News Archives: January, 2013
ICI released its December 2012 asset flow and portfolio composition data yesterday, which verified that money fund assets and CD and government agency holdings surged in December while repo holdings took their traditional quarter-end plunge. (See Crane Data's Jan. 14 news on the continued surge in repos, "December Money Fund Portfolio Holdings Show Everything Up But Repo.") Money fund assets rose in the first week of January, but the November and December surge stalled out after the second week of the month; assets will likely show just minor increases in January, according to Crane Data's MFI Daily. We show an increase of just $7.6 billion month-to-date; assets rose by $31.1 billion from Dec. 31 through Jan. 11, then they fell by $23.5 billion from Jan. 11 through Jan. 29. ICI's "Trends in Mutual Fund Investing: December 2012" shows that money market mutual fund assets jumped by $75.9 billion last month (after rising $68.6 billion in November). ICI's "Month-End Portfolio Holdings of Taxable Money Market Funds show Repurchase Agreements plunging in December (after surging in Oct. and Nov.) while CD and Agency holdings jumped sharply.
ICI's December "Trends" says, "The combined assets of the nation's mutual funds increased by $174.3 billion, or 1.4 percent, to $13.047 trillion in December, 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..... Bond funds had an inflow of $7.42 billion in December, compared with an inflow of $23.73 billion in November.... Money market funds had an inflow of $75.63 billion in December, compared with an inflow of $68.34 billion in November. Funds offered primarily to institutions had an inflow of $36.70 billion. Funds offered primarily to individuals had an inflow of $38.93 billion."
MTD through January 29, assets have increased by $7.6 billion, according to Crane Data's Money Fund Intelligence Daily, though assets leapt through Jan. 11 (up $31.1 billion) but then plummeted the rest of the month (down $23.5 billion). Retail (taxable) assets fell sharply in January (down $14.8 billion) after a buildup of $44.2 billion in November and December. Institutional (taxable) assets continued increasing in January (up $24.4 billion), after a surge of $90.1 billion in Nov. and Dec.
Prime Institutional assets rose by $23.0 billion in January and by $40.9 billion from 10/31/12 through 12/31/12. Treasury Institutional assets rose by $6.9 billion in Jan. and by $19.9 billion in Nov. and Dec. While these flows show clear signs that the year-end expiration of the "TAG" unlimited FDIC insurance program shifted assets into money funds, it appears that other factors, such as fears of the fiscal cliff and perhaps even Hurricane Sandy, were at work.
ICI's Portfolio Holdings for December 2012 show Repurchase Agreements falling sharply. Repos hit a record level in November, but fell by $76.3 billion in December to $553.6 billion (23.0% of assets). They remained the largest holding in taxable money funds though. Holdings of Certificates of Deposits moved into the second largest position with a surge in December, rising $54.2 billion to $481.1 billion (20.0%). Treasury Bills & Securities dropped to the third largest segment at 19.5%, though holdings in T-Bills and other Treasuries rose by $11.8 billion to $469.6 billion.
Commercial Paper fell to the fifth largest spot behind U.S. Government Agency Securities; CP rose by $15.4 billion to $346.7 billion (14.4% of assets) but Agencies rose by $36.8 billion to $347.3 billion (14.4% of taxable assets). Notes (including Corporate and Bank) rose by $10.7 billion to $104.8 billion (4.4% of assets), and Other holdings accounted for 3.5% ($85.3 billion).
The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds increased by 73,954 to 25.119 million, while the Number of Funds fell by 5 to 400. The Average Maturity of Portfolios shortened by 5 days to 45 days in December. Since December 2011, WAMs of Taxable money funds have lengthened by 3 days. (Note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- now has Portfolio Composition and Maturity Distribution totals updated as of Dec. 31, 2012. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.)
Among the latest batches of Comments on the FSOC's "Proposed Recommendations Regarding Money Market Mutual Fund Reform", is a trio of Comments from Arnold & Porter LLP on behalf of Federated Investors, Inc. written by John D. Hawke, Jr.. The comments include a letter on each of the three FSOC Proposed Options -- "Alternative One: Floating Net Asset Value," "Alternative Two: Minimum Balance at Risk," and "Alternative Three: NAV Buffer with Other Measures." Hawkes says in the first letter, "Dear Secretary Geithner: We are writing on behalf of our client, Federated Investors, Inc., and its subsidiaries ("Federated"), to provide comments in response to the Financial Stability Oversight Council's (the "Council's") recently issued Proposed Recommendations Regarding Money Market Mutual Fund Reform ("Proposed Recommendations" or "Release"); specifically, "Alternative One: Floating Net Asset Value." The Release would require money market mutual funds ("MMFs") to have a floating net asset value ("NAV") per share, and would also require MMFs to initially re-price their shares to $100.00 each. In conjunction with this alternative, the Release also proposes to rescind Securities and Exchange Commission (SEC) Rules 22e-3 and 17a-9, which were adopted as part of the SEC's 2010 reforms responding to the financial crisis."
He continues, "As discussed in greater detail in our letter of December 17, 2012, we believe the Council has arbitrarily and improperly invoked its Dodd-Frank Section 120 authority, in an attempt to pressure the SEC to move forward on proposals that a majority of its commissioners found unsupported by data or economic analysis and potentially risky to the financial system. The Council ignored the overwhelming public comments in the SEC docket raising substantial concerns about the very proposals the Council put forward in its Release. We do not believe Congress intended the Section 120 process to be used arbitrarily and in disregard of agency processes, in circumstances where an agency is continuing to grapple with a regulatory issue under its direct jurisdiction, simply because, in this case, the agency's former chair could not muster the votes for proposals that clearly would be ineffective in achieving their primary purpose, would introduce more risk to the system, and would impose significant costs to issuers and investors."
Hawkes explains, "We, nonetheless, appreciate the opportunity to provide comments and, again, call to the Council's attention the significant flaws in the proposed reforms, which should have been abundantly clear from the comment letters, reports and surveys complied in the SEC's docket and available to the Council before it issued its Release. As discussed in the enclosed paper, the Council should not recommend that the SEC adopt the proposal described in Alternative One, for the following reasons: (1) A floating NAV would do nothing to advance the regulatory goal of reducing or eliminating "runs." There is no data to support this proposition and, indeed, the data show just the opposite. (2) The floating NAV proposal is based on an unproven notion of "first-mover advantage," the theoretical risk of which is more appropriately addressed through the operation of existing SEC rules and MMF board authority. (3) A stable NAV does not create an arbitrage opportunity for MMF shareholders. (4) The elimination of the stable NAV is wholly unnecessary to address the perceptions of investors, who know and understand that MMFs are investments that are "not FDIC insured" and "may lose value." (5) A floating NAV would not reflect a measurably more "accurate" valuation of MMF shares than the amortized cost accounting method currently used by MMFs."
The letter continues, "(6) A floating NAV, with a mandated $100.00 initial share price, would not be "consistent with the requirements that apply to all other mutual funds" but rather would be arbitrary and punitive, and would destroy MMFs as a product. (7) A floating NAV, for the sake of showing minute variations in value that cancel out over time, would eliminate MMFs as a viable cash management tool by destroying their principal liquidity function. (8) A floating NAV, for the sake of showing minute variations in value that cancel out over time, also would impose significant operational, accounting and tax burdens on users of MMFs and destroy their utility. (9) A floating NAV would altogether prevent certain investors who are subject to statutory prohibitions and investment restrictions from using MMFs. (10) A floating NAV, because of the operational burdens, costs, and other impediments, would substantially shrink the assets of MMFs."
Hawkes first letter adds, "(11) A floating NAV would therefore contract the market for, and raise the cost of, short-term public and private debt financing while potentially destabilizing those markets. (12) A floating NAV would force current MMF users to less regulated and less transparent products. (13) A floating NAV would accelerate the flow of assets to "Too Big to Fail" banks, further concentrating risk in that sector. (14) The Council's proposal to rescind Rules 22e-3 and 17a-9 would remove important 2010 reforms designed to protect investors. (15) Instead of focusing on the floating NAV, regulators should consider how MMF's enhanced liquidity has proved to be effective in absorbing heavy redemption requests, and how it has improved the characteristics of the marketplace from 2008. We urge all members of the Council to review the comments submitted in response to its Release and to give careful thought to the issues discussed in the attached paper as well as those raised by other commenters. We further urge the Council to withdraw its Release."
Federated's second letter on "Alternative Two: NAV Buffer and Minimum Balance at Risk" comments, "The proposal in Alternative Two would require money market mutual funds ("MMFs") to hold capital to serve as an "NAV buffer" of up to 1 percent based on the nature of the fund's assets, paired with an MBR requirement. The MBR would require that 3 percent of a shareholder's highest account value in excess of $100,000 over the previous 30 days be held back (not available for redemption) for a period of 30 days.... [W]e believe the Council has arbitrarily and improperly invoked its Dodd-Frank Section 120 authority, in an attempt to pressure the SEC to move forward on proposals that a majority of its commissioners found unsupported by data or economic analysis and potentially risky to the financial system. The Council ignored the overwhelming public comments in the SEC docket raising substantial concerns about the very proposals the Council put forward in its Release."
It comments, "As discussed in the enclosed paper, the Council should not recommend that the SEC adopt the proposal described in Alternative Two, for the following reasons: (1) Imposing an MBR requirement on MMFs would do nothing to advance the stated regulatory goal of eliminating or decreasing the risk of "runs." (2) The MBR requirement would be counter-productive and increase systemic risk under some circumstances by triggering preemptive runs. (3) The MBR and subordination requirement is unfair and confusing to investors. (4) The MBR/capital buffer proposal is based on an unproven notion of "first mover advantage," the theoretical risk of which is more appropriately addressed through the operation of existing SEC rules and MMF board authority. (5) The requirement for an MBR and capital buffer, if it acts as its proponents suggest, would undermine, not promote, market discipline. (6) Implementation of the MBR would impose significant operational and cost burdens on a range of users of MMFs and intermediaries, as well as MMF sponsors, and would destroy MMFs' utility."
Hawkes adds, "(7) Because of these cost and operational challenges and uncertainties, investors would be unwilling to invest in MMFs with MBR and subordination features, and assets of MMFs would shrink dramatically. (8) Implementation of the MBR would prevent certain investors who are subject to statutory prohibitions and investment restrictions from using MMFs. (9) If an MBR requirement is imposed, MMF assets would migrate to less regulated and less transparent products and to "Too Big to Fail" banks, harming the economy and increasing systemic risk. We urge all members of the Council to review the comments submitted in response to its Release and to give careful thought to the issues discussed in the attached paper as well as those raised by other commenters. We further urge the Council to withdraw its Release." (Click here for the third letter.)
Federated Investors' CEO Chris Donahue commented on the 3rd largest money fund manager's most recent earnings call Friday, "Average money market fund assets were up over $5 billion in the fourth quarter, while the quarter end totals increased by nearly $11 billion to $256 billion. Our market share for money market funds increased slightly [in Q4].... For separate account money market assets, the $4 billion of growth in period end assets was due to expected seasonality. The year-end expiration of the government's unlimited insurance on non-interest-bearing bank, accounts called TAG program, likely accounted for some part of the money market fund asset growth for us and for the industry. However, it is not unusual for us to see money market inflows during the fourth quarter. The impact of yield related waivers decreased in Q4, but we expect it to increase in Q1."
He continued, "On the regulatory front, I'll start out by noting that with the industry up $90 billion in money market assets in the fourth quarter, it's obvious that money market investors have remained confident about the product as it's presently constructed -- dollar in, dollar out; uninsured; transparent; invested in a diversified portfolio of high-quality securities; and supported by proper accounting and market valuations. Still the regulators continue on their mission to reform money funds in ways that, as presented by FSOC in their letter to the SEC in November, will raise debt costs for municipal issuers, corporations and others. [This could cause] investors to move cash to investments that are far less regulated, have far less transparency and which, in the case of the still too-big-to-fail banks, present far more systemic risks to the financial system."
Donahue told analysts, "With the comment period extended until mid-February on FSOC's Section 120 SEC letter, we continue to be active in informing our customers and the marketplace about the dangers of the measures outlined by the FSOC, and to offer our help to the regulators to arrive at constructive changes. Our position is straightforward. We will continue to champion those things that enhance the resiliency of money market funds, while retaining the core features of a sound product with an unparalleled long record of safety and success, namely daily liquidity at par to the market rate of interest."
CFO Tom Donahue told callers, "Taking a look first at money fund fee waivers, the impact to pretax income in Q4 was $15.5 million, down from $16.3 million in the prior quarter. The improvement was due mainly to higher rates for treasuries and mortgages, and mortgage-related securities, offset partially by lower yields for prime and muni securities and by higher assets. Early in Q1, we have seen rates decrease in all money market categories compared to Q4. Some of this is cyclical, as Chris noted earlier, we tend to see cash assets including money market fund buildup at year end and carryover into the first part of the next year. As those assets compete for short-term instruments, rates tend to tighten. [T]he end of Operation Twist, QE3.5 and the end of the TAG program are factors as well. Combined with higher asset levels, the impact of these minimum yield waivers is likely to be higher in Q1."
He added, "Based on the current assets and expected yield levels, impact of minimum yield waivers to pretax income in Q1 could be approximately $21 million or $5.5 million more than in Q4. Looking out over the rest of the year, we think rates will rise as the economy improves and some of the seasonal pressures ease. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 40%, and the 25 basis point increase would reduce the impact by about 70%. It's important to note that the variables impacting waivers can and do change frequently."
One analyst asked about daily market NAVs and floating NAVs. Donahue answered, "No, we're not transitioning to variable NAVs. And any suggestion that A is related to B is, is just not appropriate especially in our case.... Once a bunch of our competitors decided to do it, then the customers look at it and say, 'Hey, if A and B are doing it, why isn't C doing it?' And that's why we're doing it. In the whole history of our money market fund area, I'm not aware of anyone who ever asked for the current shadow NAVs on our funds. On some due diligence trips, we've had people who've asked for the historic daily valuations, and so we've responded to that. So it was definitely not client demand." (See also, Federated's recent explantory piece, "Taking the Shadow Out of Shadow Pricing".)
