News Archives: May, 2012
The ICI released its latest monthly "Trends in Mutual Fund Investing: April 2012" yesterday, which showed money market mutual fund assets fell by $24 billion in April (after falling $71 billion in March) to $2.558 trillion. Money fund assets now account for 20.6% of overall mutual fund assets; total fund assets, including stock and bond funds, dipped by $26 billion to $12.431 trillion. Bond fund assets continued surging. After breaking $3.0 trillion in March for the first time, assets grew an additional $50 billion in April to $3.121 trillion, or 25.1% of assets. ICI's "Month-End Portfolio Holdings of Taxable Money Market Funds showed a sharp rebound in Repo holdings (up $52.3 billion) while most other composition sectors declined. The number of accounts outstanding showed its first increase in 8 months, rising over 21 thousand to 25.688 million.
ICI's latest "Trends" says, "The combined assets of the nation's mutual funds decreased by $26.3 billion, or 0.2 percent, to $12.431 trillion in April, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI..... Money market funds had an outflow of $24.05 billion in April, compared with an outflow of $70.63 billion in March. Funds offered primarily to institutions had an outflow of $7.98 billion. Funds offered primarily to individuals had an outflow of $16.07 billion."
Month-to-date through May 29, Crane Data's Money Fund Intelligence Daily shows money fund assets rebounding slightly. They've increased by $5.7 billion (up 0.2%). YTD, we show an overall asset decline of $119 billion, or 4.6%. Our daily series shows increases in both Retail and Institutional funds in May; they've gained $4.2 billion and $2.1 billion, respectively.
ICI's Portfolio Holdings series shows Repurchase Agreements jumped in April after plunging in March (up $52.3 billion to $559.9 billion after falling $65.2 billion the prior month). Repos remain the largest portfolio holding among taxable money funds with 24.2% of assets. Treasury Bills & Securities remained the second largest segment at 19.6%, though these fell by $35.3 billion to $447.3 billion. Holdings of Certificates of Deposits, which rank third among portfolio holdings, also fell, declining by $14.1 billion to $389.4 billion (17.0%).
Commercial Paper rose by $2.1 billion to $365.0 billion, but CP remained the fourth largest composition sector with 15.0% of taxable asset composition. U.S. Government Agency Securities holdings continued to slide, dropping $14.7 billion to $319.4 billion, or 14.0% of assets. Notes (including Corporate and Bank) accounted for 5.4% of assets ($124.2 billion), while Other holdings accounted for 3.9% ($88.1 billion).
The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds increased to 25.69 million from 25.67 million the month before, while the Number of Funds declined by 6 to 417. The Average Maturity of Portfolios shortened to 45 days in April from 46 days in February. Finally, note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet (see our Content Page to download) now has its Portfolio Composition and Maturity Distribution totals updated as of April 30, 2012. (We revise these following the monthly publication of our Money Fund Portfolio Holdings data.)
Karrie McMillan, General Counsel for the Investment Company Institute wrote a comment letter to the International Organization of Securities Commissions regarding "IOSCO Money Market Fund Systemic Risk Analysis and Reform Options" which was posted on the SEC's President's Working Group comment page as well as on the ICI's website on Friday. Written to Mohamed Ben Salem, General Secretariat of IOSCO, it says, "The Investment Company Institute is pleased to provide comments on the Consultation Report on money market funds issued by the Technical Committee ofthe International Organization ofSecurities Commissions ('IOSCO'). Money market funds playa vitally important role for investors and the global economy and constitute one of the great success stories of modern financial regulation. In the interest of preserving the important benefits these funds provide, ICI and its members have devoted significant time and effort to considering how to strengthen the regulation of money market funds and make them more robust under even the most adverse market conditions -- such as those caused by the widespread bank failures in 2008." (See also Crane Data's May 2 News "IOSCO Money Market Fund Risk, Reform Report Is Europe's Answer to PWG".)
ICI writes, "Over the past few years, the U.S. Securities and Exchange Commission ("SEC") and the U.S. fund industry have made a great deal of progress toward their shared goal of strengthening the resiliency of money market funds. Taking the initiative to respond quickly and aggressively to the events of fall 2008, ICI formed a Money Market Working Group to study the money market, money market funds and other participants in the money market, and recent market circumstances. The March 2009 Report of the Money Market Working Group addressed these topics and advanced wide-ranging proposals for the SEC to strengthen money market fund regulation."
They explain, "In 2010, with the industry's strong support, the SEC approved far-reaching rule amendments that incorporated many of the MMWG Report's recommendations and enhanced an already-strict regime of money market fund regulation: The amended rules make money market funds more resilient by, among other things, imposing new credit quality, maturity, and liquidity standards and increasing the transparency of these funds. In the event a money market fund proves unable to maintain a stable $1.00 net asset value ("NAV") per share, the fund's board of directors is empowered to take prompt action to assure an orderly liquidation of the fund and equitable treatment for all shareholders. These reforms proved their value last summer when U.S. money market funds-withour incident-met large volumes of shareholder redemptions during periods of significant market turmoil, including a credit event involving the historic downgrade of U.S. government debt. Indeed, so far reaching were these reforms that today's money market fund industry is dramatically different from that of 2008."
McMillan tells IOSCO, "U.S. policymakers, industry participants, and other stakeholders have continued to examine possible additional reforms to money market fund regulation even after adoption of the SEC's 2010 amendments. For example, the President's Working Group on Financial Markets conducted a review of money market funds and in late 2010 issued a report ("PWG Report") seeking comment on various money market reform options. Like the Consultation Report, the PWG Report did not endorse any particular course of action. The PWG Report spawned a voluminous and still growing comment record that reflects not only many good faith attempts to respond to policymakers' concerns, but also a striking absence of consensus around whether further action is needed, and if so, how to proceed."
She states, "In the United States, this lack of consensus stems in part from the substantial reforms already implemented by the SEC in 20lO. It also stems from the fact that since the onset of the global financial crisis, regulators around the world have undertaken numerous broader financial reform efforts designed to prevent a recurrence of the events of 2008 and address other perceived gaps in financial regulation. Many aspects of these efforts benefit money market funds, which, like other financial market participants, have a strong interest in a well-functioning global financial system that can withstand periodic shocks. When evaluating the need for further reforms specific to money market funds, it is important to take into account not only the changes already made to strengthen money market fund regulation but also other financial market reforms designed to reduce the likelihood of, and provide better regulatory tools to cope with, any future financial crisis."
The ICI letter continues, "For our part, as a result of ICI's own initiatives and extensive engagement with regulators over the past several years, ICI already has conducted extensive analysis of many ofthe reform options outlined in the Consultation Report (several of which also were included in the PWG Report). ICI's views on possible additional money market fund reforms also have evolved in recent months, for several reasons. First, as mentioned above, we have had the opportunity to observe the success of the SEC's 2010 amendments in helping U.S. money market funds withstand market stress, which strongly calls into question the need for additional reforms. Second, we have concluded that reform options reportedly under the most serious consideration in the United States are severely flawed and would prove extraordinarily detrimental to investors, issuers of short-term debt, and the country, not to mention the industry."
It adds, "We remain committed to working with regulators on this inlportant issue, but we submit that this process should be guided by two principles. First, we should preserve those key features of money market funds (including the stable $1.00 per-share NAV and ready liquidity) that have made them so valuable and attractive to investors. Second, we should preserve choice for investors and competition by ensuring a continued robust and competitive global money market fund industry. Unfortunately, the proposals we understand some U.S. regulators currently are considering are altogether at odds with these principles."
McMillan also says, "Our comments below begin with a brief discussion of why the difficulties that the money market and U.S. money market funds faced during the financial crisis of 2007-2008 do not support the conclusion that money market funds are particularly susceptible to runs, as some claim (Section I). We then review how the SEC's 2010 amendments have made U.S. money market funds more resilient and how their experience under these new requirements during last summer's market events should help inform IOSCO's consultation and recommendations (Section II). Next, we examine three policy options identified in the Consultation Report -- requiring money market funds to let their share prices fluctuate or "float," requiring money market funds or their advisers to maintain capital buffers against money market fund assets, and imposing permanent redemption restrictions-which reportedly are the options U.S. regulators are considering (Section III). Finally, with respect to a number of the other options outlined in the Consultation Report, to the extent we have previously examined those approaches, we summarize our views and provide links to our more detailed, earlier comment letters (Section IV)."
The letter comments on "runs", "The Consultation Report begins by suggesting that the financial crisis of 2007-2008 highlighted that money market funds are particularly "susceptible" to runs. We disagree. The highly unusual events during the 2007-2008 time period, compared to the only other time a money market fund failed to return a full $1.00 per share (or "broke a dollar"), illustrate the importance of context. How investors react in the very rare event that a money market fund is unable to return a full $1.00 per share depends, in our judgment, entirely on the context -- i.e., events that precede and surround that occurrence. Money market funds were not the cause of the financial crisis, but were directly affected by its enormous scale, duration, and by the lack of coherent, consistent government policy responses. Like many market participants, money market funds were hit by a global crisis that began to take hold long before September 2008."
Finally, it explains, "The financial crisis was, first and foremost, a crisis in the real estate markets and the "originate to distribute" phenomenon that developed as regulators stood by. As the real estate markets collapsed, the banking system experienced enormous stress as structured investment vehicles (SIVs), originally designed to move liabilities off of banks' balance sheets, suddenly were brought onto those balance sheets.' The banking crisis that followed was catastrophic. At least 13 major institutions went bankrupt, were taken over, or were rescued in the 12 months before Lehman Brothers failed. Lehman's failure was an especially difficult shock for the market because it represented an abrupt reverse in direction by the U.S. government from its previous decisions to intervene and rescue Bear Stearns, Fannie Mae, and Freddie Mac."
Moody's Investors Service put out a "Special Comment" earlier this month entitled, "US Corporate Cash Pile Totals $1.2 Trillion; Over Half Sits Overseas." Subtitled, "Technology, pharmaceuticals, energy and consumer products hold the most cash," it says, "US non-financial companies rated by Moody's held $1.24 trillion in cash as of December 2011, up 3.0% from the record level of $1.20 trillion at the end of 2010. We estimate nearly $700 billion, or 57% of that cash, is held overseas. These amounts reflect the relative strength of most emerging market economies over the last few years, the negative tax consequences of permanently repatriating money to the US, and the disproportionate consumption of cash for domestic purposes, such as dividends, share buybacks, and the majority of acquisitions. Unless there is permanent tax reform that lowers taxes on overseas profits, we expect the absolute and proportionate amount of cash held overseas will continue to rise."
Moody's summary continues, "The top 50 holders of cash account for $749 billion. This total includes liquid long-term investments, and is up 13% from $665 billion in 2010. The top five cash kings include Apple Inc., Microsoft, Cisco, Google and Pfizer. Together, these five companies have $276 billion or 22% of the total non-financial corporate cash balances, up from $207 billion or 17% in 2010. Apple could account for about $150 billion or 12% of total corporate cash by the end of 2012, up from $97 billion or 8% as of year-end 2011."
They add, "Investment grade companies rated by Moody's hold $848 billion of cash, or 77% of the rated non-financial corporate universe, down slightly from $852 billion in 2010 but up from $579 billion in 2006. Technology, pharmaceuticals, energy and consumer products are the most cash-flush industries, representing $779 billion or 63% of the corporate cash total."
Moody's report explains, "We attribute a large part of US companies' solid 2011 performance to a combination of modest overall economic growth, the strength of their overseas performance (with Asian strength offsetting European weakness) and tight cost controls. To the extent that non-US regions continue to pace overall economic growth, we expect overseas operations will represent a growing portion of US companies' earnings."
