​

ICI'​s latest "Trends in Mutual Fund Investing, June 2013" shows money fund assets decreased by $​16.​9 billion in June, after rising $​28.​3 billion in May, and falling in every prior month for 2013 (​down $​24.​5 billion in April, $​57.​6 billion in March, $​31.​7 billion in February, and $​9.​1 billion in January). YTD through 6/​30, ICI shows money fund assets down by $​110.​3 billion, or 4.​1%. The Institute'​s bond fund totals showed the breadth of the massacre in the fixed-​income markets, though, with bond funds losing a record $​143.​1 billion (​4.​1%) in assets in June. (​Note that assets include gains and losses and differ from "​flows".) ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which verified the traditional quarter-​end plunge in repo holdings. (​See Crane Data'​s July 12 News, "Repo, Europe-​Related Holdings Plunge; CDs, Treasuries Now Largest.") Money fund assets are up strongly in July though. Month-​to-​date through 7/​29, our MFI Daily shows assets increasing by $​43.​9 billion, or 1.​8%, with Institutional assets leading the way (​up $​46.​1 billion).

ICI'​s June "​Trends" says, "The combined assets of the nation'​s mutual funds decreased by $​310.​3 billion, or 2.​2 percent, to $​13.​637 trillion in June, according to the Investment Company Institute'​s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an outflow of $​60.​47 billion in June, compared with an inflow of $​12.​20 billion in May."

It adds, "Money market funds had an outflow of $​18.​00 billion in June, compared with an inflow of $​28.​34 billion in May. Funds offered primarily to institutions had an outflow of $​45.​84 billion. Funds offered primarily to individuals had an inflow of $​27.​84 billion." ICI'​s "Liquid Assets of Stock Mutual Funds" figure remains near a record low at 3.​7%, showing stock funds continue to hold razor-​thin buckets of cash.

ICI'​s Portfolio Holdings for June 2013 show that Repos plummeted $​65.​6 billion, or 12.​5%, to $​457.​9 billion (​19.​7% of assets). Repos traditionally decline sharply at quarter-​ends; the decline moved them down to the second largest segment of taxable money fund portfolio holdings behind CDs this month. Holdings of Certificates of Deposits, now the largest position, dipped by $​5.​3 billion to $​482.​9 billion (​20.​8%). Treasury Bills & Securities, the third largest segment, increased by $​27.​8 billion to $​456.​3 billion (​19.​6%).

Commercial Paper remained the fourth largest segment ahead of U.​S. Government Agency Securities; CP holdings fell by $​16.​1 billion to $​363.​4 billion (​15.​6% of assets) and Agencies rose by $​28.​3 billion to $​351.​6 billion (​15.​1% of taxable assets). Notes (​including Corporate and Bank) fell again (​down $​6.​0 billion) to $​92.​5 billion (​4.​0% of assets), and Other holdings rose by $​1.​2 billion to $​90.​0 billion (​3.​9%).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds increased by 122,​841 to 24.​654 million, while the Number of Funds remained flat at 393. The Average Maturity of Portfolios lengthened by one day to 50 days in June after being flat at 49 days for 4 months straight. Over the past year, WAMs of Taxable money funds have lengthened by 4 days.

Note that Crane Data publishes daily asset totals via our Money Fund Intelligence Daily and monthly asset totals via our Money Fund Intelligence XLS. ICI publishes a weekly "Money Market Mutual Fund Assets" summary, as well as the above-​referenced monthly asset totals. Each data set and time series contains slight differences among the tracked universes of money market mutual funds. Crane also publishes monthly Money Fund Portfolio Holdings and calculates a monthly Portfolio Composition totals from these, while ICI collects a separate monthly Composition series.

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A press release entitled, "Citi Enhances Transparency and Risk Assessment Functionality on Citibank Online Investments Portal and subtitled, "Leading global portal adds "​Nominee" and "​Fully Disclosed" offering, enhances Balance Transparency," tell us, "Citi has enhanced its global web-​based investment service, Citibank Online Investments, offering additional account options for money market mutual funds. "​Nominee" and "​Fully Disclosed" account options allow clients to leverage all key features and benefits of the current omnibus account model. These include straight-​through processing (​STP), consolidated online trades, balance and dividend reporting, as well as direct automated settlement to a Citibank operating or custody account while addressing clients' requirements for additional disclosure reporting."

Elyse Weiner, Global Head of Liquidity Management Services for Citi Treasury and Trade Solutions, comments, "We know that transparency is increasingly important to our clients, which is why we have enhanced our industry-​leading web-​based investment service supporting local investment options in over 30 countries and 19 currencies. By adding multiple account options, Citibank Online Investments is able to match or surpass the capabilities of every other portal on the market today. These new account options include an ability to provide STP for all investments regardless of the account set-​up. The breadth of our footprint, combined with the depth of Citibank Online Investments' functionality truly sets us apart."

The press release explains, "Disclosure of a client'​s balances to the underlying fund complexes is also an important trend in the cash investment world. Citibank Online Investments addresses that need with the introduction of Nominee accounts, which provide enhanced balance disclosure to funds. For clients selecting this option, fund complexes will get visibility into the clients' balances and transactions on a real time basis, facilitating tracking of investor relationships and provision of relationship credit."

It adds, "With the Fully Disclosed account option, clients may elect to open an investment account directly with the fund company as compared with investing through an omnibus account relationship between the fund company and Citi. This option more clearly defines the counterparties to the transactions, with full transparency between investors and investment vehicles. As with the Nominee structure, fund complexes will have the ability to view balances and client activity in real time, assisting in the maintenance of client/​fund relationship."

The release also says, "As well as enhancing disclosure to fund complexes, Citi is committed to giving clients sophisticated tools to help identify and manage certain risks. Clients can also leverage Citi'​s extensive relationships with senior fund personnel to conduct necessary due diligence and understand a fund'​s investment philosophy."

Citi tells us, "Cachematrix, a core provider of institutional money market fund, bank product trading and sweep technology, has been selected to power Citi'​s money market fund portfolio holdings analytics module. This analytics module will provide clients with visibility to the consolidated underlying money market fund holdings, enabling them to quickly and easily identify certain potential exposure risk. Exposures will be categorized by Country, Holding, Security Category, Issuer, and Liquidity Distribution, allowing users to select a specific data point and drill deeper into the data and customize specific reports." (Note: Crane Data is a provider of Money Fund Portfolio Holdings data to Cachematrix.)

Weiner adds, "Corporations consider transparency into their investments to be vital in today'​s environment and it is a critical factor in selecting an investment platform. We are pleased to offer these enhanced risk assessment tools to our global clients." The release adds, "​Citi'​s global network for liquidity management provides advisory, analytics, aggregation, and optimization services across the world."

Finally, the release says, "Citi Treasury and Trade Solutions (​TTS), provides integrated cash management and trade finance services to multinational corporations, financial institutions and public sector organizations across the globe. With a full range of digital and mobile enabled platforms, tools and analytics, TTS continues to lead the way in delivering innovative and tailored solutions to its clients. It offers the industry'​s most comprehensive suite of treasury and trade solutions including cash management, payments, receivables, liquidity management and investment services, working capital solutions, commercial and prepaid card programs, trade finance and services."

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Federated Investors hosted its latest quarterly earnings call on Friday (listen to the replay here and see the transcript from Seeking Alpha), and, as usual, CEO & President J. Christopher Donahue opined on many things related to the money market mutual fund business. Regarding Federated'​s results, he tells us, "Looking first at cash management. Average money market fund assets were down $​13 billion from Q1, and period end money fund assets decreased by $​10 billion. The decrease included seasonal effects of tax payments and decreases by certain institutional investors against the backdrop of declining rates and yields over the quarter. Debbie [​Cunningham] will comment later on, on market conditions and our outlook for rates." (​Note: Federated also launched a campaign supporting the website "​Save Money Market Funds", which is asking investors to comment to the SEC'​s proposals.)

Donahue adds, "Our market share for money funds decreased slightly in Q2 to approximately 9% from 9.​2%. For historical purposes, recall that in '​08, our share was about 8.​5% and back in 2000, it was about 5%. The impact of yield-​related fee waivers increased in the second quarter. Repo rates have been at very low level since mid-​May, which of course, impacts the waivers. And Tom [​Donahue] will comment on this in his remarks."

Donahue explains, "On the regulatory front, the SEC issued its 700-​page money market fund reform proposal for public comment last month. We commend the SEC for taking a thorough and thoughtful approach proper to preserving their jurisdiction for money market funds. We'​re working on a series of comment letters to address various aspects of the proposal. The main points of the proposal have been extensively reported, so I won'​t go through them. Our initial reaction to the proposal is that parts of this are workable, like gating, and would improve money funds, and other parts are unworkable, like floating the NAV, and unnecessarily detrimental to money funds with negative implications for investors, issuers and the financial market."

He tells us, "Our core beliefs remained consistent. We continue to advocate for sound policy that enhances the resiliency of money funds for our clients, who fully understand that money funds like other investments have elements of risk. They are not interested in radical, costly and unnecessary change like floating the NAV. The floating NAV would create market inefficiencies without providing meaningful benefits. In particular, as both the Fed and the SEC has acknowledged, the floating NAV would not eliminate the idea of runs."

Donahue adds, "We know that many institutional money fund users have gone on record to make it known that they cannot or will not use any floating NAV money funds due to a host of legal and/​or investment policy restrictions, operational complexity and tax burdens. Tax issues remain unsolved and significant. The cost with that systems to accommodate the floating NAV would be enormous. These and other issues will cause many users to move from the product if subjected to a floating NAV. We believe that some of these money fund users will migrate from institutional funds to government agency money funds creating dislocation in that part of the market. Others will increase deposits in banks, in particular among the largest banks, making them even bigger. So others will look to separate accounts, offshore products and other less regulated and less visible alternatives."

He says, "​This process is unnecessary and will be very disruptive to investors and to the financial system. The cost will be significant and real. And the benefits will be minimal, if any. The impact of the floating NAV were it ultimately to be enacted on the money fund asset levels of our clients is difficult to assess. We are hopeful that a significant portion of our current $​97 billion in prime money fund assets would be properly classified as retail under the proposal'​s definition, recognizing that the implementation of a retail exemption could be operationally difficult and involves added complexity because a large portion of our assets are held in omnibus accounts."

Donahue comments, "In contrast with the floating NAV, gating, that is giving the fund'​s Board of Directors the option of a gate on redemption in extremely rare periods of a dysfunctional market, as experienced by money funds and other participants in '​08, promotes the equal treatment of investors and improves financial markets by potentially stopping a run, dead in its track. It has proven to be effective in practice, avoids costly and unnecessary disruption and most importantly, preserves the critical features and benefits of money funds for investors, issuers and the capital markets."

He also says, "Following the meaningful reforms enacted by the SEC in 2010 and voluntary efforts by major industry participants, which continue today, to further increase transparency by publishing daily shadow price NAV, money funds are among the safest and most transparent investment products. And will be further enhanced by adding the gating option. Radical change like floating the NAV will unnecessarily cause the demise of the institutional prime money market funds, a high-​quality product that enhances our financial system on many levels."

CFO Tom Donahue says on the call, "Taking a look first at money fund fee waivers. The impact of pretax income in Q2 was $​23.​7 million, up from $​21.​7 million in the prior quarter. The increase was due mainly to lower rates for treasury and mortgage-​related securities. Based on current assets, and assuming overnight repo rates for treasuries and agency securities run at 3 to 8 basis points over the quarter, the impact of minimum yield waivers to pretax income in Q3 could increase to $​28 million. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 45%, and a 25 basis point increase would reduce the impact by about 70%. It is important to note that the variables impacting waivers can and do change frequently. Revenues in Q2 decreased 2% from the prior quarter, due largely to minimum yield waivers and lower average money fund assets."

During the Q&​A, Chris Donahue says of their "​Prime" exposure, "​So we'​re right now, we'​re at $​97 billion in Prime; $​12 billion of that is from offshore products, okay? So that'​s not subject to the SEC.... Another $​5 billion is our leftover historical direct retail, along with our internal use of Prime funds ... so that'​s not an issue. Then we have $​25 billion of the $​97 billion that comes from broker/​dealer sweep accounts, where usually the underlying customers tend to be retail as defined.... Then we have $​8 billion that comes from our institutional cash market, which tends to be large corporate customers who could not meet $​1 million day-​type redemption. Okay. So then we have 2 other categories. We have $​32 billion in Trust and Wealth Management, which is our bank trust business is basically. And another $​15 billion in our capital markets. So this $​47 billion, all these clients, more or less, have come in through omnibus accounts and they are very difficult to characterize. We do know ... the $​1 million isn'​t going to work for [​some of] them and others say that, most of the time it works but sometimes, it doesn'​t. And so they might be thinking about different numbers. So it'​s very difficult for us to characterize that $​47 billion because we don'​t see behind the curtain as to what their redemption profile is."

Finally, when asked about consolidation, he answers, "We would be open to discussing with others who choose to get out of the money fund business at any time. So we will be open to doing that. And we have been doing that for many years.... [​R]​emember that I guess it was about in '​07, there were over 200 people doing money market funds. Today if you look at the list, they list about 80 people doing money funds. And I think the bottom 10 or 15 of those have 10 million or 20 million in it. So you barely have 60 firms doing money market funds.... I think there are consolidation candidates there. But there has already been a [​lot of] consolidation going on here, or to look at another way, an oligopolization of this business. `​And that is encouraged each time you put on more rules, regulations and challenges, so that will just continue.... Owner operators like revenues and businesses even if it may not be the best [​area]. It would be best if we could just do acquisitions [​in] equity that will help the ratios, the PEs and all of that. But, if we think we can make a good trade on money funds, we'​re happy to do it."