Donahue continued, "And as regards to clients, so far what we can detect is, publishing is a lot like lifting your hand out of a bucket of water and then seeing what impact you had. But on the other hand, I think that, I would say, that if having been done means that this is an area where the industry, for whatever reasons and however it happened, has taken the single most transparent financial product in the history of man and made it more transparent. And that, those who think that there are problems in the funds with disclosure, ought to hit pause mode on doing things to destroy this industry because now you can look at these factors, they're all published, and see if there are things going on that you don't like. It certainly, seems to me, should undercut some of the arguments in favor of doing some of the more drastic things you mentioned like changing the NAV."
He told analysts, "Well, assuming the dread [scenario] occurs ... any of the new products that have ... a higher yield and a little bit of a change in NAV are not going to be favored by the customers. So the answer is not going to be [a] creative variable [net] asset value product. The creativity is going to be coming up with products that are as close to $1 as you can get them. And whether that is re-going over the enhanced cash products, whether it's looking at collective funds, common funds, whether it's looking at offshore funds, whether it's looking at private accounts, separate accounts, whether it's looking expanding the province of estate pools, you do all of those kinds of things. Because your goal at that point, which I don't think we'll get to because I think good policy will win out, your goal is still the dollar-in, dollar-out type net asset value as best as you can do it."
MM CIO Debbie Cunningham added, "I think, to some degree, this will help mitigate some of the perhaps sensationalization of NAV mark-to-market or shadow pricing versus the amortized cost, or 'fictional pricing' as [some] refer to it as. The fact that, for the most part, what you'll see is movement in the fourth decimal point.... [I]t makes it very boring and makes it very apparent, I think, that what has been mentioned as incorrect or a fictional pricing from an amortized cost basis was shown to be exactly wrong. And that in fact, when you look at the shadow pricing, you compare it to the trading NAV as conducted by the amortized cost pricing is identical."
Donahue commented, "On the timeline, I think, [the next step is] mid-February, [where] the FSOC extended the deadline. And so comments come in, comments have to be evaluated, however long that takes (FSOC hasn't told us). Then, FSOC has the ability to either come up with a proposal to the SEC or to not come up with a proposal to the SEC. And if the SEC receives that proposal, they then have to put it into a rule form. Then they have to publish the rule and give a 60- or 90-day comment period, then receive the comments back, and then construct the rule. So it's very hard under that sequence to get any of that completed before even Labor Day."
He said, "Another sequence that is possible at any time is the usual SEC process, which I just added on to the end of the FSOC process. So if the SEC decides to come up with a rule proposal, they have to internally come up with a term sheet, gives the commissioners 30 days to look at it and say this, that, be in favor or not, then vote on it or not. Then, if they vote on it, then they publish it, then they have 60 or 90 days and sometimes even longer comment period, then accept comments, and then decide to come up with a rule, and then have whatever implementation time they deem appropriate in the rule. So that's kind of the timeline.
Donahue answered, "Now for the second part of the question, making book on know this comes up. Having been at this business for 40 years and dealing with the regulators, at various times, the SEC, the Fed and others, now FSOC, it's very, very hard to make book on how these things will come up. My belief is that good regulation and good regulatory policy will win out. And that there has been no evidence put out that shows sins committed by money funds or a need to be draconian about the industry. And therefore, I don't think those kinds of things will happen. But I'm not in charge of it, and it's really hard to exactly predict it. But I would say that if any of those things ... come to fruition, I am certain that the regulators understand what they're dealing with, and there will be long [timelines for] the implementation because of how important and how sensitive these issues are."
The SEC's little-read, "Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher," publication finally got a response Friday when the largest manager of money funds, Fidelity Investments, sent a comment letter and survey to reporters. (The letter and survey are not available online at either the PWG comment area of the FSOC comment letter page yet.) The company's "Re: Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher" letter says, "Fidelity Investments ("Fidelity") would like to take the opportunity to provide the Commission with comments in response to the recent study issued by the staff of the SEC's Division of Risk, Strategy, and Financial Innovation, entitled "Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher" (the "SEC Study". The SEC Study addresses the Commissioners' questions regarding money market fund activity during the 2008 financial crisis, the efficacy of the 2010 money market fund reforms, and how money market funds would have performed in 2008 had the 2010 reforms been in place at the time. The materials we submit today address some of the analysis and data provided in the SEC Study.
The letter continues, "Fidelity continues to believe that the 2010 reforms have made money market mutual funds more resilient and that additional reform is not necessary. However, to the extent that regulators continue to explore additional reforms, it is critical that any new proposals be based on data and facts that are accurate and complete and that any reforms apply only to the appropriate universe of funds. As the SEC Study recognizes, not all money market mutual funds have performed similarly during times of financial stress. Accordingly, we believe the data supports excluding Treasury, government, and tax-exempt money market mutual funds from any further reform. Moreover, within the category of "prime" money market mutual funds, we believe that differences in redemption patterns between "retail" and "institutional" funds warrant further examination and definition before determining which, if any, of these funds should be subject to additional reforms."
Fidelity adds, "We urge the Commission to give full consideration to these materials as it evaluates the appropriateness of any additional regulation for money market mutual funds. Fidelity would be pleased to provide any further information or respond to any questions that the commissioners or staff may have."
The letter's attached survey, "An Analysis of the SEC Study on Money Market Mutual Funds: Considering the Scope and Impact of Possible Further Regulation," explains, "On November 30, 2012, the Division of Risk, Strategy, and Financial Innovation ("RSFI") within the Securities and Exchange Commission ("SEC") released the results of a study ("SEC Study") in response to certain questions regarding money market mutual funds ("MMFs") that had been posed by SEC Commissioners Aguilar, Gallagher, and Paredes. These Commissioners had jointly requested in September 2012 that RSFI undertake a focused research and data-gathering effort so that they could gain a better understanding of (1) MMF shareholder flows during the 2008 financial crisis; (2) the effectiveness of the most recent MMF reforms adopted by the SEC in 2010 ("2010 Reforms"); and (3) the potential impact that any additional MMF reform may have on short-term debt markets."
Fidelity explains, "The SEC Study is a thoughtful and independent analysis. As the SEC evaluates whether to move forward with a proposal for additional MMF reform, Fidelity encourages the SEC to continue to engage in a rigorous assessment of the costs and benefits of possible future regulation by applying careful, thorough economic analyses of the likely consequences of new rules using all relevant data. Only by employing a process of this kind can the SEC advance its mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation."
They write, "The SEC Study sets a solid foundation for deliberation on possible further MMF reform. The SEC's work is particularly helpful as a counterpoint to the recent proposed recommendations from the Financial Stability Oversight Council, which seeks to impose structural reform on all MMFs without appropriately considering whether such broad reforms are supported by empirical data. The SEC's analysis helps make clear that certain types of MMFs do not need any further reform."
Fidelity continues, "We have analyzed the SEC Study and augmented its findings with our own data and experience to develop a set of informed conclusions about the study, which we present in the following pages. We have organized our observations into the following four interrelated themes: 1. The SEC Study demonstrates that the 2010 Reforms significantly reduced risk across all types of MMFs. 2. The SEC Study shows that most types of MMFs were not subject to large, abrupt redemptions during the financial crisis. 3. The SEC Study highlights that certain "institutional" funds have performed differently than "retail" funds; yet there is no regulatory classification of funds based on shareholder type or composition. 4. If, based on findings from its study, the SEC determines that further reform is necessary, then such reform should be narrowly tailored, so as to minimize disruption to short-term markets and lessen adverse impacts on long-term economic activity. The remainder of this document consists of four sections designed to address these themes and to provide detailed analysis, support, and, in some cases, rebuttal, of the most significant findings of the SEC Study."
Fidelity tells us, "As the largest U.S. MMF provider, we have seen increased resiliency in MMFs after the 2010 Reforms. The SEC Study provides an independent verification of our experience. MMFs are generally classified into four major categories ... based on the types of assets they hold: Treasury, government, municipal, and prime (also referred to as "general purpose"). Clearly, the risk profiles associated with MMFs in these four categories can vary significantly based solely on fund holdings."
They add, "The SEC Study appropriately recognizes that not all MMFs have performed similarly during times of financial stress. These behavioral discrepancies among MMFs arise simply because different MMFs are exposed to different risks. A major source of the disparity in risk levels among MMFs is that they hold different types of assets, as summarized in Exhibit 1. However, the risk levels can become even more disparate when the MMFs are held by different types of investors, since share subscription and redemption patterns are strongly dependent on shareholder composition. Within each of the four major MMF categories shown in Exhibit 1, industry participants and observers routinely distinguish between two important sub-categories of funds, namely "institutional" funds (those funds with shareholders which are primarily corporations, governments, and intermediaries) and "retail" funds (those funds with shareholders who are primarily individuals). This distinction has been made not only to acknowledge structural differences in business models required to service retail and institutional investors, but also to facilitate performance comparisons among funds having similar assets and shareholder composition."
Finally, Fidelity writes, "As mentioned above, data in the SEC Study suggest that institutional and retail MMFs exhibit different redemption patterns in times of market stress. Now that the SEC has analyzed and identified these inherent differences in shareholder behavior, it has created an opportunity to tailor any future reform appropriately. Currently, however, there is no regulatory classification of funds as institutional or retail. Today, MMF advisors self-classify funds -- i.e., MMF managers voluntarily report to an industry vendor whether a particular fund is retail or institutional. Therefore, an important step toward creating properly tailored reform is to put forth formal criteria that distinguish between these two fund types. We encourage the SEC to analyze this issue further and to work toward a distinction between retail and institutional MMFs, as it will be helpful in considering appropriately tailored reform based on the available empirical evidence."
The Investment Company Institute released its 115-page Comment Letter of to the Financial Stability Oversight Council on its Proposed Recommendations Regarding Money Market Mutual Fund Reform. The press release accompanying the letter, entitled, "Temporary Liquidity Gates, Fees Concept Only Viable FSOC Option for Prime Money Market Funds," is subtitled, "ICI Comment Letter to FSOC Opposes Flawed Proposals; Raises Concerns About Council's Legal Authority and Analysis. The release says, "Temporary "gates" to halt redemptions from prime money market funds during times of market stress, with the option to impose fees for further asset withdrawals, could address regulators' concerns about redemption pressures, the Investment Company Institute says. In addition to detailing its temporary gate and fee concept in a comment letter filed with the Financial Stability Oversight Council (FSOC), ICI also explains the fund industry trade association's continued opposition to FSOC's three flawed regulatory proposals; explains that FSOC has not made the case for applying any reforms to government, Treasury or tax-exempt funds; highlights FSOC's failure to follow the legal process required by the Dodd-Frank Act; analyzes the misleading and incorrect statements FSOC uses as a foundation for its case for making fundamental changes to money market funds; and points out FSOC's required economic analysis has significant shortcomings."
President and CEO Paul Schott Stevens comments, "As we have for more than four years, ICI continues to pursue proposals that can increase the resilience of money market funds without changing the fundamental nature and value of these funds. A temporary gate with the option for a fee is the only proposal under discussion that would stop redemptions during extreme market stress. The other recycled regulatory proposals FSOC suggests would not accomplish regulators' stated goals and, in fact, would be counter-productive in light of the harm they would inflict on investors and the economy."
The release explains, "In its comment letter, ICI details how temporary restrictions on redemptions, or "gates" and fees, combined with enhanced disclosure, would act as a "circuit breaker" on heavy redemptions from prime funds during times of market stress. Unlike the other FSOC proposals, the ICI proposal would not limit investors' access to their shares during normal market conditions, and thus would not change the fundamental characteristics of money market funds or their value to investors and the economy."
It says, "Temporary restrictions on redemption, or "gates," if triggered on liquidity levels, would prohibit investors from redeeming and would provide time for the fund to restore liquidity. Temporary liquidity fees, if determined appropriate by a fund's board, would allow redeeming shareholders access to liquidity if they need it, but would impose a fee to compensate the fund and remaining investors for the potential cost to the fund of the withdrawal and to protect remaining shareholders. Enhanced disclosure of mark-to-market NAVs and portfolio liquidity levels would give regulators and investors more insight into portfolio holdings."
The statement adds, "ICI continues to oppose all three of the alternative money market fund recommendations proposed by FSOC: forcing funds to buy and sell shares at a "floating" net asset value (NAV) and an initial share price of $100.00, a NAV buffer and "minimum balance at risk," and a significantly larger NAV buffer combined with "other measures." All of these concepts have faced strong public opposition in earlier forms, as evidenced in the SEC's comment letter file for money market funds."
They tell us, "A floating NAV would harm investors and the economy. It would not change shareholder behavior and would deprive state and local governments of much-needed financing. FSOC's floating NAV proposal introduces a host of tax, accounting and operational complications that will drive many investors to less transparent and less regulated alternatives. Additionally, FSOC's concept of requiring money market funds to offer shares at a $100.00 NAV is without precedent -- no other mutual fund faces such a requirement -- and would seem to require money market funds to comply with a pricing standard that is at least 10 times more onerous than the standard articulated by Securities and Exchange Commission accounting guidance. Sponsors would be unlikely to offer such funds, and investors would be unlikely to buy them."
ICI comments, "The proposal for a minimum balance at risk (MBR), coupled with 1 percent capital (or NAV buffer), is deeply flawed. The MBR would withhold 3 percent of an investor's redemptions for 30 days and place those withheld amounts in a first-loss position if the fund suffers losses in excess of the 1 percent NAV buffer. The most likely impact of the MBR would be to drive investors as well as intermediaries away from money market funds. ICI strongly opposes denying investors access to their assets when liquidity is available in a money market fund, a change that would impair a fundamental protection that mutual fund investors have enjoyed for more than 70 years."