They tell us, "From a credit perspective, the liquidity and operating flexibility provided by high cash balances are positive factors. The cash helps ensure that companies can retire near-term maturing debt if the capital markets are disrupted and withstand a significant deterioration in business conditions. At the same time, large cash balances can be qualitatively negative. They can encourage management to deploy the cash in ways that heighten business or financial risk, such as making expensive acquisitions outside of a company's core strategy. Positively we believe the tax on permanently repatriated money encourages a level of discipline, restrains companies from making credit-weakening decisions, such as paying large dividends or aggressively buying back common stock, since this requires domestic cash and companies are generally loathe to pay taxes in order to enter into discretionary outlays."
Moody's adds, "Still, cash-rich companies are able to use relatively less debt to fund acquisitions and keep leverage lower than it would be if they funded acquisitions with additional debt. Some companies have been able to fund acquisitions almost entirely with overseas cash (for example Microsoft's $8.5 billion purchase of Skype in October 2011). As a result, over the last year, there have been many instances where companies made acquisitions and maintained their credit ratings thanks to the high proportion of existing cash (or common stock) they used to fund the acquisition."
The report's "Top 50 Cash Rich Companies" include: Apple ($97.6B), Microsoft ($51.7B), Cisco Systems ($46.7B), Google ($44.6B), Pfizer ($35.2B), Johnson & Johnson ($32.3B), General Motors ($31.6B), Oracle ($31.0B), Ford Motor Company ($22.9B), Qualcomm ($22.0B), Amgen ($20.6B), Merck ($18.0B), Chevron Corporation ($16.1B), Intel ($14.8B), Dell ($14.8B), Coca-Cola ($14.0B), Verizon Communications ($14.0B), Exxon Mobil ($13.1B), IBM ($11.9B), Bristol-Myers Squibb ($11.6B), Boeing ($11.3B), EMC ($10.8B), Eli Lilly ($10.6B), News Corporation ($9.4B), General Electric Company ($8,4B), Ebay ($8.2B), Hewlett-Packard ($8.1B), Abbott Laboratories ($8.1B), United Continental Holdings ($7.8B), Devon Energy ($7.1B), Wal-Mart Stores ($6.6B), ConocoPhillips ($6.4B), United Technologies ($6.0B), Costco Wholesale ($5.9B), Corning ($5.8B), Sprint Nextel ($5.6B), Loews ($5.2B), Time Warner Cable ($5.2B), Motorola Solutions ($5.1B), Mastercard ($4.9B), Freeport-McMoRan ($4.8B), United Parcel Service ($4.3B), American Airlines ($4.0B), Las Vegas Sands ($3.9B), Occidental Petroleum ($3.8B), 3M ($3.7B), Mosaic ($3.6B), Lockheed Martin ($3.6B), AT&T ($3.2B), and AES ($3.1B).
Today's Wall Street Journal features an article entitled, "Money Funds Open to a Deal With SEC," which says, "Major firms are willing to consider a compromise on a key issue delaying a new regulatory plan for the $2.6 trillion money-market mutual-fund industry. The firms said in a May 8 meeting in Washington that they would consider supporting a watered-down version of a plan floated by the Securities and Exchange Commission to limit how quickly investors can withdraw their money, according to people familiar with the matter."
The Journal explains, "The SEC, which called the meeting, was receptive to the idea. If the two sides can come together, it would represent a major turning point in SEC Chairman Mary Schapiro's long-running campaign to beef up regulation of money funds. Officials from fund giants BlackRock Inc., Vanguard Group Inc., J.P. Morgan Chase & Co. and Invesco Ltd. attended the meeting. Another meeting is scheduled in June. The talks still could fall apart."
They write, "At issue is Ms. Schapiro's plan to allow investors to redeem only 95% to 97% of their holdings at once, with the rest payable after 30 days. The fund industry has resisted the 30-day rule, saying it would effectively kill their businesses because investors will go elsewhere if they don't have immediate access to their money. The companies support a weaker measure: Rather than lock up a portion of investors' money for 30 days, the companies would charge investors a fee to withdraw money during a "liquidity event," such as the 2008 financial crisis, according to people familiar with the matter. The details, including what would constitute a liquidity event, haven't been settled, according to these people. European money funds take a similar approach, calling it a "dilution levy.""
The Journal's Kirsten Grind and Andrew Ackerman tell us, "Money funds pitched the SEC on the idea late last year, but the agency resisted, according to people familiar with the matter. But Ms. Schapiro has had trouble lining up support among the five-member commission for her plan, and now is more willing to negotiate, according to a person familiar with the matter."
The article mentions a floating NAV option again, and adds, "A third idea, designed in tandem with the 30-day rule, would force firms to keep more money on hand to protect against a run on money funds."
For more on the concept of a "redemption charge," see HSBC's Feb. 28, 2011, `Comment Letter to the President's Working Group from John Flint, Chief Executive of HSBC Global Asset Management.
The May issue of Money Fund Intelligence interviews Thrivent Asset Management Senior Portfolio Manager William Stouten, who oversees the $545 million Thrivent Money Market Fund as well as a number of other cash pools on behalf of parent company Thrivent Financial for Lutherans. We discuss the challenges of being a smaller sized manager in the current environment. We excerpt from the article below.
MFI: What's your biggest challenge now vs. historically? Stouten: Beyond generating enough yield to cover expenses, I think the challenge is finding enough supply of products that fit the new 2a-7 liquidity rules. I think that's one the biggest challenges now and probably in the future as new regulations change the attractiveness of short-term borrowing. Banks are being encouraged to extend their maturities and money funds are encouraged to maintain more liquidity, so I think there is going to be a challenge to find products to fit that space.
MFI: What have you been focusing on? Stouten: On the investment side, we've been spending a lot of time looking through more municipal securities. There are certainly a lot more challenges in terms of looking over the documents, because there are nuances in municipal securities that aren't necessarily in products like commercial paper.
MFI: Has your investment strategy changed over the years? Stouten: I think there are two things that have changed. Historically, there was certainly less focus on liquidity. [In the past] I would never maintain more than 10% maturities in a week. As a retail fund, with a very diversified shareholder base, the funds were never that volatile even through the financial crisis. So, trying to meet the 30% liquidity guideline has been a different strategy for us as a small retail fund, and it is unfortunate that the yield and profitability of the fund is unnecessarily impacted.
The other component is the diversification. Historically, there was a lot of product available and a lot of issuers. It seemed prudent to diversify the portfolio. I think it's more challenging to keep the portfolio diversified in this environment with a significant reduction in issuers with Tier I ratings. Because of that, I think money funds in general are more concentrated than they have been historically. We now operate our fund with a higher concentration in Treasuries and Agencies, and I think that's probably the case across the board, just having higher concentration in these products.
MFI: How are fee waivers? How bad is it? Stouten: We are waiving a significant amount of fees to maintain a zero net yield to the shareholders, and that is costing the firm money. The firm has actually had to contribute to the funds the past few years. That's obviously not sustainable in the long run. I don't think Thrivent wants to make any drastic changes until there is more certainty around possible regulatory changes. I think we will always want to have some conservative, liquid product available for shareholders in the short term space. But in this interest rate environment, money funds are not economical without scale. We need higher interest rates.
MFI: What are your thoughts on pending regulatory changes? Stouten: I am concerned that there has been so much negative talk about money market funds in the press, and much of it from the industry itself, that if regulatory changes like a floating NAV are enacted, the industry will have a lot of work to do to reverse the damage. After spending years agreeing with clients that a floating NAV will not work, it will be difficult to go back to those same clients and convince them to stay put. If the industry had spent nearly as much time working with regulators to make the changes more palatable, I think we would have had less regulatory changes and more constructive ones. There are a lot of things that can be done to keep the NAV stable even in a floating NAV environment, and therefore, I don't think the floating NAV concept is as drastic as it seems to be portrayed at times.
However, the industry needs to get these ideas out there. For instance, using amortized cost accounting for the 30% liquidity bucket, better pricing parameters, less reporting requirements, etc. Sometimes when you talk about a floating NAV, it sounds like it's pretty scary, that it's going to go all over the place every day and people are going to have gains and losses and it's an accounting nightmare. In reality, the NAV for most money market funds, especially now with the new regulations, isn't going to deviate from $1 except under extreme circumstances. So there aren't going to be all these daily gains and losses, as some have speculated. [I]f that is communicated, then the floating NAV concept becomes more acceptable to the shareholder. I certainly understand the industry's hesitation for change.... [A]ny time you change there's resistance.
MFI: What about capital or a buffer? Stouten: Actually, we're pretty open to that concept. I think it would be desirable to have a choice. Obviously, in this interest rate environment there isn't an easy way to pass on the cost of a capital buffer to clients and shareholders. But given the size of our firm, it is not something that would be insurmountable. I think that there is some concern in the industry that all the money would go to those firms that were able to provide a capital buffer to their money market fund. The reality is that the cost of providing that capital would be a significant deterrent to growing the fund whether the cost is in the form of a yield to shareholders or cost of capital to the firm.
MFI: Is there anything you'd like to add? Stouten: Having this cloud of potential regulatory changes over the industry for so long has not been helpful. I do think that the perception of implied support to money funds is something that regulators should deal with, but the industry cannot adapt or respond to regulatory uncertainty.
MFI: Is the harder rhetoric making it more difficult to craft a solution? Stouten: I think there has been a lot of energy, time, and money spent trying to convince regulators and the general public that a floating NAV is not going to work. I agree that it would be easier to leave things as they are now, and that any such change carries risk. However, if we are forced into a floating NAV environment, there's a lot a ground that the industry has to cover to try to convince clients that "yes, in fact it will work" and they should stay in money market funds. I think there is some risk in trying to maintain the view that it’s a bad thing. A softer rhetoric may be warranted.
Charles R. Schwab, Founder and Chairman of The Charles Schwab Corporation wrote a letter entitled, "Money Market Funds Are One of the Safest Investments" that appeared as a paid advertising page in Wednesday's Wall Street Journal and USA Today. Schwab says, "Regulators and other government officials have carelessly charged money market funds with being "brittle," "vulnerable to runs," and "shadow banks." Before they create undue alarm about the funds' safety among the 50 million or more investors who use them, it is important to remind ourselves what money funds are ... and are not. Money market funds are open and transparent investments that have b en regulated by the SEC since the 1970s. There are more than 500 of them in operation today, and since 1990, they have paid investors $260 billion more in dividends than what investors would have received in interest had that money been kept in a bank deposit account."
He explains, "Money market funds are permitted by regulators to invest only in short-term, fixed income securities that must be of the highest credit rating, meaning securities issued by government agencies, municipalities and large, healthy corporations. At least 97 percent of a fund must be held in securities with the highest short-term credit ratings. In addition to oversight by the SEC, all money market funds managed under the Investment Company Act of 1940 are overseen by an independent board of trustees, independent legal counsel and independent auditing firms. These funds are generally operated day to day by well-known investment management companies. Many banks also operate money funds."
Schwab's letter continues, "Money market funds have a four decade-long track record of security and safety, and are considered by many experts to be one of the safest constructed investments available to investors. They are not brittle or susceptible to runs, and are not shadow banks. In 2008, at the depth of the financial crisis, only one money fund lost value for its clients. It lost one percent of its value; that is just one penny of the $1.00-per-share price. In the history of the money fund industry, this is only the second time a fund broke the $1.00-per-share value. By contrast, just since 2008, more than 500 banks and credit unions have failed, costing investors and taxpayers more than 80 billion dollars."