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The Chamber of Commerce, which is hosting a small event on money market funds in Washington today, released a statement entitled, "U.​S. Chamber Report Outlines Costs, Operational Challenges of Floating NAV for Money Market Mutual Funds, Estimates Costs to Move from Stable to Floating NAV Could Reach $​2Billion For Investors." The Chamber'​s release says, "A new U.​S. Chamber of Commerce Center for Capital Markets Competitiveness (​CCMC) report released today finds that the operational complexity, systems alterations, and business process changes needed to support a floating NAV threaten the vitality of money market funds for most investors, including businesses and municipalities. The report titled, "Operational Implications of a Floating NAV across Money Market Fund Industry Key Stakeholders," examines the compliance costs across key stakeholders if money market funds (​MMFs) transition to a floating net asset value (​NAV)." (​Note: Federated Investors will host its latest quarterly earnings call at 9am. Call 877-​407-​0782 to listen in and look for excerpts on Monday.)

David Hirschmann, president and CEO of Chamber'​s Center for Capital Markets Competitiveness, comments, "The current proposal doesn'​t yet adequately address the challenges of implementing a floating NAV. The SEC must tackle the operational, tax, and accounting implications and the same day settlement issue. If the Commission fails to adopt a proposal that preserves the utility of MMMFs, business, cities, and states will be left searching for alternative, less regulated, cash management tools."

The release explains, "The report, conducted by independent treasury management firm Treasury Strategies, estimates total upfront cost for investors to move from a stable to a floating NAV would be between $​1.​8 and $​2 billion. Further, new estimated annual operating costs would be an additional $​2 to $​2.​5 billion. States, municipalities, and other public institutions, already operating within tight budgets, would have to absorb these and additional costs for compliance."

It adds, "Additionally, because of the complexity and interdependence of various fund service providers, the time required by market participants to fully comply with a floating NAV would be more than two years."

Hirschmann tells us, "While the SEC'​s proposed change might seem to be a small change in the large scheme of things, the impact is actually quite dramatic in both cost and operations. This proposed change represents a fundamental redesign of the structure and nature of MMFs making them undesirable to institutional investors trying to manage liquidity."

Finally, the release says, "​Since its inception in 2007, the Center for Capital Markets Competitiveness has led a bipartisan effort to modernize and strengthen the outmoded regulatory systems that have governed our capital markets. The CCMC is committed to working aggressively with the administration, Congress, and global leaders to implement reforms to strengthen the economy, restore investor confidence, and ensure well-​functioning capital markets. The U.​S. Chamber of Commerce is the world’​s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations."

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After we wrote about Morgan Stanley'​s decision to post daily 1-​day and 7-​day liquidity numbers (​see yesterday'​s "News"), we learned after the fact that Goldman Sachs Asset Management has also decided to post this daily information on just a handful of its money funds. A statement entitled, "GSAM to Disclose Daily and Weekly Liquidity for Money Market Funds, said June 28, "Effective today, Goldman Sachs Asset Management (​GSAM) will begin disclosing on a daily basis the percentage of daily and weekly liquid assets for the Financial Square Money Market Funds and the VIT Money Market Fund." Below, we also cite a handful of Comment Letters on the SEC'​s Proposed MMF Reforms, we think the only ones worth reading are those since July 15, and many of these new ones are 401k-​related with similar structure (​so you only need to read some of them).

Goldman'​s statement explains, "Earlier this year, GSAM began disclosing market-​based (​or market-​value) NAVs on a daily basis. At that time, we announced plans to release additional information to investors to provide additional transparency into the GSAM money market funds. The daily disclosure of daily and weekly liquidity is one more step in the process of increased transparency to our shareholders." (​See the daily disclosures here: http://​www.​goldmansachs.​com/​gsam/​glm/​products/​money-​market/​index.​html.) We'​ll let you know as we discover more funds reporting this information (​or enough to add it to our reports). Look for the next monthly update of MFI XLS (​the final July issue should be out in another day or two), which will contain the latest percentages for fund holdings maturing in 1-​day, in 2-​7 days, and in the combined 1-​7 days.

In other news, while the real substantive comment letters have yet to appear, there are a couple early postings on the SEC'​s Money Market Fund Reform Proposal that merit mentions to date. As expected, the floating NAV is taking a beating in the early polls. Below, we excerpt brief comments from Scott Smith, President, United States Conference of Mayors, Timothy Friday, President, Mid Atlantic Capital Group, Mary Covington, CTP, Administrator, Cash Management Services, Cleco Corporation, and Henry Bilyk, Senior Vice President, Farmers Trust Company.

Smith from www.​usmayors.​org writes, "Attached please find a resolution unanimously adopted by the nation'​s mayors on June 24 during our recent annual meeting in Las Vegas, which expresses opposition to the Securities and Exchange Commission (​SEC) proposed changes in the Net Asset Value (​NAV) rules for Money Market Mutual Funds (​MMMFs) outlined in your June 5, 2013 proposal. While the Conference of Mayors is supportive of changes that will strengthen the market and improve the quality of securities, some of the changes being discussed would undermine the value and utility of MMMFs as well as the municipal bond market. On behalf of the nation'​s mayors, I strongly urge the SEC not to make changes to the NAV or any further regulatory changes that would disrupt the existing structure and characteristics of the MMMFs and limit choices for state and local governments, businesses and other investors."

Friday'​s letter tells us, "We are writing to express our concern about the Security and Exchange Commission'​s proposed rule relating to money market mutual funds, in general, and so-​called "​institutional prime funds" specifically. We are particularly concerned about that part of the proposal that would require institutional prime funds to value their portfolio securities on a mark-​to-​market rather than an amortized cost basis.... Mid Atlantic Trust Company offers custody, investment products and related services to tens of thousands of corporate sponsors of 401(​k) plans. Shares of institutional prime funds, as that term is explained in the release, are offered as a primary option or as a liquidity vehicle.... Structural changes to institutional prime funds, particularly the proposal by the SEC that such funds value their shares using a variable net asset value, may result in serious disruptions to our retirement business and, in our view, create substantial confusion and concern for the plan participants."

The Cleco Corporation letter says, "[​I]​t is a corporation that relies on so-​called institutional prime money market mutual funds ("​prime funds") to assist us in efficiently and safely managing our corporate liquidity on a day-​to-​day basis. The cash needs and the liquidity position of our company are highly synchronized, and have been for decades, and dependent on the use of prime funds with their current configuration, particularly the ability to effect purchases and redemptions at $​1.​00 per share. Prime funds are an important investment choice for us, primarily because of their independent credit ratings, transparency and the diversification of risk among the securities of multiple issuers. From our perspective, moving more funds to bank deposits is not without problems in that they come with concentration and counterparty risk."

The company adds, "We are aware of the proposed rule published for comment by the Securities and Exchange Commission ("​SEC") on June 5, 2013. In the proposal you requested comment on various alternatives put forth and what the implementation of some or all of them would have on the ongoing attractiveness of prime funds as sources of liquidity management. From our perspective, we can say categorically that any rule that results in the withdrawal of the ability of prime funds to value their portfolio securities at amortized cost (​hence assuring in most circumstances that purchases and redemptions will not be effected at $​1.​00 per share), will cause us to reassess our use of such funds and, in all likelihood, curtail or substantially cut back on their use. The precision and sophistication with which we currently manage our liquidity position to maximize returns will be fractured, and the introduction of a net asset value per share computed on a mark-​to-​market basis (​causing our cash position to fluctuate in value) will not coincide with our existing policies or systems capacities with respect to liquidity management. We are also concerned for accounting purposes about our continued ability to carry prime funds on our corporate balance sheet and classify them as cash or cash equivalents. After having reviewed the proposed rule, we disagree with the SEC'​s underlying premise that moving to a fluctuating net asset value would stop future runs."

Finally, the Farmer'​s Trust comment tells us (​like some of the other letters do, so the format was likely was drafted by a fund company), "In our review of the proposed rule, we have two observations that appear to trivialize the important and complex operational changes to our retirement business model if institutional prime funds are required to discontinue using amortized cost ... [​The SEC writes] '​under our proposal, the share price at which investors purchase and redeem shares would reflect single basis point variations. We do not anticipate significant operational difficulties or overly burdensome costs arising from funds pricing shares using "​basis point" rounding.' Such a gratuitous comment belies the reality of the impact and has no basis in fact."

They add, "We are equally baffled by the [​SEC'​s] comment '​We recognize that a floating net asset value may not eliminate investors' incentives to redeem fund shares, particularly when financial markets are under stress and investors a re-​engaging in flights to quality, liquidity, or transparency.' In this sentence you have contradicted the basic premise on which you propose a structural change to a product that is critical to our business model and brings the critical components of a well-​diversified suite of investment products to plan sponsors and plan participants. Simply put, in almost 700 pages of narrative, the Securities and Exchange Commission has failed to make the case for abandoning the amortized cost method of valuation set forth in its proposal and their implementation will cause great harm to plan sponsors and plan participants who rely on institutional prime funds as an important source of liquidity within their retirement plans. We support the alternative set forth in the proposal that would grant authority to the fund'​s board of directors (​subject to certain conditions) to suspend redemptions for a given period of time in periods of market turbulence."

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An announcement posted on Morgan Stanley Investment Management'​s Liquidity Funds Investment website tells us that the 10th largest manager of money market funds (​ranked by our MFI XLS) will begin providing daily 1-​day and 7-​day "​liquidity" numbers, making them the second company to begin providing this information volunatarily. (​Money fund portfolios are required to hold 10% daily and 30% weekly "​liquidity" but the SEC doesn'​t require companies to provide this info publicly, and few do.) JPMorgan Asset Managemant announced that they would be begin offering these liquidity measures volunatarily last month (​see Crane Data'​s June 18 News "​JPMorgan Gets Jump on SEC Proposal by Posting Liquid Asset Levels"). The SEC proposed a number of additional disclosure measures for money funds in its June Money Market Fund Reform proposals. But we haven'​t seen any other funds follow suite to-​date. (​Note: If the SEC mandates this disclosure, it won'​t be required until sometome late in 2014. Crane Data does not track these yet, but we will add them to our MFI Daily product if and when they gain critical mass like the disclosure of daily MNAVs, or Market NAVs did earlier this year.)

Morgan Stanley'​s CIO and Head of Global Liquidity, Kevin Klingert, writes in a letter to clients, "In our continuing effort to provide transparency into our money market fund portfolios, we are now disclosing the levels of Daily and Weekly Liquid Assets in the Morgan Stanley Institutional Liquidity Funds." The data will be as of the prior business day'​s close and will be posted on our website (www.​morganstanley.​com/​liquidity)." (See their most recent posting here.)

They manager defines these as, "Daily liquid assets" ... "include (​i) cash; (​ii) direct obligations of the U.​S. Government; and (​iii) securities that will mature or are subject to a demand feature that is exercisable and payable within one business day." "Weekly liquid assets" ... "​include (​i) cash; (​ii) direct obligations of the U.​S. Government; (​iii) Government securities issued by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States, that are issued at a discount to the principal amount to be repaid at maturity and have a remaining maturity of 60 days or less; and (​iv) securities that will mature or are subject to a demand feature that is exercisable and payable within five business days." They also note: "Tax-​Exempt money market funds are not required to maintain 10% of their total assets in daily liquid assets. They are required to maintain 30% of their total assets in daily weekly liquid assets."

Klingert'​s letter explains, "Amendments to Rule 2a-​7 adopted by the Securities and Exchange Commission (​SEC) in 2010 established new requirements for minimum levels of Portfolio Liquidity. Taxable money market funds must maintain at least 10 percent of their total assets in daily liquid assets and all money market funds must maintain at least 30 percent of their total assets in weekly liquid assets. Daily liquidity is the percentage of assets that can be converted into cash by the next business day; weekly liquidity is the percentage that can be converted into cash in the next five business days."

He adds, "Higher levels of liquidity provide flexibility to manage flows and meet client redemption needs. In recent periods, our Funds have maintained daily and weekly liquidity positions substantially above the regulatory minimums. In this time of challenging markets, we hope that our steps to enhance disclosure along with our endeavors to maintain heightened levels of liquidity will assist our clients as they strive to make informed investment decisions. Our disclosure is also in keeping with the SEC'​s recent proposal for additional money market fund reform, which is now open for public comment. Among the proposed changes is a requirement that money market funds prominently disclose on their websites percentages invested in daily and weekly liquid assets as of the previous business day."

Finally, Klingert tells shareholders, "As we begin the second half of 2013, historically low interest rates and expectations of further money market fund reform overhang the industry. Nevertheless, we remain confident in the industry'​s resiliency and we are optimistic about our long-​range prospects for growth. For the first half of the year, industry flows reflected the challenges of the current environment as institutional money market fund assets continued on a downward trend. Over the same period, the Morgan Stanley Institutional Liquidity Funds experienced industry-​leading growth. We want to thank our shareholders for their continued use and support of our funds. Many factors have contributed to our recent growth. Most importantly, shareholders have come to recognize our commitment to the protection of the safety and liquidity of their assets."

