​

ICI'​s latest "`​Trends in Mutual Fund Investing, January 2013" confirms that money fund assets were basically flat in January. ICI also released its most recent "Month-​End Portfolio Holdings of Taxable Money Funds," which reaffirms the reported surge in Commercial Paper and rebound in Repo, as well as the drop in Treasuries and Government Agency securities. (​It shows CDs as flat though, while our January data showed a noticeable increase. See Crane Data'​s Feb. 14 News, "CP Soars, Repo, CDs Jump in Jan. Holdings; Comments on Daily Ports.") ICI'​s "January Trends" shows that money market mutual fund assets fell by $​9.​1 billion last month after rising $​75.​9 billion in December and $​68.​6 billion in November. Money fund assets have fallen every single week since Jan. 9, and have declined by $​33.​1 billion month-​to-​date in February, though, according to Crane Data'​s MFI Daily.

ICI'​s January "​Trends" says, "The combined assets of the nation'​s mutual funds increased by $​377.​7 billion, or 2.​9 percent, to $​13.​423 trillion in January, 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.... Stock funds posted an inflow of $​37.​91 billion in January, compared with an outflow of $​30.​67 billion in December.... Bond funds had an inflow of $​32.​82 billion in January, compared with an inflow of $​7.​25 billion in December.... Money market funds had an outflow of $​10.​72 billion in January, compared with an inflow of $​76.​46 billion in December. Funds offered primarily to institutions had an inflow of $​15.​49 billion. Funds offered primarily to individuals had an outflow of $​26.​22 billion."

As we mentioned, our MFI Daily shows that MTD through February 26, assets have decreased by $​33.​1 billion. Retail (​taxable) assets have fallen by $​7.​0 billion in February and by $​25.​7 billion YTD, while Institutional (​taxable) assets have declined by $​24.​9 billion in February but have risen by $​268 million YTD. `​Prime Institutional assets have dropped by $​15.​1 billion in February and have risen by $​6.​4 billion YTD. Prime Retail assets have fallen by $​2.​7 billion in Feb. and $​17.​8 billion YTD. We believe TAG-​expiration related inflows have played a minor role in asset movements, but that special dividends (​paid late last year) have been reallocated out of cash early in 2013.

ICI'​s Portfolio Holdings for January 2013 show Repurchase Agreements rebounding after falling sharply in December. Repos hit a record level in November, fell by $​76.​3 billion in December, then rebounded by $​17.​2 billion to $​570.​8 billion (​23.​7% of assets). They remain the largest holding in taxable money funds. Holdings of Certificates of Deposits remained the second largest position, though they dipped by $​2.​7 billion to $​478.​3 billion (​19.​9%). Treasury Bills & Securities fell by $​24.​9 billion, but they remained the third largest segment with $​444.​7 billion (​18.​5%).

Commercial Paper became the fourth largest segment behind U.​S. Government Agency Securities; CP holdings jumped by $​39.​3 billion to $​386.​0 billion (​16.​1% of assets) but Agencies fell by $​15.​1 billion to $​332.​2 billion (​13.​8% of taxable assets). Notes (​including Corporate and Bank) fell fractionally to $​104.​4 billion (​4.​3% of assets), and Other holdings dropped by $​11.​2 billion (​we believe due to a plunge in VRDN holdings) to $​74.​2 billion (​3.​1%).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 325,​567 to 24.​794 million, while the Number of Funds remained flat at 400. The Average Maturity of Portfolios lengthened by 3 days to 48 days in January. Since January 2012, WAMs of Taxable money funds have lengthened by 4 days.

Finally, 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 and final data corrections updated as of Jan. 31, 2013. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.

​

We go back to the well to review more Comments to the FOSC'​s "​Proposed Recommendations Regarding Money Market Mutual Fund Reform", focusing on two letters from retail money fund managers. Today, we excerpt from USAA'​s and Waddell & Reed'​s letters to the Financial Stability Oversight Council. The "Comment from Waddell & Reed Investment Managment Company" says, "​As portfolio managers for Waddell & Reed Investment Management Company and Ivy Investment Management Company we are responsible for three prime retail money market funds with assets totaling $​1.​5 billion. Together, we have a combined industry specific experience of 40 years, including the financial crisis of 2008. We appreciate the opportunity to comment on the issue of proposed money market mutual fund reform and hope to provide more perspective from the standpoint of retail investment managers and our investors, whose interests we believe are underrepresented in the ongoing regulatory process."

Authors Sabrina Saxer & Mira Stevovich explain in "General Comments Regardsing Retail Funds," "The proposed reforms unfairly penalize and disadvantage retail shareholders by failing to differentiate them from institutional investors. Retail funds typically have a broad and granular investor base with average account balances that are much smaller than institutional accounts. Because of the granular investor base, individual investor behavior is highly unlikely to materially influence the value or liquidity of a retail money market fund. Retail investors typically use money market funds as savings vehicles whereas institutional funds use them for working capital management or safe havens. Money market funds provide retail investors access to investments not otherwise affordable or accessible, in particular, instruments issued in high dollar denominations. This provides an opportunity for investment diversification and higher yields than traditional savings accounts."

They continue, "Additional regulation threatens the economic viability of smaller retail funds, potentially causing further industry consolidation and increased deposits of FDIC insured banks. Both of these outcomes seem contrary to the FSOC'​s objectives, in particular, exposing U.​S. taxpayers to more risk of bank failures. Retail funds currently represent $​916 billion of industry assets. Under normal market conditions, these assets are a pool of consistent and stable funding for the short term capital markets. In the past four years, over 26% of retail money market fund investors have left the market mostly due to fund closings. Since the beginning of 2008, more than 23% of retail money market funds have closed due to artificially low interest rates and the regulatory environment. Further regulation could continue to chip away at this source of funding. Continuing to disaggregate the retail investor base could cause a permanent contraction in the short term funding market."

Waddell adds, "A floating NAV will modify investor expectations in a negative way and will not eliminate the risk of a run on a fund. Certain surveys such as the 2012 AFP Liquidity Survey and Fidelity'​s "​The Investor'​s Perspective" indicate that investors will be less willing to invest in money market funds and would reduce or eliminate their holdings. There is no way to completely regulate away market risk. Investors will always have some incentive to redeem out of or sell any financial product, including bank deposits, if they fear losses. A floating NAV did not stop mass exodus from equity funds during the financial crisis of 2008. The implementation of a floating NAV could have unforeseen consequences. Floating money market fund NAVs could cause speculative or irrational investor behavior."

They write, "The money market fund industry has already contracted significantly both in terms of the number of funds and assets. The largest funds have become bigger and hundreds of funds have closed because of the costs associated with regulation and 5 years of artificially low interest rates. Municipal funds are down by over 41%. Government funds are the only class of money market funds that have gained assets since the beginning of January 2008, increasing by almost 21% or $​161 billion. Of this increase, only $​10 billion was in government retail funds."

Finally, Waddell tells FSOC, "Money market funds are a regulatory success story with only two funds in the history of their existence ever breaking the buck. In both of these instances, only shareholders experienced losses. The credit crisis of 2008 was not caused by the actions of money market funds or their shareholders, however it did expose some areas of weakness that have been addressed through the 2a-​7 reforms of 2010. Money market funds are an important source of funding for the global economy, providing efficient and cost effective financing for borrowers and historically higher yields for investors than bank deposit accounts. Changing the fundamental nature of these funds is unnecessary and will negatively impact the financial markets and the economy. While we do not believe additional regulation would be beneficial, we encourage the FSOC to consider retail money market funds separately in their evaluation of systemic risk and to carefully consider the unintentional consequences of disaggregation of the retail investor base."

USAA'​s letter comments, "USAA believes that any proposed reform targeted at MMFs should be limited to institutional funds. Retail MMFs do not pose the types of risk the Council seeks to address through its recommendations. Tailoring regulations to institutional funds protects both retail investors and the broader financial markets and addresses the potential risks noted in the Proposal.... Certain USAA affiliates sponsor and manage a family of 50 no-​load retail mutual funds, including approximately $​8 billion in retail MMFs. These retail MMFs are important to USAA'​s members because they provide a convenient short-​term investment vehicle and allow retail investors access to returns from fixed-​income capital markets investments that are often not accessible to individuals. At the same time, MMFs provide benefits of liquidity, stability and short term income while allowing retail investors to diversify risk. Without MMFs, investor options for liquid funds would be limited to checking accounts with low (​or no) yield and relatively higher transaction costs. Bank savings accounts offer higher yields than checking accounts but limit monthly withdrawals and thus do not offer liquidity comparable to MMFs. It is within this context that we seek regulation that will allow retail MMFs' key attributes to remain available to our members in the shape and form they find most convenient."

They adds, "The first part of this letter describes why we believe that distinguishing between retail and institutional MMFs is appropriate and in the best interest of investors and the broader financial markets. We suggest an approach for defining "​retail" and "​institutional" MMFs and urge the FSOC to narrowly tailor regulation to institutional MMFs. The second part of this letter addresses the three options for reform proposed by the Council, which we believe would harm retail investors while failing to meet the Council'​s stated goal of preventing runs."

Finally, USAA concludes, "As the SEC acknowledged in 2009, MMFs are a key component of the U.​S. financial system. We strongly believe that the essential characteristics of MMFs, including daily liquidity and a stable NAV, must be preserved in order for the MMF industry to remain viable. These essential characteristics, combined with existing securities laws and rules, have allowed MMFs to remain not only a commercially successful product and vital part of retail investors' portfolios, but also a significant source of financing within the capital markets. As the SEC acknowledged in 2009, "​A '​break in the link [​between borrowers and money market funds] can lead to reduced business activity and pose risks to economic growth.'" We believe that tailoring MMF reform to institutional MMFs would meet the Council'​s goal of providing safeguards to prevent MMF runs while protecting retail investors and preserving the MMF industry. In a bifurcated regulatory regime, retail investors could be regulated as they are today, and institutional investors could be regulated according to the additional risks they may pose on the market."

​

On Friday, U.​S. Securities & Exchange Commission Commissioner Daniel Gallagher, presenting at "The SEC Speaks in 2013," attacked the encroachment of the Financial Stability Oversight Council (​FSOC) upon the SEC'​s turf and again predicted that an SEC proposal on money fund reforms was coming soon. (​See our Jan. 17 Crane Data News, "SEC'​s Gallagher Says Proposals Coming in Q1, Backs Floating NAV.") Gallagher said, "This brings me to the elephant in the room: FSOC. FSOC was created, in part, to respond to the realization during the financial crisis that regulatory balkanization had resulted in a lack of communication and information-​sharing among financial services regulators, which undoubtedly led to poor policy decisions during the crisis. None of us who lived through the crisis on the ground floor would argue against improvements to the regulatory structure that would facilitate coordination and information-​sharing among regulators. However, with FSOC the threats to the Commission'​s independence move from the theoretical to the immediate, for already in its short existence, this new body has directly challenged the Commission'​s regulatory independence. It is also where just one member of the Commission, the Chairman, can defend that independence. Pursuant to the provisions of Dodd-​Frank establishing FSOC, the group is composed not of agencies, but the individual heads of agencies, acting ex officio."

He explained, "As I have said in the past, the structure of FSOC is particularly troubling for an independent agency like the SEC. While the Secretary of the Treasury and the heads of the FHFA and the CFPB may speak on behalf of their agencies -- not to mention the President that appointed them -- the same cannot be said of the Chairman of the SEC. To preserve its independence, Congress created the SEC as a bipartisan, five-​member Commission and gave each Commissioner -- including the Chairman -- only one vote. This means that the Chairman has no statutory authority to represent or bind the Commission through his or her participation on FSOC. Yet as a voting member of FSOC, the Chairman of the SEC does have a say in authorizing FSOC to take certain actions that may affect -- and indeed have already affected -- markets or entities that the Commission regulates. While one might expect that the Chairman of the SEC would always represent the views of the Commission as a whole, there is no formal oversight mechanism available to the Commission to check the Chairman'​s participation on FSOC. Moreover, although the Commission'​s bipartisan structure insulates it from undue political influence, FSOC'​s structure does not. On the contrary, FSOC is composed of individuals who are heads of their agencies -- typically making them members of the President'​s political party -- and led by a Cabinet official who is removable by the President at will. These factors, among others, make FSOC particularly susceptible to political influence which, in turn, can be -- and has been -- exerted on the agencies led by FSOC'​s members."

