The Federal Reserve says in its latest FOMC statement (​10/​30/​13), "Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee'​s longer-​run objective, but longer-​term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-​backed securities at a pace of $​40 billion per month and longer-​term Treasury securities at a pace of $​45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-​backed securities in agency mortgage-​backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-​term interest rates.... The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-​backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.... To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/​4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-​1/​2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee'​s 2 percent longer-​run goal, and longer-​term inflation expectations continue to be well anchored.... Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-​term inflation expectations."

Another release, entitled, "Cachematrix Introduces CacheOptimizer," says, "Cachematrix, the leading provider of money market fund, bank product trading and sweep technology for banks and financial institutions, announced today that it has launched CacheOptimizer, a model portfolio builder designed to help CFO'​s optimize their cash investing and mitigate risk. CacheOptimizer enables a bank'​s corporate customers to research funds with multi-​layer filtering and to construct model portfolios. As a component of the Cachematrix portal research module, CacheOptimizer works alongside ATLAS, a feature previously launched by Cachematrix in May of 2012. ATLAS provides clients with a dashboard view of existing exposure levels via graphical representations. These data points include Country, Holding, Security Category, Issuer, and Portfolio Liquidity Distribution, which enables corporate customers to identify risk by these parameters. Building off of this feature, CacheOptimizer employs a hypothetical analysis by allowing customers to research potential funds via a multi-​layered filtering of specific factors. CacheOptimizer'​s real-​time portfolio modeling capabilities allow CFO'​s to construct portfolios and make decisions that meet their investment objectives, while mitigating risk.... CacheOptimizer'​s streamlined, visual approach in the research module makes creating hypothetical portfolios a quick endeavor. The result is a solution that makes thorough and multi-​layered analysis easier for corporate customers."

A press release says, "Institutional Cash Distributors (​ICD) today announced the release of ICD AutoPay, a significant technological advancement for corporate treasury departments that strengthens payment security while streamlining the trade settlement process. ICD is introducing this new core trading technology today at the 2013 AFP Conference, at Mandalay Bay, Las Vegas, Nevada. ICD AutoPay increases efficiency by automating wire requests from approved trade orders. This eliminates the need for cash managers to login to their bank to request wires to settle purchase transactions. ICD AutoPay'​s key differentiator is its proprietary TrueMark EST (​Encapsulated Security Token) technology that locks in approved cash channels and requires a SWIFT message with matching bank details before wire requests are forwarded to the client'​s bank. Banks will restrict cash channels, however, the restrictions must be on all money advances -- not just on wire requests originating from a specific trading platform. ICD AutoPay mitigates the risk of cybercriminals, rogue traders and/​or human error of sending funds to unapproved destinations. ICD client, Cisco Systems, requested an auto payment solution as part of their continuing efforts to reduce risk and improve operational efficiency. ICD worked with Cisco and their custody bank in developing this proprietary solution." Mark Heyner, ICD Chief Technology Officer comments, "The challenge was to send the wire request from an approved, compliant ICD Portal trade ticket without adding any executional risk. This was achieved with TrueMark EST technology, which enables us to offer an unprecedented level of transactional security to our clients." Cisco Treasurer Roger Biscay says, "ICD collaborated with Cisco throughout the entire AutoPay development process. We needed an automated payment methodology for our treasury department and ICD delivered a comprehensive and innovative solution that improves our efficiency while reducing Cisco'​s trade settlement risk." ICD President & COO, Tory Hazard adds, "A key area of ICD'​s development is providing integrated solutions for our clients. ICD AutoPay is another focused example of that commitment. From the same trade ticket, trade information can be sent to the client'​s treasury workstation, custodian bank, clearing bank and/​or fund companies while updating client balances in ICD Portal and Transparency Plus exposure analytics, and generating a secure wire request to the client'​s bank."