The release continues, "The proposal for a NAV buffer of up to 3 percent of fund assets would likely drive money market fund sponsors out of business, depriving investors, issuers and the economy of the benefits of money market funds. Requiring advisers to commit capital would likely drive sponsors away from offering regulated money market funds; requiring funds to raise capital in the market is unworkable; and requiring funds to accumulate a within-fund capital buffer from retained earnings would take 10 to 15 years in the current near-zero yield environment. NAV buffers at smaller amounts would still present hardships, and would accomplish little."
Finally, ICI General Counsel Karrie McMillan adds, "In taking action on money market funds at this time, FSOC has overstepped its legal authority as defined by Congress. It is proceeding before necessary rules are finalized and in place. The fact that FSOC is acting with such haste and without adequate concern for the process outlined in the Dodd-Frank Act is very troubling."
Money market mutual funds continue to slowly move towards disclosing daily "mark-to-market" or "shadow" NAVs, though the migration has slowed to a trickly following the initial burst of disclosures that started two weeks ago. Crane Data's Money Fund Intelligence Daily, which tracks daily yields, assets and news, shows that every single one of the 208 funds (out of 1,067 tracked by MFID) disclosing these Market NAVs (or "MNAVs") shows a value of 1.0000 or higher. On average, money funds are publishing MNAVs of 1.0002 (as of Jan 22). Fund complexes currently posting MNAVs for some or all of their funds include: BlackRock, Fidelity, and Goldman Sachs. Those pledging to post but not yet publishing include: Dreyfus, Federated, Invesco, and Schwab. The most recent complexes to jump on the bandwagon is Reich & Tang. (Note: Crane's Money Fund University, our "basic training" conference, kicks off today at The Roosevelt Hotel in New York City and runs through Friday. There is still space for last-minute attendees, and clients and friends are welcome to drop by for Thursday night's opening night cocktail party from 5:10-6pm.)
Their press release says, "Reich & Tang today announced its next phase in offering additional transparency within its money market mutual funds. The company will soon begin to disclose daily net asset values for its prime money market funds, a move that is gaining steam in the industry and one that complements Reich & Tang's long standing commitment to providing transparency to all shareholders."
It continues, "To date, Reich & Tang is the only company to post its prime money market funds' portfolio holdings and approved issuer lists on a daily basis. "Disclosing daily NAVs along with our daily portfolio holdings and approved issuer lists creates an unprecedented level of transparency in money funds," said Michael Lydon, CEO. "Having this combined 'transparency trifecta' enables our shareholders to conduct appropriate real-time due diligence on our funds, evaluate our credit process, and best determine suitability to their individual investment policies and philosophies."
R&T adds, "The SEC currently mandates that all money fund companies provide these "marked-to-market", or "Shadow" NAVs on a monthly basis, which is then made available to the public on a 60-day lag. Many fund sponsors in the industry see the daily reporting of these NAVs as a positive move as evidenced by their voluntary participation in providing the information.... The preemptive move to share daily NAVs with the public comes ahead of the Financial Stability Oversight Council's (FSOC) deadline to provide comments regarding their proposed money fund reform recommendations. One of the proposed recommendations by FSOC calls for a floating rate NAV, which has stirred much debate within the money fund industry. One could argue that the disclosure of the daily NAVs may be a means to demonstrate to the public the overall long-term stability in the pricing of money market mutual fund NAVs."
Lydon comments, "Consistent with the times and our transparency efforts, we believe that added levels of transparency and education will help to address some of the challenges that FSOC's proposed money fund reform measures are seeking to overcome."
Moody's Investors Service recently commented on the trend in "Disclosure of Daily NAV Is Credit Positive for Money Market Investors," "Last Wednesday, Goldman Sachs Asset Management (GSAM), a unit of The Goldman Sachs Group, Inc. (A3 negative), announced that it would begin disclosing on a daily basis the market net asset values (NAVs) of its US money market funds (MMFs), with non-US-domiciled fund disclosure beginning in the near future. A day later, institutional MMF giants JPMorgan Chase & Co. (A2 negative), BlackRock, Inc. (A1 stable) and Dreyfus, a unit of The Bank of New York Mellon (Aa1 stable), announced they would follow suit with daily disclosure of their US MMFs' market value NAVs. FMR LLC (Fidelity, A2 stable) and Federated Investors Inc. (unrated) subsequently announced similar moves for some of their funds."
They add, "More frequent and timely disclosure of fund mark-to-market values is a positive development for MMF investors that now have access to monthly disclosures with a 60-day lag. By increasing transparency, MMF managers will be encouraged to maintain the most conservative portfolios and hold securities with the most stable prices and the lowest exposure to interest rate as well as credit spread risk. Beyond what is done today, MMF managers with daily mark-to-market NAV disclosures will attempt to further limit the potential daily deviations between the fund's mark-to-market NAV and the amortized cost NAV value of $1.00, at which MMFs transact, or face the risk of fund redemptions. The additional disclosure along with current reporting practices will also provide investors with additional transparency on the daily management, operation and current fund portfolio status."
Comment letters continue to pour in in response to the Financial Stability Oversight Council's "Proposed Recommendations Regarding Money Market Mutual Fund Reform", even though the deadline for feedback was extended to Feb. 15 from last Friday. Today, we excerpt from Charles Schwab Investment Management's comment letter. President Marie Chandoha writes, "Charles Schwab Investment Management, Inc. appreciates the opportunity to provide comments on the November 2012 "Proposed Recommendations Regarding Money Market Mutual Fund Reform," issued by the Financial Stability Oversight Council. Schwab is one of the largest managers of money market fund assets in the United States, with 3.3 million money market fund accounts and $167.9 billion in assets under management as of December 31, 2012. Approximately 85% of those assets are in sweep funds, with the balance in purchased funds. Sweep accounts automatically invest idle cash balances while providing investors with convenience, liquidity and yield. They also allow for clients to use their cash to implement intra-day trades in their investment and retirement accounts. Schwab's money market fund offerings predominantly appeal to, and are used by, individual retail investors who use money market funds to help manage their cash."
The Schwab letter says, "Schwab has been an active participant in the debate over money market fund regulation since 2009. We were supportive of the 2010 amendments to Rule 2a-7, the rule that governs the funds, which we believe substantially strengthened money market funds, made them more transparent to investors, and reduced the risk of runs. We have continued to participate in the debate about whether additional reforms are needed, submitting multiple comment letters to both national and international regulatory bodies. In these letters, and in other venues, Schwab has expressed significant concerns with many of the reform proposals that have been put on the table, including requiring money market funds to float their net asset values (NAV), requiring the funds to have a capital buffer, and requiring funds to impose redemption restrictions on investors. These proposals, particularly if applied broadly across all types of funds, would have a devastating effect on the money market fund industry, render an enormously popular product much less appealing to individual investors and exacerbate systemic risk."
It explains, "In recent weeks, however, our position on the issue of a floating NAV has evolved. We continue to believe that a blanket shift of the entire money market fund industry from a stable NAV product to a floating NAV product would imperil the industry, deprive individual investors of a critically important cash management option, disrupt the larger economy, and potentially destabilize the financial system itself. But a more targeted approach, one that applies a floating NAV to the types of money market funds most susceptible to runs and the types of investors most likely to trigger runs, is an option worth considering. As articulated in a November 23, 2012, op-ed piece in The Wall Street Journal by Charles Schwab Corporation's Chief Executive Officer, Walter Bettinger, we believe that requiring prime money market funds that cater to institutional investors to float their net asset values is an approach that merits consideration as a possible solution to the regulatory impasse."
Schwab continues, "This letter has three major components. First, Schwab offers its perspective on the process by which the Council has inserted itself into the money market fund reform debate, and urges the Council to allow the Securities and Exchange Commission ("SEC") to continue with its own regulatory process before the Council considers taking any further action. Second, Schwab addresses its concerns with each of the three recommendations put forward by the Council. And finally, Schwab is pleased to offer a detailed explanation of our "modified floating NAV proposal," an alternative reform measure that was first outlined by Mr. Bettinger. We believe such a solution could address the concerns of regulators by targeting reform at the sector of the money market fund industry most likely to initiate a potentially destabilizing run, but do so without wreaking havoc on a $2.7 trillion product that is enormously popular with individual investors and plays a critically important role in the financial system and in the broader economy. We discuss the mechanics of such a solution in the hopes that the SEC will consider this more reasonable alternative prior to issuing a final rule."
The letter also says, "In late November 2012, two months after the Chairman of the Council first indicated that the Council would issue recommendations regarding money market fund reform, the SEC staff issued a response of nearly 100 pages to the questions of Commissioners Gallagher, Paredes and Aguilar. Among other things, the response includes the first published analysis by the regulator of the impact of the 2010 amendments to Rule 2a-7 on the resiliency of money market funds. The response also provides analysis of the alternatives to money market funds, including bank deposits, time deposits, offshore funds, enhanced cash funds, ultra-short bond funds, collective investment funds, short-term investment funds, and others. The report notes that shifting money fund assets to one of these alternatives "may create additional operational costs or complexities, and they may impose redemption restrictions or other limitations on liquidity." The report also observes that shifting money market fund assets to bank deposits "would increase reliance on FDIC deposit insurance and increase the size of the banking sector, which raises additional concerns about the concentration of risk in the economy."
Schwab adds, "With the benefit of this additional information, the SEC staff is reportedly working on a revised proposal for consideration by the commissioners. Given that all signs point to another attempt by the regulatory agency of jurisdiction to promulgate a rule in 2013, we believe that the Council should not consider any further action on money market fund reform until such time as the SEC has completed its ongoing work."
The letter tells us, "In its Proposed Recommendations, the Council specifically states that it "aims to address the activities and practices of MMFs that make them vulnerable to destabilizing runs." We believe our proposal meets the Council's goal by greatly reducing the first-mover advantage in the Prime Variable NAV Fund and by removing from Prime Constant NAV funds the shareholders most likely to cause a destabilizing run. No solution can offer any guarantees -- the very nature of any securities product is that it could lose value and shareholders could abruptly decide to mitigate their potential losses. The Council also notes that the same features that make money market funds vulnerable to runs make them appealing to investors. In its zeal to prevent runs, the Council's proposed solutions render the product unappealing to retail investors. Our proposal succeeds in maintaining the important balance between stability and utility."
Among the latest Comment Letters on the Financial Stability Oversight Council's Proposals for Money Fund Reform, Wells Fargo Funds Management President Karla Rabusch writes, "Wells Fargo Funds Management, LLC appreciates the opportunity to comment on the proposed recommendations for further changes to the regulation of money market funds issued by the Financial Stability Oversight Council ("FSOC") on November 19, 2012 ("Proposed Recommendations"). Subsidiaries of Wells Fargo & Company ("Wells Fargo") advise and distribute the Wells Fargo Advantage Funds. As of December 31, 2012, Wells Fargo Advantage Funds had a total of approximately $240.4 billion in assets under management across a broad spectrum of investments. Our fund family offers a diverse set of money market funds across multiple distribution platforms that include retail and institutional investors."
The letter explains, "Money market funds have long played an important role in our nation's economy, providing both retail and institutional investors with a liquid, stable, and diversified investment option, while at the same time providing a vital source of funding to businesses, states, municipalities and other local governments. We are supportive of the amendments to Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act") adopted by the U.S. Securities and Exchange Commission ("SEC") in January 2010 ("2010 Amendments"). Following adoption of the 2010 Amendments, money market funds have successfully demonstrated their resiliency in the face of market distress, including the U.S. debt ceiling and European sovereign debt crises that occurred during 2011. We wish to continue a constructive dialogue about ways to maintain the effective regulation of money market funds for the benefit of our customers and the United States economy."
It continues, "While we believe the 2010 Amendments adequately reduced the risk that money market funds pose to financial stability, any further changes to the regulation of money market funds must strike an appropriate balance between the costs to investors and others, including businesses, states, municipalities and other local governments that rely on money market funds as a source of short-term credit, and any benefits in the form of a marginal reduction in run risk. As discussed in this letter, the Proposed Recommendations fail to strike this balance. We believe, however, that an alternative measure -- imposing a combination of redemption gates and liquidity fees in the rare event that a money market fund's liquidity becomes materially impaired -- would more directly address the risk of destabilizing runs and yet at the same time impose fewer costs on investors, borrowers, and the financial system."
Wells adds, "We believe it is critical to preserve the availability of stable value money market funds. A stable net asset value ("NAV") has long been a key element in the appeal of money market funds to investors by providing stability of principal and daily access to funds, while offering a competitive yield. While the FSOC has expressed its concern that a stable NAV makes money market funds more susceptible to runs than variable-NAV Funds, we do not believe that the FSOC has demonstrated that a variable NAV would substantially reduce any perceived risk of runs. Given the significant costs for investors in eliminating this feature of money market funds, we do not believe that it is appropriate for the FSOC to recommend this option, or for the SEC to propose and adopt it, based on conjecture and speculation about its benefits."
They write, "The FSOC has posited that a variable NAV will condition investors to become accustomed to, and more tolerant of, fluctuations in money market fund NAVs, the implication being that investors will thus not run from a distressed variable-NAV money market fund. However, the FSOC does not cite to any historical evidence that a floating NAV would have such an impact. In fact, the best evidence available points to the opposite conclusion. As the FSOC recognized in its release, ultra-short bond funds ... experienced substantial outflows in 2008 as NAVs declined. The French equivalent of floating-NAV money market funds provide yet another example, having lost roughly 40 percent of their assets over a three month time span from July 2007 to September 2007. While the FSOC cited these examples in its release, we believe that the FSOC and other regulators must do more than that before imposing sweeping changes on a popular investment alternative -- i.e., provide similarly concrete countervailing evidence demonstrating that that the proposed changes will remedy the perceived problem."
Wells also says, "A floating NAV requirement may spell the end of financial intermediaries' use of money market funds as cash sweep options for their clients. Cash sweep programs permit investors to keep their cash invested and yet still retain ready access to their funds throughout the trading day. These programs rely on the predictability of sweep balances to facilitate same-day investment of newly available cash into designated money market fund sweep shares and to permit the same-day availability of the proceeds from redeemed money market fund shares either for reinvestment or withdrawal. Without a stable NAV, purchases and redemptions of money market fund shares would likely have to be settled after the end of the trading day, which would not comport with the needs of financial intermediaries and their clients."
