Wells on Dodd-Frank, Supply, Europe
Wells Fargo Advantage Funds' latest "Fund Commentary" says, "From the perspective of money market funds, the most closely watched provisions of the [Restoring American Financial Stability Act of 2010] bill had to do with repurchase agreements. At one point, creators of the legislation contemplated increasing from one day to three days the time before a repurchase agreement investor could take possession of the underlying collateral in the event of a failure of the repo counterparty. It was speculated that such an increase might mean that repos could not be considered 'fully collateralized' under Securities and Exchange Commission (SEC) Rule 2a-7 and would be subject to the same issuer diversification limits as other investments.... With repos comprising over one-third of all investments eligible for purchase by money market funds, this would have put quite a ding in the supply side of the equation. In the end, the period of the stay does not appear to have been increased, and repos remain a safe and eligible investment for money funds." Wells also says, "Declining supply has been a problem plaguing the money market for almost three years now.... Money market participants are hopeful that `we may have hit a bottom in asset-backed commercial paper (ABCP) outstanding, with outstandings in that category increasing in June.... One sector that saw healthy growth in June was puttable bank paper, with more than $16 billion coming to market in the last two weeks of the month. As European banks especially struggled to access the longer-dated funding preferred by their regulators, they began offering securities with final maturities of six or 12 months, but which also allowed money market participants to demand payment with a notice period as short as seven days. [T]hese issues give money market funds the much needed shorter-dated paper that they need to be prepared for potential shareholder withdrawls and to meet the new liquidity requirements imposed by the amendments to SEC Rule 2a-7." Finally, Wells adds, "For European banks and sovereigns, the funding environment improved significantly during June."
