UBS issued a press release yesterday to announce updates to its roster of money market funds, primarily Government ones. The funds will be compliant with new SEC rules effective immediately and they won't impose fees and gates on them. UBS, with $34.7 billion in MMF assets, also said that it will have a full roster of money funds once the new rules take effect, including CNAV Prime, Muni and Government funds; Floating NAV Institutional Funds, Private Fund(s), Separately Managed Accounts, and Ultrashort Bond Fund(s). So stay tuned for more announcements from the 17th largest manager of money market fund assets in the US. Also, we cover a Bloomberg's "Money-Market Funds Finding New Repo Partners as Dealers Retreat"," about how some money fund managers are going to direct to issuers in the repo market.
The release says, "UBS Global Asset Management (Americas) Inc. today announced policies recently adopted by certain of its money market funds and provided additional information regarding other liquidity management products it expects to offer. UBS Global Asset Management and its affiliates/predecessors have managed money market funds for more than 35 years and today offer client focused solutions throughout the world.... Today's announcement relates to policies that allow the funds listed below to qualify as "government money market funds" under the new SEC regulations, permitting them to continue operating with the goal of maintaining a stable net asset value per share without the imposition of liquidity fees and redemption gates: UBS RMA U.S. Government Portfolio, UBS Select Treasury Institutional Fund, UBS Select Treasury Preferred Fund, UBS Select Treasury Capital Fund, and UBS Select Treasury Investor Fund."
It continues, "As described in more detail in prospectus supplements filed with the SEC earlier today, each of these funds has adopted a non-fundamental investment policy -- effective June 10, 2015 -- requiring it to invest 99.5% or more of its total assets in cash, government securities, and/or repurchase agreements that are backed by US government/Treasury securities and/or cash. This new policy -- required under SEC regulations -- is in addition to a fund's other investment policies (e.g., the policy of the Treasury funds to focus investments in Treasury securities and repurchase agreements backed by Treasuries). It should be noted that this new policy does not result in a material change in how the funds have been managed but reflects a further risk-limiting "99.5%" regulatory test."
Further, the release says, "These changes were approved by the appropriate fund boards on the recommendation of UBS Global Asset Management after consultation with investors and distribution partners. As part of adopting this new policy, each fund's board also determined that the fund will continue to use the amortized cost method of valuation to seek to maintain a $1.00 share price and that the fund will not be subject to a liquidity fee and/or a redemption gate on fund redemptions (unless a fund board determines otherwise in the future after providing the requisite advance notice to shareholders as set forth in the SEC's regulations)."
It adds, "UBS Global Asset Management is working to ensure that its products, systems and processes will be compliant with the new SEC regulations governing money market funds before the compliance deadlines and meeting the funds' goals of safety, liquidity and income. UBS Global Asset Management currently expects to offer the following investment solutions to assist clients in managing their liquidity needs, including, but not limited to: Constant net asset value ("CNAV") Treasury and government money market funds; Constant net asset value ("CNAV") retail prime and municipal money market funds; Floating net asset value ("FNAV") institutional prime money market funds; Privately placed, unregistered fund(s); Ultra-short bond fund(s); and Customized separate account solutions.... UBS Global Asset Management expects that it (or the funds it advises) will make further announcements and incorporate additional disclosure upon the finalization of more detailed, specific plans for its prime and municipal SEC registered money market funds."
The Bloomberg story, says "Facing a shrinking pool of dealers in a key part of the $2.6 trillion money-fund industry, Deborah Cunningham did something last month she's never done before in her 34 years at Federated Investors Inc. She arranged one of these trades directly with an insurance company. Cunningham, chief investment officer for global money markets at Pittsburgh-based Federated, is seeking alternatives to traditional counterparties for short-term loans known as repurchase agreements, or repos, as new regulations drive banks from the business. With that market contracting, money funds are finding new ways to get the securities they need, opening a door for other institutions to step into roles once dominated by banks."
"We sort of went down the non-traditional path and used an insurer we deal with on a direct repo basis, which is the first time we went outside the bank or broker-dealer market," Bloomberg quotes Cunningham. "Traditional collateral is in short supply." The article explains, "The new trading relationships are being forged by a confluence of post-crisis regulations that are both driving up demand for low-risk, short-term securities such as repo transactions while at the same time making the trades more costly for banks that act as middlemen. Meanwhile, the supply of short-term Treasury bills that asset managers seek is at multi-decade lows. Many top U.S. asset managers, from Federated to Fidelity Investments to BlackRock Inc., are diverting assets into government debt from money-market funds that invest in company IOUs known a commercial paper. The change comes as Securities and Exchange Commission regulations set to take effect in 2016 will no longer allow funds that invest primarily in commercial paper to report a fixed $1 share value, requiring values to float instead."
Bloomberg continues, "The amount financed daily through the tri-party repo system, where banks lend the securities used as collateral and clearing banks serve as middlemen, is down 17 percent to $1.62 trillion as of May 11 from $1.96 trillion in December 2012, data compiled by the Fed show. JPMorgan Chase & Co. and Bank of New York Mellon Corp. serve as the industry's clearing banks. There may be more change to come. Joe Abate, money-market strategist at Barclays Plc, predicts that part of this market may contract another 20 percent in the next year or two.... "The largest, capital-constrained banks are not providing enough repo to meet market demand from money funds," Abate wrote in a June 5 note. "Balance sheet reporting pressures are intensifying and have reduced liquidity in the market for Treasury collateral."
Wells Fargo's Garret Sloan commented in his "Daily Short Stuff," "Based on Crane's month-end portfolio holdings data, we see that repo counterparties of U.S. money market funds include the more common names such as Barclay's, Wells Fargo, BNP Paribas, Bank of America etc, but there is also one non-bank, non-broker/dealer counterparty that has snuck into the repo counterparty holdings data, albeit in very small amounts. Specifically, Prudential Company of America has two repo pieces outstanding with Federated's Government Obligations and Treasury Obligations Funds, for a total of $499 million. The amounts are comparatively small, but it certainly shows that the need to find repo counterparties is growing, or at least the perception is growing."