​

Former Securities & Exchange Commission Deputy Director of the Division of Investment Management Robert Plaze posted a recent "Special Bulletin," entitled, "Potential Overhaul of Money Market Funds Regulation: A Summary of the SEC Proposal and Discussion of Its Potential Implications." Plaze, now a Partner at Stroock & Stroock & Lavan LLP, wrote the piece along with Nicole Runyan and Lauren Connolly. It says, "On June 5, 2013, the Securities and Exchange Commission proposed long-​anticipated amendments to rules under the Investment Company Act of 1940 and related requirements that govern money market funds. The SEC'​s proposal is the latest action by U.​S. regulators as part of the ongoing debate about the systemic risks posed by money market funds and the need for additional reform in light of the SEC'​s reforms in 2010. This Stroock Special Bulletin provides an overview of the SEC'​s proposal, including a discussion of the two alternative regulatory regimes proposed by the SEC."

Plaze explains, "The first alternative would require institutional prime money funds to "​float" their net asset value per share instead of using a stable value (​generally, $​1.​00). The second alternative would permit all money market funds to continue to transact at a stable share price, although certain funds would be required to impose a liquidity fee in times of market and/​or fund stress and permitted to temporarily suspend redemptions (​i.​e., impose a "​gate") in similar circumstances. This Bulletin discusses each alternative in detail and also highlights potential implications and issues arising under each alternative, including with respect to omnibus and multiple accounts, tax and accounting matters, board considerations and obligations, and disclosure matters that sponsors and boards of money market funds may wish to consider."

His intro adds, "​The Bulletin also focuses on the various rules and rule amendments proposed by the SEC that would significantly expand disclosure and reporting by money market funds, including the adoption of new Form N-​CR and amendments to Form N-​MFP and Form PF along with increased website disclosure (​including real-​time disclosure of net asset value, fund liquidity levels and sponsor support), which are intended to increase transparency for both investors (​to more fully understand the risks of investing in a particular fund) and the SEC (​to obtain additional information needed to engage in oversight of these funds). Finally, the Bulletin addresses the SEC’​s proposed amendments to Rule 2a-​7 that would, among other things, further tighten its diversification requirements and revise its stress testing requirements."

After discussing some Background, Plaze says on the proposed alternatives, "Under the Floating NAV Alternative, institutional Prime Funds would be required to price their shares in a way that reflects the value of their portfolio securities, using market-​based factors, so that gains and losses would be reflected each day, similar to other types of mutual funds. To increase the "​observed sensitivity" of a money fund'​s share price, prices would have to be calculated to the fourth decimal place for institutional Prime Funds with a target NAV of $​1.​00 per share (i.​e., $​1.​0000). The rounding convention for institutional Prime Funds would thus change from penny rounding (​i.​e., to the nearest 1%) to "​basis point" rounding (​i.​e., to the nearest 1/​100th of 1%), a more precise standard than the 1/​10th of 1% currently required for most mutual funds. Amortized cost valuation could not be used by any money funds (​except for 60-​day paper)."

He tells us, "Government money funds and retail money funds (​including retail Prime Funds) could continue to maintain a stable NAV. These funds could no longer use the amortized cost method of valuing securities, but would be permitted to continue to use the penny rounding method of pricing their shares to maintain a stable price per share. As proposed by the SEC, government money market funds would be money funds that maintain at least 80% of their total assets in cash, "​government securities" (​as defined in Section 2(​a)(​16) of the 1940 Act), or repurchase agreements that are collateralized fully with government securities. Allowable securities would include securities issued by government-​sponsored entities such as the Federal Home Loan Banks, government repurchase agreements, and those issued by other instrumentalities of the U.​S. government."

Plaze adds, "The SEC did not propose a separate exemption for tax-​exempt money funds that invest in municipal securities. Securities issued by state and municipal governments generally would not qualify as "​government securities" for purposes of the Government Fund exemption, as the SEC does not believe that such securities generally share the same credit and liquidity traits as U.​S. government securities. The SEC stated that it believed that because the investor base of Municipal Funds tends to be retail shareholders (​as the tax benefit of investing in Municipal Funds is limited to individual investors), most Municipal Funds should be able to qualify as Retail Funds."

He comments on "Omnibus and Multiple Accounts," "A growing number of money fund retail shareholder accounts today are held in omnibus accounts that may not provide the fund and its transfer agent sufficient transparency to identify redemptions that exceed the $​1 million limit of the proposed Retail Fund exemption. Many omnibus accounts, themselves, could be expected to make redemptions in excess of $​1 million on a regular basis, which would further narrow the utility of the Retail Fund exemption. In order to address this issue, the SEC proposed to permit a money fund relying on the Retail Fund exemption to, with respect to an "​omnibus account holder," disregard the $​1 million per day redemption limit if the fund has policies and procedures in place reasonably designed to permit it to conclude that the omnibus account holder (​and each omnibus account holder up the ownership chain) does not permit redemptions by any beneficial owner of more than $​1 million per day."

The Stroock piece also discusses some of the tax and accounting implications. It says, "Money funds' current ability to maintain a stable NAV per share simplifies tax compliance for their investors. Under the current regulatory regime, purchases and sales of money fund shares at a stable share price generate no gains or losses. One of the consequences of the adoption of the Floating NAV Alternative may be that each sale of institutional Prime Fund shares would require a shareholder to recognize gains and losses, which would likely involve payment of very little additional taxes but could result in significant reporting burdens on shareholders because each transaction would have to be tracked and reported on the shareholder'​s tax returns. In addition, as a result of the "​wash sale" rules, a shareholder may be unable to offset some of the gains with some of the losses."

It adds, "The SEC reported, however, that the Treasury Department and the Internal Revenue Service were contemplating administrative relief that could reduce or eliminate tax burdens associated with money funds moving to a floating NAV. On July 3, 2013, the Treasury Department and the IRS proposed a revenue procedure that would permit investors in a floating NAV money fund (​i.​e., an institutional Prime Fund) to avoid wash sale rules in certain circumstances. The willingness of the tax authorities to provide administrative relief in order to make an SEC rule proposal more workable is perhaps unique, and represents one of the tangible advantages to the money fund industry of SEC collaboration with other financial regulators under the auspices of FSOC. The SEC also addressed the accounting implications for the financial statements of a business investing in a floating NAV money fund. The question had been raised as to whether, if the SEC were to adopt the Floating NAV Alternative, businesses would be able to treat their fund shares as a “​cash equivalent” on their balance sheets under U.​S. generally accepted accounting principles ("​GAAP"). As a result, there was a concern that businesses may need to use some other vehicle to invest their cash, potentially reducing by a substantial amount the assets of institutional money funds."

Finally, they add, "The SEC took the unusual step in the Proposing Release of interpreting GAAP as permitting shares of a floating NAV money fund (​i.​e., an institutional Prime Fund) to be treated as a "​cash equivalent" because the fluctuations in value of shares likely would be "​insignificant." The SEC'​s interpretation is important because it may head off an exodus of institutional investors from money funds should the SEC adopt the Floating NAV Alternative. It would, however, appear to undercut one of the SEC'​s purposes in proposing to require money funds to adopt a floating NAV, which would be to persuade investors to treat their fund holdings as investments subject to the risk of loss, rather than as riskless cash."

​

The following was originally printed in the July issue of Money Fund Intelligence.... We wrote in the article, "SEC on Reform Proposals; Comments Due by 9/​17," The Securities & Exchange Commission proposed new reforms to money market mutual fund regulations last month, including the option of either a floating NAV for prime institutional funds or a liquidity fee and gates regime, coupled with additional disclosures and tweaks. The Proposed "​Money Market Fund Reform" was officially published in the Federal Register on June 19, and interested parties have until Sept. 17 to submit comments. (​See http://​www.​sec.​gov/​rules/ proposed.​shtml for the full 198-​page proposal and to comment. No comments of substance have been submitted as of yet.)

We expect the fund industry, investors and issuers to strongly oppose the floating NAV option and to support the "​gates and fees" alternative. We also expect many to complain about the costs and confusion of the tremendous amount of new disclosures the SEC may require. Initial indications are, though, that the SEC under Mary Jo White will remain reasonable and will continue to listen to the concerns and arguments of interested parties.

SEC Senior Special Counsel Sarah ten Siethoff, who participated in the "Regulatory Roundtable" at our Money Fund Symposium (​with Federated'​s John McGonigle and Dechert'​s Jack Murphy), gave some color on the proposals in Baltimore last month. She says, "​We tried to be very clear on this proposal, from literally the first page of it and all the way through, on what the goals were for this rulemaking. [​W]​e were seeking to preserve, as much as possible, the benefits of money market funds, while lessening the susceptibility [​to] redemptions, reducing contagion effects and increasing transparency of their risks.... What we were seeking to do is to try to find the best way to make that balance."

She explains, "One of the reasons there are over 400 questions throughout, was to seek your input in what is the best way to reach that balance. That being said, we do recognize that there are going to be costs.... [​S]​o we try to get comments [​on this]; the more detailed feedback the better. That is something I always encourage.... What helps us a lot more is exactly why it is going to be expensive or why it is going to be difficult."

Ten Siethoff adds, "If I can give a plea right now: the more detail you give, the more useful all of your comments will be to us. I know that puts a lot of work on you, because it is a very long proposal. But we hope that is work that will really pay off once we start to look [​options]."

She continues, "I think we have a lot of agreement on some of the goals. There is ... room for different views in how you best meet those goals, and I think we try to reflect that there are, to be perfectly honest, two sides of the debate on every one of these different reform options. We try to lay out here what people have told us.... [​W]​e really have had ongoing commentary on this topic for years now, as everyone is aware."

The Senior Special Counsel also says, "​I think John did a very effective job of laying out the benefits of what we call the fees and gates option. We do think that it really targets and more fairly allocates liquidity costs when liquidity is quite expensive in a way we think might be quite good for the markets ... but also for investors. [​It gives] a more fair allocation of those liquidity cost between redeeming and remaining shareholders.... We think you can give great tools to money market funds to manage."

She continued, "We also think this is a very targeted reform. It could focus the reforms when [​they] really can matter [​in times of stress]. So those are some of the key benefits we see. But we recognize, as with any reform, there are costs.... I think everything we'​ve proposed we recognize there are operational and implementation costs.... We recognize that ... people'​s liquidity may be lessened in times of stress because of this.... [​W]​e welcome comments, in particular, on the proposed trigger ... for when this restrictions could come into place. Have we gotten that right? Is that imposing potential restrictions on liquidity when it really could be dear?"

She tells us, "On the floating NAV, I think, the hope is that this does lessen the first mover advantage in money market funds by allowing redemptions to happen at the market price. The idea is that would hopefully lessen susceptibility of money market fund to runs. We'​ve also tried to target that reform, as with the fees and gates options, by proposing exemptions for government money market fund and retail MMFs. On that one, we also recognize that there are a lot of costs. As John mentioned, there is a tax and accounting cost. We tried to suggest ways that hopefully those could be minimized. There are operational costs, and there are broader industry costs. We talk about all of those; we seek feedback on all of those."

Ten Siethoff adds, "We recognize that there are still liquidity costs in funds, and it doesn'​t necessary address that and there for are other better ways to handle that. On the flip sides on fees and gates, lots of people have raised concerns [​saying] this will just have a magnet effect for runs and people would all try to get out before that gate can be imposed. We ask lots of questions around that."

Finally, she says, "[​A]​ll these options have ... benefits to offer, but there is no free lunch in this world. Everything can also have some potential costs. We try to lay those out the best we can, and we really seek comments from everybody to help us understand what those are and try to figure out what the best way of balancing [​these proposals] is."

​

Money market mutual fund assets rose for their 4th week in a row and for the 9th week out of the past eleven. The ICI'​s latest "​Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $​8.​53 billion to $​2.​632 trillion for the week ended Wednesday, July 17, the Investment Company Institute reported today. Taxable government funds increased by $​7.​92 billion, taxable non-​government funds decreased by $​130 million, and tax-​exempt funds increased by $​740 million." Assets moved back above the $​2.​6 trillion mark last week and reached their highest levels since March 2013 (​prior to annual tax-​related outflows). Crane Data'​s Money Fund Intelligence Daily, which has a slightly smaller asset base than the ICI'​s series, confirms the consistent inflows, particularly since May 1.

Retail assets declined slightly in the latest week, but inflows from individual investors have fueled money funds' big gains since May 1. ICI'​s weekly assets show Retail funds, which represent 35.​2% of all MMF assets, rising by $​36 billion, or 4.​0%, since May 1 while Institutional assets rose by $​32 billion, or 1.​9%. Money funds have clearly gained assets at the expense of bond funds, which have declined by over $​75 billion over 6 straight weeks through July 10 (​see ICI'​s Bond flows).

ICI'​s latest weekly explains, "Assets of retail money market funds decreased by $​1.​51 billion to $​926.​38 billion. Taxable government money market fund assets in the retail category decreased by $​670 million to $​198.​61 billion [​7.​5% of assets], taxable non-​government money market fund assets decreased by $​970 million to $​533.​83 billion [​20.​3%], and tax-​exempt fund assets increased by $​130 million to $​193.​93 billion [​7.​4%]."

It adds, "Assets of institutional money market funds increased by $​10.​04 billion to $​1.​705 trillion [​64.​8% of assets]. Among institutional funds, taxable government money market fund assets increased by $​8.​59 billion to $​723.​83 billion [​27.​5%], taxable non-​government money market fund assets increased by $​830 million to $​908.​95 billion [​34.​5%], and tax-​exempt fund assets increased by $​620 million to $​72.​42 billion [​2.​7%]. ICI reports money market fund assets to the Federal Reserve each week."