It continues, "Of course, the effects of requiring a floating NAV will not be felt by money market fund investors alone. As the FSOC has recognized, businesses, states, municipalities and other local governments rely on money market funds as an efficient source of short-term credit. To the extent that investors pull their assets from floating-NAV money market funds, these businesses and governments will likely have to look for credit elsewhere. Neither the FSOC nor any other regulator has been able to adequately describe where these businesses and governments could turn for funding and the costs associated with seeking alternative sources of credit.... Ultimately, we believe that regulators must understand and explain these and other potential impacts for borrowers -- as well as on the financial system and economy at large -- before pursuing a sweeping change like requiring money market funds to maintain a floating NAV."
Wells explains, "The FSOC raised the question of whether money market fund shares should be re-priced initially at $100.00 if a floating NAV requirement is adopted. We do not believe that the FSOC or other regulators should require floating-NAV money market fund shares to be re-priced at any price over $10.00, which is the customary industry initial pricing for other mutual funds. At present, no legal mandate exists for variable-NAV mutual funds to establish any particular initial offering price. Any mandate to initially re-price money market fund shares at the market-based NAV nearest to $100.00 would require the calculation of a fund's market-based NAV to the nearest basis point (i.e., one hundredth of a percentage point) in order to produce a re-priced market-based NAV corresponding to the prescribed level. A commenter has observed that this action would require a higher degree of precision in calculating a fund's NAV than is required by applicable existing accounting pronouncements, which require a fund to calculate its NAV to an accuracy of the nearest one-tenth of a cent (equivalent to one tenth of a percentage point for a fund using a $1.00 share price).... Finally, we do not see any rationale for applying a floating NAV universally to all money market funds."
They tell the FSOC, "One of the core functions of money market funds is to provide shareholders immediate access to their investments, often at multiple times during a business day. The MBR requirement would severely undermine the utility and function of money market funds as a cash management tool because investors would not be entitled to access the full amount of their invested funds for a period of 30 days. Money market fund investments are frequently drawn down to meet payments that become immediately due, such as employee payroll obligations and trade payables. The MBR requirement would irreparably impair the liquidity function money market funds provide and effectively render them unusable by businesses and public entities that currently rely on money market funds to meet short-term cash operating needs.... In addition, due to delays in full payments of redemptions, the MBR requirement would effectively preclude the use of money market funds as sweep vehicles in which monies are automatically invested and redeemed, for example, to deploy excess cash."
Wells Fargo also writes, "Money market funds are investments. As such, we agree with the proposition that investors must recognize that they entail risk of loss. We acknowledge that the addition of modest NAV buffers to money market funds could help them absorb small losses and meet greater liquidity demands in distressed markets. However, we do not believe that the goal of any buffer requirement should be to entirely insulate investors from loss. We are concerned that the FSOC, in proposing its two alternative NAV buffers -- up to 1% of assets when coupled with the MBR and up to 3% of assets when combined with other measures -- is attempting to effectively eradicate such risk, at a cost that will cause investors and fund sponsors to abandon money market mutual funds."
They explain, "In its Proposed Recommendations, the FSOC stated that a NAV buffer could be funded by money market fund investors, through retained earnings or subsidization of higher-yielding subordinated shares, or by fund sponsors. However, given the current low interest rate environment in which fund investors are earning historically low yields and fund sponsors are waiving significant portions of management fees just to preserve modest returns or avoid negative yields for investors, buffers of up to 1% or 3% of assets are simply unworkable for either investors or sponsors."
Wells writes, "Though we have misgivings about the Proposed Recommendations, we believe that regulators could adopt lower cost alternative measures that would better address the risk of runs on prime funds, without removing those attributes of money market funds that investors most value. These alternatives include imposing so-called "redemption gates" and "standby liquidity fees" if a prime money market fund's liquidity becomes materially impaired. In particular, certain industry participants have put forward a sensible proposal in which liquidity fees would be "triggered" when a money market fund's one week liquidity falls to 15%. At that point, the fund would suspend additional investor redemptions for a short period, and then re-open, imposing a fee on all redemptions; a fee of 1% of redeemed amounts would be applied. The liquidity fees collected would be used to shore up a fund and help slow or stop the decline in its mark-to-market NAV by enabling the fund to avoid liquidating holdings into a distressed market."
They add, "Any excess fees left after the fund returns to its normal function could be distributed to fund investors pro rata or retained as a buffer against future losses. The redemption gate and liquidity fee proposal would present two significant benefits that strike to the heart of the problem regulators have attempted to address. First, liquidity fees would actually provide an affirmative reason for investors to avoid redeeming from a distressed fund. That is, investors redeeming from a distressed fund will pay to exercise their right of redemption. Those investors who do not need their money immediately, but who otherwise might redeem in reaction to market dislocation, will have an affirmative disincentive from doing so. The actions of those who choose to redeem in spite of the liquidity fee will help to support the fund's market-based NAV and thus reduce or eliminate the potential harm associated with the timing of their redemptions to other remaining investors."
Wells continues, "We do not intend to suggest that redemption gates and liquidity fees represent the only effective and palatable regulatory measures. We believe that regulators should consider other measures -- particularly rules mandating greater transparency and disclosure -- that could further benefit investors, funds, and the financial system without undermining the essential features of money market funds. The SEC in particular in recent years has focused on rulemaking aimed at making disclosure more accessible and comprehensible to investors. Adoption of the summary prospectus, XBRL tagging, and the proposal of new disclosure requirements for advertisements and marketing materials for target date funds provide salient examples. Though we believe that current money market fund disclosure requirements are entirely adequate, we would welcome the opportunity to review and comment on creative proposals that would, for example, require even clearer and more prominent disclosure of the necessary risk of loss associated with money market funds. We also note that a number of money market fund sponsors have voluntarily begun publishing their funds' mark-to-market NAVs on a daily basis. We believe that regulators should consider and seek public comment as to whether mandating such disclosure from all money market funds would benefit investors and the financial system at large."
Finally, the letter says, "We appreciate the opportunity to comment on the FSOC's Proposed Recommendations. While we do not believe that the Proposed Recommendations strike an appropriate balance between costs to investors and the financial system and any benefits in terms of a marginal reduction in run risk, we appreciate the work that regulators have done to further strengthen money market funds and the financial system over the last several years. We intend to continue to engage in a constructive dialogue with the FSOC and the SEC to help reduce any risks of destabilizing runs on prime money market funds without removing the key features of money market funds that have made them such a popular investment alternative and critical source of credit to businesses, states, municipalities and other local governments."
Though the Financial Stability Oversight Council (FSOC) extended the deadline for Comments on its "Proposed Recommendations Regarding Money Market Mutual Fund Reform" earlier this week (see FSOC's release here), letters continue to pour in. The most recent post is from The Vanguard Group, which says, "Vanguard believes MMFs provide an important choice for investors' cash management needs. Investors may invest in a MMF, which accepts a minimal amount of investment risk in return for market yields, or open a federally insured bank account that guarantees up to $250,000 in principal protection in exchange for lower yields. We encourage regulators to find a reform solution that continues to allow investors, particularly retail investors, the discretion to make this choice."
The letter continues, "Over the past four years, Vanguard has been actively involved in researching and evaluating potential MMF reform options. We were strong proponents of the SEC's amendments to Rule 2a-7 that were implemented in 2010. We believe these changes positioned many MMFs to be self-provisioning for liquidity, thereby reducing the likelihood that a future systemic market disruption would threaten these funds. We understand, however, that regulators remain concerned that these amendments may not sufficiently address the risks that MMFs, under highly unusual market conditions, may impose on the broader financial markets. We agree that more could be done by the SEC to address these risks, but the solutions must be narrowly and carefully tailored to the relevant funds. Regulators must also be mindful of the unintended consequences that draconian reform measures may have on the capital markets and investors. Such considerations must inform any final recommendation on this matter."
Chairman & CEO William McNabb writes, "Currently, the SEC is the only agency with the appropriate statutory authority to recommend additional MMF reforms. FSOC should not make specific MMF reform recommendations to the SEC at this time, but should permit the agency, as the primary regulator of the capital markets and MMFs, to proceed with its statutory authority to consider reasonable reforms narrowly tailored to address FSOC's concerns, if they are supported by facts. Any additional reforms proposed by the SEC should be limited to those MMFs that invest primarily in securities issued by banks, other financial institutions, or operating companies ("Prime MMFs") and should include a requirement for the boards of directors of all Prime MMFs to impose a standby liquidity fee of 1-3% when a fund's weekly liquidity has fallen below 15%. To the extent regulators have remaining concerns about institutional Prime MMFs, the Council could make additional recommendations to the SEC about how the risks posed by such institutional funds could be further mitigated. By focusing additional reform measures on institutional Prime MMFs, regulators will be able to appropriately address the most concerning risks while retaining Treasury, government and tax exempt money market funds in their current form for the retail investor."
He explains, "The SEC is the appropriate agency to determine which additional reforms should be implemented for MMFs. FSOC has recognized as much when it stated "The SEC, by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that MMFs present to the economy." Although the SEC did not propose additional reforms in August 2012, some of the SEC's Commissioners have indicated a willingness to consider additional reforms, provided that such reforms could be informed by an SEC staff analysis on the efficacy of the 2010 Rule 2a-7 amendments. In November 2012, the SEC's Division of Risk, Strategy and Financial Innovation published such analysis ("SEC Staff Report") and now the SEC is in a position to proceed with its statutory authority to consider additional reforms. Given these developments, and the confusion that could occur should two regulators move forward with different proposals, we request that FSOC not make specific MMF reform recommendations to the SEC at this time."
Vanguard tells us, "We believe FSOC's three recommendations: (i) float the NAV; (ii) retain 1% capital buffers with a minimum balance at risk ("MBR") for accounts above $100,000; or (iii) retain a 3% capital buffer with the ability to reduce such buffer through other risk-mitigating measures, attempt to reduce "systemic risk" by addressing the industry's size. Each of the three recommendations would significantly reduce the appeal of MMFs, which would curtail the size of the industry. FSOC has quite clearly stated as much in its Proposal when it said, "reforms that would provide meaningful mitigation of the risks posed by MMFs would likely reduce their appeal to investors by altering one or more of their attractive features." We believe regulators should give more consideration to reform options that could reasonably address their more pressing concerns while retaining the key features of MMFs, particularly for the retail investor."
They continue, "FSOC's approach, to reduce MMFs' appeal to investors, is also inconsistent with the spirit of the Money Market Reform Options report issued in 2009 by the President's Working Group on Financial Markets ("PWG Report"). The PWG Report, which was drafted by many of the regulatory agencies comprising FSOC, espoused the benefits of reform measures that would "internalize the cost of liquidity ... and provide appropriate incentives for MMFs and their investors." The PWG Report also cautioned FSOC against trying to prevent any individual MMF from ever “breaking the buck,” as such an approach would not be a practical policy objective. We agree. Reform measures, such as capital buffers, which attempt to address idiosyncratic credit risk by providing a cushion against which small losses can be absorbed are not practical because they raise complex tax, accounting, and source of capital concerns. Capital buffers are also likely to carry unintended consequences, as some funds may purchase riskier, higher-yielding securities to compensate for the reduction in yield. As a result, capital buffers are likely to provide investors with a false sense of security."
McNabb writes, "In previous comment letters, we have stated our thoughts about the floating NAV and capital requirements in MMFs. We wish to reiterate those comments, and underscore our concern that FSOC's reform measures will incentivize financial innovation that will cater to the needs of sophisticated investors seeking MMF alternatives, which are likely to be unregulated and not subject to the rigorous reporting and disclosure requirements of regulated MMFs. Retail investors, however, will have no choice but to resort to a bank account for their cash management needs. Investors without choice will result in investors with fewer savings. A shift in assets from MMFs to bank accounts will not eliminate "systemic risk," but simply reallocate it. The findings in the recent SEC Staff Report confirm that large cash movements from the MMF industry to the banking industry would increase the amount of assets held in FDIC-insured accounts, and further concentrate risk in the banks. We do not think these results are in keeping with FSOC's mission to mitigate systemic risk. Instead, we encourage FSOC and the SEC to consider reform measures that continue to provide investors with meaningful choice for their cash management needs and reduce the disruptions that can arise when certain MMFs experience extremely rare, destabilizing redemptions."
He explains, "We are also deeply concerned that capital will not make MMFs more resilient to losses and less susceptible to runs. In theory, we agree that a capital buffer in a MMF does provide the fund with some capacity to absorb losses due to credit deterioration, default, or interest rate changes. In practice, however, we believe the opposite may be true. FSOC and the SEC should not underestimate the unintended effects of a capital buffer. At the end of the day, capital buffers reduce total returns for investors in MMFs. A permanent, built-in reduction to returns may result in funds purchasing investments that are higher-yielding and more prone to default.... We urge regulators not to adopt reform measures, which in combination with other factors, may encourage funds to reach for yield and increase the very risks that the reforms were intended to mitigate."
The Vanguard letter also comments, "The concept of an MBR for investors with account balances in excess of $100,000 presents new concerns and challenges. First and foremost, the idea of a delayed receipt of redemption proceeds on a regular basis for those investors with account balances above $100,000 will likely cause investors to use less complicated and more liquid cash management options, or maintain balances well below $100,000."
It adds, "The Proposal is FSOC's first step in making such a recommendation to the SEC for MMF reform. Although the Proposal comments on the interconnectedness and risks inherent in Prime, and particularly, institutional Prime MMFs, we believe it fails to establish that such interconnectedness and risks are inherent in all MMFs. For this reason we recommend that the Proposal, if submitted to the SEC, apply only to Prime MMFs."