Gallagher explained, "To further complicate matters, FSOC operates under a different mandate than the SEC, having been established by Congress with a broad mandate to identify systemic risks and emerging threats to the country'​s financial stability. Putting aside the fact that FSOC'​s designation of certain firms as "​systemically important" likely institutionalizes the idea of "​too big to fail," FSOC'​s core mission is to ensure the safety and soundness of the U.​S. financial system -- not surprising given that a significant plurality of FSOC is composed of the heads of bank regulators. While this mission is of unquestionable importance, so, too is the distinct mission of the SEC. To be sure, proper oversight of our capital markets should positively impact the safety and soundness of our financial system. Nevertheless, the SEC is not by statute a safety and soundness regulator. In fact, the markets we regulate are inherently risky, and with good reason. By putting money at risk, investors allocate capital in a manner that spurs economic growth in the hopes of a much higher return on their investments than they could obtain from lower-​risk, lower-​return investments, such as bank accounts. The SEC seeks to protect these investors from fraud and to ensure that the markets in which they put their capital to work are fair and efficient. Our mission is not, and should not be, to make these markets risk-​free, nor is it to preserve the existence of any particular firm or firms. Capital markets regulators and bank regulators have drastically different missions and oversee fundamentally different markets and market participants. And, importantly for me and all of those who appreciate and advocate for free markets, we must keep a healthy distance between capital markets regulation, which rightfully assumes no taxpayer safety nets, and bank regulation."

He added, "It is not difficult to see the potential tension between the SEC and FSOC missions and the resulting threat to the Commission'​s ability to function independently. As the old adage goes: "​No one can serve two masters." When the Chairman of the SEC faces this tension, which of these two potentially competing mandates does he or she honor?"

Gallagher also told the "​SEC Speaks" gathering, "​Nor is FSOC merely an advisory body without teeth. To carry out its mandate, Congress provided FSOC with extraordinary powers for an inter-​agency council. For example, FSOC has the authority to designate a nonbank financial company as "​systemically important," and to subject these companies to prudential supervision by the Fed. FSOC may also designate a financial market utility or a payment, clearing, or settlement activity as "​systemically important," and direct the Fed, in consultation with the relevant supervisory agencies and FSOC itself, to prescribe risk management standards. To the extent that these "​systemically important" utilities or activities are conducted by firms for which the SEC or CFTC is the primary regulator, Dodd-​Frank provides "​special procedures" pursuant to which the Fed may, if it determines that the risk management standards set by the SEC or the CFTC are "​insufficient," impose its own standards. That authority is not simply a threat to the Commission'​s independence -- if exercised, it would be an outright annexation."

He commented, "​FSOC also has the authority to recommend that a primary financial regulator, such as the SEC, apply new or heightened standards and safeguards for systemically significant financial activities or practices. In this regard, FSOC has been busy in recent months prodding the Commission on money market fund reforms, including through the release of proposed reform recommendations last November."

Finally, Gallagher said, "​I won'​t recount the history that led to FSOC'​s involvement in the regulation of money market funds, an area which unquestionably falls within the core expertise and regulatory jurisdiction of the SEC. But I will emphasize that my colleagues and I have made it clear that, having now been provided with the rigorous study and economic analysis on money market funds that a bipartisan majority of the Commission asked for from the start, we fully expect the Commission to move forward with a rule proposal shortly. Why, then, is FSOC still involved in the process? FSOC was established in part to promote coordination, collaboration, and information-​sharing among its member agencies. It is immensely troubling then to think of the FSOC as an institutionalized mechanism for one set of regulators to pressure another in the latter agency'​s field of expertise -- yet that is exactly what is happening."

​

As market participants await a potential final recommendation from the Financial Stability Oversight Council (​it should be at least several more weeks), we continue to read Comments on the FSOC'​s "​Proposed Recommendations Regarding Money Market Mutual Fund Reform". (​Note: The FSOC announced recently, "On Thursday, February 28, Acting Secretary Wolin will chair the next regularly scheduled meeting of the Financial Stability Oversight Council in a closed session at Treasury.) Today, we excerpt from HSBC Global Asset Management'​s recent letter. It says, "HSBC Global Asset Management manages over USD 65bn in money market funds ("​MMFs") and segregated money market mandates. We manage MMFs in 16 different jurisdictions and in 12 different currencies. We have a unique perspective on the MMF industry due to the breadth of markets we offer MMFs and the fact that we are the only manager who has meaningful scale in the three largest markets for MMFs (​US 2a-​7 market, "​international" market Dublin/​Luxembourg and the French domestic market). We manage both Constant Net Asset Value ("​CNAV") funds and Variable Net Asset Value ("​VNAV") funds, adopting the same investment policies and investment process across our range of MMFs."

HSBC'​s Jonathan Curry, Chris Cheetham, and Travis Barker comment in their letter, "In summary, we recommend: Liquidity reforms - MMFs should be required to maintain 10%/​30% of their assets in instruments maturing overnight/​within one week; MMFs should be required to manage shareholder concentration within a target range of [​5-​10%]; Redemption management reforms - MMFs should be empowered to impose a liquidity fee on redeeming shareholders, if deemed necessary to ensure fair treatment of redeeming and remaining investors; MMFs should be able to limit repurchases on any trading day to 10% of the shares in issue; MMFs should be permitted to meet an investor'​s redemption request by distributing a pro-​rata share of the assets of the fund rather than by returning cash to the investor i.​e. an in-​specie redemption; Structural reforms - Sponsors should be prohibited from supporting their MMFs; and MMFs should be prohibited from being rated."

They add, "We fully support the enhancements made to rule 2a-​7 in the US and the creation of a short-​term MMF definition in Europe. Both sets of regulation have reduced the risk that investors in MMFs "​run" and made them better able to operate during a period of market stress. The new MMF definitions in Europe also provide clarity for investors and therefore enhance investor protection."

HSBC continues, "In our opinion there are additional reforms to MMFs that should be made to further enhance their ability to operate normally during a period of market stress. Our reform proposals are based on achieving the following objectives: 1. Provide MMFs with a greater ability to meet redemptions; 2. Create a disincentive for investors to redeem; 3. Remove any existing ambiguity of risk ownership; 4. Reduce systemic risk created by MMF ratings."

They tells FSOC, "Additionally, it is important that any MMF reform adopted is proportional to the issue being addressed. It must be remembered that whilst the challenges that the MMF industry has had to meet over the last 5 years have been very significant, the fact remains that there has only been one systemic liquidity event in the MMF industry since they were created over 40 years ago."

HSBC says, "Any reform mechanisms adopted to address regulators' concern of systemic liquidity risk in MMFs must also maintain MMFs in a form that remains attractive to investors to buy and for providers of MMFs to produce. If these objectives are not met then investors will no longer have access to a product that provides them with a solution to manage credit risk through diversification in an efficient manner. Investors in MMFs have a legitimate need for this product and continue to require access to it. We believe our objectives are consistent with those of the regulatory community, although, the objectives of the regulatory community are not necessarily consistent across relevant regulators and appear to have morphed over time."

Finally, they conclude, "HSBC Global Asset Management remains committed to working with regulators to identify reforms that will reduce the risk of runs in money market funds. We have identified seven reform proposals that will reduce the run risk in MMFs whilst preserving the value they bring to investors and the broader economy. We remain concerned that regulators continue to focus on differentiating between CNAV and VNAV funds, the use of amortisted cost accounting and the use of NAV buffers to address their concerns of run risk. We believe these are "​red herrings" that will not reduce systemic risk in the financial system created by run risk in MMFs and will leave the financial system open to risk in the future."

​

Thursday'​s Wall Street Journal featured yet another editorial on money fund reform. This one, entitled, "The SEC'​s Big Chance," says, "​Prominent alumni of the Securities and Exchange Commission are defending the agency'​s turf in a battle of Beltway bureaucracies. Wouldn'​t it be nice if someone defended taxpayers? On Wednesday several former SEC chairmen and commissioners wrote to the Financial Stability Oversight Council (​FSOC) urging that panel of regulators to stay out of the way and let the SEC address potential reforms to money-​market mutual funds. Perhaps the alums should also tell their old colleagues at the SEC to get on with it." The Journal piece immediately drew a response from Investment Company Institute President & CEO Paul Schott Stevens, who writes in "Money Market Funds: There Goes the Wall Street Journal Again, "Over the past three years, the Wall Street Journal has published six editorials on money market funds, and each has advanced more myths and distortions about these funds. By the time we saw the latest ("​The SEC'​s Big Chance," Review & Outlook, Feb. 20), we were shaking our heads in disbelief. As Ronald Reagan once said, "​There you go again.""

The Journal wrote, "​Taxpayers have been waiting years for the SEC to act to prevent a repeat of the 2008 federal bailout. If SEC commissioners want to keep other regulators from trying to fix problems created by SEC regulations, the obvious solution is to rewrite SEC rules -- now. Though money funds are securities holding assets that rise and fall in value, SEC rules allow money funds to employ an accounting fiction to create the perception that their values are fixed. To further persuade investors that these securities are super-​safe, the SEC anoints private credit-​ratings agencies, including Standard & Poor'​s, Moody'​s and Fitch, to determine which assets are least risky and allegedly suitable to be owned by money funds."

The editorial explains, "​Neither failing can really be excused, but it'​s hardest to understand why the SEC still hasn'​t proposed a plan to bring accurate pricing to these funds. Since former SEC Chairman Mary Schapiro tried and failed last year to issue such a proposal, Commissioner Troy Paredes has remained opposed to reform. But previous holdouts Daniel Gallagher and Luis Aguilar have said they'​re willing to support accurate prices. So the votes appear, at last, to be there. The letter-​writing alumni led by former GOP commissioner Paul Atkins argue that the SEC, traditional overseer of securities, has the most expertise and will do a better job than bank regulators on the stability council. This is a valid point -- if the SEC really intends to act."

The Journal tells us, "Charles Schwab CEO Walt Bettinger recently proposed in these pages to bring floating share prices to institutional prime money funds, which were the source of the 2008 panic in this market. We'​d prefer reforms industry-​wide, but the Bettinger plan, coming from a major provider of money funds, shows a sincere effort to solve the problems. Does the SEC have any more excuses for inaction? The Washington Post reports that current SEC Chairman Elisse Walter wants to do more than simply keep the seat warm until Obama nominee Mary Jo White shows up. Perfect. If Ms. Walter can bring transparent pricing to money funds and repeal the SEC'​s endorsement of private credit judges, she could go down as the greatest chairman in SEC history."

Stevens responds, "These inaccuracies, however, are no laughing matter for the millions of investors who rely on money market funds -- or for the businesses, nonprofits, and municipal governments that depend on these funds for financing. The misleading assertions start with the notion that "​taxpayers have been waiting years" for the Securities and Exchange Commission to reform money funds. We refer readers to the SEC'​s Jan. 27, 2010 press release, "​SEC Approves Money Market Fund Reforms to Better Protect Investors," outlining a sweeping set of reforms that have already proven to make these funds more resilient."

The ICI leader tells us, "The editorial'​s core argument -- that money funds use an "​accounting fiction" to maintain a stable value -- is also false. Under GAAP, amortized cost accounting commonly is used by financial and nonfinancial firms to value short-​term, high quality assets -- like those that money market funds must hold. Its use has been well-​supported by regulators and standard-​setters for more than 30 years. Detailed disclosures demonstrate that money market funds' mark-​to-​market values seldom vary from $​1.​00 by more than one-​hundredth of a cent, further supporting the use of amortized cost."

Finally, Stevens comments, "We do agree that the SEC is the appropriate agency to consider any further reforms. The SEC moved swiftly to make reforms in 2010. Last summer, a bipartisan majority resisted the chairman'​s rush toward further structural changes because commissioners wanted data to analyze the effects of those reforms. The commissioners now have that study, and have said they are moving steadily ahead to offer new proposals. The fund industry will address those ideas when they'​re issued. Until then, we believe that a deliberate, thoughtful approach to regulation is to be applauded -- not scorned."