Federated Investors released their 3rd quarter earnings last night and hosts their quarterly conference call Friday morning. (​Look for excerpts from the call on Monday.) The earnings release says, "Money market assets in both funds and separate accounts were $​270.​3 billion at Sept. 30, 2013, up $​0.​7 billion or less than one percent from $​269.​6 billion at Sept. 30, 2012 and up $​1.​8 billion or 1 percent from $​268.​5 billion at June 30, 2013. Money market mutual fund assets were $​237.​9 billion at Sept. 30, 2013, down $​6.​9 billion or 3 percent from $​244.​8 billion at Sept. 30, 2012 and up $​5.​0 billion or 2 percent from $​232.​9 billion at June 30, 2013.... Revenue decreased by $​26.​6 million or 11 percent due primarily to an increase in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields.... During Q3 2013, Federated derived 62 percent of its revenue from equity and fixed-​income assets (​39 percent from equity assets and 23 percent from fixed-​income assets), 36 percent from money market assets and 2 percent from other products and services."

Another money market-​related press release entitled, "Atom 8 from Financial Sciences Corporation Selected for Global Treasury Management says, "Financial Sciences Corporation, a developer of advanced treasury operations, financial risk management and corporate governance software solutions, today announced that a top Fortune 100 company will implement ATOM 8 to manage its cash, investments, intercompany loans and short term funding needs worldwide. ATOM 8, Financial Sciences' next generation system, brings together global treasury operations, corporate governance and risk management into one integrated, web-​based solution. Real-​time single-​currency equivalent positioning, broad instrument coverage, integrated limit management and emerging markets support provide comprehensive global cash processing and effective liquidity management." CEO Alf Newlin comments, "Our client selected ATOM 8 as their advanced treasury management solution for global payments, cash positioning, bank reporting, investments, debt and intercompany loans. ATOM will deliver comprehensive, real-​time insight into liquidity, cash positions and counterparty exposure in over 20 currencies worldwide." The release adds, "The ATOM suite of solutions is a single, web-​based platform that enables corporations and financial institutions to increase financial visibility, meet compliance standards and improve operational effectiveness through products for treasury operations, financial risk management, corporate governance and loan/​lease syndication and securitization." Financial Sciences Atom is used by a number of large commercial paper issuers and the company is a member of the Commercial Paper Issuer'​s Working Group, or CPIWG. (​Look for Financial Sciences, the CPIWG and Crane Data out at the upcoming AFP conference in Las Vegas this weekend and next week.)

We hope to see many of our readers at next week'​s Association for Financial Professional'​s (​AFP'​s) Annual Conference, which will take place October 27-​30, 2013, at the Mandalay Bay Convention Center in Las Vegas. (Visit Crane Data at Booth #​1613.) AFP'​s describes the largest gathering of corporate treasurers, "`​The AFP Annual Conference brings together more than 6,​000 treasury and finance professionals for an experience you can'​t afford to miss." The event includes: "​140 educational sessions across 8 tracks and 20 industries; An unbiased agenda featuring distinguished speakers such as General Colin Powell and former FDIC Chairman Sheila Bair; Abundant networking opportunities from the Welcome Reception to Industry Roundtables; Pre-​conference seminars to help you learn more and make the most of time away from the office; A simple and convenient way to earn continuing education credits in just a few days; and 250 exhibiting companies showcasing innovative products and solutions to streamline operations and cut costs." Crane Data will be exhibiting along with dozens of institutional money market fund vendors and online money fund trading portals. Our Peter Crane will present on Tuesday, Oct. 29 (​10:​30am), along with Chinatrust'​s Haiwen Hsu on "Emerging Issues in Money Market Funds."

