Crane Data's 6th annual Money Fund Symposium starts Monday, June 23 and runs through June 25 at The Renaissance Boston Waterfront. Crane's Money Fund Symposium is the largest gathering of money market mutual fund managers and cash investors in the world. Last summer's event in Baltimore attracted over 450 attendees, and we expect almost 500 to gather in Boston this week. See the agenda and more details on the Symposium website (www.moneyfundsymposium.com). Watch for coverage of the event in coming days and excerpts from Monday's keynote speech by Fidelity Investment's Nancy Prior, "Money Market Funds - Past & Future." (Note: For those that can't make it this week, next year's Symposium will be in Minneapolis, June 24-26. Note also: Registered attendees and subscribers may access the current binder at the bottom of our "Content" page in our "Conference materials" section.) We look forward to seeing you in Boston!
In other news, the Federal Reserve Bank of New York's (FRBNY) daily reverse repurchase agreement (RRP) drove significant shifts in investment allocations by money funds that invest exclusively in Treasury and agency securities, either directly or through repos (government MMFs). Between September 2013 and May 2014, total FRBNY RRP investments by government MMFs (repos) rose by $65 billion, while combined Treasury and agency repo holdings with broker-dealers as counterparties fell by $38 billion, according to a new report by Fitch Ratings, "Reverse Repo Program Gains Influence."
Says Fitch: "This trend likely reflects growing comfort with the operations of the RRP program and more attractive rates. Decreasing reliance on repo funding among dealers also reflected the effects of Basel III regulatory considerations, as banks have been forced to re-assess the economics of short-term wholesale funding."
The report continues: "The RRP program, which may ultimately serve as a primary tool for the Fed to influence short-term interest rates, grew in size as the overnight rate (now 5 bps) and the counterparty allocation limit (now $10 billion) have risen. Growth in participation was evident across the universe of government MMFs, which had Fed RRP holdings totaling $87 billion as of May 31, compared with $21 billion on Sept. 30, 2013. RRP volumes have fallen off markedly since mid-May as repo rates have risen, providing more attractive investment alternatives for money funds. However, the test evidenced the RRP program's ability to "set a floor under money market rates," as FRBNY Chairman William Dudley noted in a May 20 speech. Mr. Dudley pointed out that Treasury repo rates had rarely traded much below the fixed RRP rate, supporting the view that the Fed could use the facility to control short-term rates."
In addition, the report explains, "The growing importance of the Fed's RRP program as a source of money market supply appears to have contributed to the reduction in non-FRBNY repos backed by Treasury and agency securities held by government MMFs over the period of our study. Treasury repo investments with counterparties other than the FRBNY (i.e. dealers) declined by 14% to $120.5 billion from $139.7 billion between Sept. 30, 2013, and May 31, 2014, while agency repo investments fell by 15% over the same period to $104.2 billion from $123.0 billion. Broker-dealers conducting the largest volumes of repo funding with government MMFs as of May 31 included BNP Paribas, Deutsche Bank and Barclays."
Fitch writes, "Several institutions that ranked among the largest government MMF counterparties when the daily RRP program was launched last September had less government MMF repo funding as of end-May. These included Citigroup, Bank of America, Credit Agricole, Goldman Sachs and RBC. Regulatory constraints on large banks' capital positions and trading activities, tied to Basel III (embodied in the Supplementary Leverage Ratio rule approved by U.S. banking regulators in April) and the Volcker Rule, are pushing dealers' securities inventories down, and these changes could cut further into demand for repo funding."
Concerning the increase in FRBNY RRP volumes between September 2013 and May 2014, the report says, "Daily utilization reached a peak of $242 billion on March 31. The most recent month-end volume figure, reported on May 30, was $165 billion. Since mid-May, volumes have trended significantly lower, averaging closer to $100 billion per day during the first half of June. On June 16, RRP volume had fallen to $53 billion."
The Fitch report is based on government MMFs universe with assets totaling $881 billion as of end-May 2014. "Among all fund types, these funds allocate the largest share of total assets under management to Treasury and agency repos. Unlike prime funds, government MMFs have more limited investment alternatives. They therefore provide a window into the potential impact of the Fed’s RRP activity on other fund investments, notably dealer repo agreements backed by Treasury and agency securities."
The Financial Times covered the issue in the story, "New York Federal Reserve Takes on Key Role in Repo Market." "The Fed's decision to quadruple its trading with government money market funds in the repurchase or "repo market" is a sign that the central bank is now engaging more directly with the shadow banking system at the expense of large Wall Street banks."
The FT adds, "Historically, the repo market was where big banks pawned out their securities such as Treasury bonds to lenders including money market funds, insurers and mutual funds, in exchange for short-term financing. Now the Fed is stepping in to trade as well as it prepares to end its current near-zero interest rate policy. Rather than lending to the banks, money market funds have sharply boosted their dealings with the US central bank."
The article goes on, "While the growing presence of the Fed in the market has been welcomed by money market funds keen to transact with the central bank, it comes with risks for the central bank and the broader financial system. Bill Dudley, New York Fed president, warned last month that if use of the repo facility were to grow too quickly it might "result in a large amount of disintermediation out of banks through money market funds and other financial intermediaries into the facility. This could encourage further enlargement of the shadow banking system."