​

As Comments on the FSOC'​s "​Proposed Recommendations Regarding Money Market Mutual Fund Reform" continue to roll in (​the deadline was Friday), we continue our posting of the more substantial letters. Today, we excerpt from Invesco'​s response, written by Head of Global Liquidity Lu Ann Katz. It says, "In summary, our views are as follows: Before undertaking reform, regulators must give adequate consideration to whether additional reform is necessary. In particular, further changes to Treasury, government and municipal MMFs appear unnecessary. We disagree with proposals to impose an artificial distinction between "​retail" and "​institutional" investors or MMFs. Capital buffer proposals are not feasible because there would be no practical way to fund the buffer. Furthermore, we do not believe that capital buffers prevent MMF runs. The MBR could jeopardize the continued existence of MMFs by changing their fundamental nature and undermining their utility to investors, in addition to imposing onerous administrative burdens on MMF sponsors and investors. We do not believe that a floating NAV would serve as an effective deterrent to runs on MMFs and, in any event, we have serious concerns about the feasibility of this proposal. If regulators determine that additional MMF reform is necessary, we urge consideration of a redemption gate that a MMF board could activate, with a minimum trigger of a decline in weekly liquid assets to 7.​5% or less, coupled with a liquidity fee."

Invesco explains, "It is imperative that FSOC and the Securities and Exchange Commission ("​SEC"), as the primary regulator for MMFs, first demonstrate clearly that further reform to MMFs -- beyond the comprehensive changes to Rule 2a-​7 promulgated in 2010 (​the "​2010 Reforms") -- is necessary in order to further the goal of reducing systemic risk to financial markets. Given the central importance of MMFs to the stable and efficient functioning of global capital markets -- MMFs represented over $​2.​7 trillion in assets under management as of December 31, 2012 -- drastic changes to MMFs could have a significant adverse effect on the stability of global markets generally, a result that would be contrary to FSOC'​s mandate to guard against activities that "​could create or increase the risk of significant liquidity, credit or other problems spreading among ... U.​S. financial markets." If it is determined that further reforms are, in fact, necessary then thorough consideration must be given to the full direct and indirect impact of the proposed alternatives since there is great potential for unintended harmful consequences."

They tell us, "It is also important to recognize the significant beneficial effects of increased MMF transparency brought about by the 2010 Reforms and additional voluntary steps that have been taken within the industry. MMF investors now have access to more -- and more timely -- information than ever before regarding the funds in which they are invested. For example, Invesco and many other MMF providers are now voluntarily disclosing market value NAVs for the majority of prime MMF assets on a daily basis; this information was previously disclosed monthly with a 60-​day lag. Greater access to information substantially reduces the likelihood of investors engaging in preemptive runs based on a fear of the unknown. It is also significant that market value NAVs of MMFs have experienced only de minimis fluctuations since implementation of the 2010 Reforms."

Invesco'​s letter continues, "​In the event that regulators determine that further reforms to MMFs are necessary, any such reforms must be carefully tailored to address clearly identified risks. We strongly believe that there is no need for further changes to the rules applicable to government and Treasury MMFs.... Municipal MMFs likewise have been relatively unaffected by investor runs during periods of market turmoil.... We note that some commentators have proposed that any additional reforms be targeted solely at "​institutional" rather than "​retail" prime MMFs. While we acknowledge that the disruptions experienced by MMFs during the 2008 financial crisis were largely attributable to prime MMF redemptions by large investors, we believe that efforts to characterize MMFs or their investors as either "​institutional" or "​retail" are misplaced and impractical due to the difficulty of establishing a litmus test that can be used consistently to identify those investors most likely to trigger a MMF run."

They state, "​While it may be possible to establish metrics to distinguish between "​retail" and "​institutional" investors, many investors could easily be characterized as either. For example, the investment behavior of the corporate treasurer for a small- or mid-​sized business may arguably resemble more closely the behavior of an individual (​or "​retail") investor than that of a larger corporation whose investments are guided by professional investment advice. Retirement plan and bank sweep accounts may also be difficult to classify, given that a single decision maker acts on behalf of many underlying shareholders. Separating "​retail" and "​institutional" funds would also be extremely difficult given that many fund complexes have a large number of investors who access their MMFs through unaffiliated intermediary omnibus accounts."

The letter adds, "Imposing capital requirements on MMFs by requiring NAV buffers would be neither feasible nor effective. Furthermore, requiring MMFs to establish and maintain capital buffers to protect against investment losses would be fundamentally misguided because it would apply to investment funds a safeguard that was designed for banks. If such a change were mandated, it would drastically reduce the size and diversity of the MMF industry, which would have a destabilizing effect on short-​term funding markets generally."

Invesco explains, "​Fundamental obstacles would confront the implementation of capital buffers for MMFs. First, there is no practical way to fund such buffers. As a result of the ongoing ultra-​low interest rate environment, MMF yields remain at historic lows and are not expected to increase significantly during the foreseeable future. A requirement to divert a portion of a MMF'​s earnings in order to build a NAV buffer would result in prime MMF yields essentially equaling those of Treasury MMFs.... Nor are MMF sponsors a realistic source for funding NAV buffers. To mitigate the impact on investors of low MMF yields, the vast majority of MMF sponsors are already waiving advisory fees and reimbursing fund expenses, substantially diminishing the profitability for sponsors. If saddled with an additional requirement to allocate capital to MMFs, even on a contingent basis, many of these sponsors would choose to exit the business."

They continue, "Arguably the most concerning element contained in the Proposal is the proposed requirement for MMFs to impose a MBR on investors. We believe that instituting such a "​holdback" provision would fundamentally alter the nature, utility and attractiveness of MMFs as an investment product and seriously threaten the viability of the MMF industry. A principal weakness of the MBR proposal that it would remain in effect at all times, even when there is sufficient liquidity available in a MMF portfolio to fund redemptions. Full daily liquidity has been a fundamental and defining feature of MMFs since their inception and restricting access to liquidity unnecessarily -- even if an investor may not require full liquidity -- significantly alters the usefulness of the product. Our clients have clearly communicated to us their strong objections to the MBR and their disposition to eliminate or significantly reduce their use of MMFs if a MBR were introduced."

Invesco comments, "The MBR proposal also would encounter significant operational and administrative hurdles. The extensive and highly complex industry infrastructure that supports the efficient processing of MMF transactions cannot be modified easily.... Even if there were a way to implement the MBR proposal equitably, we question its effectiveness as a deterrent to investor runs in the event of a large-​scale financial crisis such as was experienced in 2008. In such cases, investors may simply view the holdback as a cost of doing business and nevertheless choose to redeem in full."

They add, "History demonstrates that a floating NAV does not necessarily reduce investors' incentive to redeem during times of market stress. For example, ultra-​short bond funds in the United States saw substantial outflows during 2007-​8, and by the end of 2008 assets in these funds had declined more than 60% from their mid-​2007 peak. A similar experience occurred with respect to French floating NAV dynamic money funds ("​tresorerie dynamique" funds), which saw assets decline approximately 40% over the three months from July to September 2007; by year-​end 2008, assets in these funds had fallen an additional 20 percentage points."

Invesco'​s comment also says, "In contrast to the alternatives suggested in the Proposal, redemption "​gates" -- temporary, across-​the-​board suspensions of investors' ability to redeem -- have proven to be an effective method of stopping or significantly impeding investor runs. We agree with view expressed by SEC Commissioners Paredes and Gallagher that "[​d]​iscretionary gating directly responds, we believe, to run risk, both as to individual fund and across multiple funds, as well as to potential disparate treatment between retail and institutional investors." We also agree with these Commissioners that any such gating should be implemented at the discretion of the board of directors and that this would be "​a change that would build on the 2010 reforms.""

Finally, they conclude, "The principal reform options set forth in the Proposal would threaten the continued viability of MMFs, alter their fundamental characteristics and undermine their attractiveness and usefulness to investors. Regulators should consider carefully the need for additional MMF reforms before mandating changes that have been roundly criticized by MMF investors, sponsors and many academics. Furthermore, the need for additional MMFs reforms must be determined taking into account the risks posed by the manner in which MMFs -- and financial markets generally -- operate today, rather than as they did in the past. MMFs have served a critical function in the operation of global short-​term markets role for over 40 years. During that span they have enjoyed a nearly flawless record of safety and liquidity while providing shareholders with competitive investment returns. And, as acknowledged by the SEC, the 2010 Reforms have ensured that MMFs are more resilient and transparent than ever. We believe that it is important to give due weight to these facts, as well as the substantial burdens and challenges posed by potential further changes, when considering the need for any additional reforms."

​

Though Friday'​s deadline has now passed for Comments on the Financial Stability Oversight Council'​s Proposed Recommendations Regarding Money Market Mutual Fund Reform, comment letters continue to be posted. We'​ll be reading through them in coming days, and will continue excerpting from the relevant ones. Today, we quote from UBS'​s comment. Rob Sabatino and Keith Weller write, "UBS Global Asset Management (​Americas) Inc. ("​UBS Global AM") appreciates the opportunity to comment on the FSOC Proposal. We strongly oppose requiring a floating net asset value ("​NAV") per share for money market funds ("​money funds") and believe that all money funds that meet the requirements of Rule 2a-​7 under the Investment Company Act of 1940, as amended ("​1940 Act"), should be allowed to continue to maintain a stable NAV per share. We also do not support the other proposed recommendations that the Financial Stability Oversight Council (​the "​FSOC" or "​Council") would make to the SEC. As described more fully below, we believe the FSOC Proposal to require money funds to float their NAVs will actually increase systemic risk by: (​1) driving money into other financial products which generally do not have as well diversified issuer risk as money funds and (​2) causing investors to gravitate toward higher yielding, short-​term bond funds, which also have floating NAVs, increasing investors' interest rate and credit risk. We do not believe that floating the NAV of money funds will be effective in modifying investor behavior. We support changes to money funds that facilitate the orderly and equitable management of redemptions from money funds experiencing significant redemption activity."

The UBS letter explains, "As detailed below, we support the following alternative approach: enhancing disclosure in prospectuses and marketing materials; granting fund boards enhanced authority to suspend redemptions/​gate, as tailored to a fund'​s particular circumstances in light of the facts prevailing at the time that the situation is being addressed; enhancing further the SEC'​s authority to monitor money funds; and further substantive amendments to Rule 2a-​7. We supported the amendments to Rule 2a-​7 and other related rules under the 1940 Act adopted by the SEC in 2010 that strengthened the transparency and regulation of money funds (​the "​2010 Amendments"). We believe that time will show that the 2010 Amendments struck the correct balance between the protection of investors and the promotion of efficiency, competition and capital formation in the US economy."

It continues, "Mandating that money funds have a floating NAV per share would remove much of the incentive for investors to invest in money fund shares and may well diminish substantially the size of the money fund business. Historically, money funds have offered both retail and institutional investors a means of achieving a market rate of return on a short-​term investment without having to sacrifice stability of principal. The stable NAV per share allows investors the convenience of not having to track gains and losses on a short-​term investment and facilitates investment processes, such as sweep account arrangements at broker-​dealers and banks, helping to make sure that investors’ cash balances are fully invested. However, the $​1.​00 NAV per share does not and has never constituted or reflected a guarantee of the amount of the investment. Accordingly, the absence of a government guarantee and the fact that an investor may lose money by investing in a money fund are prominently displayed in fund disclosures, including on the cover page of the fund prospectus."

UBS adds, "In the FSOC Proposal, the Council stated that requiring money funds to use floating NAVs could make investors less likely to redeem en masse when faced with the prospect of even modest losses by eliminating the "​cliff effect" associated with breaking the $​1.​00 NAV per share. However, it is important to note that not all prime money funds experienced mass redemptions after the Reserve Primary Fund broke the dollar share price in September 2008.... Moreover, according to a study conducted by the Investment Company Institute, floating NAV ultra-​short bond funds experienced outflows in excess of 60 percent during the 2008 financial crisis from their peaks. In our experience, we found that floating NAV short-​term funds managed by the UBS Global Asset Management Division were not less susceptible to redemption pressures than stable NAV money funds.... These facts strongly indicate that the stable NAV of money funds did not cause the reaction of investors who redeemed in the face of possible losses."

They write, "​The FSOC Proposal also indicated that regular fluctuations in money funds' NAVs likely would cause investors to become accustomed to, and more tolerant of, fluctuations in NAVs. Money fund investments, by their very nature as short-​term investments of the highest credit quality, do not ordinarily fluctuate in value on a day-​to-​day basis, certainly not to an extent that necessarily would cause investors to become accustomed to fluctuations. Given the minimal fluctuations in NAV, money fund shares would likely continue to trade at a $​1.​00 NAV per share. The Council stated in the FSOC Proposal that a floating NAV would also reduce the "​first mover advantage" that exists in money funds today because investors would no longer be able to redeem their shares for $​1.​00 when the shares' market-​based value is less than $​1.​00. We suggest that a better approach to reduce the first mover advantage would be to empower money fund boards to impose redemption gating or other restrictions as necessary to prevent some investors from gaining an unfair advantage over other investors."

