $0.5 billion in alternative/private markets assets."
Under "U.S. Institutional," they tell us, "Federated Hermes offers and distributes its products and strategies to a wide variety of domestic institutional customers including, among others, government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and non-Federated Hermes investment companies or other funds. As of December 31, 2023, managed assets in the U.S. institutional market included $159.0 billion in money market assets, $48.5 billion in fixed-income assets, $3.2 billion in equity assets, $0.6 billion in alternative/private markets assets and $0.4 billion in multi-asset."
Under "International," they say, "Federated Hermes manages assets from non-U.S. institutional and financial intermediary customers through subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. As of December 31, 2023, managed assets in the international market included $24.5 billion in equity assets, $19.9 billion in money market assets, $19.4 billion in alternative/private markets assets and $4.9 billion in fixed-income assets."
Discussing "Regulatory Matters," the 10-K says, under "Money Market Reform," "In July 2023, the SEC adopted additional rule and form amendments imposing certain reforms on money market funds. The final rule amendments purport to improve the resiliency and transparency of money market funds by: (1) de-linking and removing the regulatory tie between the imposition of redemption gates and liquidity fees and the 30% threshold for a money market fund's weekly liquid assets; (2) removing provisions from Rule 2a-7 under the 1940 Act that permit a money market fund to temporarily suspend redemptions; (3) increasing minimum portfolio liquidity requirements from 10% to 25% for daily liquid assets and from 30% to 50% for weekly liquid assets to provide a more substantial buffer in the event of rapid redemptions from money market funds; (4) requiring institutional prime and institutional tax-exempt money market funds to impose mandatory liquidity fees when such a fund experiences daily net redemptions that exceed 5% of its net assets, unless the fund's liquidity costs are de minimis; (5) requiring non-government money market funds to impose a discretionary liquidity fee if the fund's board (or its delegate) determines that a fee is in the best interest of the fund; (6) allowing retail and government money market funds to handle a negative interest rate environment either by converting from a stable NAV or share price to a floating NAV or share price or by using a reverse distribution mechanism or share cancellation to reduce the number of shares outstanding to maintain a stable NAV per share, subject to certain board determinations and disclosures to shareholders; and (7) enhancing certain reporting requirements that are intended to improve the SEC's ability to monitor and assess money market fund data."
It adds, "The amendments adopted in the final rule became effective on October 2, 2023. The compliance date for the discretionary liquidity fee, increased minimum liquidity requirements, changes to the stress testing requirements and amendments specifying the method for calculating weighted average maturity and weighted average life, is April 2, 2024. The reporting amendments will become effective June 11, 2024. Money market funds have until October 2, 2024, to comply with the mandatory liquidity fee requirement."
The filing continues, "Federated Hermes believes money market funds provide, and will continue to provide, a more attractive investment opportunity compared to other competing products, such as insured and uninsured deposit account alternatives. Federated Hermes also believes that money market funds are investment products that have proven their resiliency. Federated Hermes believes, however, that the mandatory liquidity fee required by the rule amendments could precipitate runs on money market funds during periods of high redemptions and have an effect similar to the effect swing pricing would likely have had on money market funds. The SEC's action of adopting a mandatory liquidity fee requirement, without specifically proposing it in its money market fund reform proposing release and seeking public comment on it, may be challenged in court due to its unworkability and lack of supporting data. As of February 23, 2024, Federated Hermes anticipates minimal impact to retail and government money market funds, while institutional prime money market funds and institutional municipal (or tax exempt) money market funds will be subject to some new or adjusted requirements. Federated Hermes continues to review and assess the rule amendments, plan for changes to its money market fund business required by the rule amendments and assess the impact of compliance with the rule amendments by the requisite compliance date (including increased costs of compliance) on Federated Hermes' business, prospects, reputation, results of operations, financial condition, cash flows and/or stock price (collectively, as applicable, Financial Condition)."
The report says, "Also, while Federated Hermes agrees with certain of the money market fund rule amendments adopted by the SEC (such as de-linking the imposition of redemption gates and liquidity fees and the weekly liquid asset threshold) Federated Hermes also supports efforts to permit the use of amortized cost valuation by money market funds, and to override the floating NAV and certain other requirements imposed under prior money market fund rule amendments and related guidance that became effective in 2016 for institutional and municipal (or tax-exempt) money market funds. In a continuing effort to implement these desired changes, proposed legislation has been re-introduced in the U.S. House of Representatives, and work continues to re-introduce proposed legislation in the U.S. Senate."