The advertisement includes a chart which "shows many of the critical differences between money funds and other financial institutions." It says, "The contrasts are telling and worth a quick review: Government regulators say that strong capital requirements are a good thing. I agree. How about 100 percent? That's the capital ratio you'll find in money funds. Money market funds are not in the business of leveraging their holdings. They have no liabilities, only assets. Shareholders of money funds are investing in underlying securities. One hundred percent of assets held in a money fund belong to the fund and hence to individual shareholders. In contrast, banks' daily business is to take in deposits, calculate risk and lend money to people for such things as mortgages, cars and businesses. Insurance companies and credit unions operate similarly to banks, with many different kinds of assets and liabilities."
Schwab tells us, "In 2010, new SEC rules were put in place that significantly increased the mandated liquidity requirements for money market funds -- in other words, how quickly the underlying assets can be converted to cash. Today, 30 percent of assets must mature in seven days or less, and 10 percent within one day, making them the most liquid investments available. The industry currently holds around $800 billion in instruments that mature in seven days or less. This level of liquidity helps ensure that money market funds can effectively meet spikes in redemptions. The weighted average maturity of assets held in a money fund is required by law to be 60 days or less. A reasonable estimate for bank assets is three-plus years, and many bank asset maturities extend out to decades, as is the case with the 30-year mortgages they hold."
He also states, "Money funds are transparent. SEC rules require money funds to publish their individual holdings every month for you to view. They are also published in shareholder reports. Banks and other financial institutions do not have the same obligation and likely couldn't provide that information to you even if you requested it. Rather, they are free to invest and loan however they want, and you have no visibility into those choices. Banks and other depository institutions offer FDIC insurance up to $250,000. Money market funds do not carry deposit insurance -- precisely because of the degree of safety, regulation, limitations on what can be held in a money fund, and the fact that they are 100 percent capitalized and without leverage."
Schwab adds, "Money market funds are securities and are subject to risk -- investors understand this -- but the risks are disclosed, of short duration and managed through high-quality investments. The campaign to scare owners of money fund shares is neither accurate nor wise. Over many decades, money funds have been a safe, solid and transparent investment tool for individuals to manage their short term cash. Over the past year, money market funds have weathered multiple spikes in redemptions -- prompted by the debt ceiling debate last summer, the downgrade of US debt and the ongoing euro zone crisis -- without any problems. The new rules are working."
Finally, he writes, "Investors would be better served if regulators would focus their attention where the risky components of the financial services reside and where there is little transparency -- swaps, commodities clearing, structured investment vehicles, fraud and the Madoffs of the world. Money market funds have proven themselves through thick and thin."
The Investment Company Institute's latest "Viewpoints" analyzing money fund portfolio holdings is entitled, "Prime Money Market Funds' Eurozone Holdings Down 50 Percent over The Last Year." The ICI update, by Emily Gallagher and Chris Plantier, explains, "Securities of eurozone issuers accounted for 15.7 percent of assets of U.S. prime money market funds in April, up from 14.6 percent in March (see chart in original piece). This increase was driven by a rise in holdings of German assets (up to 5.4 percent from 4.1 percent last month) and by a small rise in holdings of French assets (up to 5.2 percent from 5.0 percent last month). Over the last year, however, the share of eurozone holdings has declined from 30.1 percent in April 2011 to 15.7 percent in April 2012."
ICI's charts show total Eurozone holdings of Prime money funds (using Crane Data info since May 2011) falling from a peak of 31.1% (15.7% of which was France) to a recent low of 12.0% (3.3% France) in December 2011. Eurozone holdings rose the first two months of 2012, then dipped in March before rebounding in April. Germany represents the largest segment with 5.4% of Prime assets, France is second with 5.2%, and the Netherlands is third with 4.7%. There is zero in Italy and 0.1% in Spain. (Money funds never owned Greece and haven't owned Ireland in over 2 years.) Non-Eurozone European exposure is concentrated in the UK (7.9%), Switzerland (5.5%), and Sweden (4.1%). Canadian-affiliated debt now accounts for 10.4% of Prime assets, Japan for 8.9%, and Australia/New Zealand for 7.9%.
In other news, a press release put out yesterday entitled, "Horizon Hires Michael Markowitz as CIO," explains, "Horizon Cash Management LLC, the leading investment advisor specializing in active cash management for the alternative investment industry, today has announced the appointment of Michael Markowitz as Chief Investment Officer. Mr. Markowitz, who also holds the titles of executive vice president and partner, will be responsible for setting the overall investment strategy of the firm and for the oversight of all investment functions of the firm including trading, credit research and operational aspects of the trading desk."
Pauline Modjeski, president and executive managing partner, said, "Mike's expertise and experience in the fixed income markets will be a huge advantage to the firm and a benefit to our clients. His addition to the executive management team is very exciting and reinforces the future success of Horizon."
The release states, "Mr. Markowitz has more than 23 years of experience in managing fixed income portfolios for institutional, Central Bank and retail clients. Before joining Horizon, he was a Managing Director and Head of Short Duration Fixed Income at Guggenheim Partners where he helped launch and manage a Short Duration, actively managed exchange-traded fund. Prior to joining Guggenheim, he was a Managing Director and Head of Short Duration Fixed Income with UBS Global Asset Management where he was responsible for all trading and investment strategies of the Money Market funds and all separate accounts with a maximum maturity of five years. In addition, Mr. Markowitz has been a frequent speaker at Fixed Income Industry conferences."
Finally, it adds, "Horizon Cash Management LLC is an SEC-registered investment advisory firm with a sole focus on cash management services. Founded in 1991 by Diane Mix, Horizon has provided its clients with separately managed, customized portfolios with strict emphasis on capital preservation, safety and liquidity. Horizon manages approximately $2 billion USD for its clients worldwide. For more information about Horizon and its services, please visit their website at www.horizoncash.com."
We learned from website TheMutualFundWire.com (MFWire) that the "portal wars" continue, as trading platforms continue to add functionality and features. A press release entitled, "State Street Announces Omnibus Trading Capabilities for Mutual Fund Clients," was posted Monday. It says, "State Street Global Markets, the investment research and trading arm of State Street Corporation today announced that broker dealer omnibus trading capabilities have been added to its Fund Connect money market fund trading platform, providing clients with a single contract, allowing for multiple funds to trade simultaneously."
The release explains, "Fund Connect is part of eExchange, State Street Global Markets' suite of integrated electronic trading solutions for institutional investors. Fund Connect allows clients to invest in a wide range of institutional money market funds from leading providers through a single, secure interface. Clients receive a consolidated view of their account balances, month-to-date accruals and daily fund statistics with the added benefits of pre-trade compliance, real-time execution and customized reporting. In addition to omnibus trading, Fund Connect supports both custody and fully-disclosed trading models which allow institutional investors to automate their investment process."
Cliff Lewis, executive vice president and head of State Street's eExchange business, comments, "The addition of omnibus capabilities to Fund Connect helps to simplify the investment process for our clients by providing a broad range of funds to choose from under a single contract. Our Transparency Connect and Virtual Portfolio tools available via Fund Connect also help clients using any trading strategy better understand the underlying holdings and potential risk in their portfolios. As volatility in the financial markets continues, it is increasingly important for our clients to have access to granular data about their investments on a daily basis."
State Street adds, "Transparency Connect is a risk management tool that analyzes exposures to the underlying holdings of fund investments utilizing criteria such as issuers, country, instrument type and maturity buckets. Clients can use Virtual Portfolio to evaluate how investment decisions will impact the risk profile and counterparty exposure of a portfolio utilizing existing exposures and scenario analysis on security-level holdings in more than 350 global money market funds."
Note: State Street's Fund Connect will be exhibiting at this week's New York Cash Exchange, which takes place Wednesday through Friday morning at the New York Hilton. (See http://www.tmany.org for more details.) Crane Data will also be exhibiting, and Peter Crane will be running a panel entitled, "Money Funds After the Makeover: Cash Investing Strategies" featuring Federated Investors' Debbie Cunningham and Barclays Stewart Cutler Wednesday afternoon at 2pm.
Another comment letter directed at the Federal Reserve and banking regulators has been posted on the SEC's "President's Working Group Report on Money Market Fund Reform website, the latest by Melanie L. Fein of Fein Law Offices. Fein writes to Fed Chairman Ben Bernanke, "Last week, a major bank holding company directly supervised by the Federal Reserve Board announced a $2.0 billion loss on derivatives trades undertaken by its subsidiary bank for hedging purposes in a supposedly low-risk portfolio for the bank's own account.... This development is troubling for a number of reasons. Among other things, it raises serious questions concerning the competency of bank managers and banking regulators to supervise risks within large, complex banking organizations.... The occurrence will be reflected in banking history as a seminal failure of supervision and risk-management."
She continues, "More fundamentally, this occurrence raises questions concerning the vast expansion of the federal safety net that has resulted from government policies since the financial crisis, the concentration of assets in the banking system, and the apparent intent of the Federal Reserve to discourage diversity in the financial system by eliminating money market funds as safe and efficient alternatives to banks. The size of the bank's loss suggests that the portfolio that was being "hedged" was sizable, perhaps as much as $100 billion by some reports, which raises a question of where the bank got all of that cash and why that cash wasn't deployed in the bank's business of making loans. The answer lies in the swelling of the federal safety net as a result of government policies. In particular, the size of the bank's loss undoubtedly relates to the amount of excess deposits it holds."
Fein explains, "The bank apparently could not find borrowers for its excess deposits. It was not satisfied with the 25 basis points it could earn by placing the deposits on reserve with the Federal Reserve, and sought to profit by engaging for its own account in trading and hedging activities. Why did the bank have such a large amount of excess deposits on hand to invest for its own account? The reason is that the amount of government-insured deposits has ballooned since the financial crisis, nearly all of which has gone to large banks that have grown even bigger and more "too-big-to-fail" than before the crisis."
She adds, "The government has more than doubled the amount of FDIC deposit insurance, from $100,000 to $250,000. But perhaps more significantly, the FDIC in 2008 extended unlimited deposit insurance to bank depositors with noninterest bearing checking accounts. The FDIC did this without any legal authority, ostensibly to stabilize banks during the chaos following Lehman Brothers' bankruptcy. In the Dodd-Frank Act, Congress gave the FDIC explicit authority to provide unlimited insurance for such accounts until December 31, 2012. As a result of this unlimited deposit insurance, total insured bank deposits increased from $4.5 trillion in the second quarter of 2008 to $7.0 trillion at yearend 2011 -- a $2.5 trillion increase."
Fein tells Bernanke, "The $2.0 billion derivatives loss has demonstrated that banks still are a significant source of risk in the financial system.... It is not known how many other banks are pursuing a similar trading and hedging strategy and what their losses might be. Cumulative losses could pose a systemic threat to the banking system. Moreover, we do not yet know whether these activities might have a destabilizing or disruptive effect on the financial markets. Will the bank be able to repay depositors who want their money back when the unlimited deposit insurance expires?"
She writes, "A large portion of the excess deposits in the banking system has flowed to banks from money market funds ("MMFs"). MMFs provided a safe haven during the financial crisis but have lost approximately $1.4 trillion in assets since then, most of which has been attracted to banks because of the unlimited deposit insurance. Had this money stayed in MMFs, MMFs would have invested all of it in corporate debt, municipal securities, and U.S. government securities for the benefit of the economy. MMFs would not have engaged in risky trading or hedging activity. Unlike banks, MMFs are subject to a regulatory framework that does not allow such activity. MMFs would have earned a return (albeit small in today's low interest rate environment) on investments for their investors -- which include pension funds, charitable foundations, other fiduciaries, treasurers, municipalities, and millions of individual savers and retirees -- while providing a source of funding to corporations and municipalities to support economic growth."