In other news, Northern Trust reported Q2 earnings recently, and mentioned increases in money fund fee waivers. Their release commented, "​C&​IS investment management fees increased 3%, reflecting the favorable impact of markets and new business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in C&​IS, attributable to persistent low short-​term interest rates, totaled $​9.​8 million in the current quarter, compared to waived fees of $​7.​0 million in the prior year quarter. Securities lending revenue increased slightly, reflecting higher loan volumes, partially offset by lower spreads in the current quarter."

Northern continued, "​The increased fees in the current quarter are primarily attributable to the favorable impact of equity markets on fees and new business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in PFS totaled $​12.​9 million in the current quarter compared with $​10.​0 million in the prior year quarter.... PFS trust, investment and other servicing fees were $​293.​1 million, up 4% from $​282.​0 million in the prior quarter, primarily driven by favorable equity markets and new business. Money market mutual fund fee waivers in PFS totaled $​12.​9 million in the current quarter, down slightly from $​13.​4 million in the prior quarter."

​

The Federal Reserve Bank of New York'​s Liberty Street Economics Blog posted a brief writing entitled, "Magnifying the Risk of Fire Sales in the Tri-​Party Repo Market yesterday, written by Leyla Alkan, Vic Chakrian, Adam Copeland, Isaac Davis, and Antoine Martin. (​Vic Chakrain spoke on tri-​party repo at last month'​s Money Fund Symposium. See his Powerpoint here and hear the `​Repo session recording here.) The NY Fed piece says, "The fragility inherent in the tri-​party repo market came to light during the 2008-​09 financial crisis. One of the main vulnerabilities is the risk of fire sales, which can be enhanced by the response of some investors to stress events. Money market mutual funds (​MMFs) and the agents investing cash collateral obtained from securities lending (​SLs) are thought to behave, in times of stress, in ways that exacerbate fire-​sale risks in the tri-​party repo market. Based on detailed investor data, we find that MMFs and SLs constitute almost half of the investor market, making it crucial for tri-​party repo participants and regulators to account for MMF and SL investment behavior when considering how to mitigate the risk of fire sales."

It explains, "A recent New York Fed staff report details the risks of fire sales in the tri-​party repo market. The first risk, termed pre-​default fire-​sale risk, occurs when a dealer is under stress, but has not defaulted. A stressed dealer may be forced to sell its securities quickly, an action that likely depresses market prices and creates fire-​sale conditions. Tri-​party repo investors can aggravate this risk by quickly withdrawing funding from a troubled dealer, and so forcing that dealer to sell even more securities quickly."

The blog continues, "The second risk, termed post-​default fire-​sale risk, occurs after a dealer default, when that dealer'​s investors receive the repo securities in lieu of repayment. Fire sales can then occur if investors attempt to liquidate these securities in an uncoordinated and rapid pace. In this scenario, investors as a group will be trying to sell off a substantial amount of collateral at the same time."

It tells us, "Two categories of tri-​party repo investors, MMFs and SLs, have business models that increase the likelihood of both types of fire-​sale risks in the tri-​party repo market. This is because both investor types are particularly susceptible to their own liquidity pressures. MMFs are a class of mutual funds that invests in relatively safe financial assets, with a short maturity. Nevertheless, MMFs can be subject to runs when perceived by shareholders to have worrisome risk exposures, such as when lending cash to a stressed dealer (​see this post on the vulnerabilities of MMFs).

The NY Fed posting continues, "Securities lending refers to a collateralized loan of a security between two entities. In the United States, these loans are typically collateralized with cash. For that reason, securities lenders often hold large pools of cash collateral, which they reinvest in money markets, including the tri-​party repo market, to enhance their return. Most securities loans in the United States are done on an open maturity basis, which means that the lender of a security has to return the cash collateral whenever the borrower of the security returns it. This arrangement can create liquidity pressures on the cash reinvestment funds of securities lenders that may have placed their cash in longer-​term trades and/​or less liquid assets (see this article in our Current Issues series on the risks associated with the reinvestment of cash collateral).

It adds, "Other types of investors in tri-​party repo, such as trusts, investment managers, and pensions, do not face these liquidity pressures (​or at least not to the same extent). So, when faced with a dealer under stress, MMFs and SLs face stronger incentives to stop lending immediately, in order to avoid ending up with collateral in lieu of cash. This withdrawal of funding, however, raises the probability of pre-​default fire-​sale risk and further pushes the dealer towards default. The same liquidity pressures also push MMFs and SLs to sell the repo securities they receive from a defaulting dealer as quickly as possible, increasing the probability of a post-​default fire sale."

The piece also says, "Because the liquidity pressures faced by MMFs and SLs propel them to take actions that increase the probability of fire sale, it is important for market participants and regulators to know the prevalence of these investor types in the tri-​party repo market. Past estimates, based on conversations with market participants, had MMFs accounting for a quarter to a third of all tri-​party repo activity, and SLs with another quarter. Using detailed supervisory data, we estimated that MMFs account for about 32 percent of all funds invested in tri-​party repo and SLs account for about 14 percent of the total.... Included in "​all others" are mutual funds, banks, investment managers, trusts, pensions, municipalities, and other institutions. None of these other investor types represents more than 10 percent of the market individually."

Finally, the piece tells us, "By our calculations, MMFs and SLs are the two largest classes of investors, together representing just about half of the market. Their dominant presence heightens the risk of both pre- and post-​default fire sales, so it is important for market participants and regulators to take this fact into account when evaluating tools to address the fire-​sale vulnerability in the tri-​party repo market."

​

As we mentioned in our "Link of the Day Monday (​see Reuters writes "​House panel probes risk council role in SEC money fund rule"), a House committee is investigating improper collusion between the FSOC and SEC under Mary Schapiro. A July 10 letter from Congressmen Darrell Issa and Jim Jordan (​obtained by Crane Data but not available yet online) says, "The Committee on Oversight and Government Reform is conducting oversight of the Financial Stability Oversight Council (​FSOC or Council). The Committee is concerned that the Council may be structured and operating in a manner that vitiates the independence and core competence of the Council'​s constituent regulatory bodies. As part of the Committee'​s oversight of the Council, we are writing to request more information about the Securities and Exchange Commission'​s (​SEC or Commission) participation in FSOC activities."

The letter explains, "​The Dodd-​Frank Wall Street Reform and Consumer Protection Act established FSOC with the purpose of identifying risks to financial stability, promoting market discipline, and responding to emerging threats to the stability of the United States financial system. Given the breadth of this mission, the Act structured the Council to include a broad swath of federal financial regulators, including: Department of the Treasury; Office of the Comptroller of the Currency; Federal Housing Finance Agency; Consumer Financial Protection Bureau; Federal Reserve Board of Governors; Securities and Exchange Commission; Federal Deposit Insurance Corporation; Commodity Futures Trading Commission; and National Credit Union Administration."

It tells us, "First, we are concerned about the structure of the Council'​s voting membership. By the terms of the statute, the Council'​s voting membership is constituted of the singular top official from each one of the member agencies. This structure is operationally problematic: only in four of the nine constituent agencies is the full authority of the office vested in a single individual. By contrast, the authority of the other five agencies is explicitly and intentionally placed in commission by their respective organic statutes. The chairperson of each commission merely possesses administrative authority and is "​first among equals." Because of this distinction, the Council'​s structure can create perverse results. For example, in Council meetings the Chairman of the CFTC' speaks- and votes- under cloak of the full authority of the CFTC, when in fact the Chairman possesses only one of five equal votes on that Commission.... The Dodd-​Frank Act plainly describes the Council'​s duties in the context of interaction with the member agencies, not the singular officials who serve ex officio."

The Issa letter continues, "Second, we are concerned about the implications of the Council'​s membership to the political independence of some of its member agencies. The structural threats to the primary financial regulator'​s independence are most acutely felt by the members of the independent commissions. In a public address, SEC Commissioner Daniel Gallagher explained his concerns with regard to the Council: [​T]​he 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.... 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.""

The House letter adds, "Third, we are concerned about the Council'​s ability to intervene in the regulatory processes of the independent agencies. Section 120 of the Dodd-​Frank Act empowers the Council to formally issue "​recommendations to a primary financial regulatory agency to apply new or heightened standards and safeguards ... for a financial activity or practice." Upon receipt of these recommendations, the agency has three months to accept the recommendations or explain in writing why it will not do so. Commentators have observed that through this provision, "​traditionally independent regulatory agencies ... are now subject to potentially more direct influence by the Administration and other financial services regulators.""

It explains, "In November 2012, FSOC invoked Section 120 for the first time when it issued formal recommendations regarding money market fund (​MMF) reform. These recommendations followed an August 2012 decision by the Securities and Exchange Commission not to pursue a SEC staff proposal advocated by then-​Chairman Mary Schapiro. At that time, a bipartisan majority of the Commission determined there was insufficient data on which to advance further changes to MMF regulations. In response to such concerns, staff in the SEC Division of Risk, Strategy, and Financial Innovation prepared a detailed report addressing the Commissioners' questions, and began working with the Commissioners to formulate a workable proposal. Notwithstanding this ongoing deliberative process, FSOC formally intervened."

Issa and Jordan write, "On February 20, 2013, a bipartisan group of fifteen former SEC Chairmen, Commissioners, and senior staff expressed grave concerns with the manner in which FSOC exercised its Section 120 authority. The former officials specifically objected to FSOC'​s intervention as both premature and fundamentally destructive to the Commission'​s deliberative process: "The Council'​s authority under section 120, if exercised precipitously or with insufficient deference to the subject-​matter expertise of the Commission, could disrupt the long-​standing collaborative nature of the Commission'​s deliberative process. Knowledge that the Council stands ready to circumvent Commission deliberations by asserting jurisdiction over a matter clearly confided to the SEC'​s jurisdiction ineluctably would undermine the incentives exhibited by Commission Members to labor diligently in search of sound, middle-​ground policy outcomes.""

It tells us, "Documents produced to the Committee appear to validate these concerns. For example, emails from June 2012 reveal that a top advisor to then-​SEC Chairman Mary Schapiro admonished her colleagues at other Council agencies that "[​FSOC'​s] recommendation [​for MMF reform] ... needs to be stronger." Subsequently, this advisor worked closely with a senior official at the Federal Reserve Board of Governors to draft a letter in the Council'​s name urging the SEC to adopt a MMF reform proposal. The draft letter unsubtly threatens the invocation of Section 120 authority: "However, in the event that the SEC does not act, the Council will have no alternative but to consider the entire range of tools at its disposal to address identified threats to U.​S. financial stability.""

The letter says, "It does not appear that this draft letter was reviewed by the bipartisan majority of the Commission who, at the time, disagreed with the Schapiro/​FSOC proposal. Further emails shed light on then-​Chairman Schapiro'​s goal: "​In the closed session of the FSOC principals meeting on July 18, SEC Chairman Schapiro said that in addition to the recommendations in the annual report, she might want more FSOC support for MMF reform ahead of a SEC meeting scheduled for late August. The meeting is now scheduled, and she would like another statement of support for MMF reform." Consistent with these efforts, it appears FSOC member agencies intervened in internal SEC deliberations. Documents reveal that a high ranking official at the Federal Reserve made red-​line edits to the term sheet SEC staff would be using to brief the Commissioners on the proposed rule? Thus, it appears that four SEC Commissioners were presented with what they believed represented the views of the SEC'​s professional staff, when in reality the document reflected the views of another FSOC member agency and was developed in a non-​transparent manner. While interagency cooperation can be beneficial, the Commissioners of an independent agency are indisputably entitled to know the origin of the recommendations presented to them."

It continues, "This is precisely the kind of interference that threatens the independence and core competence of the primary financial regulators. The office of one single Commissioner -- in this case the Chairman -- surreptitiously cloaked its opinions and advocacy in the mantle of FSOC, with the explicit threat to marshal the Council'​s Section 120 power. Such actions are wholly inconsistent with Congress' intent that the SEC operate as an "​independent, collegial body, [​and] not [​as] an executive department headed by a sole administrator." The heavy-​handed and destructive approach exercised by FSOC was neither advisable nor necessary. As observed by one academic commentator: FSOC could have enhanced -- rather than undermined -- the SEC'​s rulemaking process in two ways. First, it could have encouraged the SEC to use tried and tested regulatory impact analysis tools to identify with precision and transparency the problems to be addressed, feasible alternative solutions, and the costs and benefits of each of those alternatives. Second, FSOC could have marshaled the relevant cross-​agency expertise to address ... accounting and tax issues."

Finally, the letter adds, "The Council'​s decision to proceed through non-​transparent unilateral action raises serious questions as to the prudence and desirability of its operative structure. The Committee is concerned that, in the words of one commentator, "a piecemeal approach that allows [​an agency'​s] chairman to outsource the agency'​s regulatory responsibilities on an ad hoc basis does not benefit investors, other market participants, or taxpayers."" The letter includes an extensive request for documents, so stay tuned for further disclosures in coming months.

​

Today, we excerpt from "A Guide to Understanding How Money Market Funds Serve Investors," which was a supplement to our recent Money Fund Symposium Binder provided by Federated Investors' John McGonigle (​who spoke on our "Regulatory Roundtable" session June 21). The Guide, which was written by Stephen Keen of Reed Smith LLP, explains in its introduction, "Federated Investors, Inc. has prepared this briefing book to help provide both the facts and the conceptual foundations needed to appraise how proposed structural reforms of money market funds will affect the more than 56 million Money Market Fund shareholders and, in turn, the capital markets."