Though the Sept. 17 deadline is long passed, Comments on the SEC'​s Proposed Money Market Fund Reforms continue to trickle in. The latest is from Margaret Wood Hassan, Governor of New Hampshire, who is the second Governor to weigh in on the SEC'​s proposal. (​The first was from Deval L. Patrick, Governor, Commonwealth of Massachusetts.) The NH Governor says, "I write to express concern relative to a rule proposed by the Securities and Exchange Commission (​SEC) in June of 2013 that would amend the regulatory structure for Money Market Funds (​MMFs). While I appreciate the efforts of the SEC to provide reform on matters important to investors, I believe if implemented this proposed rule could adversely affect the State of New Hampshire and our cities and towns. In New Hampshire, MMFs provide nearly two-​thirds of short-​term credit utilized by our cities and towns to finance essential capital projects, including funding the construction of roads and schools. I am concerned that the SEC'​s proposed amendment to rules governing MMFs, specifically the proposed elimination of a stable $​1.​00 net asset value and imposition of redemption restrictions on investors, will reduce the amount of capital available to state and municipal governments as MMFs become less attractive to investors. Moreover, while the SEC was right to exclude Treasury and Government money market funds from the proposed rules, the decision to consider municipal MMFs as prime or non-​governmental funds is troubling. Municipal MMFs have historically not experienced sudden, unanticipated withdrawals and as a result, I am concerned by the scope of the proposed rules, which could restrict borrowing by state and municipalities for important public infrastructure projects. As the SEC continues to deliberate this proposal, I urge you to consider the harmful impacts that such changes could have on the people of New Hampshire and request that the SEC exclude municipal MMFs from new regulations contained in the current proposal."

Bloomberg writes "​Investors Pour Back Into Money-​Market Funds After Debt Deal". It says, "Investors pumped $​8.​9 billion into money-​market mutual funds yesterday, the first day of deposits in more than two weeks, as an agreement by lawmakers in Washington averted a government default. Money funds that cater to institutions took in $​11.​1 billion, according to research firm Crane Data LLC in Westborough, Massachusetts, including $​5.​1 billion into funds that almost exclusively buy Treasuries or other debt backed by the U.​S. government.... Yesterday'​s net deposits were the first for U.​S. money funds since Oct. 1. Investors withdrew $​61.​9 billion this month through Oct. 16, including $​21.​6 billion on Oct. 11, according to Crane Data." In other news, see also, FT'​s "​Almost 20 money market funds bailed out". This article explains, "Almost 20 money market funds have been bailed out by their parent companies to prevent them from making losses since the 2007-​09 financial crisis, according to Moody’​s, the rating agency. The revelation that 16 US money market funds received injections of capital in 2010 and another two US funds and one non-​US vehicle accepted infusions in 2011 to "​top up" their mark to market values comes as the debate over future regulation of the $​2.​6tn US industry intensifies."

A press release entitled, "iShares Launches Short Maturity Bond ETF," says, "BlackRock, Inc. announced today that its iShares Exchange Traded Funds (​ETFs) business, the world'​s largest manager of ETFs, has expanded its range of bonds ETFs with the launch of iShares Short Maturity Bond ETF (​BATS: NEAR). This actively-​managed ETF seeks to maximize income through diversified exposure to short-​term bonds, primarily of investment grade. The slow, steady growth of the U.​S. economy combined with the possibility of the Fed winding down its bond-​buying program has resulted in continued interest rate uncertainty for investors. iShares Short Maturity Bond ETF seeks to reduce investors' exposure to rising interest rates relative to longer duration bond portfolios by maintaining an effective duration of less than one year. The ETF also aims to help investors navigate the current low yield environment by providing exposure to a diversified portfolio of short term, primarily investment grade bonds." The release quotes Matthew Tucker, Head of iShares Fixed Income Investment Strategy, "​Investors have traditionally looked to bonds to add diversity, stability and income into their portfolios. But as large areas of the bond market offer little or no yield, and with a period of rising rates likely ahead of us, investors have been rethinking their fixed income portfolio." The release adds, "iShares Short Maturity Bond ETF invests across a broad spectrum of short term fixed income securities with an average duration of one year or less. The fund is managed by BlackRock'​s Short Duration Portfolio Team, led by Thomas Musmanno, CFA, with more than 20 years' experience managing fixed income portfolios and $​55.​2 billion under management across multiple products."

Bloomberg writes "​Money-​Market Fund Withdrawals Accelerate as Debt Cap Approaches". It says, "Investors pulled $​41.​6 billion from U.​S. money-​market mutual funds in the past week, or 1.​6 percent of total assets, as concern grew over lawmakers' inability to strike a budget deal that would avert a default on Treasury securities. The exodus in the seven days through yesterday was punctuated by the withdrawal of $​21.​6 billion on Oct. 11, according to research firm Crane Data LLC in Westborough, Massachusetts. Investors pulled $​15.​7 billion in the preceding seven days. While the spike appeared connected to the approaching debt ceiling, it was exacerbated by companies moving cash to make bi-​monthly payroll and meet a quarterly tax payment deadline on the next business day, Peter Crane, president of Crane Data, said in an interview." Bloomberg quotes Crane, "The outflows are still quite manageable. They'​d be worrisome if they continued for a number of weeks."