Fein states, "It thus is baffling why the Federal Reserve has launched a crusade to impose structural changes on MMFs that would effectively eliminate them from the financial system. Statements by yourself, other Board members and Federal Reserve Bank presidents in speeches, Congressional testimony, and comments to the media leave no doubt that the Board seeks to reduce money market funds as a source of short-term financing by eliminating the characteristics that make them useful cash management tools or imposing inappropriate regulatory requirements on them. The $2.0 billion derivatives trading fiasco demonstrates that the Board is engaged in a high stakes gamble."
She explains, "Shrinking MMFs to further concentrate financial assets in the banking system will only increase, not reduce, systemic risk. Moreover, it seems highly doubtful that the Board understands the operations and regulation of MMFs sufficiently to aspire to supervise them effectively. It is particularly unclear what 'more stringent" prudential standards the Board could impose on MMFs that are not already imposed under regulations of the Securities and Exchange Commission, which is the independent agency to which Congress has assigned supervisory and enforcement responsibility for MMFs. The SEC has decades of regulatory experience with MMFs and dozens of staff who are expert in the operations of these useful entities, which have operated successfully for over 40 years with a safety record far superior to that of banks."
Fein tells Bernanke, "A number of lessons should be learned from the $2.0 billion derivatives loss debacle. One lesson is that any extension of unlimited deposit insurance beyond December 31, 2012 would be a mistake. Another lesson is that diversity in the financial system is healthy. For decades, MMFs have counterbalanced weaknesses in the banking system and, because of their risk-averse nature, exerted an element of market discipline within the financial system. By holding short-term assets outside the banking system, MMFs reduce the size of the federal safety net and exposure of taxpayers to instability at banks."
She says, "The concentration of additional assets in the banking system would mean that more of the financial system would be subject to banking regulation and the mistakes of banking regulators. As commentators elsewhere have described, regulatory action and inaction by U.S. banking regulators contributed in significant ways to the buildup of risks in the banking system prior to the crisis. A diversity of regulators, along with a diversity of institutions, may foster a healthier financial system in the long run."
Finally, Fein concludes, "I recently published two papers disputing assertions by yourself and others that MMFs are subject to runs and that the "unregulated shadow banking system" operating outside the regulated banking system exacerbated the financial crisis. I also have written to Eric Rosengren concerning statements he has made regarding the risks of MMFs. I have submitted these materials to the SEC for consideration in connection with its deliberations on MMFs and am enclosing them here with the hope that you will find them useful as you contemplate this matter further."
Standard & Poor's published a paper entitled, "New Regulatory Rules Likely Will Have A Limited Impact On U.S. Nonbank Financial Company Ratings" last week, which said, "When the global financial markets are in crisis, the risk that one or a few nonbank financial companies could destabilize the financial system rises. In an effort to manage this risk, Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act created the Financial Stability Oversight Council (FSOC) under the U.S. Treasury. The FSOC's purpose is to determine whether a nonbank financial company poses a threat to U.S. financial stability. If the FSOC determines that a nonbank financial company poses a threat, the Board of Governors of the Federal Reserve will supervise the entity and subject it to a higher level of regulatory supervision, known as "prudential standards." The FSOC recently released its final rules and plans for making these determinations."
It continues, "Standard & Poor's Ratings Services expects the FSOC's final rules will apply to only a handful of rated entities and will have a minimal, if any, ratings impact on traditional and alternative asset managers, independent brokers, finance companies, and insurance companies. However, the FSOC may determine that a number of open-end investment companies, specifically large money market funds, could pose a threat to U.S. financial stability. If that happens and if the Federal Reserve imposes capital, liquidity, or other requirements, we believe that money market funds' operational flexibility and ability to compete effectively could weaken."
S&P writes, "Title I of the Dodd-Frank Act defines nonbank financial companies as entities that are predominately (85% of consolidated gross revenues) engaged in financial activities, as the Bank Holding Company Act of 1956 defines. Nonbank financial companies exclude bank holding companies, national securities exchanges, securities clearing agencies, boards of trade, derivatives clearing organizations, and certain other institutions. Title I gives the FSOC the authority to determine whether a nonbank financial company will be subject to the Fed's supervision and prudential standards. This would be the case if the nonbank financial company is in material financial distress (imminent danger of default or insolvency) that poses a threat to the financial system of the U.S., or if the company's size, complexity, interconnectedness, and mix of activities pose a threat to the U.S. financial system, regardless of whether the company is experiencing financial distress."
They explain, "The FSOC must apply 10 statutory considerations when it makes its determination. In so doing, the FSOC will employ a three-stage process. In the first stage, it will analyze nonbank financial companies based on six quantitative measures. It will use existing data from public and regulatory resources. The companies that exceed the asset size threshold plus one or more of the remaining five quantitative measures could move onto the second stage, during which the FSOC will evaluate their risk profiles using a wider variety of quantitative information that is available from public and regulatory resources. In the third stage, the FSOC will use quantitative and qualitative information it receives from the companies to determine whether they are potential threats to the financial stability of the U.S."
S&P's report features a table (using Crane Data info) of the "10 Largest Money Market Funds," which includes: JPMorgan Prime Money Market Fund (CJPXX) $115.9B (AAAm), Fidelity Cash Reserves (FDRXX) $115.5B, Vanguard Prime Money Market Fund (VMMXX) $113.1B, JPMorgan US Government Money Market Fund (OGVXX) $59.8 (AAAm), Fidelity Institutional MM Money Market Portfolio (FNSXX) $59.6B, Fidelity Institutional MM Prime Money Market Portfolio (FIPXX) $53.1 (AAAm), Federated Prime Obligations Fund (POIXX) $48.9 (AAAm), BlackRock TempFund (TMPXX) $44.7B (AAAm), Federated Government Obligations Fund (GOIXX) $34.1B (AAAm), and Schwab Cash Reserves Fund (SWSXX) $33.9B. (Data is as of March 31, 2012. Source: Crane Data LLC. The report also contains a table of the 20 largest families; see www.cranedata.com or MFI XLS for the latest version of this table.)
The report adds, "If the FSOC determines that a large money market fund poses a threat to financial stability, the fund would come under the Fed's supervision and would also have to comply with prudential standards. In applying prudential standards, the Fed could require the money market fund to maintain a certain level of liquidity, beyond what the SEC requires, or meet certain capital requirements. This would put the fund at a competitive disadvantage to the money market funds not subject to prudential standards. If a money market fund is unable to maintain a stable net asset value (NAV) as a result of having to comply with the Federal Reserve's prudential standards, Standard & Poor's may lower its PSFR on the fund."
S&P also says, "In addition to the work the FSOC is doing, the SEC is considering new rules that, we believe, could hurt the entire money market fund industry. The SEC is considering two new proposals: floating NAV and redemption holdbacks combined with minimum capital requirements. We believe either of these proposals, if enacted, could result in reintermediation of funds back into the U.S. banking industry from money market funds. This could strengthen the U.S. banking industry's funding profile, but it could greatly reduce money market funds' competitiveness. Again, if a money market fund is unable to maintain a stable NAV as a result of having to comply with the SEC's proposals, Standard & Poor's may lower its PSFR on the fund."
They add, "Asset managers are in good shape to handle potential regulatory oversight. Among the largest asset managers that we rate, we have identified three independent asset managers with more than $50 billion of assets under management (AUM) in money market funds. We used this $50 billion AUM threshold only to be consistent with the $50 billion total consolidated assets threshold. The three independent asset managers are FMR LLC (A+/Stable/A-1), the manager of Fidelity branded investment products with more than $400 billion in money market funds, BlackRock, with more than $140 billion, and Invesco Holding Co. Ltd. (A-/Stable/--), with $58 billion. Just missing the $50 billion cutoff is Western Asset Management, a subsidiary of Legg Mason Inc. (BBB/Stable/--) with nearly $49 billion of money market fund assets. Charles Schwab, besides being a retail broker and a deposit gathering bank, also manages more than $150 billion of proprietary money market funds."
Finally, S&P's report says, "We have not factored into our CCRs the risks that any traditional asset manager could face Fed supervision and prudential standards. Firms like FMR, BlackRock, and Invesco could sell or stop operating their money market funds if prudential standards became too burdensome. The impact on their operations would not be severe because they have sufficiently diverse businesses or mix of AUM. In addition, these three asset managers, as well as Schwab, have been waiving a large portion of their advisory fees because of historically low interest rates. If these companies decide to leave the money market fund business, we believe their credit risk exposure would decline. Our traditional asset manager ratings analysis considers the possibility that a manager may decide, for business reasons, to support its money market funds when the capital markets are in distress. This happened during the global credit crisis in 2008, when several asset managers provided support for their money market funds."
The Investment Company Institute released a statement yesterday entitled, "ICI Study: Capital Buffers Could Undermine Money Market Funds, Harm Shareholders." Subtitled, "SEC Concept Would Raise Costs, Could Drive Sponsors Out of Product, and Create New Systemic Risks," the press release says, "Requiring money market fund advisers to hold capital to support their money market funds would fundamentally change the nature of these funds, according to a new study by the Investment Company Institute released today. Depending on the size of the capital buffer and the assets covered, a capital buffer could result in advisers shifting to less regulated products or exiting the cash management business altogether. These changes would not benefit investors and could lead to greater systemic risk in the economy."
ICI President and CEO Paul Schott Stevens comments, "This study confirms the problems with the capital buffer concept that we have noted for some time. Our analysis shows that this approach, like the other money market fund changes being weighed by the SEC, could undermine the money market fund as a product. Investors, as a whole, could well be deprived of a powerful tool for cash management, and retail investors would have lower rates of return if forced into bank deposit accounts. More broadly, financing for key sectors of the economy could be disrupted and systemic risk potentially increased, as cash balances of institutional investors migrate to less-regulated, more-opaque financial instruments."
ICI explains, "The study, "The Implications of Capital Buffer Proposals for Money Market Funds," analyzed a range of approaches, including requiring fund advisers to commit capital, requiring funds to raise capital in the market, or requiring funds build a capital buffer inside funds from retained income."
ICI Chief Economist Brian Reid says, "Requiring advisers to put up capital places them in a first-loss position for their funds -- a risk that they are not being paid to assume. It's hard to imagine many fund sponsors deciding to undertake this new cost that they could not cover. Instead, many would likely stop offering money market funds and turn to managing similar, but less regulated products -- an outcome desired by neither regulators nor investors."
ICI adds, "Imposing capital requirements on a fund adviser would shift the investment risks from fund shareholders to advisers, requiring advisers to absorb possible losses in the funds that they manage. While the potential for losses is remote, the cost of providing capital could be significant. As a practical matter, the study concludes, advisers have no ability to pass along cost increases to investors in the current very low interest rate environment. But even with more normal interest rates and fund revenues, the fee increases needed to provide a market rate of return on adviser-provided capital could be prohibitive, the study finds."
It also says, "The analysis demonstrates that capital buffer requirements, especially those that require fund advisers to pledge capital, could lead fund advisers to make business decisions that dramatically alter the money market fund business. The changes could negatively impact the money markets, business cash management practices, and regulators' ability to monitor risks in the financial markets. ICI has filed the study with the Securities and Exchange Commission (SEC). For more information, visit ICI's money market funds resource page."
The study itself says in its Executive Summary, "Recent comments by Securities and Exchange Commission (SEC) Chairman Mary L. Schapiro indicate that the SEC is considering proposing that money market funds or their advisers hold capital to buffer fund investors from potential future losses on their funds. This study analyzes the likely outcomes of the imposition of a capital buffer. Given the wide range of approaches that SEC requirements could take, this analysis considers several variations on the capital buffer idea, including requiring fund advisers to commit capital, requiring funds to raise capital in the market, or having funds build a capital buffer inside funds from fund income."