Vanguard writes, "We are particularly concerned that FSOC is unwilling to recognize the profound differences among Treasury and government MMFs, on the one hand, and Prime MMFs, on the other. Either the primary regulator of systemic risk is severely misinformed about the credit quality and liquidity of Treasury and government securities, or the regulator's approach is a disingenuous effort to elicit admissions of systemic risk for Prime MMFs. Either way, Treasury and government MMFs should not be subject to additional reform measures given that the Proposal acknowledges that these MMFs did not experience disruptive redemptions during the 2008 financial crisis, and in fact, tend to attract net inflows during times of market stress."
They continue, "The key to preventing a run on Prime MMFs from contributing to broader dislocations in the financial markets during a widespread crisis is to ensure that these funds have adequate liquidity, and have the ability to slow redemptions when a fund's liquidity becomes scarce. We believe a standby liquidity fee ("SLF") is an effective tool to accomplish both of these objectives. Our proposal for an SLF would be used in conjunction with a stable $1 NAV, without capital buffers or MBR. This reform approach was developed in December 2011 through the input of various industry members in response to regulators' requests to see MMFs internalize the cost of liquidity."
Finally, Vanguard writes, "If the SEC were to impose a SLF on all Prime MMFs, we believe retail Prime funds would not be capable of contributing to broader financial market disruptions. If, however, regulators remained concerned about the ability of institutional Prime MMFs to contribute to dislocations notwithstanding the SLF, we recommend that further reform measures, such as additional liquidity, more frequent disclosure, or other options, be targeted to those funds. If regulators decided that it was necessary to further reform institutional Prime MMFs, we suggest an account balance in excess of $5M would be a good way to distinguish these funds from retail Prime MMFs. Most retail investors have account balances well below $5M, and most institutional investors maintain balances well above this threshold. The $5M mark also would allow retail MMFs to accommodate the high-net worth individuals, who tend to have larger than average MMF account balances, but who behave no differently than the retail investors with much smaller account balances. Moreover, given that Prime funds tend to have tens of billions of dollars under management, a maximum account size of $5M would represent a very small portion of any fund's overall assets."
U.S. Securities and Exchange Commission Commissioner Daniel M. Gallagher gave "Remarks before the U.S. Chamber Center for Capital Markets Competitiveness. He indicated that a money market reform proposal is expected before the end of the first quarter and he gave qualified support for a floating NAV option during the Q&A at the end of the speech. (See the video here on C-SPAN.) Gallagher said, "You can say this about the Dodd-Frank Act: it's a perfect example of not letting a crisis go to waste. Indeed, the Act is a model of the new paradigm of legislation -- a core concept, in this case regulatory reform, overwhelmed by a grab bag of wish-list items. What continues to amaze me about the Act is not only what it covers in its 2319 pages, but also the crucial regulatory issues it does not address. The juxtaposition of the two is jarring. The Act tasks the SEC with a mandate to create unprecedented new disclosure rules relating to conflict minerals from the Congo -- but not to reform money market mutual funds, which, we were later told, are ticking time bombs of systemic risk."
He explained, "[W]e could be spending our time in a far more productive manner, focusing on mandates that are critically important such as those in the JOBS Act, as well as addressing the SEC's basic "blocking and tackling." Indeed, one personal frustration of mine has been the Commission's inability to fully implement what I believe is the most useful and important provision of the Dodd-Frank Act, the Section 939A mandate to remove all references to Commission-registered credit rating agencies, formally referred to as nationally recognized statistical rating organizations, from all agency regulations. This clear and direct mandate is actually responsive to one of the core problems underlying the financial crisis -- overreliance on inaccurate credit ratings by both investors and regulators -- yet the most important rules continue to include such references."
Gallagher continues, "Meanwhile, FSOC, charged with averting the next financial crisis, is apparently spending more time hectoring the Commission -- a purportedly "independent" agency -- on the reform of money market funds -- an issue that falls directly, and solely, within the Commission's regulatory sphere of responsibility but that was somehow not important enough to be addressed by the Dodd-Frank Act -- than they are focusing on the bubbles that have the potential to cause another crisis. On the issue of money market funds, I am happy to report that Craig Lewis and his fine staff in our economic analysis division have completed the rigorous study and economic analysis that a bipartisan majority of Commissioners had long asked for in advance of considering new rulemaking. We are currently working with the economic analysis staff and the Division of Investment Management to shape a reform proposal based on that rigorous economic analysis."
He added, "Separately, I'm encouraged by Chairman Walter's commitment, even as we continue to implement the Dodd-Frank mandates, to focusing as well on the everyday, core blocking-and-tackling issues that affect investors most. In the coming months, I look forward to working together to address the Commission's priorities -- both short-term priorities such as the long-overdue amendments to the Commission's net capital and customer protection rules commonly referred to as the Onnig amendments and longer-term ones such as engaging in a formal, thorough evaluation of equity market structure issues, last done in a comprehensive manner in the Commission's Market 2000 Report all the way back in 1994."
Finally, Gallagher's speech said, "For all the recent talk of gridlock in a divided Commission, I believe that notwithstanding our party and policy differences, this Commission is fully united in its desire to carry out the Commission's mandate to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. With a clear, data and analysis-based understanding of the problems we face and the complexity of their underlying causes coupled with a deliberate, measured allocation of our resources, I believe that the Commission can accomplish great things, and can avoid the mistakes of the past, over the course of the coming year."
MarketWatch wrote on the speech, "Reform of the $2.7 trillion money-market fund industry will be one of the "primary issues" that the Securities and Exchange Commission tackles in the coming months, a Republican commissioner on the agency said Wednesday. "We at the commission can and have been proceeding ... and I think there is sort of a new spirit at the commission, working with the staff, working with industry, working amongst the commissioners and a consensus that we need to take some actions," Republican commissioner Dan Gallagher said after addressing the U.S. Chamber of Commerce. Gallagher reiterated his view that the SEC should explore abandoning what's known as a stable Net-Asset-Value for money-market funds and permit a floating NAV instead. However, he said that "there are pretty serious tax and accounting issues that need to be addressed and haven't been addressed."
Ahead of the now-extended (see our "Link of the Day") deadline for Comments on the FSOC's MMF Reform Proposals, the Investment Company Institute has released an extensive study on the impact of the SEC's 2010 Money Fund Reforms. The press release, entitled, "ICI Analysis of SEC's 2010 Money Market Fund Reforms: Tested, Working, and Have Enhanced Financial Stability," and subtitled, "Findings Relevant to Current Money Market Fund Regulatory Developments and U.S. Debt Ceiling Policy Debates," says, "Comprehensive reforms by the Securities and Exchange Commission (SEC) in 2010 to regulations governing money market funds were tested by market stresses in 2011 and are working, according to new analysis by the Investment Company Institute (ICI) in a study released today."
ICI says, "The study, "Money Market Mutual Funds, Risk, and Financial Stability in the Wake of the 2010 Reforms," further finds that those reforms ultimately enhanced financial stability -- as evidenced by the fact that the prime money market had enough liquidity to meet heavy redemptions in the summer of 2011, triggered by two major market events. At the beginning of that summer, thanks to the SEC 2010 reforms, prime money market funds were already poised to manage through the market stresses with higher liquidity and increased transparency. Those factors, coupled with diligent portfolio management, allowed funds to respond to evolving market conditions."
It continues, "The study examines the impact on money market funds of the SEC 2010 reforms, which significantly strengthened the maturity, credit risk, and liquidity requirements for money market fund holdings. The study comes as the Financial Stability Oversight Council (FSOC) considers additional changes to money market fund regulation and as Congress and the Administration engage in policy debates over the looming U.S. debt ceiling, which could be a catalyst for new stresses in the financial markets."
President & CEO Paul Schott Stevens comments, "The study confirms that money market funds of 2013 are nothing like the funds of 2008, thanks to the SEC's far-reaching amendments to money fund regulation. This is important analysis and perspective for regulators to consider as they look at additional regulations and for the public to understand, as the nation faces another debt ceiling debate in the coming weeks. Money market funds are stronger and well positioned today to deal with market issues."
ICI's release continues, "Money market funds were hit in the summer of 2011 by two financial market shocks: the standoff over the U.S. federal debt ceiling and deteriorating conditions in eurozone debt markets. The study finds that money market fund managers reacted appropriately to both events and money funds were well positioned to manage the events due to new requirements in place. Money market fund managers prepared for the likelihood that the U.S. federal government would default in 2011. Anticipating that concerns about the debt ceiling impasse might lead investors to redeem shares, both government and prime funds shortened their maturities in the weeks leading up to a key August 2011 deadline. Funds also maintained levels of liquidity well above new liquidity requirements."
It adds, "Money market funds gradually reduced their holdings to banks most exposed to the unfolding debt crisis in Europe. Money market funds also showed a careful and proactive response to the unfolding sovereign debt crisis in Europe during the 2011 market turmoil. Managers reduced their overall holdings of securities issued by banks in the eurozone from 30 percent of their assets in May 2011 to 11 percent by December 2011. In addition, the evidence shows that prime funds also reduced their exposures to other European banks that, although outside of the eurozone itself, were exposed to eurozone banks."
ICI tells us, "Evidence from 2011 shows that prime money market funds took only marginally more credit risk than did Treasury-only money market funds. ICI analyzed data on credit default swap spreads in 2011, and found that prime money market funds took on or maintained only minimal credit risk, despite small increases in such risk as the eurozone crisis progressed in the second half of 2011."
It says, "The paper concludes: "The efficacy of the SEC's new provisions was tested in 2011 by the market turmoil created by the standoff over the U.S. federal debt ceiling and deteriorating conditions in eurozone debt markets. Money market funds passed these tests. The data show that money market fund managers proved themselves careful stewards of their investors' assets, adjusting their holdings in response to changing conditions and maintaining liquidity levels above those stipulated by the 2010 requirements."
It also explains, "The ICI study rebuts a number of oft-repeated misperceptions about the role of money market funds during the 2011 financial market shocks. Specifically, the evidence supports the conclusion that money market funds' proactive measures to reduce their credit and market risk during the market difficulties in 2011 did not harm the financial system.... Outflows from prime money market funds did not cause an aggregate decline in lending by subsidiaries of foreign banks in the United States."
ICI's statement continues, "Outflows from prime money market funds did not cause collateral damage to U.S nonfinancial firms. Contrary to some reports, prime funds increased their lending to U.S. nonfinancial firms in the summer of 2011. The prime funds most exposed to eurozone banks reduced their holdings of securities issued by U.S. nonfinancial firms over the summer of 2011 by a small amount, $900 million. More than anything, however, this decline reflected the decision of U.S. nonfinancial firms to take advantage of historically low interest rates to replace short-term funding with long-term debt issuance."
As Friday's deadline approaches for Comments on the Financial Stability Oversight Council's "Proposed Recommendations for Money Market Fund Reform", more letters of substance are appearing. One of the latest is from J.P. Morgan Asset Management, the second largest manager of money funds in the U.S. with $243 billion. President of the JPMorgan Mutual Funds Patricia Maleski writes, "J.P. Morgan Asset Management ("JPMAM") supports regulatory reforms that address structural vulnerabilities and decrease systemic risk in money market funds ("MMFs"). The reforms enacted by the Securities and Exchange Commission ("SEC") in 2010 were very effective in reducing risk taking, improving liquidity and disclosure, and they have been important to ensuring the stability of the short-term fixed income markets; however, concerns remain about the susceptibility of MMFs to run risk, as well as the implicit support investors believe is provided by fund sponsors. The Financial Stability Oversight Council ("FSOC") has requested feedback on a number of different proposals to address these risks, and JPMAM appreciates the opportunity to provide its perspective on these proposals, providing a constructive assessment of each. There also exists a series of other policy measures that regulators should consider, including standby liquidity fees and enhanced transparency to investors, which could further reduce risk and aid investors in understanding the true nature and risk of their investments"
She says, "To demonstrate our commitment to enhanced transparency, three MMFs advised by JPMAM began to disclose their market-based net asset value ("NAV") on January 14, 2013. More frequent availability of market-based valuations will allow investors to better understand the nature of MMF risks and make more informed decisions regarding their investments in MMFs." (Note: Crane Data will begin publishing the new daily "Market NAVs" for those funds that publish them on Friday in our Money Fund Intelligence Daily product.)
The JPMAM letter comments on the Floating NAV Option, "Stable NAV MMFs currently hold $2.70 trillion in U.S. investors' cash assets. There are a few important features of these funds including same day settlement and the $1.00 NAV which lead to simplicity in the accounting and tax treatment utilized by investors. As the SEC correctly stated, "The $1.00 stable net asset value per share ... facilitates the funds' role as a cash management vehicle, provides tax and administrative convenience to both MMFs and their shareholders, and promotes MMFs' role as a low risk investment option." Since the adoption of Rule 2a-7 in 1983, MMFs have proven successful at providing those benefits to investors."
It adds, "A requirement for MMFs to float NAVs would fundamentally reshape the product and its ability to deliver these core benefits to investors. Floating the NAV has the benefits of providing transparency of market values to investors and reducing the possibilities for transaction activity that results in non-equitable treatment across all shareholders; however, it will likely give rise to a number of consequences for investors and market participants that should be examined rigorously and addressed in order to arrive at a constructive solution."
The letter continues, "Investors have expressed strong concerns about the complexity from an accounting, tax and operational perspective associated with FNAV MMFs under the current regulatory framework. Recent market surveys of existing U.S. corporate treasurers found that between 77% and 79% of respondents would reduce or eliminate the use of MMFs if their per share NAVs were forced to float. In addition, accessibility would likely be materially diminished for those that remain active: automated investment sweeps are a dominant access point for MMF investing activity, with our own corporate treasury survey finding that 52% of investors utilize this kind of service to facilitate investments of their excess cash."
It says, "An implication of the various FNAV-related operational issues is that the number of intermediaries capable of making sweeps to MMFs available to their underlying investors should be expected to shrink materially, particularly in the near-term, as the industry adjusts and market participants gauge outflow and reallocation activities by investors. The market feedback to date implies that this sort of structural change may result in a substantial reduction in assets, investors and intermediaries participating in the MMF segment; however, some of the market feedback may be due in part to the level of uncertainty and collateral effects that are triggered by a change of this scale. Although it is difficult to quantify, some proportion of these investors may be encouraged to remain active participants in the prime funds if the industry and regulators establish a comprehensive set of proposals and policies."