A press release entitled, "BNY Mellon Capital Markets Launches Securities DIRECT Electronic Portal," and subtitled, "Investment portal gives clients access to broad range of debt products, provides extensive trading control and reporting features," says, "BNY Mellon, the global leader in investment management and investment services, today announced the launch of Securities Direct, an online portal offering a broad range of debt products to institutional investors. Securities DIRECT is being provided by BNY Mellon Capital Markets, LLC, an SEC registered broker-​dealer that operates as part of BNY Mellon Global Markets. Leveraging the strength and breadth of BNY Mellon Capital Market'​s fixed income trading desks and demonstrating BNY Mellon'​s commitment to technological innovation, Securities DIRECT has been designed to provide easy and efficient access for institutional investors to treasury bills, agency securities, corporate bonds, commercial paper and other debt securities. Products currently available include U.​S. Treasuries (​T-​bills and short maturity notes), commercial paper and certificates of deposit. Short corporates and agencies will be added during the fourth quarter, and future releases will include longer term maturities, municipal bonds and other asset classes. Securities DIRECT will provide authorized users with a number of client-​focused features and functionalities. Information will be provided on current yields for different fixed income asset types. Users will be able to export data and search by asset class, rating, maturity and other parameters. "​Click and buy" ticketing will be available, and the portal'​s robust on-​line reporting will include order status and trade history reporting.... In keeping with BNY Mellon'​s strategic commitment to enterprise-​wide platform integration, Securities DIRECT will provide efficient access for authorized users to BNY Mellon'​s custody, treasury services and liquidity management platforms, delivering significant straight-​through processing benefits in terms of both efficiency and reliability." Gary Strumeyer, president of BNY Mellon Capital Markets, says, "Securities DIRECT allows us to provide clients with the speed, convenience and efficiency of electronic trading, and delivers those client benefits in a fully integrated fashion alongside BNY Mellon'​s other service delivery platforms. In that respect, it mirrors our strategic commitment to providing broker-​dealer services that add value to client relationships across the entire BNY Mellon enterprise."

Reed Smith'​s Stephen Keen writes on "​Money Market Fund Reform: The Next Crossroads". He says, "​The period for comments on the Securities and Exchange Commission'​s proposed money market fund reforms ended September 17. The tone of the comment letters, as well as the large quantity of responses, should serve to remind the SEC that the views of investors matter most in the rulemaking process. Indeed, the outcome of this regulatory chapter needs to be about which reform best serves the shareholders of money market funds, and not which best pleases the Financial Stability Oversight Council ("​FSOC"). Unfortunately, sometimes it seems as if the latter, not the former, is the party getting preferential treatment. The SEC proposed two fundamentally different alternatives. Alternative 1 would force the prices of institutional prime and tax-​exempt money market shares to "​float" by requiring these funds to calculated their net asset values ("​NAVs") using market-​based prices and rounding the result to the nearest basis point. (​A basis point is the fourth decimal following a price of $​1—​a hundredth of a cent). Retail money market funds could avoid this by imposing a $​1 million limit on each shareholder’​s daily redemptions. Alternative 2 would require all prime and tax-​exempt money market funds to impose a 2 percent fee on redemptions if, at the end of the previous business day, its weekly liquid assets were less than 15 percent of its total assets. The fund'​s board of directors would have the option of suspending redemptions for up to 30 days, imposing a lower redemption fee or calling off the redemption fee entirely. As of October 9, 200 comment letters were available on the SEC'​s website regarding the proposal, in addition to more than 1,​200 form letters against Alternative 1. Additional letters will continue to trickle in, but the current docket already reflects a massive and predominantly negative response to the proposed alternatives. Contrary to earlier reports, JPMorgan did not support Alternative 1, arguing instead that a variation of Alternative 2 is "​the best option for achieving the SEC'​s objectives." Goldman Sachs' support for Alternative 1 was tepid, insofar as it recommended rounding the NAV to only the nearest 10 basis points, which would not produce a floating price under most market conditions. Of the 10 largest money market fund managers, only the two predominantly retail managers (​Schwab and Vanguard) commented in favor of Alternative 1, in each case subject to increasing the cap on daily redemptions and solving the tax and accounting issues inherent in using a floating share price for daily cash management. Even before the comment period ended, unnamed sources at the Federal Reserve and the Treasury told the press that only Alternative 1 would be acceptable to FSOC."