A press release entitled, "Cachematrix Unveils Enhanced Money Fund Holdings Transparency Dashboard," was sent out early this morning. Subtitled, "Introducing Cachematrix ATLAS -- the best of breed analytics and transparency module for corporate treasurers," it says, "Cachematrix (www.cachematrix.com), the leading provider of institutional money market fund and fixed income trading technology for banks and financial institutions, announced today that it has launched Cachematrix ATLAS, the first of its kind money market fund holdings transparency dashboard and search module. This next generation money market fund portfolio holdings analytics module provides Cachematrix's Bank partners with a powerful, yet easy to use interface to offer their corporate clients. Cachematrix ATLAS will provide institutional investors with much needed visibility into the world of money market fund holdings accessible at their fingertips."
The release continues, "Cachematrix ATLAS will help treasurers identify exposure risk by visually representing the user's largest exposures by Country, Holding, Security Category, Issuer, and Portfolio Liquidity Distribution. Each of these groupings allows the user to select a specific data point and drill deeper into the data to customize specific reports. For Country exposure, the user can either select a specific country to view the underlying securities and/or issuers, or visually represent their exposure on an interactive world map."
Cachematrix Founder and CEO George Hagerman comments, "The biggest single driver for any product development that we undertake is the end user, which in this case is the corporate treasurer of Fortune 500 firms. After thorough research and focus group sessions we listened to our Bank's clients and the result is the Cachematrix ATLAS transparency dashboard. The launch of Cachematrix ATLAS signifies my commitment to provide an industry leading risk assessment tool to our Bank partners that they can then provide to their corporate clients."
Hagerman adds, "Our objective in developing Cachematrix ATLAS is to deliver a dynamic, high-level dashboard component that allows corporations the ability to assess potential risk factors across their entire portfolio at a glance on a daily basis, while enabling comprehensive access into multiple sectors when necessary. We designed ATLAS with the future in mind, because what is pertinent today may change tomorrow."
In other news, Deutsche Bank's William Prophet wrote about April Portfolio Holdings yesterday, "Well, the good news is that there has not been a wholesale liquidation of European assets by U.S. money funds -- not yet anyway. That conclusion is based on an analysis of the holdings of a sample of some of the largest funds in the industry (seven to be exact) which combined account for about a third of total prime fund assets. There actually was indeed a small decline in unsecured lending to Europe by these funds during April. But the decline was not particularly alarming and in any case, it was the first meaningful change in eight months."
Crane Data's latest Money Fund Portfolio Holdings collection, with taxable money fund data as of April 30, 2012, was released to our Money Fund Wisdom subscribers late last week. Our most recent statistics show Repurchase Agreement (Repo) holdings jumped by $55.4 billion in April to $556.3 billion, a record 24.4% of holdings. Treasury Debt fell by $40.5 billion, or 1.8%, after rising $28.8 billion over the last two months. Treasuries were briefly the largest segment of taxable fund composition last month, but they now again rank No. 2 with $468.2 billion (20.5% of holdings). CDs were the third largest holding segment with $404.7 billion, or 17.7% of taxable money fund assets.
Government Agency Debt fell for the second month in a row to $310.2 billion (13.6%). CP inched higher to $355.4 billion (15.6%). CP was comprised of $182.9 billion (8.0% of all holdings) in Financial Company CP, $115.5 billion (5.1%) in Asset Backed Commercial Paper, and $56.9 billion (2.5%) in Other CP. Repo holdings were comprised of $272.9 billion in Government Agency Repurchase Agreements (12.0%), $157.8 billion in Treasury Repo (6.9%) and $125.7 billion in Other Repo (5.5%). Other securities dropped to $113.3 billion (5.0%) with Other Notes (the largest subcategory of this segment) falling to $84.5 billion (3.7%). VRDNs accounted for $76.3 billion (3.3%) of the total securities held by taxable money funds as of April 30, 2012.
Among all Taxable money funds, the U.S. Treasury remains by far the largest issuer with 22.2% of all investments ($468.2 billion). (Treasuries are the largest segment of Prime money funds too at 9.8%, or $122.8 billion of the total.) Federal Home Loan Bank again ranked second among money market issuers with $137.2 billion (6.5%) of the money held in taxable money funds tracked by Crane Data's MF Portfolio Holdings collection. Barclays Bank remained in third place with $95.2 billion (4.5%) of Taxable holdings. Deutsche Bank moved into fourth place with $87.3 billion (4.2%), while Federal Home Loan Mortgage Co. ranked fifth with $70.3 billion (3.3%) of outstandings among taxable money fund holdings.
The rest of the top 10 issuers include: Credit Suisse ($66.8B, 3.2%), Federal National Mortgage Assoc. ($64.0B, 3.0%), Bank of America ($55.6B, 2.6%), UBS ($50.4B, 2.4%), and JPMorgan ($48.2B, 2.3%). Numbers 11-20 include: Bank of Nova Scotia ($47.3B), Citi ($47.1B), RBC ($45.9B), Bank of Tokyo-Mitsubishi UFJ Ltd ($42.0B), Societe Generale ($39.9B), BNP Paribas ($39.6B), Rabobank ($39.6B), National Australia Bank Ltd ($39.4B), RBS ($39.9B), and Sumitomo Mitsui Banking Co ($37.8B).
J.P. Morgan Securities' "Short-Term Market Research Note: Update on prime money fund holdings for April 2012 comments, "Prime MMF total exposures to bank credits were about flat at April month-end versus March month-end, remaining at a balance of about $1tn. However, there were changes in the exposure mix with total Eurozone bank exposures increasing by $14bn, total non-Eurozone European bank exposures falling by $20bn, and non-European bank exposures rising by $7bn. There was also a general shift away from time deposits in favor of repo, which experienced large seasonal declines last month. Total net bank unsecured CP/CD exposures were lower by $4bn month-over-month while ABCP exposures remained flat."
JPM's Alex Roever continues, "Total Eurozone bank exposures increased by $14bn in April driven by increases in repo by $15bn. Other notes, which consist mostly of time deposits declined by $5bn. ABCP declined by $1bn and unsecured CP/CD exposures were up by $5bn. We note that French bank unsecured CP/CD exposures increased by $12bn in April, which was the largest monthly increase in French bank unsecured CP/CD exposures since April 2011. Tenors, however, remain short with 59% of the French bank unsecured CP/CD holdings with maturities under a week and 72% under a month. It continues to be the case most of this added exposures are coming from the largest fund complexes with most of this month’s increase coming from fund complexes with over $100bn in AUM."
SEC Chairman Mary Schapiro participated in a Q&A Friday morning at the Investment Company Institute's General Membership Meeting. Moderator and Conference Chairman Mellody Hobson said, "It's no secret that the SEC and the industry are at loggerheads over the issue of money market mutual funds. We all know where we stand.... How do we solve this?" Schapiro answered, "We do all know where we stand.... There are a lot of people in this room who have come to talk to us, even in the last couple of weeks about these issues, about how do we speak the same languages, broach the differences and find a way forward? I really applaud those funds that have been willing to talk to us about that."
Schapiro continues, "I think I have a very legitimate concern about the risks that are posed by the stable NAV and the potential to cause runs. It's not hypothetical. We all know what happened in 2008, and we all know [about] the Treasury stepping in and creating the Guaranty program.... We also know that the tools to do that are gone. They do not exist any longer. Congress made it clear that they wouldn't make that safety net available."
She told the GMM, "So we want to confront this issue, and we want to have an open dialogue. We want to put some concrete ideas out there for people to react to. We want to [perform a] useful cost-benefit analysis. We want to talk about what happens if we go forward with a capital buffer and what happens if we try to go to a floating NAV. What are the other possibilities that exist to deal with these issues? And have an honest and open debate. Frankly, we're counting on industry to engage constructively in that debate and discussion."
Hobson commented, "Does that mean that there's more room for discussion? And that the lines that have been drawn are not drawn in ink?" Schapiro answered, "Nothing's ever in ink [until it's final]. A lot of you know, I am always open to discussion. Even this week, we were talking with fund firms.... There are always questions in our proposals.... We always ask, 'Is this a better way?' 'Is that a better way?' We [ask] 'Here's the core problem we are trying to solve.... We can't sit by ... and not at least have the discussion and raise the issues."
Hobson then added, "The industry has never dug in like this [against potential changes]. How does this affect your thinking?" Schapiro says, "The ICI and SEC have historically had a really constructive relationship. In some ways you speak for 90 million Americans.... You have a responsibility to speak for those [investors].... You're also businesses. We understand that. We appreciate that there's great passion on this issue.... I notice it. We don't think that doesn't mean we can't confront it, and we have to deal with it."
Schapiro also said, "I think the reforms we did in 2010 were very good and positive.... But we still come in whenever there's a problem and ask, 'What's the impact on money market funds?' I want them to be resilient investment products. They should be what they should be. They should be resilient and they should be strong and investors should know about risks."
In other regulatory news, on Friday a "Statement concerning publication by IOSCO on April 27, 2012 of the "Consultation Report of the IOSCO Standing Committee 5 on Money Market Funds: Money Market Fund Systemic Risk Analysis and Reform Options" from SEC Commissioners Luis Aguilar, Troy Paredes, and Daniel Gallagher was released. It says, "On April 27, 2012, IOSCO published the above captioned Consultation Report without the concurrence of the U.S. Securities and Exchange Commission (the Commission). We feel that it is important to state for the record that the Consultation Report does not reflect the views and input of a majority of the Commission. In fact, a majority of the Commission expressed its unequivocal view that the Commission's representatives should oppose publication of the Consultation Report and that the Commission's representatives should urge IOSCO to withdraw it for further consideration and revision. Accordingly, the Consultation Report cannot be considered to represent the views of the U.S. Securities and Exchange Commission." (See our May 2 Crane Data News, "IOSCO Money Mkt Fund Risk, Reform Report Is Europe's Answer to PWG".)
Wells Fargo Advantage Funds latest "Institutional Cash Management Portfolio Manager Commentary" says, "In our conversations with our shareholders and distribution channel partners, we get a number of questions about the markets and our money fund portfolios. For the last several months, the most frequently asked questions (FAQ) have centered on our view of Europe, our opinion on potential regulatory changes, and our holdings of municipal variable-rate demand notes (VRDNs) and tender option bonds (TOBs) in our prime funds. These are all good questions; the first two are very topical, and with (depending on which fund you look at) a quarter to a third of our prime funds' assets invested in the municipal sector, our stake is larger than your average prime money fund." We excerpt from their comments on muni holdings below.
Wells Head of Money Funds Dave Sylvester writes, "A clouded credit outlook in Europe and an uncertain regulatory environment lead us to conclude that the most appropriate structure for a prime portfolio is one that is both short and highly liquid. In this market environment -- where we want to construct portfolios that have minimal exposure to eurozone financials, are highly liquid, have a relatively short WAL, and contain solid credits -- VRDNs and TOBs meet all four of these criteria."
He explains, "VRDNs are long-term municipal securities that feature both a periodic coupon reset and a tender option that allows an investor to periodically sell the securities for payment at par plus accrued interest. Generally, the interest rate on VRDNs is reset every one to seven days based on the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index. VRDNs also generally have a one-day or seven-day "put" or "demand" feature that enables the investor to sell the securities back to a financial intermediary such as a remarketing agent, tender agent, or trustee on a one-day or seven-day notice. The daily or weekly coupon reset and one-day or seven-day par "put" or "demand" feature are the two key structural characteristics that make VRDNs attractive, liquid, stable value investments for money market funds, by combining the ability to invest in a wide range of high-quality municipal securities with the benefit of SEC 2a-7-eligible short-term securities."
Sylvester continues, "While issuers of VRDNs may provide their own liquidity to fund the purchase of bonds that are tendered, most VRDNs benefit from third-party credit and/or liquidity enhancement, such as letters of credit and standby bond purchase agreements. Such credit and liquidity enhancements are typically provided by a highly rated bank or other financial institution and are designed to ameliorate the risk of nonpayment by an issuer."