JPMAM writes on the Minimum Balance at Risk, "While a minimum account balance at risk and other forms of holdbacks may slow the rate at which a run progresses once it has occurred, it may introduce other complications, the net effect of which is likely to threaten the viability of the product by a) significantly reducing the demand for MMFs, and b) potentially accelerating the risk of runs. In line with the investor feedback received related to the FNAV proposal, recent surveys show that between 80% and 90% of current MMF users would reduce or eliminate their investments in MMFs if a portion of their cash position was held back for a predefined period of time. Based on our own investor discussions, it is also likely that such a structure would encourage a heightened level of restlessness across the investor base and thereby enhance the likelihood of a run."
They say about Capital," "In our experience, liquidity concerns are fueled by credit events. In the past, sponsor capital used at the discretion of sponsors, has generally been effective in preventing idiosyncratic credit risk in a single fund leading to a broader systemic issue across the industry and short term funding markets. Isolating the fund (or funds) exposed to a credit event in order to curtail a more systemic issue across the short end funding markets may now be accomplished more easily following the 2010 SEC money market reforms, which conferred authority to a fund board to put a fund into orderly liquidation. There are a number of ways that capital could be funded, i.e., by sponsors, shareholders or third parties, and a number of ways it could be structured, i.e., first loss reserve used only upon liquidation or a buffer that absorbs day-to-day fluctuations in market-based values. While there are some distinct benefits to capital, there are also challenges that should be addressed."
The letter also comment on Other Measures," "As the industry and regulators continue to work towards a constructive solution, JPMAM believes the theme of transparency should play a central role. Recognizing this, the prime MMFs advised by JPMAM began disclosing their market-based NAVs each business day. Specifically, effective January 14, 2013, the funds began disclosing market-based NAVs the next business day. All redemptions and subscriptions for the funds will continue to be processed using the stable NAV determined under the amortized cost method of accounting consistent with the provisions under Rule 2a-7."
It adds, "Requirements that enable managers to have a better understanding of the type of investors in MMFs will allow managers to better manage for risks that may arise from high shareholder concentration and to better monitor subscription and redemption cycles. These would be positive steps for the industry's ability to manage potential MMF risks. Steps to encourage distributors/agents to provide better information to MMF managers on the underlying investor bases in omnibus accounts, in terms of concentrations, investor types and trading patterns, would be protective for existing MMF investors and therefore positive for the industry."
Finally, they comment, "Enhancements to the credit related portfolio constraints under Rule 2a-7 could act to further minimize the potential of a defaulted security having a material impact on the overall value of these portfolios. Building on these reforms by applying exposure limits based on long-term issuer ratings and tenors could be an effective measure for reducing the impact credit events have on perception on a MMF portfolio.... While the reforms of 2010, and specifically the liquidity requirements, have proven highly effective, consideration should be given to additional liquidity requirements. A 50% monthly liquidity requirement could complement the existing daily and weekly requirements and provide additional safeguards to MMFs.... There have been numerous proposals submitted regarding standby liquidity fees ("SLFs") and "gates". These proposals have considerable merit and should be given serious consideration; however, it is important to recognize the benefits and limitations of SLFs and gates."
Crane Data's latest Money Fund Portfolio Holdings dataset, with data as of December 31, 2012, were released to our Money Fund Wisdom subscribers late last week. Our latest collection shows money market securities held by Taxable U.S. money funds increased by $34.4 billion in December (after rising $58.1 billion in November and $31.0 billion in October) to $2.397 trillion. Repurchase Agreements held by money funds plummeted by $90.0 billion (-14.2%) in December to $545.0 billion, after jumping $38.5 billion in November and $81.0 billion in Oct., but repos remain the largest segment of money fund holdings at 22.7% of assets. (Note: Watch for the recently announced disclosures of daily "shadow" or "Market NAVs" to be added to Crane Data's MFI Daily starting this Friday.)
Certificates of Deposit (CDs) became the second-largest segment with a jump of $35.2 billion, or 7.9%, to $480.9 billion (20.1% of holdings), while the former second-largest sector, Treasury Debt, rose by $15.1 billion (+3.4%) to $466.4 billion (19.5% of holdings). Commercial Paper (CP) rose by $23.4 billion (up 6.7%) to $371.6 billion (15.5% of holdings), while Government Agency Debt increased by $37.5 billion to $334.6 billion (14.0% of assets). European-affiliated holdings plunged in December, falling $71.4 billion to $659.2 billion, or 27.5% of securities (after rising a combined $86.2 billion in October and November). Eurozone-affiliated holdings also declined to $418.5 billion in December; they now account for 17.5% of overall taxable money fund holdings.
Repo, the largest segment of taxable money fund composition, was made up of: Government Agency Repurchase Agreements ($276.9 billion, or 11.6% of total holdings), Treasury Repurchase Agreements ($187.5 billion, or 7.8% of assets), and Other Repurchase Agreements ($80.5 billion, or 3.4% of holdings). Commercial Paper, the fourth largest segment, was made up of the combined total of Financial Company Commercial Paper's 8.2% ($197.0 billion), Asset Backed Commercial Paper's 4.8% ($114.5 billion), and Other Commercial Paper's 2.5% ($60.1 billion). "Other" Instruments (including Time Deposits and Other Notes) are the sixth largest sector with $139.7 billion (5.8%) and VRDNs (including Other Muni Debt) were the smallest segment with $58.5 billion (2.4% of holdings) in December.
The 20 largest Issuers to taxable money market funds as of Dec. 31, 2012, include the US Treasury (19.5%, $466.4 billion), Federal Home Loan Bank (7.2%, $173.5 billion), Bank of America (3.1%, $74.5B), Federal Home Loan Mortgage Co (2.9%, $68.3B), Deutsche Bank AG (2.7%, $64.4B), Credit Suisse (2.6%, $63.1B), Bank of Nova Scotia (2.6%, $62.4B), Federal National Mortgage Association (2.6%, $61.3B), Bank of Tokyo-Mitsubishi UFJ Ltd (2.5%, $59.3B), Barclays Bank (2.4%, $58.6B), JP Morgan (2.4%, $57.3B), RBC (2.4%, $57.2B), Sumitomo Mitsui Banking Co (2.4%, $56.7B), `BNP Paribas (2.2%, $53.1B), Citi (2.0%, $47.4B), Credit Agricole (1.8%, $42.0B), Societe Generale (1.6%, $39.3B), Toronto-Dominion Bank (1.6%, $38.2B), National Australia Bank (1.6%, $37.2B), and Bank of Montreal (1.5%, $36.6B).
The largest increases among Issuers of money market securities (including Repo) in December were shown by the Federal Home Loan Bank (up $33.5 billion to $173.5 billion), the US Treasury (up $15.3 billion to $466.4 billion), Natixis (up $13.3 billion to $24.6 billion), Bank of Nova Scotia (up $12.7 billion to $62.4 billion), and State Street (up $10.3B to $20.0B), while Deutsche Bank (down $25.5B to $64.4B), Societe Generale (down $16.4B to $39.3B), HSBC (down $8.8 billion to $26.3 billion), RBS (down $7.1B to $28.7B) and Rabobank (down $6.2B to $29.6B) all showed large declines in issuance.
The United States is still the largest segment of country-affiliations with 50.5%, or $1.211 trillion. Canada (9.4%, $225.1B) remained the second largest country, but Japan reclaimed third place (7.4%, $176.8B), moving ahead of France (7.0%, $168.2B) and the UK (5.6%, $135.3B). Australia (4.3%, $101.5B) moved to sixth, while Germany (4.3%, $103.1B) fell to the 7th largest country, as Deutsche Bank's repo issuance plunged. `Sweden (3.6%, $86.2B), Switzerland (3.5%, $82.9B), and the Netherlands (2.6%, $61.1B) rounded out the top 10.
As of Dec. 31, Taxable money funds held 24.0% of their assets in securities maturing Overnight, and another 11.8% maturing in 2-7 days (35.7% total in 1-7 days). Another 19.9% matures in 8-30 days, while 27.5% matures in the 31-90 day period. The next bucket, 91-180 days, holds 12.4% of taxable securities, and just 4.4% matures beyond 180 days. Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated last week, while our MFI International "offshore" Portfolio Holdings will be updated tomorrow (our Tax Exempt MF Holdings will be updated today). Visit our Content center to download files or visit our Money Fund Portfolio Laboratory to access our "transparency" module.
J.P. Morgan Securities writes about its latest analysis of portfolio holdings, "Prime MMFs increased their non-European bank holdings in December while reducing their European bank holdings. Month-over-month, there were marginal increases to US agencies, foreign SSAs, and non-financial corporates and marginal decreases to US Treasuries, US municipals, and non-bank financial corporates. Prime MMF total bank exposures increased by $16bn in December driven by increased holdings of unsecured CP, ABCP, CDs, and time deposits. Repo holdings dropped by $71bn with agency debt/MBS repo and Treasury repo holdings falling by $58bn and $19bn, respectively, offset slightly by other repo, which increased by $6bn. Some of these reductions in repo were cushioned by a $29bn increase in time deposit holdings."
They explain, "In our view, the decreases in repo holdings in December were driven by seasonal reductions in dealer balance sheet availability. Although the $71bn month-over-month decrease is significant, it is a sign of a correction of overextended dealer balance sheets in October and November. As we noted in prior research notes, October and November repo holdings in prime MMFs were at 2-year highs as elevated repo rates spurred heavy demand. The drop in December has now brought prime MMF repo holdings to their 2-year monthly average of about $240bn and close to their 2-year quarterly average of about $225bn."
As next Friday's deadline approaches for feedback on the Financial Stability Oversight Council's Money Market Fund Reform Proposals, a number of Comment Letters are being posted, and some even have substance and familiarity with the issues at hand. One of the more educated recent postings is a Comment from The Independent Trustees of the Fidelity Fixed-Income and Asset Allocation Funds. Chairman Albert Gamper writes, "Frankly, we are increasingly dismayed at the imbalance of contextual perspective represented by the Proposed Recommendations and the poverty of the economic and financial analysis on which they rest. We think that singling out MMFs as the first financial product to be subject to FSOC recommendations under Section 120 represents a perverse mis-prioritization in light of more pressing financial and economic issues, disregards the very substantial benefits that MMFs have brought to MMF shareholders, short-term credit markets generally both in terms of pricing and liquidity, and to borrowers in those markets, including the United States Treasury itself, state and municipal governments and public and privately-held enterprises, and ignores the effects of both the 2010 Rule 2a-7 amendments and MMF industry participants' efforts to enhance the resiliency of MMFs to credit market uncertainty and turmoil."
The letter continues, "We view differently than the FSOC the events that led to and the aftermath of the Lehman default, and do not agree with its proposed determination that the pricing methodology of MMF shares is a source of systemic risk. Indeed, it seems to us that the attribution of general market illiquidity to MMFs in the fall 2008 disproportionately burdens a financial sector entirely not responsible for the opaque financial institution balance sheets and the regulatory environment in which such institutions existed at that time, and dramatically underweights the behavior of many other market participants during the period. We object to the characterization of MMFs as "shadow" banking because MMF balance sheets and assets are a beacon of light compared to the opacity of the balance sheet and off-balance sheet liabilities of so many regulated and nonregulated financial institutions at that time and now. Moreover, the proposed determination that the activities of MMFs are the first non-bank financial activities under Section 120 to pose systemic risk represents a perverse policy choice with substantial risk that the consequences intended to be avoided will in fact be precipitated or accelerated, including the probable migration to unregulated investment pools or increased deposits in still weak banking institutions."
Gamper's letter explains, "We believe that neither the SEC nor the FSOC have made sufficient study and analysis of the possible effects of changes to MMF regulation on the nation's short-term credit markets generally, and the discussion in FSOC's Proposed Recommendations is speculative and unpersuasive. As a result, we think the Proposed Recommendations are at best premature."
The letter says of FSOC's Alternative 1, "We have been attentive to the debates since prior to the proposal of amendments to Rule 2a-7 in 2009 concerning changing MMFs' pricing from amortized cost valuation to market valuation. We are unpersuaded that the purported benefits of reducing systemic risk through Alternative 1 outweigh the detriments to shareholders. Indeed, it seems self-evident to us that first-mover advantage, and thus possible contagion risk, cannot be eliminated through either constant or variable net asset valuations. Enhanced and more frequent and current portfolio and mark-to-market valuation disclosure, as required by the 2010 amendments, has greater potential in our view to engender caution in credit determinations than net asset valuation pricing, and without the destabilizing effect of the anticipated massive redemptions by shareholders which can or will not use variable net asset value liquidity vehicles. In addition, net asset value pricing in declining credit conditions creates no impediment to redemptions and could, indeed, generate undesirable volatility in short-term credit markets."
The Independent Directors comment, "Alternative 2 will, in our view, make MMFs so unattractive to shareholders that well before the end of any "transition period" there will be few assets left. MMF shareholders, including ours, whether retail or institutional, have been encouraged over several decades to value the convenience, flexibility and current yield of MMFs by their banks, their broker-dealers, their benefit plan advisors and sponsors and their investment advisers. To say nothing of the nearly impossible task of funding the capital buffer from fund income in the current interest rate environment, the minimum balance requirement deferring a portion of full redemptions of holdings greater than $100,000 (the "MBR") is simply an unacceptable burden on shareholders. The MBR is not in their interests and we believe they will not accept it as a regular feature of their source of daily liquidity. We are mindful that Reserve Primary Fund was unable to maintain a constant $1.00 net asset value, and that other MMFs received actual or committed sponsor support from time to time, and particularly in the financial crisis of 2008-2009. Nevertheless, we believe that there is no demonstrable need for the MBR based on more than three decades of experience. Instead, we believe that, rather than attempting to solve for some economists' theoretical view of perfect protection against credit events in an MMF portfolio with the likely consequence that a valuable financial product which has almost invariably met shareholder expectations would be destroyed, shareholders should continue to benefit from MMFs in their current form and with the enhanced disclosures of possible risk of loss that may be required by further amendments to Rule 2a-7."