UBS tells FSOC, "​The FSOC Proposal stated that a floating NAV "​would remove uncertainty or confusion regarding who bears the risk of loss" in a money fund. Given the fact that the market value of short-​term, high quality investments does not ordinarily fluctuate on a day-​to-​day basis to any meaningful extent, whether a floating NAV would achieve this goal is uncertain at best. The goal of ensuring that money fund investors understand the risks of investing is an important one with which UBS Global AM and others in the industry can readily agree. However, this goal can be far more effectively addressed through requiring enhanced disclosure in the prospectus, summary prospectus and marketing materials of every money fund."

They add, "As a practical matter, the proposed Buffer would be difficult, if not impossible, for most money fund sponsors to implement, given the economic realities of the money fund business. The historically low interest rates that currently are paid on short-​term money fund securities have resulted in many prime money funds being unable to earn a return that is sufficient to cover fund expenses. In the face of this environment, many money fund sponsors have waived management and other fees and/​or reimbursed fund expenses to enable funds to continue to operate and to keep fund expenses from reducing fund assets. This low interest rate environment, which has existed since the 2008 crisis and is likely to continue for the foreseeable future, has greatly reduced, if not eliminated, profitability from the money fund business for many sponsors and would make it difficult for any sponsor to fund a Buffer out of its own resources."

They explain, "The Buffer proposal is not a necessary or appropriate means of implementing money fund reform. The proposal purports to base the size of a fund'​s buffer on the level of risk presented by the money fund'​s portfolio holdings. However, the proposal significantly overstates the level of risk presented by a fund'​s portfolio and would result in too high a level of buffer being maintained. In the event a determination is made to move forward with the proposal, we propose below an alternative Buffer proposal. Assuming that a Buffer is to be required, the purpose of the Buffer should be to ensure that a money fund has on hand sufficient assets to pay $​1.​00 per share to redeeming shareholders without harming the interests of those shareholders who have not redeemed. To accomplish this goal, the size of the Buffer should be measured by the difference between the fund'​s current market based NAV and the $​1.​00 price at which money fund shares are redeemed.... In the event that a money fund'​s market-​based NAV per share were to exceed $​1.​00, no Buffer would be required."

Finally, UBS writes, "The Risk Based NAV Buffer in Alternative Three represents a debatable effort to protect money funds from investment losses, so as to avoid the possibility of investor redemptions that could cause problems for the funds and, the proposal assumes, the financial system. As investment companies, money funds take investment risks and can lose money. These risks are an unavoidable part of operating any mutual fund and are required by the federal securities laws to be fully disclosed to investors. Investors in money funds, thus, unavoidably bear the risk of loss. To try to require a fund to maintain a NAV buffer for the purpose of offsetting any losses that might be realized is both a mistake and a losing proposition. A more realistic approach to addressing the risks of "​runs" on money funds would be to incorporate the following concepts.... `​Enhance further risk disclosures in money fund prospectuses and marketing materials to ensure that investors understand that, by holding fund shares, they are assuming the risk of loss.... Provide fund boards with the flexibility to temporarily suspend redemptions of fund shares (​or, alternatively, to record redemption requests, but temporarily suspend the payment of redemption proceeds) in the event that a fund experiences events, whether through holding defaulted securities, experiencing an unanticipated high volume of redemptions or some combination of these and other events (​such as market illiquidity), that threaten the ability of the fund to continue to maintain the $​1.​00 share price or to make payment upon redemptions."

​

While Friday' deadline passed for Comments on the FSOC'​s Proposals for MMF Reform, we'​re still digging our way through the more thoughtful responses. Today, we features a letter from The Dreyfus Corporation'​s J. Charles Cardona, who writes, "Dreyfus appreciates the Council'​s critical role in monitoring the stability of the U.​S. financial system and its corresponding desire to advance the discussion on money market fund regulation by publishing these Proposals. We also respect the Commission'​s role as the nation'​s primary securities regulator and we were pleased to learn about the Council'​s preference for the Commission taking the lead in matters of money market fund regulation. Thus, we hope our comment letter informs both the Council and the Commission in their respective deliberations. We thank the Council for the opportunity to share our views on this important topic."

He explains, "The Council has placed substantial emphasis on the contribution of money market funds to destabilizing the U.​S. financial system in 2008 when the evidence, in our view, suggests that the crisis was characterized more broadly by a general "​run on risk." As a result, we believe too much emphasis has been placed on stopping money market fund redemptions to the exclusion of considering how a money market fund'​s structure and resiliency determines how it will perform in a time of crisis, and tailoring any further regulations accordingly."

Dreyfus says, "​We believe deliberation over further money market fund regulation should be guided by a fair assessment of historical money market fund shareholder investment and redemption activity and whether or to what extent that activity contributed (​or could contribute) to destabilizing the financial system. Thus, we do not believe that government and municipal money market funds should be subject to additional regulation. There is no historical evidence of destabilizing net redemption activity (​if any net redemption activity at all) associated with these types of money market funds.... Accordingly, we respectfully urge the Council and the Commission to continue to consider the value of improving the resiliency of prime money market funds rather than seeking only to address the perceived "​structural vulnerabilities" of money market funds with reform proposals that, in our view, would do more harm than good."

They continue, "We believe maintenance of the stable $​1 net asset value ("​NAV") money market fund is preferable to a shift to a floating NAV money market fund. Such a change would eliminate the usefulness of the product without providing a disincentive for redemption activity. A floating NAV money market fund would be subject to a different kind of "​first mover advantage" that could accelerate redemptions in a time of crisis. If a floating NAV cannot resolve one of the key structural vulnerabilities identified by the Council, then the benefits of preserving stable NAV money market funds should outweigh any benefits from their elimination."

Cardona tells FSOC, "We believe implementation of either of these alternatives would drive a considerable amount of assets out of money market funds. Surveys of money market fund shareholders and service providers including corporate treasurers, institutions, and cash sweep providers, among others, have indicated that a significant majority of invested assets would migrate away from money market funds to other cash management vehicles if a floating NAV were implemented. Similarly, we do not believe money market fund investors or their service providers (​e.​g., cash sweep providers) can be expected to support an MBR requirement that both severely hampers ready liquidity and poses prohibitive operational challenges."

He adds, "​To the extent the Council pursues issuing recommendations to the Commission, we hope the Council'​s deliberations will be guided by the views expressed herein.... Thus, we respectfully request that the Council defer issuing recommendations on money market fund reforms to the Commission at this time. If the Council suspends its Section 120 activity at this time, we believe it will provide clarity to the regulatory process for the benefit of the industry and its millions of fund shareholders."

Dreyfus concludes, "However, we do not agree with how the Council has advanced the concept of "​run risk" in forming these Proposals, and we also believe implementation of these Proposals will have unintended consequences. To one degree or another, adoption of any one of these Proposals would compromise the current utility of money market funds for millions of investors' and ultimately drive considerable amounts of assets out of money market funds into other liquidity vehicles (​e.​g., bank deposits, of offshore or other unregistered liquidity vehicles),' the result of which would be to transfer systemic risk to alternate (​and perhaps less regulated) venues within the financial system rather than reduce it in the aggregate. We believe there is a different interpretation of the 2008 financial crisis that is supported by evidence and that does not justify the extent to which these Proposals potentially compromise the utility of money market funds."

Finally, they add, "To summarize, for the reasons stated above, we respectfully ask that the Council suspend its Section 120 process at this time and, to the extent the Council re-​initiates the Section 120 process after the Commission completes its review of money market fund regulation, consider our proposals for money market fund regulation as reasonable yet effective means for reducing systemic risk associated with money market funds without compromising their utility and popularity as stable NAV cash management vehicles. We have confidence, though, that the Commission'​s regulatory process, with the money market fund industry'​s active participation, will achieve fair, balanced, and meaningful results."

​

Fidelity Investments, the largest manager of money market funds in the U.​S. and worldwide, filed its Comment Letter with the Financial Stability Oversight Council yesterday, saying, "Fidelity has been engaged actively in discussions regarding potential MMF reform for several years, and we do not believe that additional reform is necessary for MMFs. Furthermore, we believe that the FSOC has failed to meet the procedural and substantive requirements as well as the policy justifications that are necessary to exercise its authority under Section 120 of the Dodd-​Frank Act ("​Section 120") and make the Proposed Recommendations. However, should regulators nonetheless elect to proceed with additional regulatory reform, we strongly urge a narrowly tailored approach to address a clearly defined problem. In particular, we believe that neither the FSOC nor any other regulator has provided any reasonable justification for additional regulation of Treasury, government, tax-​exempt, or retail prime MMFs. Any further reforms should be limited to institutional prime MMFs."

Fidelity Senior VP & General Counsel Scott Goebel writes, "All MMFs are subject already to extensive oversight and regulation in the United States under the Investment Company Act of 1940, together with the rules promulgated thereunder. These comprehensive regulations and rules include portfolio construction constraints, investor protections, extensive disclosure requirements, and broad financial reporting and recordkeeping requirements. In addition, mutual fund investors are afforded protections under state law and other federal statutes, such as the Investment Advisers Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934."

He explains, "For decades, MMFs have been attractive destinations for shareholder capital, due to their convenience, high credit quality, and liquidity. MMFs seek to provide a stable, constant net asset value ("​NAV") and daily access to money, with a competitive yield versus bank deposits and direct investments. MMFs are utilized by a broad spectrum of investors, from small, individual investors, to large, institutional investors. As the FSOC recognizes, "​MMFs are a convenient and cost-​effective way for investors to achieve a diversified investment in various money market instruments, such as commercial paper (​CP), short-​term state and local government debt, Treasury bills, and repurchase agreements (​repos)." MMFs provide retail individual investors, including retirees, a safe way to earn income on cash awaiting further investment with low risk and low volatility. Many of the instruments in MMFs generally are not available for direct purchase by individual investors. In addition, some MMFs offer checkwriting privileges, allowing an investor to make payments directly out of a MMF rather than requiring the investor to redeem, transfer the proceeds to another account and then make the payments. These convenience features have made MMFs an attractive complement to bank accounts."

Fidelity'​s letter continues, "We also believe that MMFs are a success story for the capital markets, allowing issuers to access low-​cost funding under a well-​defined financial regulatory framework. By investing in short-​term debt instruments, MMFs serve as important providers of short-​term funding to financial institutions, businesses and governments. Issuers of short-​term debt instruments include the federal government and its agencies, corporations, hospitals, universities, banks, and state and local governments. Regulators recognized the importance of MMFs to the short-​term funding markets in the Report of the President'​s Working Group on Money Market Fund Reform Options ("​PWG Report"), stating that "​MMFs are the dominant providers of some types of credit, such as commercial paper and short-​term municipal debt, so a significant contraction of MMFs might cause particular difficulties for borrowers who rely on these instruments for financing.""

It adds, "MMFs also provide investors a convenient, cost-​effective cash investment option. In addition to millions of individual investors, institutional investors in MMFs include "​corporations, bank trust departments, pension plans, securities lending operations, and state and local governments." MMFs also assist broker-​dealers, trustees, pension funds, and charitable foundations in managing customer assets. Today, while many MMFs offer a yield return of only one or two basis points in the current near-​zero interest rate environment, investors have maintained MMF investments due to the safety, flexibility, and liquidity that MMFs provide."

Fidelity writes, "Respectfully, Fidelity'​s message to the FSOC is simple: take no further action on MMFs at this time. As described in more detail in this letter, the SEC is the regulator with the authority and expertise to consider whether and how to adopt additional reforms on MMFs. Furthermore, the alternatives the FSOC has proposed are not workable; and the FSOC has failed to meet the procedural and substantive requirements as well as the policy justifications that are necessary to exercise its authority under Section 120 and make the Proposed Recommendations."

Finally, they say, "Fidelity believes that regulators should proceed cautiously when considering further structural changes to a well-​functioning investment vehicle that serves the needs of short-​term investors and borrowers. The costs and benefits of additional reforms should be identified clearly and evaluated robustly before moving forward. Any changes to MMFs should be considered carefully prior to implementation to ensure that they are consistent with creating a stronger, more resilient product, without imposing harmful, unintended consequences on financial markets or on the global economy. Fidelity does not believe that the Proposed Recommendations or the accompanying discussion meet those standards."