He adds, "TOBs are similar to VRDNs in that they also provide the benefits of a periodic coupon reset with the put option feature to sell the securities for payment on demand at par. An important difference between VRDNs and TOBs is that the former are primary market instruments, while the latter are created in the secondary market. They share more similarities than differences, though, since remarketing agents are responsible for resetting the rates on the TOBs; a remarketing agent is responsible for finding new buyers for tendered securities; and the liquidity facilities provided by highly rated banks and other financial institutions acts as a backstop for tendered securities to ensure that investors are paid par plus accrued interest on demand."
The Wells piece writes, "VRDNs and TOBs have historically been a core holding for most municipal money market funds due to their ability to provide liquidity and principal preservation in cash portfolios. The safety and soundness of the structures of these securities have endured through various market conditions and economic cycles and most notably persevered during the 2008 financial crisis. As a result, the popularity of these securities has increased over the years due to growing demand from nontraditional investors seeking the safety and liquidity offered by these products."
Finally, it says, "It was once the case that because the income from many VRDNs and TOBs was exempt from federal (and in some cases state) income taxes, their yields were significantly below equivalent taxable investments. More recently, however, the compression in yields and declining demand from municipal money market funds and corporate investors have led remarketing agents to reset VRDN and TOB rates at a level that is more in line with taxable yields."
The Investment Company Institute kicked off its annual General Membership Meeting Wednesday in Washington, and unsurprisingly money market mutual funds are a hot topic of conversation. ICI President Paul Schott Stevens discussed them at length in his Opening Remarks on an "investor-centered" organization with an "affirmative approach to regulation". He says, "Investor interests also motivate and inform our activities to preserve money market funds and the great value they provide to shareholders and the economy. We cannot envision a future in which American mutual funds are foreclosed from providing our investors tools for effective cash management through which they can access current money market returns."
He explains, "For 56 million individual investors, money market funds offer the only way to achieve a current money market yield and the safety of a diversified, professionally managed portfolio. Since 1990, retail investors have earned $242 billion more in returns from money market funds than they would have earned in competing bank products. For millions of institutional investors who need to balance daily income and outflow, money market funds offer greater flexibility, diversification, and liquidity than either bank products or direct investments in money market instruments."
Stevens tells the GMM, "Looking beyond our investors for a moment, I'd point out that the $2.6 trillion entrusted to money market funds is put to valuable uses throughout the economy -- financing commercial paper, short-term municipal debt, asset-backed commercial paper, bank CDs, Treasury bills. In short, money market funds help keep the lifeblood of the economy flowing. This is a remarkable success story -- but not just for our industry. It is one of the great success stories of modern financial regulation. Throughout the history of money market funds, the SEC has carefully crafted rules that balance these funds' competing objectives of convenience, liquidity, and yield. Under this regulatory regime, money market funds have flourished and innovated—to the great benefit of investors and the economy."
He continues, "Unfortunately, the SEC -- urged on by bank regulators -- seems to be on a path to deprive investors, issuers, and the economy at large of the manifold benefits of a robust money market fund sector. On its current path, the Commission may abandon the regulatory regime under which these funds have maintained a stable $1.00 per-share value. Alternatively, it may force money market funds to adopt a complicated regime of capital buffers and redemption restrictions. In a recent survey by consultants at Treasury Strategies, four out of five institutional investors said they would reduce or eliminate their use of money market funds if those funds are subjected to a floating net asset value or redemption restrictions. Based on these investors' estimates, institutional assets in money market funds would decline by 60 percent or more. Undoubtedly, many individual investors would react similarly. We could expect a hemorrhaging of money market fund assets."
Stevens tells us, "In another study which we will release soon, ICI Research will examine the impact of requiring money market fund sponsors to provide capital buffers. This change would fundamentally alter the nature of the business. Requiring advisers to put up capital places them in a first-loss position for their funds -- a risk that advisers are not being paid to assume. It's hard to imagine fund sponsors taking on such a burden. Instead, many would prefer to leave the business, directing their skills and systems to managing similar products that are less regulated and less transparent. The Institute is also preparing a paper on the operational challenges that funds and financial intermediaries would face in implementing the SEC's contemplated asset freezes for shareholders who redeem their money market fund shares."
He says, "We are talking about retirement plans ... financial advisers ... bank trust departments ... insurance companies ... sponsors of sweep accounts ... the whole range of intermediaries that depend upon the convenience and liquidity of money market funds to provide useful and economical services to investors. The impacts are, quite simply, mind-boggling. Thousands of intermediaries will be faced with a stark choice: invest millions of dollars in new systems to manage redemption freezes, or find a different product to meet investors' cash needs. We expect many -- if not most -- will opt for other products, even if those products are less regulated, less transparent, and riskier. Investors will be the losers."
Stevens speech continues, "The interests of our investors, the interests of the economy, and the interests of the financial system -- these are powerful motivators as ICI and its members work to preserve the fundamental nature of money market funds. How can we do that? Through research, we and our members are demonstrating the flaws in the SEC's contemplated changes. We are standing up for the success of the SEC's prior amendments to money market fund regulation. In January 2010, with the fund industry's strong support, the SEC adopted rule amendments that raised the credit quality, shortened the maturity, enhanced the transparency, and increased the liquidity of money market fund portfolios."
Finally, he adds, "These reforms were tested in the troubled markets of the last year -- and they passed with flying colors. Thanks to the 2010 amendments, money market funds are stronger today -- and today's money market fund is a very different product from its 2008 predecessor. It's ironic, but we seem more cognizant of what was accomplished than are the regulators themselves. The SEC should be proud that it achieved so much, so quickly, to strengthen money market funds -- without undermining their core principles or their role for investors and the economy."
The first comment letter to be posted on the SEC's newly redesigned website and the latest Comment posted on the "President's Working Group Report on Money Market Fund Reform" page is another stemwinder from Arnold Porter's John Hawke. He writes in his letter, "Enclosed is a copy of comments we submitted on behalf of our client, Federated Investors, to the Board of Governors of the Federal Reserve on the Board's proposal to adopt new Regulation YY ("Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies"). As you are aware, we believe that designation of money market mutual funds as systemically significant, and subjecting them to bank-type supervision, would be inappropriate and could have serious adverse consequences."
Hawke continues, "As we have outlined in the attached comment letter, the Commission's robust regulation and oversight of money funds has been very successful. The Commission's 2010 amendments to its rules governing money funds have made them even more liquid, transparent and stable than ever before. Indeed, money funds were able to meet shareholder requests for redemptions during recent periods of significant turmoil. Under these circumstances, requiring a money fund to comply with an additional body of regulations, especially regulations that are premised on banking industry models, is simply not warranted. In any event, as we have noted before, the standards that would be applied to systemically important firms under proposed Regulation YY are not appropriate for money funds."
The attached extensive (162 page) comment letter to the Fed explains, "Federated, as a participant in the money markets and a sponsor of the Federated Money Funds, and the Federated Money Funds themselves, are interested in many of the details of the NPR and related rulemakings. We are concerned that certain aspects of Titles I and II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the implementing rules, and the way they will be interpreted and applied, will increase uncertainty, risk and volatility in the money markets and other fixed income markets, particularly in times of crisis. For instance, as we have stated in prior comment letters, we believe the process for designation of firms for Board oversight by the Financial Stability Oversight Council, should include formal consideration of the effects of a particular designation throughout the economy and the financial system. This would help to ensure that efforts to constrain risks in one firm do not simply shift risk to other parts of the financial system where the exposure of taxpayers and the financial system may be larger and more direct. Similarly, we are concerned that certain proposed rules and guidelines may be used inappropriately to designate Money Funds under Title I, which would harm not only Money Funds but the persons who use them, with many unintended consequences across the economy."
It says, "Here, while the NPR recognizes that the rules the Board must apply to designated non-banking firms must be tailored to the types of business activities in which such firms engage, it nonetheless proposes to apply bank-type regulations to any company that is designated for supervision by the FSOC, whether or not the company is a bank, and regardless of its business, structure, regulatory oversight, or the types of services that it offers. But shoehorning different types of financial firms into a single regulatory model will have negative consequences. As applied to a Money Fund, these would include potentially weakening a crucial source of short-term funding, disrupting capital markets operations, and actually increasing systemic risk, all in contravention of Congressional intent."
Hawke writes, "Money Funds are subject to robust regulation by the SEC, which has an excellent record in its oversight of Money Funds and a superior track record in this area in comparison to bank-type regulation or receivership by the Federal Deposit Insurance Corporation. Further, the receivership process created by Title II of the DFA is inappropriate for Money Funds, which rely on equity, rather than debt financing, are essentially self liquidating by the nature of their assets, and are already covered by existing regulatory and judicial protocols when necessary for a prompt and efficient wind-down. Thus, FDIC wind-down procedures and banking supervision are inappropriate for Money Funds. As the Board is aware, Section 170 of the DFA dictates that in connection with Council rules implementing Title I, the Board "shall promulgate regulations in consultation with and on behalf of the Council setting forth the criteria for exempting certain types or classes of U.S. nonbank financial companies ... from supervision by the" Board. Contrary to a recent statement by the FSOC, Section 170 is not merely a grant of authority, it is a specific rulemaking requirement that the exemptive rules shall be promulgated. The Section 170 exemption criteria the Board must adopt should make clear to investors and the public that Money Funds will not be designated for Board supervision under Title I of DFA or FDIC receivership under Title II."
He adds, "In fact, it is doubtful that any open-end investment company (e.g. a mutual fund), including a Money Fund, is within the definition of a "nonbank financial company" that is subject to designation under Title I or Title II of the DFA.... Thus, mutual funds are not "nonbank financial companies" for purposes of Title I of Dodd Frank. The Board cannot have it both ways. If Sections 4(c)(8) and 4(k) do not authorize a bank holding company to engage in the activity of being or controlling a mutual fund, then a mutual fund cannot be a nonbank financial company within the meaning of Title I."
The letter continues, "To the extent that the Council and the Board were to consider applying Titles I and II to them, Money Funds should be excluded from designation because they are already subject to rules and regulations that address the concerns that underlie each of the rules that the NPR proposes. Thus, even if the FSOC designates any Money Funds for supervision by the Board, the regulations proposed by the NPR would be ill-suited to Money Fund supervision, and at the least, duplicative. In this regard, the NPR does not demonstrate adequate consideration of the collateral consequences of applying duplicative rules to entities that are already subject to regulations that address their stability. Nor does its scanty discussion of compliance burdens differentiate among types of financial service companies -- again reflecting a one-size-fits-all approach toward regulation."
Hawke adds, "Finally, and aside from the issues associated with their application to Money Funds, the proposed rules should be revised to permit designated firms to meet asset liquidity standards with additional types of instruments. Specifically, owing to their long history of stability and the fact that they are a pass-through for U.S. government securities, and because they are "a type of asset that investors historically have purchased in periods of financial market distress during which market liquidity is impaired," we suggest that government money market funds (money market funds that invest exclusively in securities issued by the United States, including those subject to repurchase agreements), be added to the definition of "highly liquid asset" in each of the proposed rules where that term is defined."
The letter concludes, "Regulation of Money Funds under the securities laws and regulations has been far more effective than banking regulation. In the past 40 years only two Money Funds have broken the buck, and both were liquidated with relatively minimal losses to investors on a percentage basis and zero cost to the federal government. During that same period, almost 2,900 depository institutions failed, and almost 600 were kept afloat with government infusions of capital, at a cost to the government of more than $188 billion. There is nothing in the historical record to suggest that imposing "bank like" regulatory requirements on Money Funds will make Money Funds, or the American economy, safer. The prudent course, in our view, is to continue to build upon what has worked and to continue the current system of regulation of Money Funds under the supervision of the SEC."