Finally, they add, "Alternative 3 is a hollow recommendation because in establishing in our view an utterly impossible hurdle for an MMF to leap over, it betrays either a profound cynicism intended to gather support for the other proposals or a design to eliminate MMFs entirely. We appreciate that some sponsors may be able to establish up to 3% capital buffers, but we think no MMF will be able to do so in the transition period -- at all, or even during a transition period with a more favorable interest rate environment. Moreover, we think the capital buffer (as contemplated by both Alternative 2 and Alternative 3) is ill-conceived and based on a bank-centric model that is inapposite to the MMF model. Banks are required to have depositary insurance and capital buffers to protect depositors at the expense of bank shareholders who otherwise benefit from the returns earned on deposits. MMF shareholders earn a return, or not, on the MMF's assets, and neither look to, nor expect that either there is, a U.S. Government guarantee or fund sponsor support to avoid loss in principal. We have been advised, and it has been widely reported, that Fidelity's shareholder surveys clearly demonstrate an understanding of an MMF's key financial attributes, including the absence of a guarantee from anyone against loss."
See also, Reuters' "Fidelity trustees call money market reform 'perverse'", which says, "Independent trustees of the money market funds at Fidelity Investments called proposed industry reforms a "perverse mis-prioritization," according to a letter released on Thursday. The trustees, including former CIT Group Inc Chairman Albert Gamper Jr., told the Financial Stability Oversight Council that there are more pressing financial and economic issues than reforming money market funds."
As we mentioned in our "Link of the Day" yesterday, Goldman Sachs announced that they would begin reporting mark-to-market, or "shadow" NAVs out to 4 decimal places on a daily basis. Now the 2nd largest money fund manager says it will join them. A press release says, "J.P. Morgan Asset Management today announced that three of its U.S. money market funds will begin to disclose their market-based NAVs per share (also known as Shadow NAVs) on a daily basis. This additional disclosure will provide investors with greater transparency regarding the Market-Based NAV's fluctuation, but will not change the funds' existing objective to maintain $1.00 stable NAV."
The JPMAM release continues, "Beginning on January 14, 2013, the JPMorgan Prime Money Market Fund, JPMorgan Liquid Assets Money Market Fund and the JPMorgan Current Yield Money Market Fund will calculate their Market-Based NAVs per share to four decimals at the Funds' close of each trading day and disclose it the following business day on its website. J.P. Morgan plans to add Market-Based NAVs disclosure for its other money market funds in the near future."
Robert Deutsch, head of Global Liquidity at J.P. Morgan Asset Management, tells us, "Daily disclosure of market-based NAVs will help investors better understand how day to day market movements or events can affect the value of the funds' portfolios. Increased NAV transparency will allow investors to better understand the nature of money market fund risks and to make more informed decisions regarding their investments while they continue to enjoy the benefits that money market funds offer."
The release adds, "Money market funds' Market-Based NAVs per share have historically been calculated at least weekly, and since December 2010, have been disclosed monthly to the SEC within Form N-MFP and made public with a 60-day lag."
Goldman's statement, entitled, "GSAM To Disclose Daily Nav For US-Domiciled Commercial Paper Money Market Funds," explains, "Goldman Sachs Asset Management announced that it will begin disclosing a daily market value Net Asset Value ("NAV") for its US-domiciled Commercial Paper Money Market funds effective today. Disclosure of the NAV for the Government and Municipal funds is expected to follow next week."
James McNamara, Managing Director and President of Goldman Sachs Mutual Funds," says, "As a leading provider of liquidity solutions, we believe that more frequent disclosure and greater transparency will benefit investors. This will have no impact to how fund shareholders transact or the way the funds are managed. It is our belief that this level of transparency will also benefit the ongoing dialogue around potential regulatory changes to money market funds."
Goldman's release adds, "As the industry and regulators work to determine the next course of action relative to money market fund reform, GSAM believes increased transparency will help investors, and the market at large. This disclosure is also consistent with Goldman Sachs' long-standing advocacy of mark-to-market accounting."
David Fishman and James McCarthy, Managing Directors and Co-Heads of GSAM's Global Liquidity Management business, comment, "Given that much of the discussion about systemic risk has centered on the commercial paper fund market in the US, we have decided as a first step to disclose those funds' market value NAVs. This additional transparency gives fund investors more information to understand the underlying value of the portfolio -- a data point we already use each day to manage risk and achieve the funds' primary goal: seeking to achieve a $1.00 NAV."
Goldman tells us, "The calculation, disclosure and monitoring of a market value NAV for a money market fund is not new. In fact, every money market fund is required by the Securities and Exchange Commission (SEC) to calculate a market value NAV to the nearest hundredth of a cent (or $0.0001) on a monthly basis, which is made available to investors on a 60-day lag. Additionally, GSAM and its Funds' Board regularly monitor the funds’ market value NAV."
Finally, they say, "GSAM will begin disclosing a daily market value NAV for the following US-domiciled commercial paper or "prime" funds: the GS Financial Square Money Market Fund, the GS Financial Square Prime Obligations Fund and the GS VIT Money Market Fund. The information will be available to investors on the Funds website. GSAM plans to disclose daily NAVs for US-domiciled tax-exempt, government, and Treasury funds next week and for non-US Money Market funds in the near future."
Money funds saw outflows on Monday, Jan. 7, for the first time since Dec. 20 as the heavy year-end inflows into Government and Treasury money funds due to the expiration of unlimited FDIC insurance appear to be subsiding. Fears of a flood of formerly Government guaranteed cash pushing interest rates into negative territory and forcing funds to close to new investors also appear unfounded. Repo rates remain solidly in the black and we're not aware of any Treasury funds shutting their doors. One Treasury fund that had implemented maximum purchase limits at year has since lifted the restriction, so it seems that corporates and institutions are taking their time to reallocate cash out of now uninsured deposit vehicles.
Our Money Fund Intelligence Daily, which tracks 1,067 money funds' daily yields, assets, WAMs and factors, showed an asset decline of $523 million Monday. This follows a big buildup of $74 billion in money fund assets from Dec. 21 through Jan. 4, and a surge of $175.3 billion since Oct. 31, 2012. Interestingly, less than half of the inflows were Treasury Institutional or Government Institutional funds, indicating that the year-end cash buildup was likely more than just shifting TAG money. Retail money funds and Tax Exempt money funds saw strong increases in assets too during Q4 and December 2012 too.
We're not aware of any money funds closing to new investors during this period, but at least one fund group did temporarily limit investment sizes. However, Wells Fargo Advantage Funds, posted a "Service Alert" dated Jan. 3 on its website entitled, "Maximum purchase limits lifted for certain money market funds." It says, "Effective Friday, January 4, 2013, Wells Fargo Advantage Funds will lift the temporary maximum purchase limits for shareholders of the Wells Fargo Advantage 100% Treasury Money Market Fund and the Wells Fargo Advantage Treasury Plus Money Market Fund. The purchase limits had been instituted because continued volatility and challenges in the financial markets created additional demand for the money market securities in which these funds invest, resulting in low, and sometimes negative, yields on these securities. The temporary maximum purchase limit was designed to allow our fund managers to continue to pursue stated investment strategies as they seek to prudently manage the funds for the benefit of all shareholders."
The Wells notice adds, "Although these limits are being lifted, we strongly encourage notification at least one day in advance of transactions in excess of $25 million for the Wells Fargo Advantage 100% Treasury Money Market Fund and $50 million for the Wells Fargo Advantage Treasury Plus Money Market Fund. We also encourage that trades be placed as early in the day as possible. The effect of this prior notification will be to assist the portfolio management team in managing the funds in a more effective manner and may reduce the possibility that a large purchase is not able to be accepted. Please note that, as indicated in each fund's prospectus, we reserve the right to refuse or cancel a purchase or exchange order for any reason, including if we believe that doing so is in the best interest of the funds and their shareholders."
The FDIC explained on its website recently in a post entitled, "Expiration of Temporary Unlimited Coverage for Noninterest-Bearing Transaction Accounts," "Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts (NIBTAs) at all FDIC-insured depository institutions (IDIs) from December 31, 2010 through December 31, 2012 (the Dodd-Frank Deposit Insurance Provision). In anticipation of the expiration of the Dodd-Frank Deposit Insurance Provision, the FDIC issued Financial Institution Letter FIL-45-2012 to provide related direction and guidance to IDIs."
It adds, "Beginning January 1, 2013, noninterest-bearing transaction accounts will no longer be insured separately from depositors' other accounts at the same IDI. Instead, noninterest-bearing transaction accounts will be added to any of a depositor's other accounts in the applicable ownership category, and the aggregate balance insured up to at least the Standard Maximum Deposit Insurance Amount (SMDIA) of $250,000, per depositor, at each separately chartered IDI."
The January issue of Crane Data's Money Fund Intelligence newsletter, which will be e-mailed to subscribers later this morning, will announce the winners of our MFI Awards, a designation given to the top-performing money market mutual funds for 2012. We also review recent fund news in the article, "Consolidation & Liquidations, Asset Rebound & FSOC Outlook," and feature the profile, "Dechert's Vartanian Says FSOC Jumping the Gun" in our new edition. Finally, we've updated our Money Fund Wisdom database query system with Dec. 31, 2012, performance statistics and rankings, and our MFI XLS will be sent out shortly. (Our Dec. 31 Money Fund Portfolio Holdings are scheduled to go out on Thursday.)
Our piece, "Top MMFs of 2012; Our 4th Annual MFI Awards," says, "In this issue, we once again recognize some of the top-performing money funds, ranked by total returns, for calendar 2012, as well as the top-ranked funds for the past 5-year and past 10-year periods. We present the following funds with our annual Money Fund Intelligence Awards. (See the table on page 6 of MFI for the table with the winners.) These include the No. 1-ranked funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2012, in each of our major fund categories (our "Type") -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Individual, Government Individual, and Treasury Individual."
MFI says, "The top-performing Taxable funds overall in 2012 and among Prime Institutional funds was Reich & Tang Natixis Liq Prm Port Treas (LQTXX), which returned 0.25%. Among Prime Retail funds, Flex-funds Money Market Retail (FFMXX) again had the best return in 2012 (0.10%). American Beacon US Govt Select (AAOXX) won the Top Government Institutional fund over a 1-year period with a return of 0.09%, while Selected Daily Govt Fund S (SDGXX) won the MFI Award for Government Retail Money Funds (1-year return). BlackRock Cash Treas MMF Inst (BRIXX) ranked No. 1 in the Treasury Institutional class, and Invesco Treasury Private (TPFXX) ranked tops among Treasury Retail funds.
We say about the "Top Funds Over Past Five Years," "For the 5-year period through December 31, 2012, Touchstone Inst MF again took top honors for the best-performing money fund with a return of 1.01%. Fidelity Select MM Port ranks No. 1 among Prime Retail funds with an annualized return of 0.78%. Goldman Sachs FS Govt In (FGTXX) again ranked No. 1 among Govt Institutional funds, while Selected Daily Govt Fund D (SGDXX) ranked No. 1 among Treasury Retail funds over the past 5 years. Vanguard Admiral Treasury ranked No. 1 in 5-year performance among Treasury Institutional money funds, and Invesco Treasury Priv ranked No. 1 among Treasury Retail MM funds."
On the "Best Money Funds of the Decade," MFI comments, "The highest-performers of the past 10 years include: DWS Daily Assets Fund Inst (DAFXX), which returned 2.04% (No. 1 overall and first among Prime Inst); Fidelity Select MM Portfolio (FSLXX), which returned 1.87% (the highest among Prime Retail); American Beacon US Govt Select (AAOXX), which returned 1.85%, (No. 1 among Govt Inst funds); and, Vanguard Federal Money Market Fund (VMFXX), which ranked No. 1 among Govt Retail funds (1.76%). Milestone Treasury Obligs Fin (MIL01) returned the most among Treasury Institutional funds over the past 10 years; and, Goldman Sachs FS Trs Obl Sel (GSOXX) ranked No. 1 among Treasury Retail funds."
MFI's Awards piece adds, "See our additional rankings tables on pages 9-11, and see our Money Fund Intelligence XLS for more detailed listings, percentiles, and rankings. Look for more details in coming days on the website too (www.cranedata.com). Winners will receive a letter and certificate stating their No. 1 ranking and the criteria used. The table below shows the No. 1 ranked money funds for each category based on 1-year, 5-year, and 10-year annualized total returns." Watch for more excerpts from MFI and more awards in coming days.
In a rare bit of regulatory sanity and good news for the money markets, global regulators decided to delay and dilute some of the more onerous provisions of the Basel III banking regulations, the LCR, or liquidity coverage ratio. The Bank for International Settlements, in a release entitled, "Group of Governors and Heads of Supervision endorses revised liquidity standard for banks," says, "The Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, met today to consider the Basel Committee's amendments to the Liquidity Coverage Ratio (LCR) as a minimum standard. It unanimously endorsed them. Today's agreement is a clear commitment to ensure that banks hold sufficient liquid assets to prevent central banks becoming the "lender of first resort."
The release tells us, "The GHOS reaffirmed the LCR as an essential component of the Basel III reforms. It endorsed a package of amendments to the formulation of the LCR announced in 2010. The package has four elements: revisions to the definition of high quality liquid assets (HQLA) and net cash outflows; a timetable for phase-in of the standard; a reaffirmation of the usability of the stock of liquid assets in periods of stress, including during the transition period; and an agreement for the Basel Committee to conduct further work on the interaction between the LCR and the provision of central bank facilities."
It explains, "A summary description of the agreed LCR is in Annex 1. The changes to the definition of the LCR, developed and agreed by the Basel Committee over the past two years, include an expansion in the range of assets eligible as HQLA and some refinements to the assumed inflow and outflow rates to better reflect actual experience in times of stress. These changes are set out in Annex 2. The full text incorporating these changes will be published on Monday 7 January."