Under the section "Current Regulatory Environment – International," Federated states, "The regulation of money market funds in the EU and UK is another example of potential divergence between the EU and UK post-Brexit. EU and UK money market fund regulation is considered 'equivalent' until December 31, 2025. Accordingly, UK-domiciled money market funds currently remain on par with current EU regulatory requirements. As a result, EU-based funds can still use passports to sell to UK investors. However, following various consultations, reports, and speeches by representatives of the IOSCO and the FSB in 2020, 2021, 2022, and 2023 similar to the SEC in the U.S., ESMA, the BoE, the European Systemic Risk Board, the European Banking Authority, and the International Monetary Fund (IMF), among other regulators, have been re-examining existing money market fund regulation, soliciting public comment on proposed money market fund reforms, and issuing reports and recommendations."
They continue, "In September 2023, ESMA published Working Paper No. 2, 2023 titled, 'Bang for (breaking) the buck: Regulatory constraints and money market funds reforms' wherein the authors: (1) set out a framework to assess money market fund resilience; (2) demonstrate that the maximum redemptions a money market fund can face depends on regulatory constraints and asset liquidity; and (3) utilize the framework to assess the impact of regulatory reforms, such as an increase in liquidity requirements, changes to the allowed price deviation for money market funds using amortized cost or requirements to invest in more liquid assets, to, among other things, conclude that removing the use of amortized cost has the largest positive effect in terms of resilience, while higher liquidity requirements have more limited effects. In a September 2023 progress report, 'Enhancing the Resilience of Non-Bank Financial Intermediation' (FSB Progress Report), the FSB reviewed its 2021 money market reform recommendations, discussed perceived vulnerabilities of money market funds, and recognized that individual jurisdictions need flexibility to tailor measures to their specific circumstances. In its FSB Progress Report, the FSB also indicated that: (1) through its 'Thematic Peer Review of Money Market Fund Reforms' announced on August 14, 2023, it will take stock of the money market fund policy measures adopted by FSB member jurisdictions by the end of 2023; (2) it will be working with IOSCO to assess the functioning and resilience of commercial paper and negotiable certificates of deposits markets by the end of 2023; and (3) it will be working with IOSCO to complete an assessment of the effectiveness of money market fund reforms in addressing risks to financial stability by the end of 2026."
The report says, "In December 2023, the FCA published a consultation paper in which it sets out proposals to enhance the resilience of Money Market Funds domiciled in the UK, and addressing vulnerabilities identified in March 2020 and other times of market stress. The proposals are intended to mitigate risks to wider financial stability and reduce the need for central bank support in the future, while maintaining cash management services that meet the needs of investors. HMT expects to lay a Statutory Instrument (SI) before UK Parliament which will replace the UK Money Market Fund Regulation with provisions in new legislation which will purportedly set an overall framework for money market fund regulation more suited to the needs of the UK market. HMT published the draft SI and policy note at the same time as the FCA's consultation paper."
They explain, "The proposals in the FCA's consultation paper prioritize strengthening the existing regulatory regime for money market funds while maintaining the broad current money market fund operating model. The proposals increase money market fund resilience principally by seeking to ensure money market funds have usable liquidity sufficient to endure severe but plausible redemption stresses. The proposals include: (1) increasing the minimum liquid asset requirement for all money market funds, raising daily liquid assets and weekly liquid assets (WLA) levels to 15% and 50% of their assets respectively; (2) modifying the assets eligible for WLA for Variable NAV (VNAV) money market funds; (3) removing the regulatory link between liquidity levels in money market funds that have the ability to offer subscriptions and redemptions at a constant NAV (so-called 'stable NAV money market funds') and the need for the manager to consider or impose tools such as liquidity fees or redemption gates; (4) enhancing 'know your customer' requirements; (5) enhancing stress testing for stable NAV money market funds; and (6) enhancing operational resilience for stable NAV money market funds. Measures not proposed include: (1) changing or removing stable NAV operation for the current stable NAV money market funds, so these money market funds would be no longer permitted to deal at a constant NAV; and (2) making changes to how money market funds currently operate in order to impose on redeeming investors the true cost of their redemptions in the absence of money market funds selling assets and crystallizing losses (however, the FCA is consulting on a requirement for all money market funds to have at least one Liquidity Management Tool available for use when the fund is still trading if needed, and for all managers to have the ability to suspend their money market funds, with such tools to be deployed at the manager's discretion."
Finally, Federated adds, "In December 2023, ESMA also published a 'Final Report: Guidelines on stress test scenarios under the MMF Regulation' that included: (1) updated guidelines on the methodology to implement scenarios related to hypothetical changes in the level of liquidity of the assets held in the portfolio of a money market fund; and (2) updated guidelines on specifications on the type of stress tests and their calibration for reporting purposes. As noted above, Federated Hermes believes money market funds provide, and will continue to provide, a more attractive investment opportunity compared to other competing products, such as insured and uninsured deposit account alternatives. Federated Hermes also believes that money market funds are investment products that have proven their resiliency."