​

Crane Data'​s latest Money Fund Portfolio Holdings dataset, with info as of January 31, 2013, shows money market securities held by Taxable U.​S. money funds increased by $​25.​7 billion in January (​after rising $​34.​4 billion in December and $​58.​1 billion in November) to $​2.​422 trillion. Commercial Paper held by money funds soared, rising $​46.​0 billion, while Repurchase Agreements (​up $​24.​1 billion) and CDs (​up $​17.​8 billion) also jumped. Treasury Debt (​down $​26.​1 billion) Government Agencies (​down $​15.​3 billion), VRDNs (​down $​10.​5 billion), and Other Securities (​down $​10.​4 billion, primarily Time Deposits) all declined substantially. Below, we review our Money Fund Wisdom'​s latest portfolio holdings aggregates, and we also add some recent FSOC comments from Dreyfus (​watch for more excerpts tomorrow) and the Boston Fed arguing for more frequent disclosure of portfolio holdings.

Repo remained the largest holding segment with 23.​5% of fund assets and $​569.​1 billion in total, and Certificates of Deposit (​CDs) remained the second-​largest segment (​20.​6%) with $​498.​7 billion of taxable money fund assets. Treasuries fell by 5.​6% to $​440.​3 billion (​19.​2% of holdings). Commercial Paper (​CP) rose by 12.​4% to $​417.​6 billion (​17.​2% of holdings), while Government Agency Debt dropped to $​319.​3 billion (​13.​2% of assets). European-​affiliated holdings jumped in January, rising $​97.​7 billion to $​756.​9 billion, or 31.​3% of securities. Eurozone-​affiliated holdings though declined to $​400.​1 billion in January; they now account for 16.​5% of overall taxable money fund holdings.

The Repo totals were made up of: Government Agency Repurchase Agreements ($​286.​9 billion, or 11.​9% of total holdings), Treasury Repurchase Agreements ($​201.​6 billion, or 8.​3% of assets), and Other Repurchase Agreements ($​80.​6 billion, or 3.​3% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper'​s 9.​5% ($​230.​8 billion), Asset Backed Commercial Paper'​s 4.​8% ($​116.​7 billion), and Other Commercial Paper'​s 2.​9% ($​70.​1 billion). "​Other" Instruments (​including Time Deposits and Other Notes) were the sixth largest sector with $​129.​3 billion (​5.​3%) and VRDNs (​including Other Muni Debt) were the smallest segment with $​48.​0 billion (​2.​0% of holdings) in January.

Money funds now hold at least 39 percent of the total $​1,​059.​9 billion in CP outstanding (​see the Federal Reserve'​s latest on CP totals). Commercial paper outstandings, on a non-​seasonally adjusted basis, rose by $​107.​6 billion in January -- their biggest monthly gain since the Federal Reserve instituted its support programs in late 2008 -- bringing CP'​s total over $​1 trillion for the first time since mid-​2011. Every category of CP rose, though Foreign Financial (​up $​40.​5 billion) and Domestic Nonfinancial (​up $​33.​2 billion) showed the largest jumps.

The 20 largest Issuers to taxable money market funds as of Jan. 31, 2013, include the US Treasury (​18.​2%, $​440.​3 billion), Federal Home Loan Bank (​6.​7%, $​162.​5 billion), Deutsche Bank AG (​3.​4%, $​81.​9B), Bank of America (​2.​9%, $​69.​8B), BNP Paribas (​2.​9%, $​69.​2B), Societe Generale (​2.​8%, $​68.​4B), Federal Home Loan Mortgage Co (​2.​7%, $​65.​4B), Credit Suisse (​2.​6%, $​62.​9B), Federal National Mortgage Association (​2.​4%, $​58.​7B), Sumitomo Mitsui Banking Co (​2.​4%, $​58.​5B), JP Morgan (​2.​3%, $​56.​0B), Bank of Tokyo-​Mitsubishi UFJ Ltd (​2.​3%, $​55.​5B), RBC (​2.​3%, $​54.​7B), Bank of Nova Scotia (​2.​2%, $​53.​4B), Barclays Bank (​2.​2%, $​52.​1B), Citi (​2.​0%, $​49.​3B), National Australia Bank (​1.​6%, $​39.​4B), Bank of Montreal (​1.​6%, $​37.​8B), Mizuho Corporate Bank Ltd. (​1.​6%, $​37.​6B), and Toronto-​Dominion Bank (​1.​5%, $​36.​8B).

The largest increases among Issuers of money market securities (​including Repo) in January were shown by the Societe Generale (​up $​29.​1 billion to $​68.​4 billion), Deutsche Bank (​up $​17.​6 billion to $​81.​9 billion), BNP Paribas (​up $​16.​1 billion to $​69.​2 billion), Lloyds TSB Bank PLC (​up $​11.​3 billion to $​21.​4 billion), and Swedbank AB (​up $​11.​0B to $​16.​5B). Meanwhile, the biggest declines in holdings were shown by the US Treasury (​down $​26.​1B to $​440.​3B), State Street (​down $​11.​4 billion to $​8.​6 billion), Federal Home Loan Bank (​down $​11.​0 billion to $​162.​5B), Natixis (​down $​8.​7 billion to $​15.​9 billion), and Credit Agricole (​down $​7.​1B to $​34.​9B).

The United States is still the largest segment of country-​affiliations with 47.​4%, or $​1.​147 trillion. Canada (​8.​8%, $​212.​5B) remained the second largest country, but France reclaimed third place (​8.​4%, $​202.​3B), moving ahead of Japan (​7.​3%, $​176.​7B) and the UK (​6.​1%, $​146.​6B). Germany (​5.​3%, $​129.​1B) moved to sixth as Deutsche Bank'​s repo issuance rebounded after quarter-​end, and Australia (​4.​8%, $​116.​1B) fell to the 7th place among country-​affiliated securities and dealers. (​Note: Crane Data attributes Treasury and Government repo to the dealer'​s parent country of origin, though funds themselves "​look-​through" and consider these U.​S. government securities.) Sweden (​4.​1%, $​98.​7B), Switzerland (​3.​5%, $​84.​4B), and the Netherlands (​2.​7%, $​65.​1B) continued to round out the top 10.

As of Jan. 31, 2013, Taxable money funds held 23.​6% of their assets in securities maturing Overnight, and another 13.​8% maturing in 2-​7 days (​37.​4% total in 1-​7 days). Another 19.​0% matures in 8-​30 days, while 26.​0% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 12.​4% of taxable securities, and just 5.​2% matures beyond 180 days. Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated yesterday, while our MFI International "​offshore" Portfolio Holdings will be updated tomorrow (​the Tax Exempt MF Holdings will be updated this morning). Visit our Content center to download files or visit our Portfolio Laboratory to access our "​transparency" module.

J.​P. Morgan Securities writes on its monthly portfolio holdings analysis, "The New Year kicked off with relatively strong funding conditions in the money markets. Foreign financial CP and Yankee CD outstandings rose by over $​100bn in January after stagnating for most of 2012. Some of this surge in issuance may have been prefunding of ECB'​s first 3y LTRO repayments at the end of January by European banks. Issuance was likely helped by low repo rates as prime MMFs, among other investors, placed much of the cash they had withdrawn from the repo markets at 2012 year-​end into Yankee bank CP/​CDs.... Prime MMFs increased their Yankee bank holdings in January while reducing their US bank holdings. Eurozone bank holdings increased by $​25bn and $​70bn since the end of 2011.... Time deposit holdings dropped by about $​23bn and ABCP and CCP holdings increased by a total of about $​5bn."

Finally, it is possible we may see some changes in the frequency of portfolio holdings disclosures if an SEC or FSOC proposal ever does get out and come to fruition. (​Crane Data has been analyzing monthly portfolio holdings since the SEC mandated their disclosure at the end of 2010, and we'​ve been producing a weekly holdings collection. But weekly and daily disclosure is incomplete and inconsistent.) Recent FSOC comment letters have included some arguing for more frequent disclosure. The Boston Fed'​s Eric Rosengren (​see yesterdays' "News"), who has mentioned the topic before, commented to FSOC, "Even more frequent and timely disclosure may be warranted to increase the transparency of MMFs. The SEC'​s 2010 Rule 2a-​7 amendments require funds to disclose portfolio information no more than 5 business days after the end of each month. As of month end November 2012, prime funds turned over on average 44% of portfolio assets every week. Given this high turnover rate, investors are unlikely to be fully apprised of the fund'​s portfolio composition from the first day of the month through the twenty-​ninth day. During times of stress, this uncertainty regarding portfolio composition could heighten investors' incentives to redeem in between reporting periods, as they will not be able to determine if their fund is exposed to certain stressed assets. A daily or weekly reporting requirement would ensure that investors are well informed as to what assets are in the fund, and may reduce contagion effects from one fund breaking the buck. A daily or weekly reporting requirement would also enable better use of primary market data for pricing purposes."

Dreyfus'​s Charlie Cardona writes, "If further regulation is pursued, we believe the risk-​limiting conditions under Rule 2a-​7 can be enhanced to reduce various kinds of concentration and other credit risks and to increase portfolio liquidity, and we would couple these changes with required daily disclosure of portfolio holdings ("​Daily Transparency"). We believe the combination of a lower overall risk profile and Daily Transparency would more effectively match portfolio construction with investor risk tolerance and would result in more stable and predictable investor behavior during a time of crisis characterized by a "​flight to quality." ... [​W]​e respectfully urge the Council and the Commission to continue to consider the value of improving the resiliency of prime money market funds rather than seeking only to address the perceived "​structural vulnerabilities" of money market funds with reform proposals that, in our view, would do more harm than good."

​

Federal Reserve Bank of Boston President & CEO Eric Rosengren submitted a Comment letter on the Financial Stability Oversight Council'​s Proposed Recommendations Regarding Money Market Mutual Fund Reform today, which, unsurprisingly, supported the FSOC'​s reform proposals. He says, "I am writing on behalf of the Presidents of the 12 Federal Reserve Banks, all of whom are signatories to this letter. We appreciate the opportunity to respond to the request for comment on the Proposed Recommendations Regarding Money Market Mutual Fund ("​MMF") Reform (​the "​Proposal") issued by the Financial Stability Oversight Council (​the "​Council") on November 19, 2012. We agree with the Council'​s proposed determination that the conduct, nature, size, scale, concentration, and interconnectedness of MMFs' activities and practices could create or increase the risk of significant liquidity and credit problems spreading among bank holding companies, nonbank financial companies, and the financial markets of the United States. For this reason, we support the Council'​s efforts to address the structural vulnerabilities of MMFs by releasing the Proposal."

Rosengren writes, "Our comments in this letter will focus primarily on prime MMFs where the greatest credit risk can be taken and where financial stability risks consequently appear to be the greatest. Once reforms are instituted to address the structural vulnerabilities of prime MMFs, we would encourage consideration of what reforms, if any, are worth pursuing for other categories of MMFs."

He explains, "​As support for the Council'​s proposed determination and to set the context for identifying the essential elements of reform, we briefly discuss some of the risks associated with MMFs' activities and practices in Section I. Section II focuses on issues that should be addressed as part of any prime MMF reform proposal -- most notably, suggestions for the enhancement of the accuracy of market-​based net asset values ("​NAVs" and each, a "​NAV"), particularly in the context of Alternative 1, the Floating NAV. Section III then presents observations concerning each of the three reform alternatives included in the Proposal. Section IV briefly discusses standby liquidity fees and redemption gates and explains why these mechanisms, as proposed by some industry participants, do not meet reform requirements. Finally, we conclude by concurring with the Council'​s view that more than one MMF reform alternative could address the financial stability concerns posed by MMFs, in which case fund complexes could be permitted to choose from among multiple alternatives. For example, a complex could offer both a floating NAV fund and separately a stable NAV fund with a capital buffer (​and possibly coupled with a Minimum Balance at Risk ("​MBR")), from which investors could choose."