It says, "The most important thing to understand is why there are more than 56 million money market fund investors. People use money market funds ("​MMFs") because they need what a MMF does for them. This briefing book is intended as a primer on what a MMF is, how it works, how it satisfies the basic and important needs of investors for a stable value and ready access to their cash, and the history of MMF operations and regulations. The importance of the history of the MMF is that it is a Securities and Exchange Commission-​enabled innovation that has become a fundamental vehicle for cash management for individuals, as well as an array of other investors such as corporate and personal trustees, businesses, state and local government entities, other government-​sponsored enterprises, and pension plans. This innovation has led to the MMF becoming a critical component of the financial products and companies that, together, are the financial services industry providing services underlying the system that is our capital markets. While it is important to understand how the MMF fits into the financial services industry, we encourage you to also seek to listen to the shareholders ... the investors ... in MMFs who are the fund'​s primary beneficiaries. It is the efforts of the 56 million shareholders to satisfy their financial needs that ultimately drive the capital markets."

The piece tells us, "Section 1 begins by explaining how most MMFs have managed to preserve the value of their shareholders' investments, year-​in and year-​out, without any financial support from their sponsors or from the government. Using Federated'​s largest prime MMF as an example, this section explains: How the fund has provided for the past 23 years, without interruption or the intervention of its sponsor, daily liquidity to shareholders who purchase and redeem a billion shares a month. How the fund maintains a stable $​1 net asset value per share (​a stable "​NAV") that is fair to its shareholders, who have earned billions more than they could have from other cash investment alternatives. Why shareholders rely on MMFs to meet their transactional, operational and strategic cash needs, and the enhanced levels of professional management, service and diversification these funds provide. The significant legal, tax, accounting and operational difficulties that changes in a share'​s price would create for these shareholders, if they were required to transact at a fluctuating NAV."

It continues, "Section 2 provides a history of money market fund regulation, including: The history of the Securities and Exchange Commission'​s ("​Commission") interpretations and hearings that led to the exemption of MMFs from certain pricing standards of the Investment Company Act of 1940 (​the "​ICA"); The Federal Reserve'​s initial efforts to limit the appeal of MMFs to cash investors; and The Commission'​s adoption and extensive amendment of Rule 2a-​7."

The Guide adds, "Section 4 reviews the impact of the recent financial crisis on MMFs. This section draws almost exclusively on the findings of the Financial Crisis Inquiry Commission and a report prepared by the Commission'​s Division of Risk, Strategy and Financial Innovation (​the "​Risk Fin Division") to show: MMFs did not contribute to the "​bubble" in real estate financing that was the primary cause of the financial crisis; Prime MMFs absorbed, without any government assistance, the initial shocks from the collapse of the bubble in 2007; Prime MMFs were not otherwise affected by the financial crisis until its climax during the days following Lehman Brothers bankruptcy, which touched off an "​extraordinary rush" to safety that spread to every corner of the global credit markets; and Cash began to flow back into prime MMFs within three weeks after Lehman Brothers bankruptcy and continued to do so during the remainder of the financial crisis."

It asks, "What steps are most critical for the Council to take to prepare for the possibility of a future financial crisis? The Council can best prepare for the next financial crisis by completing the regulatory program mandated by the DFA [​Dodd-​Frank Act]. As the Chairman acknowledged during her confirmation hearing, "​complet[​ing] these legislative mandates expeditiously must be an immediate imperative for the SEC." Completion of DFA'​s mandates is no less imperative for the other Council members. The fact that none of the DFA'​s provisions were directed at MMFs strongly indicates that Congress did not consider MMF reform a priority."

The Guide answers, "Perhaps the most important step would be for the Federal Reserve to comply with the mandate in Section 1101 that it "​establish, by regulation, in consultation with the Secretary of the Treasury, the policies and procedures governing emergency lending [​in compliance with Section 1101] for the purpose of providing liquidity to the financial system." Congress directed the Federal Reserve to undertake this rulemaking "[​a]​s soon as is practicable" after the date of enactment of the DFA, specifically to avoid bailouts of individual institutions and to avoid the ad hoc and inconsistent approach taken in 2008, which the FCIC concluded, "​added to uncertainty and panic in the financial markets." Yet, more than two and a half years after the enactment of this congressional directive, no rules under this section have even been proposed. Given the critical role played by the Federal Reserve during a financial crisis, the policies and procedures adopted under Section 1101 should be a lynchpin for any plans to prepare for the next financial crisis. If the Council [​FSOC] makes any recommendations to one of its members, it should begin by recommending that the Federal Reserve complete these policies and procedures so they may be factored into the policies adopted by the other members."

It adds, "In summary, this briefing book has demonstrated that: 1. Nearly all MMFs have provided their shareholders with a stable NAV without sponsor or government support; 2. Shareholders need a stable NAV for cash management; 3. MMFs were not affected until the very peak of the financial crisis, and then only for a brief period; 4. Confidence in MMFs was quickly restored during the financial crisis and the Commission acted promptly to further increase the resiliency of MMFs; 5. Current regulations minimize the risk of a fund breaking a dollar and charge the Board with preventing any dilution or other unfair results if their fund breaks a dollar; and 6. MMFs could not survive any of the reforms currently being considered in the FSOC Proposals."

Finally, the piece, which was written prior to the SEC issuing its latest MMF Reform proposals, says, "Federated must emphasize that it has not opposed legitimate enhancements to MMF regulations. Federated advocated for most of the reforms the Commission adopted in 2010. In addition, we have submitted a detailed proposal to the Commission to enhance the Board'​s oversight of events that might lead to wide-​scale redemptions from a MMF, and to give the Board the ability to suspend redemptions for a brief period while it determines which course of action would best protect the fund'​s shareholders. The FSOC Proposals, however, that would make it nearly impossible for shareholders to use MMFs or for managers to operate them profitably, or both, are not "​enhancements" to current regulations. The Commission should be allowed to perform its proper role by using its years of expertise in overseeing MMFs to develop (​working with the industry) reform proposals consistent with its mission of protecting investors and promoting efficiency, competition, and capital formation."

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Tomorrow, the Association of Financial Professionals will host a Webinar entitled, "Making the Most from the 2013 AFP Liquidity Survey Results" (​Tuesday at 3-​4pm). Crane Data'​s Peter Crane will join several others to discuss the recent AFP Liquidity Survey. (​See the last paragraph for more details.) Below, we excerpt from the survey'​s section on potential money fund reforms. AFP writes, "​The floating NAV has been integral to several reform proposals in recent years. From the perspective of many treasurers, a floating NAV would undermine the safety of principal that has made money market funds attractive investment vehicles. Should a "​floating NAV" rule be enacted, many organizations will have to revise their investment policies and look for alternative investments that offer comparable safety, liquidity and yield. Accounting treatment would also have to be taken into consideration, determining if the classifications of Hold to Maturity, Available for Sale, or Actively Traded rules apply. To investors, this presents new decisions and challenges given their situation."

The survey explains, "​Having possible mark to market accounting for a product that doesn'​t fluctuate all that much and has potential income statement impacts is not all that appealing to investors. A floating NAV fund most likely would not have same-​day availability either, as security prices are dependent on outside parties that would most likely have next day availability, undermining the liquidity of same day funds. If the demand for MMFs wanes as a result, a floating NAV would also change market dynamics for debt issuers that supply the securities to the money market fund companies (​e.​g., commercial paper). For purchasers of MMFs, the return of principal is still a more important driver of the investment decision than is return on principal. For a large number of institutional investors, the potential for loss of principal would preclude investing in floating NAV MMFs."

AFP tells us, "​U.​S. businesses make their investment decisions based on a variety of factors unique to their organizations. In many instances, MMFs are the investment option that most closely matches the risk/​return profile companies seek to hold surplus operating cash, as specified by an organization'​s own written investment policy. Changing to a floating NAV would significantly change the risk/​return profile of MMFs. Nearly two-​thirds of financial professionals indicate their organizations would be less willing to invest in MMFs and/​or would reduce/​eliminate their current holdings of MMFs in their short-​term investment portfolio in response to a floating NAV. Large organizations, those that are publicly held and net investors would be more likely than other companies to make changes in their MMF investments in response to reform."

The Liquidity Survey continues, "A proposal to limit redemptions or charge fees for full redemptions of MMF holdings faces similar resistance, particularly from large organizations. Two-​thirds of survey respondents at large companies indicate they would take action in response. Overall, 56 percent of respondents would stop investing in money funds if there were fees charged on redemptions in one form or another. Charging fees to redeem balances in a historically stable NAV product is contrary to the principle of safety, and undermines any full return of principal. Many companies would not expect to pay a fee over and above what they are currently paying to the fund for redemptions. While this may be an effort to make investors share the risk from fluctuations in principal, many companies do not want to be burdened with the additional administrative hassle of having to manage redemption fees or understand a complicated structure."

It also says, "It is important to note that corporate investors rely on MMFs as a daily cash management and liquidity tool. Restrictions put in place that limited redemptions of MMFs would create severe operational constraints on investors, rendering MMFs unusable for daily use. Redemption gates would be very unattractive from the standpoint of limiting access to funds when needed to pay expenses, and they could also result in higher and less frequent withdrawals."

AFP comments, "Reform efforts were triggered by the need to ensure that government intervention would not be necessary to support money market funds in the future. It is likely that some companies would expect fund sponsors to prop up or support the funds much like they have in the past. Companies also realize that if the fund were to "​break the buck," they could, potentially, lose principal. There is no guarantee of principal preservation: if the event occurs, it will most likely be a credit-​driven event, not one resulting from price/​rate fluctuations. A small portion of respondents also believes that the U.​S. Government would support money market funds, as it did in the past to shore up liquidity in fixed income markets. This probably is not a realistic expectation given recent policies of the Securities and Exchange Commission (​SEC), the Federal Reserve and the Financial Stability Oversight Council (​FSOC) through the various regulatory efforts underway to remove the implied guarantee expectation that lingers from their past actions in support of money funds."

Finally, they write, "According to financial professionals, a floating NAV -- if enacted -- would be detrimental to the money fund industry. Only five percent of respondents indicate such a measure would render money funds as appropriate investment vehicles for their organizations. Financial professionals consider enhanced liquidity standards or redemption limits/​restrictions the most palatable reform proposal. Enhanced liquidity standards are acceptable along with redemption gates assuming that redemptions would be fully redeemable over time and that a time period is specified." [​Editor'​s Note: Keep in mind that most of the AFP'​s survey had already been completed by the time the SEC announced their Money Market Fund Reform proposals on June 5.]

AFP'​s Webinar, "​Making the Most from the 2013 AFP Liquidity Survey Results", will take place on Tuesday, July 16, 2013, from 3-​4 p.​m. EDT. AFP says, "Join us as we review the results from the 2013 AFP Liquidity Survey. Pete Crane will provide a market perspective on money market funds and the recent SEC proposals. We'​ll review what the survey results mean to the corporate investor, discuss various portfolio changes that might be considered along with different investment options. We'​ll also provide tips and best practices that investors have put in place and include a focus on investment policy updates. We'​ll conclude with Q&​A." Speakers include: Thomas Hunt, CTP Director of Treasury Services, Association for Financial Professionals, Peter Crane, President, Crane Data, and Lesly Murray, Head of Liquidity Product Management Segment - Treasury Solutions, RBS Citizens.

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Crane Data released its July Money Fund Portfolio Holdings dataset earlier this week, and our collection of taxable money market securities with data as of June 30, 2013, shows another plunge in Repo holdings which caused both CDs and Treasuries to surpass repo as the largest segments of money fund holdings. Repo holdings are at their lowest level since April 2011, just prior to the peak of concerns over European-​related holdings. Money market securities held by Taxable U.​S. money funds overall fell by $​30.​1 billion in June (​after increasing by $​25.​8 billion in May, and falling $​9.​9 billion in April and $​34.​6 billion in March) to $​2.​346 trillion. (​Note that our Portfolio Holdings collection is a separate series from our monthly Money Fund Intelligence XLS and daily MFI Daily universes.) Treasuries, Agencies and Other were the only segments to increase in June, while Repo and VRDNs plunged, CP dropped sharply and CDs inched lower. CDs took over as the new largest holding among taxable money funds, followed by Treasuries, Repo, CP, Agencies, Other, and VRDNs. Money funds' European-​affiliated holdings (​including repo) plummeted (​primarily due to the drop in repo) from 31% to under 28%. Below, we review our latest portfolio holdings aggregates.

Certificates of Deposit (​CD) holdings decreased slightly by $​881 million to $​479.​6 billion, or 20.​4%, but the sharp drop in repos at quarter-​end left CDs as the largest segment of money fund composition. Treasury holdings increased by $​27.​1 billion to $​457.​5 billion (​19.​5% of holdings) and moved into the second place spot. Repurchase agreement (​repo) holdings decreased by $​62.​7 billion to $​551.​0 billion, or 19.​2% of fund assets, dropping them to their lowest level in over 2 years. Commercial Paper (​CP) remained the fourth largest segment, but fell by $​13.​2 billion to $​397.​4 billion (​16.​9% of holdings). Government Agency Debt jumped by $​22.​5 billion; it now totals $​346.​5 billion (​14.​8% of assets). Other holdings, which include Time Deposits, rose by $​6.​1 billion to $​161.​5 billion (​6.​9% of assets). VRDNs held by taxable funds fell by $​9.​0 billion to $​52.​8 billion (​2.​3% of assets). (​Crane Data’​s Tax Exempt fund data is released in a separate series.)