The BIS release continues, "The GHOS agreed that the LCR should be subject to phase-in arrangements which align with those that apply to the Basel III capital adequacy requirements. Specifically, the LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity."
It adds, "The GHOS agreed that, during periods of stress it would be entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum. Moreover, it is the responsibility of bank supervisors to give guidance on usability according to circumstances. The GHOS also agreed today that, since deposits with central banks are the most -- indeed, in some cases, the only -- reliable form of liquidity, the interaction between the LCR and the provision of central bank facilities is critically important. The Committee will therefore continue to work on this issue over the next year."
BIS also says, "GHOS members endorsed two other areas of further analysis. First, the Committee will continue to develop disclosure requirements for bank liquidity and funding profiles. Second, the Committee will continue to explore the use of market-based indicators of liquidity to supplement the existing measures based on asset classes and credit ratings. The GHOS discussed and endorsed the Basel Committee's medium-term work agenda. Following the successful agreement of the LCR, the Committee will now press ahead with the review of the Net Stable Funding Ratio. This is a crucial component in the new framework, extending the scope of international agreement to the structure of banks' debt liabilities. This will be a priority for the Basel Committee over the next two years."
Mervyn King, Chairman of the GHOS and Governor of the Bank of England, said, "The Liquidity Coverage Ratio is a key component of the Basel III framework. The agreement reached today is a very significant achievement. For the first time in regulatory history, we have a truly global minimum standard for bank liquidity. Importantly, introducing a phased timetable for the introduction of the LCR, and reaffirming that a bank's stock of liquid assets are usable in times of stress, will ensure that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery." See also, Bloomberg's "Banks Win Watered Down Liquidity Rule to Prevent Lending Squeeze" and Wall Street Journal's "Regulators Give Ground to Banks".
Money market mutual fund assets retook the $2.7 trillion level for the first time since Jan. 11, 2012, and moved to their highest level since June 15, 2011, the week before concerns over European holdings caused large outflows. The ICI's latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $37.78 billion to $2.705 trillion for the week ended Wednesday, January 2, the Investment Company Institute reported today. Taxable government funds increased by $27.75 billion, taxable non-government funds increased by $3.72 billion, and tax-exempt funds increased by $6.32 billion." Since Oct. 31, money fund assets have increased by $158.2 billion, or 6.2%, rising 7 out of the past 9 weeks.
No doubt the expiration of the TAG, or Transaction Account Guaranty, program, which provided unlimited FDIC insurance for noninterest bearing transaction accounts, on Dec. 31, 2012, has fueled the rebound in money fund assets. Government Institutional (including Treasury Inst) money funds accounted for the lion's share of the gains in the latest week, rising $25.0 billion. Money funds two week asset gain of $68.1 billion represents the largest two-week gain since Jan. 14, 2009. In the 52 weeks through Jan. 2, 2013, money fund assets have increased by $12 billion, or 0.4%. (Assets had been showing declines for almost all of 2012, but the past two weeks will likely push 2012's totals into the positive column.)
ICI's report explains, "Assets of retail money market funds increased by $13.89 billion to $943.12 billion. Taxable government money market fund assets in the retail category increased by $2.76 billion to $200.15 billion, taxable non-government money market fund assets increased by $7.90 billion to $539.12 billion, and tax-exempt fund assets increased by $3.24 billion to $203.86 billion.... Assets of institutional money market funds increased by $23.89 billion to $1.762 trillion. Among institutional funds, taxable government money market fund assets increased by $24.99 billion to $727.06 billion, taxable non-government money market fund assets decreased by $4.18 billion to $947.21 billion, and tax-exempt fund assets increased by $3.08 billion to $87.24 billion."
Crane Data's Money Fund Intelligence Daily, which is delivered to subscribers each day at 8am with the prior day's assets and yields on over 1,000 money market funds, shows assets rising by $44.4 billion over the past week (through 1/2/13). We show Government Institutional (excluding Treasury funds) funds rising by $19.1 billion, Treasury Institutional money funds rising by $10.0 billion, and Prime Institutional funds falling by $4.0 billion. Surprisingly, Retail (taxable) money funds also showed a strong $13.9 billion increase, belying the suspicion that this is all "TAG" money moving into MMFs.
The 20 largest gainers among money funds on the week include: Goldman Sachs FS Govt (FOAXX, $38.3 billion, up $2.54 billion), Dreyfus Govt Cash Mgmt Instit (DGCXX, $17.3B, +2.45B), BlackRock Lq TempFund (TMPXX, $56.0B, +1.9B), Fidelity Instit MM: Govt Port I (FIGXX, $27.9B, +$1.8B), Northern Trust Treasury Money Mkt (NITXX, $11.5B, +$1.79B), BlackRock Lq FedFund Inst (TFDXX, $14.9B, +$1.68B), JPMorgan US Govt MM Capital (OGVXX, $27.8B, +$1.64B), Dreyfus Treas Prime Cash Mg (DIRXX, $23.9B, $1.58B), Federated Treasury Oblig (TOCXX, $24.8B, +$1.41B), Fidelity Cash Reserves (FDRXX, $118.3B, +$1.38B), Vanguard Prime MMF (VMMXX, $96.9B, +$1.250B), HSBC Inv US Govt Money Mkt (RGYXX, $3.3B, +$1.19B), Federated Government Obl (GOCXX, $32.8B, +$1.1B), Morgan Stanley Inst Liq Govt (MVRXX, $15.7B, +$1.07B), State Street Inst Liquid Res Inst (SSIXX, $25.86B, +$1.04B), Goldman Sachs FS Prm Ob (FBAXX, $19.9B, +$1.03B), Goldman Sachs FS Fed (FVAXX, $12.2B, +$1.03B), JPMorgan 100% US Trs MM (CJTXX, $9.4B, +$1.0B), Western Asset US Treas Res (CIIXX, $10.7B, +$1.00B), and JPMorgan 100% US Trs MM (JTSXX, $9.02B, +$957M).
We've written several times over the last two months about liquidations in the money fund space, particularly among Tax-Exempt money funds. (See Crane Data's Dec. 26 News "More State Tax Exempt MMFs Liquidate: BlackRock's BIF AZ, FL, NC", our Dec. 18 News, "Fed's Stein on Dollar Funding; Sterling Capital Liquidates MMFs" and our Nov. 13 News, "Consolidation Continues: Pyxis, Some Dreyfus Muni MFs Liquidating".) Today, we cite two more sets of liquidations, and we note a couple more recent Comment letters posted to the Financial Stability Oversight Council's Money Market Fund Reform proposal site.
HSBC is the latest fund advisor to liquidate some of its tax-exempt money funds. The HSBC Funds prospectus Supplement (dated Dec. 26, 2012) "to the HSBC New York Tax-Free Money Market Fund and HSBC Tax-Free Money Market Fund Prospectus dated February 28, 2012" says, "On December 18, 2012, the Board of Trustees of HSBC Funds (the "Board of Trustees") approved Plans of Liquidation to provide for the orderly liquidations of the HSBC New York Tax-Free Money Market Fund and the HSBC Tax-Free Money Market Fund (each a "Fund," and collectively, the "Funds"). On September 7, 2012, the Board of Trustees authorized HSBC Global Asset Management (USA) Inc. (the "Adviser"), the Funds' investment adviser, to take steps towards the liquidation of each Fund. While the Adviser initially anticipated that the liquidations would occur on or about December 28, 2012, the Adviser now expects that each Fund will be liquidated on or about January 31, 2013. The liquidations have been postponed to provide additional time to notify shareholders and financial intermediaries."
The filing adds, "The Funds no longer sell shares to new investors, including through exchanges into each Fund from other funds of the HSBC Funds. Investors may continue to redeem shares of the Funds. Once each Fund has been liquidated, all references to that Fund are deleted from the Prospectus." As of Dec. 31, 2012, HSBC Inv NY Tax-Free MMF D (HNYXX) was $170 million (Class Y, RYYXX, had an additional $123 million), and HSBC Inv Tax-Free Money Mkt Y (HBYXX) was $23 million (Class D, HBDXX, had an additional $14 million too).
Dreyfus, which announced the liquidations of its `MA Muni Money Market Fund, PA Muni MMF, Basic NJ Muni MMFs in November (as we mentioned above, see our 11/13 "Consolidation Continues: Pyxis, Some Dreyfus Muni MFs Liquidating"), has also announced the liquidations of Dreyfus Basic CA Muni MMF (DCLXX, $66M) and Dreyfus Basic MA Muni MMF (DMRXX, $63) as well.
The filing for the Dreyfus/Laurel Tax-Free Municipal Funds, Dreyfus Basic California Municipal Money Market Fund says in its, "Supplement to Summary Prospectus and Statutory Prospectus dated November 1, 2012" "The Board of Trustees of The Dreyfus/Laurel Tax-Free Municipal Funds has approved the liquidation of Dreyfus BASIC California Municipal Money Market Fund (the "Fund"), a series of The Dreyfus/Laurel Tax-Free Municipal Funds, effective on or about December 18, 2012 (the "Liquidation Date"). Accordingly, effective on or about November 15, 2012 (the "Closing Date"), the Fund will be closed to any investments for new accounts.... The Fund will continue to accept subsequent investments until the Liquidation Date."
The filing for the Dreyfus Basic Massachusetts Municipal MMF, "Supplement to Summary Prospectus and Statutory Prospectus dated November 1, 2012," says, "The Board of Trustees of The Dreyfus/Laurel Tax-Free Municipal Funds has approved the liquidation of Dreyfus BASIC Massachusetts Municipal Money Market Fund (the "Fund"), a series of The Dreyfus/Laurel Tax-Free Municipal Funds, effective on or about December 19, 2012 (the "Liquidation Date"). Accordingly, effective on or about November 15, 2012 (the "Closing Date"), the Fund will be closed to any investments for new accounts, except that new accounts may be established for "sweep accounts" and by participants in group retirement plans."
In other news, we also noticed additional postings on the FSOC's Comment Letter site. These include two recent oddball studies, Comment from University of Louisiana at Lafayette, B. I. Moody III College of Business ("Will the SEC's 2010 Reforms Prevent Another $2.7 Trillion Bailout of Money Funds?") and Revised comment from Robert Comment ("Do Money Market Funds Require Further Reform?"), as well as a series of notices about recent meetings with Treasury (including Federated, Fidelity and BlackRock). (These don't say anything about the discussions other than noting who was in attendance.)
As we've long suspected, the Federal Reserve's ultra-low interest rate policies are doing more harm than good argues a recent paper by J.P. Morgan Funds Chief Global Strategist Dr. David Kelly. The "Market Bulletin," entitled, "Two Problems with Easy Money," says, "Probably the oldest maxim in economics is that there is no such thing as a free lunch. Less frequently observed is that even large, expensive lunches can be very unhealthy. Sadly, the monetary fare currently being served up by the Federal Reserve suffers from both vices -- it is unhealthy for the current growth of the U.S. economy and could prove very expensive in the long run. While it would be better for everyone if the Federal Reserve realized this today, for investors it is important to understand the consequences of it continuing on its current path."
Kelly explains, "In this paper, we make two basic points. The first, and the more controversial, is that easy money has now gone well beyond the point of being ineffective in stimulating the economy and is now, in fact, a significant drag on U.S. economic growth. The second is that when, despite the misguided efforts of monetary policy, U.S. economic conditions improve, the Federal Reserve will find it very difficult to tighten policy in an appropriate way, potentially leading to a bout of higher inflation that may, in turn, force aggressive tightening and a new recession."
He continues, "We should say, at the outset, that while we are critical of current Federal Reserve policy, we do recognize the crucial role played by the Fed in limiting the damage from the financial crisis. We also accept that, unlike many Washington policymakers, the members of the Federal Reserve are solely motivated to do the right thing for the economy. Unfortunately, we believe their actions are exactly the wrong thing for the economy today."
Kelly writes, "So, why has monetary policy been so ineffective? To understand this, it is first necessary to review the mechanisms by which easy money is supposed to help the economy.... First, contrary to the assumptions of most commentators, the Fed's policy of super-low interest rates is actually reducing consumer discretionary income relative to the alternative of raising interest rates. As shown in Chart 2 on the right, as of September 30, 2012, American households had $78.2 trillion in assets, of which we estimate roughly $15.2 trillion were interest-bearing, compared to $13.4 trillion in debt."
He adds, "Based on mortgage data from the Census Bureau, over 90% of outstanding mortgages carry a fixed rate, as well as the vast majority of auto loans, allowing us to assume that approximately 70% of liabilities are fixed rate debt. Determining the exact amount of variable rate assets is more difficult, but given that more than one-half of deposits are comprised of time deposits, savings deposits and money market funds, it may be reasonable to assume that more than 70% of household interest-bearing assets could be considered to be variable rate. Therefore, as an approximation, a +1% increase in interest rates could increase consumer interest income by $106 billion (on 70% of assets) and interest expense on household liabilities by $40 billion (on 30% of liabilities). While definitive numbers are more difficult to calculate, what is clear is that interest income would rise more than interest expense."
Crane Data asked Kelly about his recent paper. He tells us, "Well, I have been talking about it for a while, but I haven't written anything comprehensive. I've talked about different pieces of it. But I just want to put it all down on a one piece of paper.... What I find happens is that a lot of relatively orthodox economists agree and say, "Yeah, that is true, and, yeah, that is true." But they don't add it all up. If you add it all up, I think the conclusion is inescapable. The Federal Reserve is actually slowing the economy down. The answer to the mystery of why this economy is growing so slowly is in part because the Federal Reserve is trying to help it so much."
Finally, when asked if he really believes the Fed is hurting the economy, he adds, "I do. It took me a while to come to that conclusion. I didn't start out [it]. I recognized that ... all attempts to manipulate the economy can have some negative side effects.... It is actually harming the economy.... The key issue is that we are not just pushing on the string, we are actually strangling ourselves with the string."