Rosengren tells us, "Under any reform alternative, it is critical that market-​based NAVs, now known as the "​shadow NAV", be computed accurately. By accurate, we mean that a market-​based NAV needs to reflect the market value of all fund assets at the time fund shareholders transact, and not some other value such as amortized cost or a value that is not available in the market. This requirement is in effect today for MMFs in calculating their shadow NAV and should continue to be applied to the market-​based NAV requirements under all the reform alternatives. Currently, an accurate shadow NAV provides investors with some protection from share value dilution, even though penny rounding reduces this protection."

He adds, "We support the Council'​s efforts to address the structural vulnerabilities of MMFs by releasing the Proposal. We agree with the Council'​s proposed determination that the structural vulnerabilities of MMFs could create or increase the risk of financial instability. As currently structured, MMFs provide a stable price at which an investor may purchase or sell an interest in the MMF, but MMFs have no explicit loss absorption capacity. By allowing redemptions at a constant share price rather than at a share price reflecting the current market value of the underlying portfolio assets, MMFs give investors a financial incentive to redeem before others during times of stress. As such, reforms are necessary to address fundamental instabilities in MMFs."

Rosengren continues, "As discussed above, we believe that reforms should initially focus on prime MMFs as this is where the greatest credit risk can be taken. We also believe that under any reform alternative it is critical that market-​based NAVs accurately reflect the value of a fund'​s underlying portfolio and that disclosures of funds' asset composition be made daily or weekly. In addition, appropriately sizing any NAV buffer will be critical as investors may run if a fund'​s buffer becomes depleted."

He says, "We share the Council'​s concerns that standby liquidity fees and temporary redemption gates may increase the potential for industry-​wide runs in times of stress, and therefore do not meet the Council'​s reform requirements. Once reforms are instituted to address the structural vulnerabilities of prime MMFs, we would encourage consideration of what reforms, if any, are worth pursuing for other categories of MMFs. In conjunction with prime MMF reform, we also urge the Council and relevant regulators to use their authorities, where appropriate and within their jurisdictions, to address any potential financial stability concerns associated with the broader cash management industry, where certain products have structural instabilities similar to those found in MMFs."

Finally, he adds, "​We concur with the Council that more than one MMF reform alternative could address the financial stability concerns posed by MMFs, in which case fund sponsors may offer both a floating NAV fund and, separately, a stable NAV fund with a capital buffer (​or a capital buffer coupled with a MBR). It is also worth noting that if initial reforms apply only to prime MMFs, investors will have the ability to continue investing in a traditional stable NAV fund by investing in a non-​prime MMF."

​

The brochure and preliminary agenda are now available for Crane Data'​s 5th annual Money Fund Symposium, the largest gathering of money fund professionals anywhere, which will be held June 19-​21, 2013 at The Hyatt Regency Baltimore. The Agenda has been posted on the Symposium website (​www.​moneyfundsymposium.​com), which is also now accepting registrations ($​750) and hotel reservations. Brochures will be sent to past attendees and to Crane Data subscribers later this week. (​E-​mail us at info@​cranedata.​com to request the full brochure.) Last year'​s Money Fund Symposium in Pittsburgh attracted over 420 money fund managers, marketers and servicers, cash investors, and money market securities dealers and issuers, and was supported by 30 sponsors and exhibitors.

After an initial "Welcome to Money Fund Symposium 2013" by Peter Crane, President & Publisher of Crane Data, this year'​s agenda will start the afternoon of June 19 with the keynote speech "Moving Forward: Money Funds & Washington" by ICI'​s Paul Schott Stevens. The opening afternoon will also feature: "The Treasury Talks: FSOC & Floating Notes" with U.​S. Department of the Treasury'​s Matt Rutherford. This will be followed by a session entitled, "Corporate & MMFs: Liquidity Is Still King" with Jeff Glenzer from the Association for Financial Professionals and Tony Carfang of Treasury Strategies. The first day will close with a panel, "Major Money Fund Issues 2013" featuring Charlie Cardona of BNY Mellon CIS/​Dreyfus, Debbie Cunningham of Federated Investors and Nancy Prior of Fidelity Management & Research. The opening reception will be sponsored by Bank of America Merrill Lynch.

Day 2 of Money Fund Symposium features: "The State of The Money Market Fund Industry" with Peter Crane of Crane Data and Robert Deutsch of J.​P. Morgan Asset Management; "Senior Portfolio Manager Perspectives" with Chris Stavrakos of BlackRock, Dave Sylvester of Wells Fargo Funds and John Tobin of J.​P. Morgan Asset Management; "Repurchase Agreement Issues & Update" with Joseph Abate of Barclays Capital and Rob Sabatino of UBS Global Asset Management; and "Municipal Money Fund Market Update" with Helena Condez of T. Rowe Price Associates, Colleen Meehan of Dreyfus Corp., and Ron Vandenhandel of Deutsche Bank.

The afternoon of Day 2 (​after a Dreyfus-​sponsored lunch) features: "Dealer Doings: Supply, Innovations, Concerns" moderated by Lu Ann Katz of Invesco and featuring Chris Condetta of Barclays Capital, John Kodweis of J.​P. Morgan Securities, and Jean-​Luc Sinniger of Citi Global Markets; "Government Agency Issuers & Supernationals" with Jonathon Hartley of FHL Banks Office of Finanace, Regina Gill of Federal Farm Credit Funding, and Michael Schulze of KfW; "Risks to Ratings: Areas of Concern" with Peter Yi of Northern Trust, Roger Merritt of Fitch Ratings and Peter Rizzo of Standard & Poor'​s; and "Survivor: Update on European Money Funds" with Jonathon Curry of HSBC Global Asset Management and Dan Morrissey of William Fry. (​The Day 2 reception is sponsored by Barclays.)

The third day of Symposium features: "Strategists Speak '​13: Fed, Cash Plus & Europe" with Brian Smedley of Bank of America Merrill Lynch, Alex Roever of J.​P. Morgan Securities, and Garret Sloan of Wells Fargo Securities; "Regulatory Roundtable: Pending & Potential" with John McGonigle of Federated Investors, and possibly a speaker from the Securities & Exchange Commission (​invite pending). The last section includes: "Portal Panel: Beyond MMFs & Transparency" with John Carter of Citi Global Transaction Services and George Hagerman of Cachematrix; and, finally, "Technology Tools & Software Update" with Peter Crane, Anthony Mossa of Bloomberg, and James Morris of Investortools.

Money Fund Symposium 2013 promises once again to be "​the" place to be for money market professionals -- register and reserve your spot today! Exhibit space for Money Fund Symposium is $​3,​000; and sponsorship opportunities are $​4.​5K, $​6K, $​7.​55K, and $​10K. Finally, our next Crane'​s Money Fund University is tentatively scheduled for Jan. 23-​24, 2014, in Providence. Note too that Crane Data is preparing to launch its first European Money Fund Symposium, which is tentatively scheduled for Sept. 26-​27, 2013 in Dublin, Ireland. Contact us or watch for more details in coming weeks.

​

The latest weekly asset totals from the Investment Company Institute show money fund assets falling for the fourth week in a row. ICI'​s Money Market Mutual Fund Assets says, "Total money market mutual fund assets decreased by $​3.​67 billion to $​2.​691 trillion for the week ended Wednesday, February 6, the Investment Company Institute reported today. Taxable government funds decreased by $​320 million, taxable non-​government funds decreased by $​4.​35 billion, and tax-​exempt funds increased by $​1.​00 billion." Since the week ended Jan. 2, 2013, money fund assets have decreased by $​13 billion, or 0.​5%, with Institutional assets up $​14 billion (​0.​8%) and Retail assets down $​27 billion, or -​2.​9%.

ICI'​s weekly explains, Assets of retail money market funds increased by $​70 million to $​915.​86 billion [​34.​0% of assets]. Taxable government money market fund assets in the retail category decreased by $​200 million to $​195.​39 billion [​7.​26% of assets], taxable non-​government money market fund assets decreased by $​550 million to $​520.​38 billion [​19.​3%], and tax-​exempt fund assets increased by $​830 million to $​200.​10 billion [​7.​4%]."

It adds, Assets of institutional money market funds decreased by $​3.​74 billion to $​1.​776 trillion [​66.​0% of total assets]. Among institutional funds, taxable government money market fund assets decreased by $​110 million to $​726.​08 billion [​27.​0%], taxable non-​government money market fund assets decreased by $​3.​80 billion to $​967.​21 billion [​35.​9%], and tax-​exempt fund assets increased by $​170 million to $​82.​33 billion [​3.​1%]."

Since the week ended Jan. 9, 2013, ICI shows money fund assets declining by $​25.​0 billion, all of the drop due to Retail withdrawals. Money fund assets rose by $​170 billion from Oct. 31, 2012, through Jan. 9 ($​114 billion Inst and $​54 billion Retail), and they remain up by $​145 billion since 10/​31/​13 ($​114 billion Inst and $​30 billion Retail).

As we wrote in the February issue of our Money Fund Intelligence, the monthly asset inflows in October and November were the strongest monthly jumps since January 2009. Crane Data'​s monthly statistics show assets increased by $​74.​6 billion in October and $​74.​4 billion in December. But assets fell by $​6.​3 billion in January. Note that ICI'​s weekly series, which comes out on Thursday afternoons with data as of each Wednesday, is the broadest collection of money fund assets, while Crane Data'​s monthly and daily series each track different slightly smaller universes.

Though, as we discussed in the recent MFI, the expiration of TAG (​the unlimited FDIC insurance transaction account guarantee program) undoubtedly played a role in the Institutional inflows, the amounts have been less than would be expected. We also believe other factors, such as the special dividends many companies paid ahead of the "​fiscal cliff", played a role in recent flows. We quoted Citi Strategist Andrew Hollenhorst in MFI, "Rather than TAG or OT [​Operation Twist], we think that the surge in cash entering short-​term markets may be partially accounted for by a one-​time $​35.​5 billion increase in personal dividend income in Q4 2012. With the fiscal cliff approaching, corporations sought to pay special dividends ahead of potential tax rises."

​

The Financial Stability Oversight Council released its 2012 Annual Report recently, and the recommendations, unsurprisingly, included "Reforming Structural Vulnerabilities in Wholesale Short-​Term Funding Markets." The Annual Report says, "​Stable wholesale short-​term funding markets are a critical component of a well-​functioning financial system, but if they suffer disruptions, these markets can rapidly spread shocks across financial institutions. The Council continues to be particularly focused on the structural vulnerabilities in money market funds (​MMFs) and the tri-​party repo market, as follows."

It explains, "The Council continues to support the implementation of structural reforms to mitigate run risk in MMFs. Specifically, these reforms are intended to address the structural features of MMFs that caused a run on prime MMFs and the freezing of the short-​term credit markets after the Reserve Primary Fund was unable to maintain a stable net asset value (​NAV) in September 2008. In 2010, the SEC adopted MMF reforms designed to make MMF portfolios more resilient by improving credit quality standards, reducing maturities, and -- for the first time -- instituting liquidity requirements. The 2010 reforms appear to be working as designed and meeting the intended goals."

FSOC continues, "However, the SEC'​s 2010 reforms did not address -- and were not intended to address -- two core characteristics of MMFs that continue to contribute to their susceptibility to destabilizing runs. First, MMFs have no mechanism to absorb a sudden loss in the value of a portfolio security, without threatening the stable $​1.​00 NAV. Second, there continues to be a "first mover advantage" in MMFs, which can lead investors to redeem at the first indication of any perceived threat to the value or liquidity of the MMF."

The Report explains, "Chairman Shapiro recommended two alternative reforms to address these remaining structural fragilities. They are (​1) a mandatory floating NAV; and/​or (​2) a capital buffer to absorb losses, possibly combined with a redemption restriction to reduce the incentive to exit the fund. The Council supports this effort and recommends that the SEC publish structural reform options for public comment and ultimately adopt reforms that address MMFs' susceptibility to runs."

It adds, "In addition, the OCC issued a proposed rulemaking in April 2012 that would partially align the requirements for short-​term bank common and collective investment funds (​STIFs) with the SEC'​s revisions to Rule 2a-​7 under the Investment Company Act. In an effort to impose comparable standards on comparable financial activities, the Council further recommends that, where applicable, its members align regulation of cash management vehicles similar to MMFs within their regulatory jurisdiction to limit the susceptibility of these vehicles to run risk."