Among Prime money funds, CDs represent almost one-​third of holdings, or 32.​2%, followed by Commercial Paper (​26.​7%). The CP totals are primarily Financial Company CP (​15.​3% of holdings) with Asset-​Backed CP making up 6.​4% and Other CP (​non-​financial) making up 5.​1%. Prime funds also hold 7.​7% in Agencies, 6.​8% in Treasury Debt, 6.​0% in Other Notes, 5.​1% in Other (​including Time Deposits), and 3.​2% in VRDNs. Prime money fund holdings tracked by Crane Data total $​1.​487 trillion, or 63.​4% of taxable money fund holdings’ total of $​2.​346 trillion.

European-​affiliated holdings plunged $​90.​5 billion in June to $​653.​9 billion (​among all taxable funds and including repos); their share of holdings fell to 27.​9%. Eurozone-​affiliated holdings fell sharply too (​down $​58.​0 billion) to $​338.​4 billion in June; they now account for 14.​4% of overall taxable money fund holdings. Asia & Pacific related holdings inched up by $​1.​5 billion to $​291.​7 billion (​12.​4% of the total), while Americas related holdings jumped up by $​59.​4 billion on the bounce in Treasuries and Agencies to $​1.​401 trillion (​59.​7% of holdings).

The Repo totals were made up of: Government Agency Repurchase Agreements (​down $​29.​6 billion to $​230.​4 billion, or 9.​8% of total holdings), Treasury Repurchase Agreements (​down $​30.​5 billion to $​149.​7 billion, or 6.​4% of assets and Other Repurchase Agreements (​down $​2.​7 billion to $​70.​9 billion, or 3.​0% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​10.​8 billion to $​227.​3 billion, or 9.​7% of assets), Asset Backed Commercial Paper (​down $​2.​8 billion to $​94.​7 billion, or 4.​0%), and Other Commercial Paper (​up $​345 million to $​75.​5 billion, or 3.​2%).

The 20 largest Issuers to taxable money market funds as of June 30, 2013, include the US Treasury (​19.​5%, $​457.​5 billion), Federal Home Loan Bank (​8.​1%, $​189.​1 billion), Federal Home Loan Mortgage Co (​2.​7%, $​62.​6B), JP Morgan (​2.​6%, $​61.​2B), Federal National Mortgage Association (​2.​6%, $​60.​1B), Barclays Bank (​2.​5%, $​59.​0B), RBC (​2.​5%, $​58.​4B), Bank of Tokyo-​Mitsubishi UFJ Ltd (​2.​4%, $​56.​3B), Bank of Nova Scotia (​2.​4%, $​56.​1B), Bank of America (​2.​4%, $​56.​0B), Credit Agricole (​2.​2%, $​51.​3B), BNP Paribas (​2.​2%, $​50.​9B), Sumitomo Mitsui Banking Co (​2.​2%, $​50.​9B), Credit Suisse (​2.​1%, $​48.​5B), Citi (​2.​0%, $​46.​9B), Deutsche Bank AG (​2.​0%, $​46.​7B), Toronto-​Dominion Bank (​1.​7%, $​40.​3B), Mizuho Corporate Bank Ltd (​1.​5%, $​36.​2B), Bank of Montreal (​1.​5%, $​35.​3B), and National Australia Bank (​1.​4%, $​33.​4B).

The 10 largest Repo issuers (​dealers) (​with the amount of repo outstanding and market share among the money funds we track) include: Bank of America ($​48.​1B, 10.​7%), Barclays ($​38.​1B, 8.​5%), BNP Paribas ($​31.​6B, 7.​0%), Goldman Sachs ($​27.​3B, 6.​1%), Credit Agricole ($​25.​8B, 5.​7%), RBS ($​25.​6B, 5.​7%), Credit Suisse ($​24.​9B, 5.​5%), Citi ($​24.​3B, 5.​4%), RBC ($​24.​2B, 5.​4%), and Deutsche Bank ($​23.​2B, 5.​1%).

The 10 largest issuers of CDs (​with the amount of CDs issued to our universe and market share include: Sumitomo Mitsui Banking Co ($​43.​0B, 9.​0%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​38.​6B, 8.​1%), Bank of Nova Scotia ($​32.​2B, 6.​7%), Toronto-​Dominion Bank ($​31.​4B, 6.​6%), Bank of Montreal ($​29.​9B, 6.​2%), Mizuho Corporate Bank Ltd ($​26.​1B, 5.​5%), National Australia Bank Ltd ($​19.​7B, 4.​1%), RBC ($​16.​5B, 3.​5%), Credit Suisse ($​15.​0B, 3.​1%), and Canadian Imperial Bank of Commerce ($​14.​9B, 3.​1%).

The 10 largest issuers of CP (​owned by money funds) as of June 30 include: JP Morgan ($​24.​8B, 7.​2%), Commonwealth Bank of Australia ($​17.​3B, 5.​0%), Westpac Banking Co ($​16.​0B, 4.​6%), FMS Wertmanagement ($​13.​0B, 3.​7%), Australia & New Zealand Banking Group Ltd ($​12.​1B, 3.​5%), NRW.​Bank ($​12.​0B, 3.​5%), Barclays Bank ($​12.​0B, 3.​5%), General Electric ($​11.​4B, 3.​3%), HSBC ($​9.​4B, 2.​7%), and Toyota ($​9.​3B, 2.​7%).

The largest increases among Issuers of money market securities (​including Repo) in June were shown by: US Treasury (​up $​27.​1B to $​457.​5B), Federal Home Loan Bank (​up $​22.​8B to $​189.​1B), Goldman Sachs (​up $​6.​3B to $​27.​5B), Natixis (​up $​4.​7B to $​29.​6B), and Barclays (​up $​4.​3B to $​59.​0B). The largest decreases among Issuers included: Deutsche Bank (​down $​30.​4B to $​46.​7B), Societe Generale (​down $​22.​8B to $​33.​2B), BNP Paribas (​down $​13.​2B to $​50.​9B), Lloyd’​s TSB Bank PLC (​down $​12.​2B to $​9.​1B), and Svenska Handelsbanken (​down $​6.​5B to $​23.​2B).

The United States is still by far the largest segment of country-​affiliations with 49.​9%, or $​1.​170 trillion. Canada increased and moved into second place (​9.​8%, $​229.​1B) ahead of France (​7.​8%, $​182.​6B). Japan was again fourth (​7.​2%, $​169.​3B) and the UK (​5.​8%, $​136.​9B) remained fifth. Australia (​4.​5%, $​104.​6B) moved ahead of Germany (​4.​1%, $​97.​0B) among country-​affiliated securities and dealers. (​Note: Crane Data attributes Treasury and Government repo to the dealer'​s parent country of origin, though money funds themselves "​look-​through" and consider these U.​S. government securities. All money market securities must be U.​S. dollar-​denominated.) Sweden (​3.​3%, $​78.​2B), Switzerland (​3.​1%, $​72.​7B), and the Netherlands (​2.​4%, $​56.​1B) continued to round out the top 10.

As of June 30, 2013, Taxable money funds held 21.​0% of their assets in securities maturing Overnight, and another 13.​2% maturing in 2-​7 days (​34.​5% total in 1-​7 days). Another 20.​7% matures in 8-​30 days, while 26.​6% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 13.​4% of taxable securities, and just 4.​7% matures beyond 180 days.

Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated earlier this week, and our MFI International "​offshore" Portfolio Holdings will be updated on Monday (​the Tax Exempt MF Holdings will be released later today). Visit our Content center to download files or visit our Portfolio Laboratory to access our "​transparency" module and contact us if you'​d like to see a sample of our latest Portfolio Holdings Reports or our new Weekly Money Fund Portfolio Holdings collection.

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On Monday, we published our latest Money Fund Intelligence and released our latest Family & Global Rankings for July with data as June 30, 2013. The most recent market share rankings show that Fidelity, Vanguard and Schwab were the only managers among the 10 largest to increase assets in June, as retail assets gained from bond fund outflows but overall money fund assets fell by $​26.​4 billion in June. (​Assets rose by $​35.​8 billion in May, but they had fallen in every month prior in 2013, dropping by $​124.​0 billion through April 30.) Fidelity Investments remained the largest money fund manager, followed by J.​P. Morgan and Federated Investors. The rest of the Top 10 managers of domestic U.​S. money funds were also unchanged in order and included -- Vanguard, Schwab, BlackRock, Dreyfus, Goldman Sachs, Wells Fargo, and Morgan Stanley. When "​offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Island -- are included, the top 10 match the U.​S. list, except for BlackRock moving up to No. 3, Goldman moving up to No. 5, and Western Asset appearing on the list at No. 9.. We review these rankings below and also summarize our Crane Money Fund Indexes for the latest month. (​Note: Crane Data'​s June 30 Money Fund Portfolio Holdings were released yesterday afternoon and that our "Reports & Pivot Tables" should be out this morning. Watch for our News coverage on these tomorrow.)

Our latest domestic U.​S. money fund Family Rankings show Fidelity managing $​419.​0 billion, or 17.​2% of all assets (​up $​5.​4 billion in June, up $​8.​0B in Q2 and up $​21.​4B over 12 months), followed by JPMorgan'​s $​225.​3 billion, or 9.​3% (​down $​5.​4B, $​11.​5B, and $​10.​5B for 1-​month, 3-​months and 12-​months, respectively). Federated Investors ranks third with $​221.​2 billion, 9.​1% (​down $​2.​5B, 8.​8B, and 8.​9B), Vanguard ranks fourth with $​170.​3 billion, or 7.​0% (​up $​5.​1B, 3.​9B, and $​10.​6B), and Schwab ranks fifth with $​160.​2 billion, or 6.​6% (​up $​5.​1B, $​2.​3B, and $​8.​8B) of money fund assets.

The sixth through tenth largest U.​S. managers include: BlackRock ($​143.​8 billion, or 5.​9%), Dreyfus ($​140.​4 billion, or 5.​8%), Goldman Sachs ($​127.​2 billion, or 5.​2%), Wells Fargo ($​111.​5 billion, or 4.​6%), and Morgan Stanley ($​93.​0 billion, or 3.​8%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: SSgA, Northern, Invesco, UBS, BofA, DB Advisors, Western Asset, First American, Franklin and RBC. Crane Data currently tracks 76 managers, the same number as last month and last quarter. (No. 53 Calvert and No. 60 Hartford recently announced that they will exit the money fund space, but they continued to be listed until their liquidations later this year.)

Over the past year, Fidelity shows the largest asset increase (​up $​21.​4B, or 5.​3%), followed by Morgan Stanley (​up $​15.​8B, or 20.​5%). (​MS'​s assets continue to be fueled by the shifting of Morgan Stanley Smith Barney brokerage assets away from Western.) Other big gainers since June 30, 2012, include: Vanguard (​up $​10.​6B, or 6.​6%), SSgA (​up $​9.​1B, or 13.​1%), Schwab (​up $​8.​8B, or 5.​8%), and Northern (​up $​8.​6 billion, or 12.​4%). The biggest declines over 12 months include: JPM (​down $​10.​5B, or 4.​2%), Dreyfus (​down $​9.​3B, or 6.​3%), Federated (​down $​8.​9B, or 3.​8%), and First American (​down $​5.​0B). (​Note that money fund assets are very volatile month to month.)

Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our Money Fund Intelligence XLS (​domestic U.​S.) and our Money Fund Intelligence International ("​offshore), we show these families: Fidelity ($​424.​0 billion), JPMorgan ($​354.​4 billion), BlackRock ($​235.​9 billion), Federated ($​232.​3 billion), and Goldman ($​196.​7 billion). Vanguard, Dreyfus, Schwab, Western, and Wells Fargo round out the top 10. These totals include offshore US dollar funds, as well as Euro and Sterling funds converted into US dollar totals. (​For more details, see our latest MFI Family & Global rankings e-​mail or our MFI XLS and MFI International products.)

For the month ended June 30, 2013, our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 798), declined to a record low of 0.​01% for both the 7-​Day and 30-​Day Yield (​annualized) averages. Our Crane 100 Money Fund Index shows an average yield (​7-​Day and 30-​Day) of 0.​03%, also a record low, and down from 0.​04% last quarter and from 0.​05% at the start of 2013. Our Prime Institutional MF Index yielded 0.​03% (​7-​day, down one basis point), the Crane Govt Inst Index, Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.​01%. The Crane Tax Exempt MF Index also yielded 0.​01%.

The Crane 100 MF Index returned on average 0.​00% for 1-​month, 0.​01% for 3-​month, 0.​02% for YTD, 0.​05% for 1-​year, 0.​06% for 3-​years (​annualized), 0.​30% for 5-​year, and 1.​70% for 10-​years. Our Crane Index Gross 7-​Day Yields averaged 0.​10% for Treasury Institutional and Treasury Retail funds; 0.​13% for Government Institutional and 0.​14% for Govt Retail funds; 0.​23% for Prime Institutional funds and Prime Retail funds; and, 0.​20% for Tax Exempt money funds. These all represent record lows for gross yields for money funds.

Average expense ratios charged inched lower again in June along with gross yields. The Crane 100 and MF Average were 0.​16% and 0.​17% (​flat and down one basis point, respectively). Prime Retail funds charged the higher rates (​0.​22%) on average, while Treasury Inst charged the lowest rates at 0.​09%. Finally, WAMs, or weighted average maturities, remained the same or lengthened slightly, at 46 days and 49 days, for the Crane MF Average and Crane 100 Index, respectively. WAMs were 43 days 45 days, respectively, at year-​end 2012.