The Investment Company Institute released its "2012 Investment Company Fact Book" this week, ahead of its annual General Membership Meeting conference. The Fact Book says, "Money market funds continued to experience outflows in 2011 (Figure 2.13), but at a much reduced pace from the outflows seen in 2009 and 2010. Outflows in 2009 and 2010 were in part driven by an unwinding of the flight to safety in response to the financial crisis of 2007 and 2008. This effect likely waned in 2011, but other factors continued to limit inflows to money market funds: the low short-term interest rate environment, the European debt crisis, the potential for a default by the U.S. federal government, and the U.S. federal government's extension of unlimited deposit insurance on non-interest-bearing checking accounts."
It explains, "Owing to Federal Reserve monetary policy, short-term interest rates continued to remain near zero in 2011. Yields on money market funds, which track short-term open market instruments such as Treasury bills, also hovered near zero, and were a bit below yields on money market deposit accounts offered by banks (Figure 2.14). Individual investors tend to withdraw cash from money market funds when the difference in interest rates between bank deposits and money market funds narrows or becomes negative. Retail money market funds, which are principally sold to individual investors, saw a $4 billion outflow in 2011, following outflows of $309 billion in 2009 and $125 billion in 2010 (Figure 2.13). The reduced outflow from money market funds in 2011 likely reflected at least two factors that offset, in part, the effect of the low-yield environment. First, the stock market declined markedly from April through early October and during this time investors may have parked cash in money market funds as a safe haven. Second, following regulatory changes, many banks reportedly altered checking account arrangements, which may have resulted in higher fees to certain deposit accounts, thus reducing their competitiveness relative to money market funds."
ICI writes, "Institutional money market funds -- used by businesses, pension funds, state and local governments, and other large-account investors -- had outflows of $120 billion in 2011, following outflows of $230 billion in 2009 and $399 billion in 2010 (Figure 2.13). As with retail money market funds, this three-year pattern was heavily influenced by continued low interest rates and an unwinding of the flight to quality by these investors in 2007 and 2008. In 2011, flows to institutional money market funds were affected by two financial market shocks attributable in large measure to government gridlock: the looming U.S. federal debt ceiling crisis and deteriorating conditions in European debt markets. Reflecting concerns about solvency and liquidity in U.S. and European sovereign debt markets, investors withdrew $174 billion from institutional money market funds in June and July, more than the total for the entire year."
They continue, "In response to the eurozone debt crisis, prime money market funds markedly reduced their holdings of eurozone issuers in the second half of 2011 (Figure 2.15). Prime money market funds' holdings of eurozone issuers fell to 12 percent by year-end from 31 percent at the end of May. This pattern was not uniform across Europe, however, with prime money market funds' holdings of European issuers outside the eurozone ("Other European issuers") rising slightly to 23 percent at the end of December from 22 percent of assets at the end of May. (Denmark, Switzerland, Sweden, and the United Kingdom constitute the bulk of the "Other European issuers" category.)"
ICI adds, "U.S. nonfinancial businesses are important users of institutional money market funds. In 2011, U.S. nonfinancial businesses continued to reduce the portion of cash balances held in money market funds (Figure 2.16). This portion reached a peak of 36 percent in 2008 and fell to 19 percent by year-end 2011. In part, the decline in 2011 may have reflected cash managers' concerns regarding the U.S. federal debt ceiling crisis and developments in Europe. In addition, regulatory changes have enticed corporate cash away from money market funds toward bank deposits. Under provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, banks have been able to pay interest on business checking accounts and, through December 2012, can offer unlimited deposit insurance on non-interest-bearing business checking accounts."
The May issue of Crane Data's Money Fund Intelligence was e-mailed to subscribers Monday morning, along with our April 30, 2012 monthly performance data and rankings, our Money Fund Intelligence XLS monthly spreadsheet, our Money Fund Wisdom database query website and our Crane Index money fund averages series. (Our monthly Money Fund Portfolio Holdings with 4/30/12 data will be distributed on the 8th business day, May 10.) The new edition of MFI features the articles: "Stalemate: MMF Reform Stalls, Despite Fed Push," which discusses the new thinking that regulations may not be coming; "Thrivent's Bill Stouten Says Softer Rhetoric Warranted," our monthly fund "profile" which interviews Thrivent Money Market Fund manager William Stouten; and, "Donahue Blasts Falsehoods Spread by Regulators," which excerpts the Federated President's recent corrections to the money fund regulatory debate.
Our lead piece says, "Though SEC Chairman Mary Schapiro, Fed Chairman Ben Bernanke and other regulators continue to push for additional money market reforms, it seems the tide has turned against them as of late. Both The Wall Street Journal and Bloomberg report that it's unlikely that the regulation changes being discussed since late last year will even make it to the proposal stage."
The Thrivent Profile, which we'll excerpt later this month, tell us, "This month Money Fund Intelligence interviews Thrivent Asset Management Senior Portfolio Manager William Stouten, who oversees the $545 million Thrivent Money Market Fund as well as a number of other cash pools on behalf of parent company Thrivent Financial for Lutherans. We discuss the challenges of being a smaller sized manager in the current environment."
The third feature piece in our monthly says, "In their most recent quarterly earnings call, Federated Investors' President & CEO Chris Donahue addressed "myths" surrounding the debate over money fund reform. We excerpt from his comments below."
The May MFI also contains monthly News, Indexes, top rankings and extensive performance tables. E-mail info@cranedata.us to request the latest issue. Subscriptions to Money Fund Intelligence are $500 a year and include web access to archived issues and fund "profiles". Additional users are $250 and bulk pricing and "site licenses" are available. Crane Data's other products include: Money Fund Intelligence XLS ($1K/yr), MFI Daily ($2K/yr), Money Fund Wisdom ($4K/yr), MFI International ($2K/yr), and Brokerage Sweep Intelligence ($1K/yr).
Finally, note that Money Fund Intelligence and Crane Data celebrates their 6th Birthday this week. We'd like to take this opportunity to thank all of our readers and subscribers!
Below, we excerpt from recent statements by Treasury and Federal Reserve officials involving the possible launch of floating-rate Treasury securities and regulation of money funds and repurchase agreements. First, the latest minutes from the Quarterly Refunding Statement of Treasury Acting Assistant Secretary for Financial Markets Matthew Rutherford May 2012 says, "One member asked about the status of negative bidding and awards in Treasury bill auctions. Acting Assistant Secretary Rutherford briefly stated that there were several operational challenges that are currently being addressed. He noted that more information on this topic would likely be shared in the coming months."
It continues, "Next, the discussion turned to Floating Rate Notes (FRNs). Director Kim presented key takeaways of Treasury's request for information (RFI) on FRNs, stating that most respondents thought this product would be a useful debt management tool. There was a consensus that the product should initially have a maturity of 2 years and under. However, there was a lack of consensus on the reference index, with respondents divided between Treasury bills, the federal funds effective rate, and a Treasury general collateral rate."
The Treasury minutes state, "After Director Kim's synopsis of key takeaways, Acting Assistant Secretary Rutherford mentioned that Treasury planned to continue to study the benefits and optimal terms of FRNs. Moreover, he noted that system limitations would prevent any possible issuance of FRNs until 2013. The Committee again unanimously recommended that Treasury pursue an FRN program, citing the merits of expanding the investor base and providing a cost effective means of extending the average maturity. In discussing the best index, the member recommendations were divided, with 4 members voting for Treasury bills, 3 members voting for a general collateral rate, and 6 members voting for the federal funds effective rate."
A separate press release adds on the Floating Rate Notes topic, "As noted in the February quarterly refunding statement, Treasury believes that there are benefits to issuing floating rate notes (FRNs). In recent weeks Treasury has received a significant amount of feedback on the topic, in part through a formal request for information published in the Federal Register. Treasury is in the process of analyzing the feedback, and we continue to study the benefits and optimal terms of a Treasury FRN. Treasury will announce its conclusion about issuance of FRNs at a later date, after our analysis has been completed. Please send comments and suggestions on these subjects or others related to debt management to debt.management@treasury.gov."
In other news, Fed Governor Daniel Tarullo spoke Wednesday on "Regulatory Reform since the Financial Crisis." He said, "While there is a well-defined set of regulatory measures to address too-big-to-fail, the same cannot be said for the second major challenge revealed by the crisis: the instability of the shadow banking system. Although some elements of pre-crisis shadow banking are probably gone forever, others persist. Moreover, as time passes, memories fade, and the financial system normalizes, it seems likely that new forms of shadow banking will emerge. Indeed, the increased regulation of the major securities firms may well encourage the migration of some parts of the shadow banking system further into the darkness -- that is, into largely unregulated markets. And it bears reminding that, just as the fragility of major financial firms elicited government support measures during the crisis, so the runs and threats of runs on the shadow banking system brought forth government programs such as the Treasury's insuring of money market funds."
He added, "Two areas where the case for reform in the short-run is compelling are money market funds and the tri-party repo market. The requirement adopted by the Securities and Exchange Commission (SEC) in 2010 for a greater liquidity buffer in money market funds was a step in the right direction, but the combination of fixed net asset value, the lack of loss absorption capacity, and the demonstrated propensity for institutional investors to run together make clear that Chairman Schapiro is right to call for additional measures. As to the tri-party repo market, there are several important concerns. A major vulnerability lies in the large amount of intraday credit extended by clearing banks on a daily basis. An industry initiative to address the issue led to some important operational improvements to the tri-party market, but, to be frank, fell short of dealing comprehensively with this problem. So it now falls to the regulatory agencies to take appropriate regulatory and supervisory measures to mitigate these and other risks."
A press release entitled, "Mutual Fund Independent Directors and Trustees Express Concern About Further Money Market Fund Regulation" says, "Two groups representing mutual fund independent directors and trustees are joining together to voice their shared concerns about the potential collateral consequences and negative impacts that changes to the fundamental structure of money market funds could have on investors, on capital markets and on the economy in general. The Mutual Fund Directors Forum and the Independent Directors Council each represent independent directors and trustees of mutual funds, who play a crucial role in overseeing the operations of funds on behalf of their shareholders. Independent directors' oversight role gives them first-hand experience with and knowledge of the impact of regulation on money market funds, the important role of money market funds for their investors, and the importance of money market funds to the U.S. capital markets."
The joint release explains, "The director groups are unified in their views of money market funds: - Money market funds create important benefits to investors by providing them with an easy-to-use and competitive option for managing cash. As a key provider of credit to federal, state and local governments, as well as to many corporations and financial institutions, money market funds also provide significant benefits to the capital markets and to the American economy as a whole. - In 2010, the Securities and Exchange Commission adopted rule amendments designed to make money market funds much more resilient in times of stress. Subsequently, money market funds have proven to be highly resilient in volatile markets. In the face of unprecedented challenges such as the impasse over the federal debt ceiling, the historic downgrade of the United States credit rating, and the sovereign debt crisis in Europe, money market funds have functioned well."
It continues, "The fundamental changes to money market funds currently being considered by the SEC -- requiring the net asset value of money markets to float instead of retaining a stable $1 net asset value (NAV), or restricting investor redemptions and imposing capital requirements on money market funds -- would render these funds substantially less attractive to investors and will likely result in investors moving their cash to less-regulated and/or less-transparent products. Other assets will likely flow to banks, exacerbating their need for capital and concentrating risks in that sector. Movement of investor money to such other products would greatly diminish the benefits now provided to investors and the capital markets by money market funds while at the same time increasing the systemic risk posed by these alternative products."