On the Tri-​Party Repo Market, FSOC'​s Annual Report says, "The elimination of most intraday credit exposure and the reform of collateral practices in the tri-​party repo market continues to be an area of intense focus for the Council. The Tri-​Party Repo Infrastructure Reform Task Force was formed in September 2009 in response to the financial crisis. Before being disbanded in February 2012, the Task Force accomplished a number of changes in process and practice that laid a foundation for future risk reduction, including: (​1) moving the daily unwind of some repos from 8:​30 a.​m. to 3:​30 p.​m., which shortens the period of credit exposure; (​2) introducing automated collateral substitution; and (​3) introducing three-​way trade confirmation functionality. While important, these changes do not meaningfully reduce reliance on intraday credit from the clearing banks."

Finally, the FSOC comments, "​The industry has indicated that elimination of the intraday credit associated with tri-​party settlement will be a multi-​year effort. The Council views this proposed timeline as unacceptable to achieve timely substantive reductions in risk. The Council recommends that the industry implement near-​term steps to reduce intraday credit usage within the next 6 to 12 months and an iterative strategy over six-​month increments to continue both to reduce intraday credit substantially and to implement improvements in risk-​management practices across all market participants. In addition, the Council recommends that regulators and industry participants work together to define standards for collateral management in tri-​party repo markets, particularly for lenders, such as MMFs, that have legal or operational restrictions on the instruments that they can hold."

​

The February issue of Crane Data'​s Money Fund Intelligence newsletter, which was e-​mailed to subscribers this morning, features the articles: "Year-​End Asset Surge Stalls in January; Jury Out on TAG," which talks about recent asset flows; "Breaking Bad: Comments Opposed to FSOC, But Rift," which reviews the comment letters posted to date; and, "Introducing MNAV; Daily "​Market" Pricing Spreads," which discusses the recent postings of daily "​shadow" NAVs by some funds. We'​ve also updated our Money Fund Wisdom database query system with Jan. 31, 2013, performance statistics and rankings, and our MFI XLS will be sent out shortly. Our Jan. 31 Money Fund Portfolio Holdings are scheduled to go out on Tuesday, Feb. 12. Note that we'​ll also be releasing the agenda for Crane'​s Money Fund Symposium, which will be held June 19-​21, 2013, in Baltimore, Md., early next week. Registrations ($​750) and hotel reservations are now being accepted via the website at www.​moneyfundsymposium.​com.

Our piece on TAG-​related asset inflows says, "For those expecting a surge of new money fund assets in January due to the expiration of unlimited FDIC insurance in the form of the TAG (​transaction account guarantee) program, January was very disappointing. Though money funds did see big asset increases in November (​up $​74.​6 billion) and December (​up $​74.​4 billion), January proved to be a bust (​down $​6.​3 billion). However, Institutional (​taxable) assets did continue their increase in January (​up $​22.​8 billion), and they'​ve increased by $​100.​9 billion over the past 3 months."

MFI also writes on FSOC comments, "While the now-​extended deadline isn'​t until February 15, it appears that the majority of substantial comment letters on the Financial Stability Oversight Council'​s "​Proposed Recommendations Regarding Money Market Mutual Fund Reform" have already been posted. (​See the 86 letters at: www.​regulations.​gov; search for "FSOC-​​2012-​​0003".) Two things are clear. First, funds and the few investors that bothered to weigh in hate all the options, particularly the floating NAV. And, second, funds, particularly retail ones, are making contingency plans, arguing that if FSOC goes with any of their drastic measures, they should exclude Treasury, Government, Municipal, and/​or Retail funds from the proposals."

Our article on MNAVs (​market NAVs) explains, "Since Goldman Sachs and J.​P. Morgan announced that they would publish daily "​market" or "​shadow" NAVs on some of its money funds almost a month ago, a majority of large institutional money fund managers have followed suit. Those now posting daily NAVs include: BlackRock (​most funds), BofA (​some funds), Federated (​some funds), Fidelity (​all funds), Goldman Sachs (​all funds), Invesco (​most funds), and JPMorgan (​all funds). Schwab and Reich & Tang have announced that they will post, but their data has yet to appear. More fund complexes are expected to join the trend in coming weeks, though announcements have slowed to a trickle after the initial burst of activity."

MFI adds, "Crane Data'​s Money Fund Intelligence Daily, which tracks daily yields, assets and news, shows that all but 3 of the now 345 funds (​​out of 1,​057 tracked by MFID) disclosing these Market NAVs (​​or "​MNAVs") shows a value of 1.​0000 or higher. On average, taxable money funds are publishing MNAVs of 1.​​0001 (​​as of Feb. 5)."

In other news, the Federal Reserve Bank of New York published a Staff Report entitled, "​Money Market Funds Intermediation, Bank Instability, and Contagion" which was written by Marco Cipriani, Antoine Martin, and Bruno Parigi. The Abstract says, "​In recent years, U.​S. banks have increasingly relied on deposits from financial intermediaries, especially money market funds (​MMFs), which collect funds from large institutional investors and lend them to banks. In this paper, we show that intermediation through MMFs allows investors to limit their exposure to a given bank (​i.​e., reap gains from diversification). However, since MMFs are themselves subject to runs from their own investors, a banking system intermediated through MMFs is more unstable than one in which investors interact directly with banks. A mechanism through which instability can arise in an MMF-​intermediated financial system is the release of private information on bank assets, which is aggregated by MMFs and could lead them to withdraw en masse from a bank. In addition, we show that MMF intermediation can also be a channel of contagion among banking institutions."

​

A press release entitled, "Eaton Vance Announces Launch of Institutional Cash Management Services Business" tell us, "Eaton Vance Management (​Eaton Vance) ... today announced the formation of Eaton Vance Institutional Cash Management Services (​ICMS). ICMS will provide cash management services to institutional investors in the U.​S. and internationally through customized separate accounts. Compared to institutional money market funds, separately managed cash accounts can offer higher yield potential, lower costs, greater transparency and more client control, while eliminating the risk of impaired liquidity or loss of value due to the actions of other fund investors. In conjunction with the launch of ICMS, Eaton Vance has hired a team of investment professionals who formerly worked together managing institutional cash management businesses at Dwight Asset Management (​2009-​2012), Lehman Brothers Asset Management (​2003-​2009) and Allmerica Asset Management (​1995-​2003)."

The release explains, "​Joining the ICMS unit of Eaton Vance are: John C. Donohue, Vice President and Head of Institutional Cash Management Services; Robert J. Swidey, Vice President and Risk Manager; Timothy J. Robey, Vice President and Portfolio Manager; Jeffrey R. Boutin, Vice President and Credit Analyst - Structured Finance; and Kevin E. Zimmerman, Vice President and Director of Business Development. Mr. Boutin and Mr. Zimmerman began working with the other team members in 2003 and 2006, respectively. This group brings to Eaton Vance a disciplined, risk-​managed approach to managing cash assets, a history of successful collaboration and a record of favorable investment performance and high client satisfaction."

It continues, "​Also joining ICMS as a portfolio manager will be Maria Cappellano, co-​portfolio manager of Eaton Vance U.​S. Government Money Market Fund and Eaton Vance'​s primary portfolio manager and trader for money market and short duration portfolios. Ms. Cappellano is a Vice President of Eaton Vance and has been a member of its Investment Grade Fixed Income group since 1998. She earned a B.​S. in business administration with a concentration in finance, summa cum laude, from Northeastern University."

The company adds, "The ICMS unit will service approximately $​3 billion in cash assets held across various Eaton Vance separate accounts and mutual funds. In addition to its dedicated staff, the ICMS unit will draw upon the investment and operational resources of Eaton Vance'​s Investment Grade Fixed Income group. Mr. Donohue will report to Thomas H. Luster, CFA, and Kathleen C. Gaffney, CFA, Co-​Directors of Investment Grade Fixed Income."

Thomas E. Faust, Jr., Chairman and CEO, comments, "Eaton Vance views this as a particularly opportune time to enter the institutional cash management business. Large corporate cash balances, dislocation in the institutional money fund business and a thirst for yield in a low rate environment create demand for new cash management solutions. Given the experience and track record of John Donohue and his team and the broader resources of the Eaton Vance income organization, we see ourselves as ideally positioned to serve this growing market." Donohue adds, "​My colleagues and I are very excited to join Eaton Vance. Together, we have all the ingredients in place to meet the cash management needs of institutional investors."

The release tells us, "​Mr. Donohue has spent his 20-​year investment career building and managing successful institutional cash management businesses. Prior to joining Eaton Vance, he headed liquidity management units of Dwight Asset Management, Lehman Brothers Asset Management and Allmerica Asset Management, and was a portfolio manager at CS First Boston Investment Management.... Mr. Swidey specializes in quantitative risk management for money market and short duration income portfolios. During his 22-​year career he has been affiliated with Dwight Asset Management, Lehman Brothers Asset Management, Allmerica Asset Management, Allmerica Financial Corporation, 440 Financial Group and State Street Bank and Trust.... Mr. Robey has 12 years of experience managing and trading money market and short duration income portfolios. He was formerly affiliated with Dwight Asset Management, Lehman Brothers Asset Management and Allmerica Asset Management. Mr. Robey is a graduate of Bentley College."

​

The Comments on the FSOC'​s "​Proposed Recommendations Regarding Money Market Mutual Fund Reform" keep coming, though the pace has slowed following the exension of the Council'​s original Jan. 18 deadline to the new February 15 date. The latest is a letter from T. Rowe Price Associates, the 21st largest manager of money market mutual funds (​out of 71) with $​15.​1 billion in assets. T. Rowe'​s Edward Bernard writes, "​In November 2012, the Financial Stability Oversight Council ("​FSOC") published recommendations for structural reforms of money market funds. Those recommendations included three alternatives for consideration: (​1) requiring money market funds to maintain a floating net asset value ("​NAV"); (​2) continuing to allow money market funds to maintain a stable NAV with a capital buffer and the maintenance of a minimum balance at risk ("​MBR"); and/​or (​3) continuing to allow money market funds to maintain a stable NAV with a larger capital buffer and additional reforms designed to further mitigate portfolio risk and increase investor transparency. Our comments will primarily focus on alternative one, which would require money market funds to have a floating NAV per share by removing the special exemption that currently allows money market funds to utilize amortized cost accounting and/​or penny rounding to maintain a stable NAV. We would also like to make some general observations about the impact that such reforms may have on our money market funds."

The letter continues, "As an initial matter, we believe that the 2010 amendments to Rule 2a-​7 under the Investment Company Act of 1940 significantly increased the resilience of money market funds. This resilience was confirmed during 2011 when money market funds withstood the volatile markets related to the escalation of the crisis in the Eurozone, a U.​S. debt ceiling crisis, and a downgrade of the U.​S. government'​s credit rating by a rating agency. Therefore, we do not believe that further structural money market reforms are necessary. However, if the FSOC is intent upon additional reforms, because such changes could be detrimental to shareholders and may have an impact on the broader economy, we believe that any FSOC recommendations should be narrowly tailored to avoid unnecessary disruption and to target the primary FSOC concerns, one of which is the possible vulnerability of money market funds to run risk. FSOC indicates that it believes a floating NAV would address the run risk inherent in the current structure of money funds and would change investor expectations that they would not bear any risk of loss. We disagree with these premises, and are not aware of any concrete data that has been shown to support them. More specifically, we believe the weight of evidence and past experience indicate that any reforms that impact the structure of money market funds should exclude Treasury money funds, U.​S. government money funds, tax-​exempt money funds and retail prime money funds, and thus would be limited to institutional prime money market funds.”

The T. Rowe letter explains, “Even at the height of the financial crisis in September 2008 and as evidenced by our own analysis related to the Price retail money funds discussed below, our retail funds, including our prime and U.​S. Treasury money funds, did not experience the level of redemptions that were reportedly experienced by certain institutional prime money market funds. For example, our retail prime funds did not experience weekly net redemptions over 3% of fund assets during the period from September through December of 2008. Our municipal money funds generally showed similar redemption patterns during the crisis with no weekly net redemptions greater than 6% of fund assets. In contrast, our Treasury money market fund experienced significant net subscriptions during the same time period. We also note that these redemption patterns are comfortably below the weekly liquidity requirements imposed by the 2010 money fund reforms, which require money funds to hold 30% of their assets in securities that can be liquidated in 5 business days."