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Stradley Ronon published a "Fund Alert" yesterday, written by Joan Swirsky, entitled, "Money Market Fund Reform: SEC Proposes Fundamental Reform and Other Significant Rule Amendments. It says, "At an open meeting (​the Open Meeting) on June 5, the SEC proposed fundamental reform of money market funds that operate under Rule 2a-​7 (​the Rule) under the Investment Company Act of 1940, along with additional significant proposals that would expand money market funds' required disclosures, constrain their portfolio management and broaden stress testing. If adopted, the reforms will increase operational and compliance demands on money market funds and their advisers and enhance board responsibilities. In addition, the reforms could dampen yields on money market funds if operational and compliance costs are passed on to shareholders or if managers invest conservatively in response to the reforms. The SEC offers the candid assessment that the reforms "may come at a cost to fund yield and profitability as managers shift to shorter dated or more liquid securities"."

Swirsky explains, "The fundamental reforms are set forth in the proposing release (​the Release) as two alternative versions of Rule 2a-​7, with the second alternative consisting of two separate features -- (​1) a floating net asset value (​NAV), and (​2) a liquidity fee and redemption gate. However, the SEC makes clear that the two alternatives (​and the two separate features in the second alternative) could be adopted together or in any combination. The proposed fundamental reforms would do the following: A. Floating NAV - Require a floating NAV for money market funds other than U.​S. government money market funds and retail money market funds. This requirement would apply to prime money market funds and tax-​exempt money market funds unless the funds satisfy the proposed description of a retail money market fund. The SEC acknowledges the operational and other costs that would be required to transition to a floating NAV. The Rule as amended under this alternative is referred to as the "​Proposed FNAV Rule."

The piece continues, "The proposal exempts from the requirement to float the NAV funds that do not permit any shareholder of record to redeem more than $​1 million on any one business day. The SEC acknowledges the significant operational and compliance burdens of implementing the retail exemption. The SEC estimates that the cost for each fund to implement the retail exemption would range from $​1 million to $​1.​5 million per fund. Omnibus exception to $​1 million redemption limit – fund needs procedures that "​allow conclusion" that intermediary imposes $​1 million daily redemption limit."

The Stradley Alert says, "The floating NAV must be calculated to the nearest hundredth of a percent (​the fourth decimal place on a $​1.​00 share). Money market funds currently calculate NAV to the nearest one percent, and non-​money market funds with a $​1.​00 NAV are required to calculate NAV to the nearest tenth of a percent under existing SEC precedent.... Money market funds that maintain a stable NAV would do so only by using the penny-​rounding method of pricing. Under penny-​rounding, a fund calculates the market value of its share and rounds the market value to the nearest penny on a $​1.​00 share."

It tells us, "Amortized cost valuation permitted only for securities maturing within 60 days. The SEC will permit an exception to the prohibition on amortized cost valuation for securities with maturities within 60 days unless the particular circumstances warrant otherwise. The permission to value very short-​term securities at amortized cost reflects current SEC requirements for non-​money market funds. This exception may cover a significant portion of money market fund holdings because money market funds are required to maintain an average weighted portfolio maturity of no more than 60 days."

On the "Liquidity Fee and Redemption Gate" option, the Alert states, "Impose two provisions that apply when the weekly liquid assets of a money market fund other than a U.​S. government money market fund have fallen to less than 15 percent of total assets (​referred to below as "​depleted"). (​U.​S. government money market funds could voluntarily abide by these requirements. Tax-​exempt money market funds are subject to these requirements.) The Rule as amended under this two-​part alternative is referred to as the "Proposed FG Rule." The Proposed FG Rule essentially grants the board5 the authority to impose or not impose the liquidity fee (​in the amount the board desires) and/​or the gate for the period the board desires while weekly liquid assets are depleted."

Swirsky writes under the section "Commissioners Prefer Combination?, "At the Open Meeting, one of the commissioners voiced support for adopting the Proposed FG Rule as a stand-​alone measure, two commissioners indicated a preliminary preference for combining the measures, and the two remaining commissioners did not clearly indicate their preference on this issue. The less fundamental reforms could be adopted without regard to the approach to the fundamental reforms. If both the Proposed FNAV Rule and the Proposed FG Rule are adopted as proposed, the only money market funds that would be required neither to adopt a floating NAV nor to operate with a liquidity fee or gate would be U.​S. government money market funds. Retail money market funds could continue to have a stable NAV but would be required to operate with a liquidity fee and gate unless the funds were U.​S. government money market funds. Non-​U.​S. government institutional money market funds would be required to comply with both proposals."

She adds, "The Release raises important challenges and uncertainties regarding the floating NAV, including: how to transition to the floating NAV without triggering pre-​emptive redemptions by shareholders who anticipate that the NAV may be less than $​1.​00 at the conversion date; compliance with tax rules for a floating NAV share; purchasers of money market fund shares concluding that a floating NAV share is a "​cash equivalent" (​the SEC believes that it is under normal circumstances); and determining whether certain funds can qualify as "​retail" funds, which are exempt from the floating NAV requirement. Funds that raise particular challenges are those that include both retail and institutional shareholders, funds with shareholders who are omnibus accounts, funds in master-​feeder structures, and tax-​exempt funds."

The Stradley piece says, "​The proposals are likely to draw a wide variety of reactions from industry participants, which may include the following, among others: Some may be relieved that the fundamental reforms do not include capital buffers or minimum balance requirements. These alternatives were included as proposed recommendations to the SEC by the Financial Stability Oversight Council (​FSOC) in its report issued on Nov. 13, 2012 (​the "​FSOC Recommendations"), to widespread objection by industry participants. Some may be pleased that the Proposed FG Rule could be a stand-​alone measure. Some have argued that the floating NAV for any money market funds will not stem runs and will greatly reduce the value of the money market funds to investors. On the other hand, others may believe that a gate is not a practical solution, because when it is lifted the fund will experience a run, even if a liquidity fee is imposed.

Finally, Swirsky tells us, "The Release poses myriad questions on every aspect of the proposals, giving the impression that the proposals remain a work in progress despite the detailed analysis in the Release and copious comments already provided on prior money market fund reform proposals. Even if reforms are finalized, implementation is a distant goal -- by some estimates, no earlier than late 2014 for less fundamental reforms, early 2015 for fees and gates, and early 2016 for a floating NAV. These estimates are based on the following possible timeline: September 17 – comments are due on the proposal; Early 2014 – the SEC could issue a final rule release, assuming that it will need several months to analyze comments and finalize rules; Late 2014 – non-​fundamental reforms implemented (​the SEC has proposed a nine-​month compliance period); Early 2015 – fees and gates implemented (​the SEC has proposed a one-​year compliance period); Early 2016 – floating NAV implemented (​the SEC has proposed a two-​year compliance period)."

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In today'​s Crane Data News, we take a look at money market mutual funds outside the U.​S.. We review the ICI'​s "​Worldwide Mutual Fund Assets and Flows, First Quarter 2013", which was released recently. Crane Data excerpts and analyzes the money fund portion of the ICI'​s latest global statistics. We also quote from IMMFA Chairman Jonathan Curry, who presented a session entitled, "Survivor: Update on European Money Funds" at our recent Money Fund Symposium. Finally, we also review the agenda and plans for our upcoming European Money Fund Symposium, Crane Data'​s first conference event focusing on "​offshore" money funds domiciled in Dublin or Luxembourg. European MFS is scheduled to take place Sept. 24-​25, 2013, at the Conrad Hotel in Dublin, Ireland.

ICI'​s latest Worldwide release says, "Mutual fund assets worldwide increased 3.​8 percent to $​27.​86 trillion at the end of the first quarter of 2013, an all-​time high. Worldwide net cash flow to all funds was $​339 billion in the first quarter, compared to $​427 billion of net inflows in the fourth quarter of 2012.... Equity funds worldwide had net inflows of $​144 billion in the first quarter.... Flows into bond funds totaled $​189 billion in the first quarter, down from net inflows of $​217 billion in the previous quarter. Outflows from money market funds were $​109 billion in the first quarter of 2013, reversing most of the $​137 billion inflow recorded in the fourth quarter of 2012."

The release continues, "The global outflow from money market funds in the first quarter was driven predominately by outflows of $​95 billion in the Americas, while Europe registered outflows of less than $​3 billion in the first quarter.... At the end of the first quarter of 2013, 41 percent of worldwide mutual fund assets were held in equity funds. The asset share of bond funds was 26 percent and the asset share of balanced/​mixed funds was 12 percent. Money market fund assets represented 17 percent of the worldwide total."

According to Crane Data'​s analysis of ICI'​s data, the U.​S. maintained its position as the largest money fund market in Q1'​13 with $​2.​596 trillion (​56.​2% of all worldwide MMF assets), though assets declined by $​98 billion in Q1'​13 (​they were up by $​14B in the past year). France remained a distant No. 2 to the U.​S. with $​475 billion (​10.​0%, down $​4 billion in Q1 and down $​25B over 1 year), followed by Ireland ($​363 billion, or 7.​9% of total assets, down $​16B in Q1 and down $​28B over 12 months). Australia moved up to 4th place in the latest quarter with a gain of $​10 billion in the quarter and $​53B in the past year to $​355B (​7.​2%), surpassing new No. 5, Luxembourg ($​326B, 7.​1% of the total, down $​17B in Q1 and down $​54B for 1 year).

Ireland and Luxembourg'​s totals are primarily "​offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. (​Crane Data considers some, like France and Italy, with "​accumulating" NAV instead of stable NAV funds, to be more like variable annuities than money market funds.) China ($​84B, down $​8B in Q1 and up $​36 billion in 12 months), Korea ($​68B, up $​8B and $​12B), Mexico ($​58B, up $​2B and down $​5B), Brazil ($​56B, up $​11B and $​10B), and Canada round out the 10 largest countries with money funds.

We mentioned in yesterday'​s "Link of the Day" that the Institutional Money Market Funds Association (​IMMFA), which represents triple-​A rated, constant NAV money funds similar to those found in the U.​S., launched a new website. Chairman Jonathan Curry commented at our recent Symposium, "The need for strong money market funds is stronger than ever, that'​s true in Europe and in the U.​S. The AUM of IMMFA funds has been pretty stable, which we take as a positive based on the headwinds that the industry faces ... low interest rates, [​a limited] supply of assets and of course a fraught regulatory environment.... Suffice it to say that we need to waive fees in some currencies and in some products, based on the ultra-​low yields."

He continues, "Indeed, in Euros, we face a more challenging environment in terms of ultra-​low yields than the industry faces here today. The industry has made some changes to the products to address the risk of yields going into negative territory, which I think is a low probability of that happening here in the US.... The debate has been as fierce in Europe as it has been here, and I think despite the level of interaction and the level of lobbying that IMMFA and its members have done, we still see a lack of objectivity and arguably a lack of understanding from the European regulatory community around reform of money market forms. So the common misconceptions that we experience in Europe are similar to the ones that are experienced here."

Finally, Crane Data will be bringing its affordable and involved brand of conference events to Europe in September with the launch of European Money Fund Symposium, Sept. 24-​25 in Dublin. European Money Fund Symposium features an unmatched speaking faculty, including many of the world'​s foremost authorities on money funds in Europe and worldwide, and an impressive inaugural list of sponsors. Visit http://​www.​euromfs.​com to register and see the latest agenda, or contact us for more details.

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The July issue of Crane Data'​s Money Fund Intelligence newsletter was posted on our website and e-​mailed to subscribers this morning. It features the articles: "SEC on Reform Proposals; Comments Due by 9/​17," which reviews the SEC'​s Sarah ten Siethoff'​s recent comments on proposed regulations; "ICI'​s Stevens Keynotes Symposium: Blasts Floating," which excerpts from Paul Stevens' recent speech in Baltimore; and, "Treasury'​s Rutherford on Reforms, FRNs, Stability," which quotes from the Assistant Secretary'​s Money Fund Symposium appearance. We'​ve also updated our Money Fund Wisdom database query system with June 30, 2013, performance statistics and rankings, and our MFI XLS will also be sent out Monday a.​m. (​It is already available at our Content center too, along with the recordings and Powerpoints from our Baltimore Money Fund Symposium.) Our June 30 Money Fund Portfolio Holdings are scheduled to go out Wednesday, July 10.

Our SEC on Reform piece says, "The Securities & Exchange Commission proposed new reforms to money market mutual fund regulations last month, including the option of either a floating NAV for prime institutional funds or a liquidity fee and gates regime, plus a series of additional disclosures and tweaks The Proposed "Money Market Fund Reform" was officially published in the Federal Register on June 19, and interested parties have until Sept. 17 to submit comments. (​See http://​www.​sec.​gov/​rules/​proposed.​shtml for the full 198-​page proposal and to comment. No comments of substance have been submitted as of yet.)"

The July issue'​s lead story adds, "SEC Special Counsel Sarah ten Siethoff, who participated in the "​Regulatory Roundtable" at our Money Fund Symposium (​with Federated'​s John McGonigle and Dechert'​s Jack Murphy), commented in Baltimore, "​We tried to be very clear on this proposal, from literally the first page of it and all the way through, on what the goals were for this rulemaking. [​W]​e were seeking to preserve, as much as possible, the benefits of money market funds, while lessening the susceptibility [​to] redemptions, reducing contagion effects and increasing transparency of their risks.... What we were seeking to do is to try to find the best way to make that balance."