Note: Crane Data'​s MFI Daily also showed a large $​7.​4 billion 1-​day drop in Govt Institutional funds last Thursday (​look for our Friday data early Tuesday). ICI'​s latest "​Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $​19.​78 billion to $​2.​666 trillion for the week ended Wednesday, October 9, the Investment Company Institute reported today. Taxable government funds decreased by $​19.​46 billion, taxable non-​government funds increased by $​1.​12 billion, and tax-​exempt funds decreased by $​1.​45 billion. Assets of retail money market funds increased by $​1.​78 billion to $​935.​71 billion. Taxable government money market fund assets in the retail category increased by $​420 million to $​200.​90 billion, taxable non-​government money market fund assets increased by $​1.​83 billion to $​540.​49 billion, and tax-​exempt fund assets decreased by $​470 million to $​194.​32 billion.... Assets of institutional money market funds decreased by $​21.​56 billion to $​1.​730 trillion. Among institutional funds, taxable government money market fund assets decreased by $​19.​87 billion to $​731.​58 billion, taxable non-​government money market fund assets decreased by $​710 million to $​926.​92 billion, and tax-​exempt fund assets decreased by $​980 million to $​71.​43 billion." ICI chief economist Brian Reid comments, "Outflows from money market funds were very modest in the last week, well within the range that money market funds can easily accommodate, given their high liquidity requirements. Taxable government fund outflows totaled less than 3 percent of assets, while prime funds saw small inflows." Note: ICI'​s survey includes Treasury funds within its Government category, while Crane Data breaks Treasury and Government funds out into separate groups. Our Money Fund Intelligence Daily shows Treasury Institutional funds declined by $​9.​1 billion and Govt Institutional funds declined by $​8.​3 billion in the week ended Oct. 9. Outflows in Treasury funds continue, but they have been decelerating over the past several days.

Economists from the Federal Reserve Bank of New York published a brief entitled, "Twenty-​Eight Money Market Funds That Could Have Broken the Buck: New Data on Losses during the 2008 Crisis." It says, "During the financial crisis in 2008, just one money market fund (​MMF) "​broke the buck" -- that is, its share price dropped below one dollar. The Reserve Primary Fund announced on September 16 that the value of its shares had dropped to 97 cents. As we discussed in a previous post, Reserve'​s announcement helped spark a widespread, damaging run on MMFs that slowed only when the federal government intervened three days later to backstop the funds. But new data that we first published in a New York Fed staff report and discussed in a Brookings paper show that at least twenty-​nine MMFs had losses large enough to cause them to break the buck in September and October 2008 despite significant government intervention and support of the sector. Five funds or more experienced losses exceeding the 3 percent reported by Reserve, and one fund reported a loss of nearly 10 percent. Among the twenty-​nine funds that would have broken the buck without sponsor support, the average loss was 2.​2 percent. Yet, the losses for twenty-​eight of these MMFs may have gone unnoticed during the crisis, as neither their shareholders nor almost anyone else could have observed their magnitudes at the time. As in other episodes in which MMFs suffered significant losses, the losses were absorbed -- and hence obscured -- by voluntary financial support from MMF sponsors (​the MMFs' asset management firms or their parent companies). The extensive record of sponsor support for MMFs does allow us to look back to the 2008 crisis and other periods of strain for indirect evidence about funds' losses. In a 2010 report, Moody'​s found 144 cases in which U.​S. MMFs received support from sponsors between 1989 and 2003. Brady, Anadu, and Cooper (​2012) documented 123 instances of support for seventy-​eight different MMFs between 2007 and 2011, including thirty-​one cases in which support was large enough that it probably was needed to prevent funds from breaking the buck. Still, these data only allow estimates of what MMF losses must have been to motivate sponsors' actions. In contrast, the data we describe are market-​based values of MMF portfolios reported confidentially by the funds themselves during the crisis to the Department of the Treasury ("​Treasury") and the Securities and Exchange Commission (​SEC). In general, these "​shadow" net asset values (​NAVs) are invisible to investors and the public, as MMFs are permitted to round their reported share values to $​1 so long as the shadow NAV remains above $​0.​995. Only if the shadow NAV drops below that threshold does the fund break the buck -- unless it receives sponsor support. During the crisis, many MMFs did receive such support, so their shadow NAVs remained invisible. However, any MMF with a shadow NAV below $​0.​9975 that participated in Treasury'​s Temporary Guarantee Program for MMFs was required to report to Treasury and the SEC what its shadow NAV would have been without some forms of sponsor support, such as capital support agreements."