It says, “Although we are aware of no direct evidence that a floating NAV will meet the FSOC’​s goal of preventing a run on money market funds, and because a stable NA V is a critical feature of money funds generally, FSOC’​s recommendation should be narrowly applied to ameliorate run risk in only those funds that may be subject to such a risk. Certain types of money market funds that do not present the concerns enumerated by the FSOC, including the likelihood for investors to rapidly redeem their investments, should be permitted to continue to maintain a stable NAV. Our retail money funds did not experience the type of rapid and coordinated redemption activity that FSOC posits is a structural flaw of a stable NAV money fund. We believe FSOC should develop a bright-​line distinction between retail and institutional funds based on quantifiable facts, and that the FSOC should recommend that the Securities and Exchange Commission ("​SEC") limit the consideration of a floating NA V to institutional prime money market funds.”

Price adds, “Finally, we believe that any recommendation by the FSOC that includes a requirement for a floating NAV should acknowledge that money market funds with a floating NAV will not have the same tax convenience, accounting simplicity and operational convenience of money market funds in their current form. We believe that the resolution of these issues by various regulators is integral to an assessment of the costs and benefits of the floating NAV. Therefore, the FSOC should instruct the SEC to address these issues in coordination with Treasury and other FSOC members to give the industry greater clarity as to how they might be resolved in any proposal that the SEC releases so that the industry can provide meaningful comments on the impact of a floating NAV.”

In other news, The Wall Street Journal writes "​Money Funds Beset by Excess Cash". The article, though a little late to the TAG party, says, "​Money-​market funds have a high-​quality problem: investors are entrusting them with too much cash. The flood of money is prompting the funds, which buy short-​term, top-​rated debt, to seek higher returns in investments that until recently were seen as too risky, including French bank debt. Investors plowed $​149 billion into U.​S.-​based money-​market funds between the start of November and Jan. 30, bringing total assets under management to $​2.​695 trillion, close to the most since mid-​2011, according to the Investment Company Institute. The funds have received billions of dollars that until recently were stashed in zero-​interest checking accounts held by businesses, municipalities and charitable organizations. Those accounts had been guaranteed by the federal government, but the guarantees expired in December 2012 for balances over $​250,​000."

The Journal piece adds, "But finding places to park that new cash is proving tricky for fund managers, as yields on the ultrasafe debt they usually buy push recent lows. Some are taking on more risk.... Some funds are buying assets they recently viewed as too risky, including returning to French bank debt to an extent unseen since the early days of the euro debt crisis. French bank debt made up 6.​5% of money-​market fund assets in December, the highest since September 2011, according to Fitch Ratings. Money funds also are buying Treasurys and corporate debt with longer maturities, which offer a higher yield to compensate for the higher default risk."

​

Federal Reserve Bank of New York President & CEO William Dudley spoke Friday on "Fixing Wholesale Funding to Build a More Stable Financial System." He commented, "One critical factor [​of the recent financial crisis] was the extensive use of short-​term wholesale funding in the years leading up to the crisis. Not only did this aspect of our financial system create the potential for a firm to fail in an extraordinarily rapid manner when faced with a loss of market confidence, but it also served as a channel through which the effects of those failures were widely propagated throughout the broader financial system. Although much has been done over the past few years to mitigate the structural flaws that make wholesale funding a point of weakness in the global financial system, some important issues and vulnerabilities remain. I will focus my remarks today on some of those vulnerabilities -- including the areas of tri-​party repo and money market mutual funds markets -- and discuss what could be done to make wholesale funding markets more stable."

He explained, "​Short-​term funding of longer-​term assets is inherently unstable particularly in the presence of information and coordination problems. It can be rational for a provider of funds to supply funds on a short-​term basis, reasoning that it can exit if there is any uncertainty over the firm'​s continued ability to roll over its funding from other sources. But if the use of short-​term funding becomes sufficiently widespread, the firm'​s roll-​over risk increases. In this situation, there is a strong incentive for each lender to "​run" if there is any uncertainty that could undermine the borrower'​s ability to continue to roll over its funding from other sources. This is the case even if the provider of funds believes that the borrower would remain solvent as long as it retained access to funding on normal terms."

Dudley continued, "Heavy reliance on short-​term wholesale funding exposed the system to a series of intertwined downward spirals in asset and funding markets. This spread in waves, beginning in the market for asset-​backed commercial paper (​ABCP) issued by off-​balance-​sheet conduits, and spreading via auction-​rate securities, to the repo, money market and financial commercial paper markets that formed the core financing for market-​based financial intermediation."

He said, "The fragility of short-​term wholesale funding was greatly aggravated by certain critical institutional shortcomings in these markets, particularly in the structure of the tri-​party repo system and the U.​S. money market mutual fund business.... As the concerns about the U.​S. housing market escalated in 2007, participants in the tri-​party repo market became increasingly concerned about the liquidity and credit risks that they faced."

Dudley explained, "The crisis also made it clear that the monies provided to the money market mutual funds by their own investors were also inherently unstable. This made such funds, in turn, an unreliable source of finance in repo, commercial paper and other markets. Investors in a fixed net asset value (​NAV) money market fund could take their money out on a daily basis at par value, with no redemption penalty. This could occur even if the money market fund did not have sufficient cash or liquid assets that it could easily sell to meet all potential redemptions. This created an incentive for investors to be the first to get out whenever there was any uncertainty over the underlying value of the assets in the fund.... The longer the investor waited, the greater the risk that the fund would be forced into the fire sale of assets to meet redemptions and end up "​breaking the buck.""

He added, "As the crisis unfolded, the Federal Reserve, the U.​S. Treasury and others took a series of actions to contain the spiral of funding runs and asset fire sales.... The Federal Reserve created a direct backstop to the tri-​party repo system through the Primary Dealer Credit Facility (​PDCF). When the Reserve Fund broke the buck after the failure of Lehman Brothers, precipitating a run on money market mutual funds, the Treasury guaranteed money market fund assets and the Fed introduced the Asset-​Backed Commercial Paper Money Market Fund Liquidation Facility (​AMLF). The Fed also backstopped the commercial paper market (​formerly funded in large part by money market mutual funds) by introducing the Commercial Paper Funding Facility (​CPFF)."

Dudley continued, "Worthwhile as the steps taken thus far are, we have not come close to fixing all the institutional flaws in our wholesale funding markets. The tri-​party repo system and the money fund industry that plays a crucial role financing collateral through it are both still exposed to runs. In fact, in each of these areas, one could argue that the risks have increased compared to prior to the crisis. That is because the Dodd-​Frank Act raised the hurdle for the Federal Reserve to exercise its Section 13.​3 emergency lending authority and because Congress has explicitly precluded the U.​S. Treasury from guaranteeing money market mutual fund assets in the future. With extraordinary interventions ruled out or made much more difficult, this may cause investors to be even more skittish in the future. This is why it is essential to make the system more stable."

He told us, "Turning first to the issue of tri-​party repo reform, there is still considerable work to do. In particular, the risk that investors will run at the first sign of trouble persists. That is because the costs of running are very low relative to the potential costs of staying put. The potential costs of staying are elevated in part because investors often don'​t have the capacity to take possession of the collateral or liquidate the collateral in an orderly way should a large dealer fail. Both aspects result in run risk, fire sale risk and potential financial instability."

Dudley then said, "Turning next to the issue of money market mutual funds, further reform to directly address the incentive for investors to run is essential for financial stability. In November, the Financial Stability Oversight Council (​FSOC) put out for comment three alternative paths forward: 1. Moving to a floating net asset value (​NAV). 2. Retaining a stable NAV, but adding a new NAV buffer and a minimum balance requirement. The minimum balance would be at risk for 30 days following withdrawals. If the fund subsequently "​broke the buck" during this period by suffering losses greater than the size of its NAV buffer, the minimum balance would be first in line to absorb these losses. 3. A larger NAV buffer than in the second alternative, but without a minimum balance at risk buffer."

He continued, "​I have stated my views on money fund reform before. Although any of these proposals -- depending on the fine print of course -- would likely be an improvement over the status quo, the first and third proposals don'​t fully eliminate the incentives to run. In the case of a floating rate NAV, fund managers faced with large redemption requests typically sell their most liquid assets first, leaving the remaining investors with a riskier, less-​liquid portfolio and a greater risk of loss. Similarly, with a stable NAV and a capital buffer, unless the capital buffer were very large, there would still be an incentive to run because the buffer might not prove large enough to shield the investor from loss."

He added, "Because the second option is the only one that actually creates a disincentive to run, as I stated before the FSOC proposal, I view it as the best one for financial stability purposes. The requirement that investors who withdraw funds must maintain a small balance for a short period to absorb near-​term losses would deter investors from pulling out at the first glimpse of trouble and make the system safer. The modest withdrawal restrictions, which create a "​minimum balance at risk," might be set at 5 cents on the dollar, based on the high-​water mark of recent holdings, with more favorable treatment for small retail investors. A minimum balance at risk of loss would also increase market discipline. Corporations and other sophisticated investors would have an incentive to monitor risk-​taking more carefully, rather than rely on their ability to get out ahead of small retail investors when trouble materializes."

Finally, Dudley concluded, "Reforming the tri-​party repo system and the money market mutual fund industry is essential and would make the financial system significantly more stable. But even after such reforms, we would still have a system in which a very significant share of financial intermediation activity vital to the economy takes place in markets and through institutions that have no direct access to an effective lender of last resort backstop."

​

The Associated Press about the new trend of daily posting of money funds' market NAVs in "TMI? New disclosures by money-​market funds are about more than just an investor'​s need to know." The article says, "​The more informed you are, the better. Yet there'​s so much information about mutual funds available, from performance data to legal disclosures, that it'​s understandable to wonder what information you really need to know. For the past three weeks, many investors have been able to check out new information that falls into this category. On a fund company'​s website, they can click on list of available money-​market funds to see daily updates showing tiny changes in the market value of a money fund'​s portfolio." (​Note: Crane Data'​s Money Fund Intelligence Daily now includes "​shadow" or "​market" NAVs for those funds that are publishing them; we label these as "MNAVs".)

AP explains, "Goldman Sachs on Jan. 9 became the first to post daily values of its money funds. More than a half-​dozen other companies have since followed suit or announced similar plans. They include the largest money fund provider, Fidelity Investments, as well as such names as Charles Schwab, Federated Investors, BlackRock, JPMorgan and Charles Schwab. There'​s minimal practical value for average investors to review these numbers. Money funds get relatively little attention because they'​re low-​risk investments, and their portfolios of short-​term bonds generate tiny returns even in the best of times."

The article continues, "But by voluntarily making these daily disclosures, the money fund industry is doing more than just serving investors. It'​s trying to convince regulators that it'​s open to some degree of change, in hopes of heading off more far-​reaching rules that are under consideration to stabilize money funds." AP quotes Peter Crane of money fund researcher Crane Data, "All of a sudden, the industry got religion on transparency. It'​s throwing a bone to regulators."

AP adds, "With its leadership in transition, it'​s too early to say how the Securities and Exchange Commission will react to the industry'​s increased openness. But the step could convince regulators that there'​s no need to require funds to hold loss reserves -- there are none currently -- or that there'​s no need to set limits on how quickly investors can withdraw cash."

The article tell us, "So far, money funds are making daily disclosures covering more than half of the industry'​s assets, according to Crane Data. But there are some holdouts. One is Vanguard.... Each of the more than 200 funds that Crane Data tracked through Jan. 22 posted net asset values above $​1 a share. On average, the funds published market values of $​1.​0002, or a dollar and two-​hundredths of a penny. Typically, values are rounded off to four decimal places."

They quote Crane, "Anyone tracking this should expect to see a lot of zeros. So far, there have been no nines, and that'​s good." Our latest data from MFI Daily shows the 252 funds out of 1,​067 we track daily with MNAVs ranging from 1.​0000 to 1.​0017. Taxable money funds average 1.​0001, while Tax Exempt money funds average 1.​0004. (​The Tax Exempt universe is much thinner as many fund managers are only reporting their "​Prime" money fund MNAVs.)

Money fund managers publishing daily NAVs currenty include: BlackRock (​most funds), BofA (​some funds), Federated (​some funds), Fidelity (​all funds), Goldman Sachs (​all funds), Invesco (​most funds), and JPMorgan (​all funds). Schwab and Reich & Tang have announced that they will post, but their data has yet to appear. Other fund complexes are expected to join the trend in coming weeks.

Finally, AP quotes Crane, "Anything happening in the world that'​s important enough to noticeably move a fund'​s net asset value is probably something that'​s important enough to be in the newspapers. So you can just stay alert that way, rather than watching all these zeros."

Money Market News Archive