The MFDF and IDC add, "Rulemaking without a thorough understanding of these financial and economic consequences is simply not an appropriate approach to regulation. Prior to proposing fundamental changes to money market funds, the SEC must first fully analyze the effects of the 2010 amendments; the consequences of its proposed changes for investors and for business and state and local issuers of money market securities; and the systemic risk created in driving investors from money market funds to alternative cash management products."
In other news, see also The Wall Street Journal article, "Fed's Tarullo Backs SEC's Money-Market Overhauls". It says, "A top Federal Reserve official on Wednesday endorsed a Securities and Exchange Commission plan to tighten regulations on the U.S. money-market-fund industry, citing it as a key vulnerability of the U.S. financial system. The remarks by Federal Reserve governor Daniel Tarullo, given in a speech in New York, come a day after nearly three dozen lawmakers delivered a letter to SEC Chairman Mary Schapiro urging her to back off her plan to shore up the $2.6 trillion money-market industry."
As we mentioned in Monday's "Link of the Day," late last week, IOSCO, the International Organization of Securities Commissions, released the European version of the President's Working Group report, entitled, "Money Market Fund Systemic Risk Analysis and Reform Options: Consultation Report." The 69-page report's "Foreward" states, "Certain events during the recent financial crisis highlighted the vulnerability of the financial system, including Money Market Funds, to systemic risk. These events have prompted a review of the regulation of the role of MMFs in the non-bank financial intermediation system. In this regard, the Financial Stability Board (FSB) asked IOSCO to undertake a review of potential regulatory reforms of MMFs that would mitigate their susceptibility to runs and other systemic risks, and to develop policy recommendations by July 2012. IOSCO has mandated its Standing Committee on Investment Management (SC5) to elaborate such policy recommendations."
It explains, "To ensure a sound base for evaluation of these options, the FSB asked IOSCO to review: The role of MMFs in funding markets; Different categories, characteristics and systemic risks posed by MMFs in various jurisdictions, and the particular regulatory arrangements which have influenced their role and risks; The role of MMFs in the crisis and lessons learned; Regulatory initiatives in hand and their possible consequences for funding flows; and The extent to which globally agreed principles and/or more detailed regulatory approaches are required/feasible. The objective of this consultation paper is to share with market participants IOSCO's preliminary analysis regarding the possible risks MMFs may pose to systemic stability, as well as possible policy options to address these risks." Comments must be submitted by May 28, 2012, and e-mailed to moneymarket@iosco.org. (The subject line should say "Money Market Fund Systemic Risk Analysis and Reform Options."
The Executive Summary says, "Although there is no globally accepted definition, MMFs can be defined as an investment fund that has the objective to provide investors with preservation of capital and daily liquidity, and that seeks to achieve that objective by investing in a diversified portfolio of high-quality, low duration fixed-income instruments. Specifically, MMFs are broadly used by both retail and institutional investors as an efficient way to achieve diversified cash management. MMFs act as intermediaries between shareholders seeking liquid investments and diversification of credit risk exposure and borrowers seeking short term funding. In some jurisdictions, including the United States and Europe, MMFs serve as an important source of financing for governments, business and financial institutions. The health of MMFs is important not only to their investors, but also to a large number of businesses and national and local governments that finance current operations through the issuance of short-term debt."
The IOSCO report continues, "With a worldwide financial footprint of over US$ 4.7 trillion in assets under management as of 3rd quarter 2011, MMFs comprise over 20 percent of the assets of CIS [funds] worldwide, and are a significant source of credit and liquidity. MMFs typically invest in high-quality, short-term debt instruments such as commercial paper, bank certificates of deposit and repurchase agreements and generally pay dividends that reflect prevailing short-term interest rates. MMFs' history of providing daily liquidity and principal preservation have played a significant role in differentiating MMFs from other CIS and have facilitated the use of MMFs as important cash management vehicles."
It explains, "Assets under management total approximately US$ 2.7 trillion in the United States and US$ 1.5 trillion in Europe, which together represents around 90 percent of the global MMF industry. Within Europe, three countries (France, Luxembourg and Ireland) represent a combined market share close to 90 percent. Two business models co-exist: constant net asset value (CNAV) funds, which are offered in the United States and in other jurisdictions such as Canada, China, Luxembourg, Ireland and Japan, and variable net asset value (VNAV) funds. CNAV funds dominate the MMF market with an estimated market share of close to 80 percent globally (around 40 percent in Europe). Over the last three years, money market funds have experienced a decline in their total assets under management, reflecting the low interest rate environment."
IOSCO adds, "It has been said that a "break in the link [between borrowers and MMFs] can lead to reduced business activity and pose risks to economic growth." The regulation of MMFs, therefore, is important not only to fund investors, but to a wide variety of operating companies, as well as national and local governments that rely on these funds to purchase their short-term securities. However, certain events during the recent financial crisis highlighted the vulnerability of the financial system, including MMFs, to systemic risk. These events have prompted a review of the regulation of the role of MMFs in the non-bank financial intermediation system."
It says, "In this regard, the Financial Stability Board (FSB) asked IOSCO to undertake a review of potential regulatory reforms of MMFs that would mitigate their susceptibility to runs and other systemic risks, taking into account national regulatory initiatives, and develop policy recommendations by July 2012. IOSCO has mandated its Standing Committee on Investment Management (SC5) to elaborate such policy recommendations. The FSB's mandate indicates that a crucial issue to be considered by such a review is whether the regulatory approach to MMFs needs to choose between (i) encouraging/requiring shifts to variable Net Asset Value (NAV) arrangements, (ii) imposing capital and liquidity requirements on MMFs which continue to promise investors constant NAV, and/or (iii) whether there are other possible approaches."
The report adds, "To ensure a sound base for evaluation of these options, the FSB asks IOSCO to review: - The role of MMFs in funding markets; - Different categories, characteristics and systemic risks posed by MMFs in various jurisdictions, and the particular regulatory arrangements which have influenced their role and risks; - The role of MMFs in the crisis and lessons learned; - Regulatory initiatives in hand and their possible consequences for funding flows; and - The extent to which globally agreed principles and/or more detailed regulatory approaches are equired/feasible."
Finally, the intro says, "The products covered by this report are investment funds marketed as "money market funds" as well as collective investment schemes (CIS) which use close terminologies for their marketing e.g., "cash" or "liquid" funds) or which are presented to investors and potential investors as having similar investment objectives even though they are labeled differently. This definition is not intended to cover non-MMFs (e.g. short-term bond funds) but is intended to be broad enough to cover products that seek to arbitrage around money market fund regulation in certain jurisdictions. MMFs are not homogeneous and as such demonstrate a range of characteristics dependent on their structure, which is reflected in the regulatory approach adopted by different jurisdictions. Nonetheless, MMFs are a type of CIS and are subject to CIS regulation in SC5 jurisdictions."
Fidelity Investments submitted another Comment Letter to the President's Working Group Report on Money Market Fund Reform. Written by Scott Goebel, Senior Vice President and General Counsel of Fidelity Management & Research Company, the letter says, "Fidelity Investments would like to take the opportunity to provide the Commission with the results of our recent research, which demonstrates that money market mutual fund investors are well aware of the risks associated with these funds. Currently, money market mutual funds are subject to a comprehensive regulatory framework and to oversight by the Commission. This existing structure includes a requirement for a money market mutual fund to disclose in its prospectus that investments in the fund are not insured or guaranteed by the Federal Deposit Insurance Corporation." (See also Fidelity's Nancy Prior on CNBC yesterday.)
Goebel continues, "Recently, a number of regulators and commentators have suggested that investors do not understand the risks associated with money market mutual funds. We do not share this view, and research conducted with our customers yields little evidence to suggest that a significant number of investors are misinformed about the risks associated with money market mutual funds. To the contrary, in our experience, investors today are generally quite aware of the investment risks of mutual funds, and there is ample, robust disclosure of money market mutual fund risks available upon the most cursory review of fund materials. In fact, we credit the Commission and its salutary focus on investor education and disclosure for contributing substantially to the well informed state of the typical mutual fund investor."
He explains, "Various regulators and commentators have also suggested that investors expect the federal government will provide a bailout of money market mutual funds in the future. Our research indicates that the vast majority of our customers understand that these funds are not guaranteed by the government and that the securities held by these funds have some small day to- day price fluctuations. Moreover, Fidelity believes that the Commission's 2010 amendments to Rule 2a-7 have been quite helpful in clarifying the process by which money market mutual funds can suspend redemptions if needed. This process provides money market mutual funds with a pre-ordained orderly liquidation plan."
Goebel adds, "We urge the Commission to give full consideration to these materials as it evaluates whether any additional regulation for money market mutual funds is appropriate <b:>`_. We appreciate the opportunity to provide further information on the President's Working Group Report on Money Market Fund Reform. Fidelity would be pleased to provide any further information or respond to any questions that the staff may have."
The study attached to the letter, entitled, "The Investor's Perspective: What individual investors know about the risks of money market mutual funds," says, "Despite the significant reforms adopted by the Securities and Exchange Commission (SEC) in 2010, which improved the overall soundness of money market mutual funds (MMMFs) and made them more resilient to market stress, there are some policymakers who insist more should be done to regulate these funds. A key argument underlying the push for more change is that a significant number of individual investors do not understand the risks associated with MMMFs. However, research that Fidelity Investments conducted with our customers finds little evidence to suggest that a significant number of investors are misinformed about the risks associated with MMMFs."
It continues, "To the contrary, the research indicates that the vast majority of our customers understand that MMMFs are not guaranteed by the government, and the securities held by these funds have some small day-to-day price fluctuations. In fact, we found that only a small percentage of these investors (approximately 1 out of 10) thinks otherwise. Fidelity believes that policymakers should be careful not to over-regulate these funds and undermine the fundamental benefits tens of millions of investors have come to rely upon, because a small minority of investors are not as knowledgeable as they could be. We are providing the following research with Fidelity customers to give policymakers a better understanding about what investors truly think and know about the risks involved with MMMFs."
Among the brief's "Key Takeaways From Research with Fidelity Retail Customers: 81% of Fidelity retail customers with MMMFs indicate they understand that the securities held by these funds fluctuate up and down daily in value. 75% of Fidelity customers know that the MMMFs they invest in are not guaranteed by the government. Only 10% believe the government would step in to prevent MMMFs from breaking a stable $1 share price. The majority of customers do not favor further regulation of MMMFs, but would support additional investor education."
Under the heading, "Investors Understand the Value of Money Market Securities Fluctuates Up and Down, the study explains, "Fidelity's research indicates that a majority of investors understand the risks of investing in MMMFs. 81% of Fidelity investors know that the securities held by MMMFs have some small fluctuations up and down in value. Correspondingly, only 11% think the prices of money market securities do not fluctuate."
It adds, "There is little evidence to suggest many Fidelity retail investors mistakenly believe that MMMFs offer a government guarantee protecting the stable $1 share price. This should not come as a surprise given the amount of disclosure that is provided to shareholders on the topic. Our research indicates that 75% of Fidelity customers know that there is no government guarantee associated with MMMFs. Only 11% believe MMMFs are government guaranteed, while 14% are unsure."
Finally, the study comments, "Fidelity also tested to see if those survey participants who cite safety as a key reason for choosing to invest in MMMFs might be more inclined than other investors to believe their principal is Federal Deposit Insurance Corporation (FDIC)-insured. We found that they do not. Fully 75% of the respondents who say that they are drawn to MMMFs for safety reasons also tell us that they understand that these funds are not government guaranteed.... One issue that has been raised by regulators is that investors now expect the government would support MMMFs that run into trouble, because the U.S. Treasury Department temporarily provided a principal guarantee on these funds in September of 2008. However, our research indicates that only a small percentage of investors believe the government would intervene in the future to support MMMFs."