Wells Fargo Advantage Funds' latest Portfolio Manager Commentary discusses the debt ceiling. (​See also, "Wells Fargo Advantage Money Market Funds: Our perspective on the government shutdown.") They say, "As we write this, the news outlets are very much focused on the budget stalemate and potential government shutdown. We cannot foresee where this all might stand by the time this is published, but we see little long-​term impact from such an event on the markets.... Some of the players have changed since 2011, and the debt ceiling is now $​16.​699 trillion instead of $​14.​29 trillion, but the Treasury still has the same tools that it can use to avoid a default on its debt. With $​4.​78 trillion of the $​16.​7 trillion in total federal debt held by other government units, and another $​2 trillion in the Federal Reserve'​s (​Fed'​s) portfolio, the potential for creative accounting solutions to address the debt ceiling issue is significant. The concern is that the Treasury has been deploying these tools since mid-​May, and it is not clear how much additional room under the ceiling can be obtained in this fashion. Current estimates are that the Treasury may exhaust these approaches sometime in the mid-​October to November time frame. We do believe an accord will be reached, and while the consequences would obviously be quite severe, we would assign an extremely low probability to a default or disruption in the market for Treasury securities." (Note: Watch for an analysis of money funds' latest Treasury bill holdings following the publication of Crane Data'​s Money Fund Portfolio Holdings late Wednesday and Thursday.) Finally, see Reuters' "​Money funds avoid some U.​S. debt on fear of repayment delays".

A press release from Moody'​s writes "US money market funds boost European exposure by 16%; European funds stabilise AUMs and increase French exposure by 9%." It explains, "US-​Dollar Prime money market funds (​MMFs) have increased their total exposure to European financial institutions by 16% (​USD 27 billion) in the first two months of Q3 2013, said Moody'​s Investors Service. Most of this increase is due to higher exposures to Swedish and French banks, which rose by 40% and 22% respectively. Within Euro-​denominated MMFs, exposure to European financial institutions remained stable, albeit with significant country shifts, while Sterling MMFs reduced their exposure to the euro area by 6.​5% (​GBP 3.​2 billion).... U.​S. domiciled USD funds increased assets under management (​AUMs) by 6% to USD 679 billion from USD 639 billion during the first two months of the third quarter.... Exposure to European financial institutions within US-​Dollar Prime MMFs has risen significantly in Q3, with assets attributed to the region increasing by 16%." Yaron Ernst, Managing Director of Moody'​s Global Managed Investments Group, comments, "US money market funds have shown a much stronger appetite for investments in Europe in recent months. This reflects the subsiding concerns about Europe'​s financial system."

