First American Funds posted some commentaries on their website recently, including one entitled, "The Ostrich Principle and Institutional Prime Money Market Funds," which gives a number of "Reasons to Invest in Institutional Prime Funds Post-Reform." Lou Martine, Head of Distribution and Marketing for U.S. Bancorp Asset Management, writes, "'To bury one's head in the sand' is a popular metaphor for ignoring uncomfortable situations in the hope that by simply denying their existence they will go away.... Not surprisingly, the "Ostrich Principle" is not very effective. However, it is important to realize that the Ostrich Principle is not equivalent to evaluating a situation and then deciding not to make a change. This is simply decision making."
He explains, "The Securities and Exchange Commission's (SEC) ... reform of prime money market funds (Reform) is a situation where, at first blush, many institutional investors wish the Ostrich Principle would work. However, after undertaking some evaluation of the Reform and one's risk tolerance and cash needs, institutional investors will soon realize the benefits institutional prime money market funds still offer post-Reform."
Among the reasons to invest in Prime Inst MMFs, First American lists, "Reason 1: Two of the SEC's stated goals in implementing Reform are to improve the money market fund industry's ability to perform in times of market stress and to increase transparency. Both of these goals benefit institutional prime money market fund investors, as well as all money market fund investors. Reason 2: It is our opinion that institutional prime funds may offer a yield spread over government money market funds of up to 20 to 40 basis points. While this in no way can be ascertained with any degree of certainty, it is logical to expect issuers of money market debt instruments to have to offer higher yields."
They continue, "Reason 3: For investors concerned about the NAV variability, some solace may be offered through the understanding of total return. Historically, prime funds have been the best-yielding type of money market fund.... Reason 4: It is expected that the most common cause of deviation from a $1.0000 NAV per share for an institutional prime fund will be interest rate movement or an expectation of such, for various reasons including – but not limited to – an actual federal funds rate change. We believe such deviations will be relatively short lived before the fund's NAV migrates back to $1.0000."
Martine comments, "Reason 5: More and more institutional investors are focusing on cash flow forecasting and cash management. As a result, institutions are getting a better handle on their actual daily cash needs. Given their focus on principal stability and liquidity in conjunction with yield, money market funds have historically been utilized to invest operating cash."
The article concludes, "We feel the primary features investors want in money market funds – safety, liquidity and yield commensurate with risk – will remain intact for institutional prime money market funds post-Reform. Ultimately, however, an investor's cash flow needs and risk tolerance will determine its appetite for institutional prime money funds. For those investors currently invested in prime funds who determine to remain so invested after evaluating the situation, such a decision is not adherence to the Ostrich Principle. It is prudent cash management."
First American also published, "The Dynamics of Quarter-End Investing for Money Market Funds," "First American Institutional Prime Obligations Fund Announces Share Class Conversions," and "U.S. Bancorp Asset Management Announces a Capital Contribution to First American Institutional Prime Obligations Fund." The latter Oct. 14 letter says, "U.S. Bancorp Asset Management announced today that it has made a capital contribution to First American Institutional Prime Obligations Fund (the "Fund") in the amount of $17,048.52. The contribution was made by U.S. Bancorp Asset Management in order to offset the Fund's historical capital losses. The Fund was required to disclose additional information about this event on Form N-CR and to file this form with the U.S. Securities and Exchange Commission (the "Commission"). Any Form N-CR filing submitted by the Fund is available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov."
Note that a number of others funds filed "Form N-CR" submissions prior to the October 14 reform deadline, though all are minor and not indicative of any "bailout" or problem in the fund. (See the SEC's Form N-CR filings here.) These all appear to be "window dressing" to make sure NAVs were all exactly at 1.0000 prior to liquidations, mergers or separation of retail vs. institutional assets.
In other news, The Wall Street Journal writes, "Libor Alternatives Have Their Own Issues," which says, "Efforts to replace the compromised Libor financial benchmark are running into their own problems, in part thanks to new rules governing money-market funds.... Since 2014, market overseers have been pushing the industry to come up with a credible replacement for U.S. dollar Libor. One strong candidate has been the Overnight Bank Funding Rate, a new benchmark devised by the Federal Reserve as a comprehensive measure of overnight bank borrowing costs."
It continues, "But since it was introduced in March, the rate, known as OBFR, has been beset by slumping trading volume. Lower volumes stand to make the rate less useful as an indicator of demand for funds, traders and analysts say -- an important consideration for its future role. It is the latest setback for regulators' efforts to replace the tainted Libor benchmark with a new measure that will more accurately depict conditions in short-term lending markets. The overhaul has been complicated by regulations that have dampened lending to banks and the limits on regulators' capacity to impose a new gauge by fiat."
The Journal explains, "Declines in eurodollar transactions are being attributed in part to new restrictions on U.S. money-market funds that took effect last month and aim to prevent a recurrence of the 2008 run on such funds. The rules have driven investors away from "prime" funds that historically have invested in a range of debt, toward funds that invest in government bonds and therefore aren’t subject to new restrictions."
Finally, it adds, "In May, a Fed-sponsored industry committee proposed two alternatives. One is OBFR. The other is a blended rate of short-term loans called "repurchase agreements" secured by U.S. Treasury bonds. This "repo" rate, as envisaged, has never been calculated before but on Friday the Federal Reserve Bank of New York announced three new repo benchmarks that fit the bill, and likely will be published starting in late 2017 or early 2018. The final decision by the industry committee on choosing a new benchmark is expected to take several months, and implementation would take even longer."