On Friday, Federal Reserve Bank of New York President William Dudley spoke on "Introductory Remarks at Workshop on "​Fire Sales" as a Driver of Systemic Risk in Tri-​Party Repo and Other Secured Funding Markets." He says, "I am pleased to have the opportunity to open this workshop and discuss key developments in the tri-​party repo market. In my remarks, I would like to give a brief overview of some of the problems that surfaced in this market during the financial crisis of 2008, recognize the improvements that have occurred since then, and most importantly, highlight significant vulnerabilities that still persist despite the progress we have made. While we can feel proud of the enhancements that are currently underway in the tri-​party repo market, today I want to underscore the fact that significant work remains to be done. The tri-​party repo market constitutes a vital component of the U.​S. financial system. It plays an important role in providing financing for broker-​dealers that make markets in Treasury and agency securities, and is an important mechanism that supports dealer intermediation of credit. The market also provides a secure investment vehicle for those that manage large amounts of liquidity and need an investment vehicle to park these monies. We care about the health and stability of the tri-​party repo market both because of our interest in promoting stable and liquid financial markets and because we use it to implement monetary policy. The recent financial crisis showed us that the tri-​party repo market was inherently unstable due to deficiencies in the settlement infrastructure. Prior to 2008, there was limited recognition of the ways in which adverse developments in this market could quickly transmit risk to other parts of the financial system with unforeseen consequences. We now know, with the benefit of hindsight, that the market was overly reliant on massive extensions of intraday credit by the clearing banks to the broker-​dealers, that market participants did not adequately appreciate the magnitude of the risk embedded in the role played by the clearing banks, and, as a result, market participants underpriced risk in ways that undermined the market’​s resiliency during periods of stress. These vulnerabilities were made apparent in the spring of 2008 when the events surrounding Bear Stearns demonstrated the run risk that existed more broadly in the tri-​party repo market, prompting the Federal Reserve to intervene in order to restore confidence and market functioning. This intervention took the form of the creation of a Primary Dealer Credit Facility in March 2008, and a subsequent expansion of the facility in September 2008. The scope and scale of the market disruption were clearly very troublesome."

The Financial Times writes "​Treasury bill yields rise on US default fears". It says, "Money market funds dumped October Treasury bills on Thursday, in the first sign of investor unease that Washington may not raise the federal debt ceiling in the coming weeks and risk triggering a technical default by the US Treasury on its debt. As the US officials sought to underline the dangers a default would pose, a new report from the Treasury on Thursday pointed to rising yields on Treasury bills as evidence of investors’ concern.... But as the debt ceiling deadline looms and with no sign of accord within Washington, money funds are looking to lighten up on their holdings of October dated bills, said bill traders. The four-​week Treasury bill that matures on October 31 more than doubled to a peak of 17 basis points, before steadying to stand at 13bps. Bills that mature in late November and December are quoted at around 2bps." See also, ICI'​s latest "​Money Market Mutual Fund Assets". It says, "Total money market mutual fund assets decreased by $​8.​51 billion to $​2.​685 trillion for the week ended Wednesday, October 2, the Investment Company Institute reported today. Taxable government funds decreased by $​40 million, taxable non-​government funds decreased by $​11.​29 billion, and tax-​exempt funds increased by $​2.​82 billion."

Below, we link to an excerpt from the Squam Lake Group'​s Comment Letter to the SEC on its MMF Reform Proposal. As was the case with previous requests for comment on money fund regulations, Squam Lake, a group of economists named after a lake in New Hampshire, is one of the few that doesn'​t like any of the options and which endorses more radical regulatory change (​such as a capital buffer). They write, "The structure of money market funds (​MMFs) makes them vulnerable to rapid large-​scale redemptions ("​runs"). Our largest concern is with prime MMFs, which invest primarily in the short-​term paper of financial institutions, because they are a key source of short-​term financing to large global financial institutions. As long as such financing is allowed, a run on prime MMFs can become part of a run on these financial institutions, or could instigate such a run. This, in turn, threatens the ability of these financial institutions to process payments and to extend credit to other market participants, businesses and households. Indeed, this threat led the U.​S. Treasury to provide a temporary guarantee of all outstanding MMF balances after the failure of Lehman Brothers in September 2008 precipitated a run on prime MMFs.... First, we believe that the floating NAV described in Alternative One would not achieve the goal of materially decreasing the systemic risk posed by MMFs because the NAV would not reflect actual prices at which investors and the fund itself could transact in a crisis. Unless the SEC is able to create a system whereby reported NAVs reflect actual NAVs, investors will have incentives to run. At a minimum, if this alternative is adopted, MMFs should not be allowed to use amortized cost accounting for instruments maturing in 60 days or less. Second, we believe that the liquidity fees and redemption gates described in Alternative Two could actually exacerbate run incentives and could be detrimental to financial stability. As we have written previously, an appropriately sized capital buffer for prime money market funds would have a more meaningful impact on financial stability."

An industry advocacy organization, the Structured Finance Industry Group (http://​www.​sfindustry.​org/) comments to the SEC in its letter on proposed MMF reforms, "We are concerned that the broad nature of some of the proposed amendments may restrict the amount of asset-​backed securities ("​ABS") available for purchase by money market funds. The proposals would in particular affect asset-​backed commercial paper ("​ABCP"). ABCP is a form of ABS issued by a special purpose entity (​an "​ABCP conduit") that is frequently sold to money market funds. ABCP is an important source of funding to the real economy, providing substantial funding of trade receivables, auto loan and lease receivables, equipment loans and leases, student loans and credit card and consumer loan receivables and other corporate and consumer financial assets. As of July 31, 2013, money market funds held over $​94 billion [​source: Crane Data] of ABCP representing approximately 36% of the overall ABCP market. The comments provided herein are intended to highlight the concerns of our members regarding these enhanced diversification proposals. We understand that the scope of the Release is far-​reaching, however, we express no views about any of the proposed amendments other than those discussed in this letter.... We recommend that the SEC'​s final rules specifically exclude equity owners of ABCP conduits from the new affiliate aggregation rule, allowing funds to treat each special-​purpose entity ("​SPE") issuing ABS as a separate issuer for purposes of issuer diversification testing even if the same entity or affiliate group controls the voting equity of multiple ABCP conduits."

After a brief pause (​which may resume if the government does indeed shut down some nonessential operations in coming days), the SEC has resumed posting (​and accepting after the deadline) comment letters on its Money Market Fund Reform Proposal. Today, we quote from Mary Beth Rhoden Albaneze, Secretary and Chief Legal Officer, Russell Investment Company. The letter says, "We urge the SEC to consider the effect of the Proposing Release on unregistered money market funds that currently conform to the requirements of Rule 12d1-​1. These unregistered money market funds serve as valuable cash management vehicles for many registered investment companies, including the Investment Companies. Through Rule 12d1-​1, the SEC has provided registered investment companies with the ability to invest in unregistered money market funds that comply with Rule 2a-​7. However, some aspects of the proposed amendments to Rule 2a-​7 are ill-​suited for these unregistered money market funds. Accordingly, we ask that the SEC specify in the final rule that certain provisions of the amended rule are not applicable to unregistered money market funds that serve as cash management vehicles for registered investment companies. Section 12(​d)(​1)(​A) of the 1940 Act limits the amount one investment company may invest in shares of other investment companies. In 2006, the SEC adopted several rules under Section 12(​d)(​1) to broaden the ability of an investment company to invest in shares of other investment companies, codifying a number of exemptive orders that had previously been issued by the SEC. One such rule -- Rule 12d1-​1 -- allows investment companies to invest in shares of money market funds in excess of the limits of Section 12(​d)(​1). Rule 12d1-​1(​b)(​2) provides that investment companies may invest in an unregistered money market fund if the acquiring investment company reasonably believes that the unregistered money market fund, among other things, operates in compliance with Rule 2a-​7. Unregistered money market funds currently are a valuable tool for an acquiring investment company, because such unregistered money market funds are designed to accommodate the significant daily inflows and outflows of cash of the acquiring investment company. Because these funds are privately offered to institutional investors, they frequently can be operated at a lower cost than registered investment companies, providing an attractive investment for a registered investment company'​s uninvested cash. In order for a registered investment company to continue to invest in unregistered money market funds, the unregistered money market fund would have to comply with any amendments to Rule 2a-​7. The Proposing Release does not appear to anticipate the circumstances of these unregistered money market funds, for which compliance with several aspects of the Proposing Release would be difficult, if not impossible."

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