MFI excerpts from the Stevens keynote for its monthly "​profile," writing, "Investment Company Institute President & CEO Paul Stevens delivered the opening keynote to the 5th annual Crane'​s Money Fund Symposium in Baltimore (​​which ran June 19-​21). His speech, entitled, "Top of the Ninth? The State of Play for Money Market Funds," states, "From the start, ICI and the fund industry have consistently supported measures designed to make money market funds more resilient, subject to two conditions. First, we must preserve the key features of money market funds that make them so valuable for investors and issuers. Second, we must preserve choice for investors by ensuring a robust and competitive global money market fund industry.""

The article on Treasury'​s Rutherford explains, "The U.​S. Treasury'​s Matt Rutherford also spoke at our recent Money Fund Symposium and discussed financial stability, reforms, and the likely introduction of floating rate notes later this year. We excerpt from his comments below. He told us, "​As others have pointed out, intermediaries in the money markets often conduct maturity, liquidity, and credit transformation without access to central bank liquidity, deposit insurance and prudential regulation, and leading up to the financial crisis the role of these intermediaries ... increased greatly. The subsequent disruptions in specific markets revealed structural weaknesses in some of these intermediaries, including ABCP conduits, SIVs, securities lenders and money market mutual funds. Now this is territory that has been covered by policymakers and academics. [​B]​ut today I just want to focus my discussion more narrowly on Treasury'​s interest within money markets, and this includes our rule as an issuer, as well as our ongoing support to make private money markets more resilient, in particular through money market mutual fund reform as well as tri-​party repo reform."

See the latest issue and future "​News" postings for more details, or contact us to request the latest issue.

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We learned from Stradley Ronon Attorney John Baker that the IRS has issued Notice 2013-​48, "​Application of Wash Sale Rules to Money Market Fund Shares". An IRS bulletin says, "Notice 2013-​48 establishes a de minimis exception to the wash sale rules of Section 1091 for certain redemptions of shares of money market funds that, under regulations proposed by the Securities and Exchange Commission, would no longer maintain a constant share price. Under the proposed revenue procedure, if a taxpayer realizes a loss upon a redemption of shares in such a fund, and the amount of the loss is not more than 0.​5 percent of the taxpayer'​s basis in the shares, the IRS will treat such loss as not subject to Section 1091. Notice 2013-​48, will be published in Internal Revenue Bulletin 2013-​31 on July 29, 2013." The IRS will take comments through Oct. 28.

The IRS says, "This notice proposes a revenue procedure describing circumstances in which the Internal Revenue Service (​IRS) will not treat a redemption of shares in a money market fund as part of a wash sale under Section 1091 of the Internal Revenue Code. The proposed revenue procedure provides that if a taxpayer realizes a loss upon a redemption of certain money market fund shares and the amount of the loss is not more than a specified percentage of the taxpayer'​s basis in such shares, the IRS will treat such loss as not realized in a wash sale."

They add, "This proposed guidance is intended to mitigate tax compliance burdens that may result from proposed changes in the rules that govern the prices at which certain money market fund shares are issued and redeemed. The Securities and Exchange Commission (​SEC) has issued proposed regulations to effect these changes. See Money Market Fund Reform, Securities Act Release No. 9408, Investment Advisors Act Release No. 3616, Investment Company Act Release No. 30,​551, 78 Fed. Reg. 36834 (​proposed June 5, 2013). The proposed revenue procedure is drafted as if the SEC had already adopted final rules addressing floating net asset value in substantially the same form as the proposed rules. If those rules are not adopted in substantially the same form as they have been proposed, the revenue procedure proposed by this notice may not be adopted or may be adopted in materially modified form."

Stradley'​s Baker tells us, "The IRS has issued a proposed Revenue Procedure (link here) that sets forth circumstances under which a shareholder'​s loss on redemption of a floating-​NAV money market fund will not be disallowed as a wash sale. The proposed Rev. Proc. is drafted as if the SEC had already adopted final rules addressing floating net asset value in substantially the same form as the proposed rules. If those rules are not adopted in substantially the same form as they have been proposed, the proposed Rev. Proc. may not be adopted or may be adopted in materially modified form."

He explains, "As you know, the Internal Revenue Code (​specifically, section 1091(​a)) disallows a loss realized by a taxpayer on a sale of securities if, within a period beginning 30 days before and ending 30 days after the date of the sale, the taxpayer acquires substantially identical securities (​a "​wash sale"). The proposed Rev. Proc. states that redemptions of shares of money market funds, which have relatively stable values even when share prices float, do not give rise to the concern that section 1091 is meant to address, and tracking wash sales of MMF shares will present shareholders of floating-​NAV MMFs with significant practical challenges."

Baker tells us, "Accordingly, the proposed Rev. Proc. States that a redemption of a floating-​NAV MMF that results in a de minimis loss will not be treated as part of a wash sale. For this purpose, a "​de minimis loss" mean a loss that is not more than 0.​5% of the taxpayer'​s basis in the shares."

He adds, "The SEC stated in its money market fund reform proposal last month, "​We understand that the Treasury Department and IRS are actively considering administrative relief under which redemptions of floating NAV money market fund shares that generate losses below a de minimis threshold would not be subject to the wash sale rules." Treasury has now announced that administrative relief more quickly than expected. However, the SEC went on to say, "​We recognize, however, that money market funds would still incur operational costs to establish systems with the capability of identifying wash sale transactions, assessing whether they meet the de minimis criterion, and adjusting shareholder basis as needed when they do not." Those are still issues."

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The Federal Reserve Bank of New York released its "2012 Annual Report this week, and the 132-​page document spend 2 pages on money funds and tri-​party repo. It says, "​In 2012, the Bank contributed to multiple workstreams focused on improving financial stability through better market infrastructure. Key efforts included supporting reforms in the tri-​party repo system, money market funds, over-​the-​counter (​OTC) derivatives, and foreign exchange settlement. Significant work was also carried out to support the stability of financial market infrastructures."

It says of the "​Tri-​party repo <​b:>`​_, "The tri-​party repo market is a large and important market where securities dealers fund a substantial portion of firm and client assets. The crisis revealed significant fragility in the tri-​party repo system. To help support financial stability in this market in 2012, a cross-​bank team including contributors from FISG and the Markets, Risk, and Research groups continued their work with market participants to effect changes in settlement infrastructure. The aim is to help reduce the extension of intraday credit within the tri-​party repo market and to improve dealers' liquidity risk-​management practices. To this end, the Bank intensified its direct oversight of market participants to make the infrastructure changes necessary to reduce reliance on intraday credit and worked with broker-​dealers affiliated with bank holding companies and foreign banking organizations to improve risk-​management practices."

The NY Fed'​s report comments on "Money market funds," "In 2012, the Bank continued to support reform in the money market fund business. The crisis made clear that the monies provided to the money market mutual funds by their own investors are inherently unstable and susceptible to runs in times of panic. Investors in money market funds with a fixed net asset value can take money out on a daily basis at par value, with no redemption penalty. This can occur even if the money market fund does not have sufficient cash or liquid assets to meet all potential redemptions. This creates an incentive for investors to be the first to get out whenever there is any uncertainty about the underlying value of the assets in the fund. The size of the money market fund sector and its interconnectedness with the rest of the financial system make reform of these vulnerabilities crucial."

It adds, "While the primary responsibility for implementing money market fund reform lies with the U.​S. Securities and Exchange Commission, the Bank provided substantial analysis to policymakers on reform alternatives, with leadership from staff in the Research Group and the Office of Financial Stability and Regulatory Policy. In early 2013, I personally joined with the presidents of the other eleven Reserve Banks to offer our public support for reform in this market."

In other news, a release from the ratings agency Moody'​s Investors Service, entitled, "Moody'​s: US Money Market Funds Boost Euro Area Exposure by $​21.​2 Billion" explains, "US-​domiciled money market funds (​MMFs) have increased their total exposure to European financial institutions to $​189.​8 billion (​28% of their assets) from $​168.​6 billion (​25% of their assets) in the first two months of Q2 2013, said Moody'​s Investors Service. Most of this increase is due to higher exposures to UK banks, which rose by 47% to $​30.​5 billion from $​20.​4 billion in the same time period. Within euro- and sterling-​denominated MMFs, exposure to European financial institutions remained stable at EUR28 billion (​40% of their assets) and GBP58 billion (​49% of their assets), respectively. However, there have been significant country shifts."

It continues, "​Moody'​s analysis is based on the portfolios of all Moody'​s-​rated MMFs in the first two months of Q2 2013. For the USD funds, the data covers 41 US Prime MMFs and 29 European and offshore USD-​denominated MMFs. For both the euro-​denominated MMFs and sterling-​denominated MMFs, the data covers 22 funds domiciled in Europe for each (​44 total). The credit profiles of U.​S. prime, Euro-​denominated and Sterling prime money market funds (​MMFs) continued to experience a modest deterioration during the second quarter of 2013, whereas portfolios' duration and diversification improved."

Moody'​s writes, "In the first two months of Q2 2013, both US Prime MMFs and offshore USD MMFs have shown increased exposures to European financial institutions, increasing by 11% to $​189.​8 billion (​28% of their assets) and 9% to $​91.​7 billion (​57% of their assets), respectively. For offshore USD-​denominated MMFs, most of this increase is due to their exposures to Swedish banks that went to $​22.​2 billion from $​19.​6 billion, and to UK banks that went to $​11 billion from $​8.​8 billion. There was modest credit deterioration in the same time period, as 5.​9% of investments in US-​domiciled funds and 3.​9% of offshore-​domiciled funds moved from Aaa- and Aa-​rated securities to A-​rated securities. Approximately 18% of investments in all Moody'​s-​rated MMFs were rated Aaa, down from 23% in March in US-​domiciled funds and 20% in offshore-​domiciled funds. Overnight liquidity remains high, at around 32% in US-​domiciled fund assets and 36% in offshore-​domiciled funds on average."

They add, "Prime euro-​denominated MMFs experienced a stabilisation in their credit, liquidity and market risk profiles, while they reduced their maturity profile and decreased their portfolio concentration. While funds' aggregate exposure to European financial institutions remained stable at EUR28 billion, there have been significant shifts in country allocation. In the first two months of Q2 2013, investments in French financial institutions decreased significantly by 20% to EUR8.​5 billion from EUR10.​6 billion. However, exposure to Swedish banks increased by 16% to EUR6.​6 billion from EUR5.​7 billion, and investments in German financial institutions also increased by 24% to EUR2.​9billion from EUR2.​3 billion. The low interest-​rate environment and low yields across the sector prompted a further AUM decrease by 7% in euro MMFs to EUR69.​9 billion."

Finally, Moody'​s release writes, "Prime sterling-​denominated MMFs experienced a stabilisation in their risk profiles, with a modest credit deterioration of their portfolio, but a shorter duration and higher diversification. Funds' investment in Aaa- and Aa-​rated securities decreased by 4%, increasing exposures to A-​rated instruments. While exposure to European financial institutions remained stable at GBP58 billion (​49% of their assets), there have been significant country shifts in the first two months of Q2 2013. Exposures to UK and Swedish financial institutions continued to increase by 11% and 19%, to reach GBP15.​2 billion and GBP10.​5 billion, respectively, while reducing exposures to German financial institutions by 31% down to GBP4.​4 billion.... Portfolios have become less concentrated and exposure to the largest three obligors decreased to 18.​4% of AUM from 20% on average. Combined AUM increased by 3.​2% to GBP118.​5 billion during the quarter, despite the low yields across the sector."

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Markets are still reeling from Federal Reserve Chairman Ben Bernanke'​s press conference June 19, when he indicated that the Fed would likely be winding down its asset purchase programs later this year. (​See the Fed'​s statement here.) Today, we quote from two recent commentaries on Bernanke'​s latest statements, one from Federated'​s Debbie Cunningham and one from the New York Fed'​s William Dudley. Federated Investors' latest "​Month in Cash", is entitled, "Second guessing the Fed." It says, "Federal Reserve Chairman Ben Bernanke'​s delivery of his opening statement as the Federal Open Market Committee (​FOMC) wrapped up its two-​day meeting on June 19 did not flow as smoothly as his past post-​FOMC presentations, giving a sense he might not have been fully on board with the language he was asked to read. The statement was, however, a representation of sentiment across the policy-​setting committee. It was also in line with what we'​ve been saying for some time -- while it'​s not being reflected in inflationary levels, keeping rates this low for so long is dangerous, and in light of the progress we'​ve seen in the economic recovery this year, tapering of quantitative easing measures is likely to start in the second half of 2013. It'​s important to note, as Bernanke did in his press conference, that tapering of QE does not amount to tightening of monetary policy -- it'​s just reduced easing. Further, the Fed cutting back on purchases of Treasury bonds and mortgage-​backed securities is not slamming on the brakes, it'​s more like easing off the accelerator. The strategy can be adjusted, or even reversed, if economic data starts turning downward again."

Federated'​s Cunningham writes, "Despite a steady stream of indications over the past few months that the Fed was heading down this path, many were taken aback by the Fed chairman'​s openness. Nobody likes surprises, and ripple effects spread quickly across all sectors of the markets. Luckily, the upheaval being seen in the bond markets hasn'​t played through to the money market yield curve. Rates at the short end have suffered by just a couple basis points, with the London interbank offered rates (​Libor) curve steepening out one-​three basis points in some places—​minor effects compared with what is happening in the ten-​year range of the bond market."

The piece continues, "The scramble in the markets to react, and even overreact, to the Fed'​s moves also presented a buying opportunity. Federal funds futures had for some time been pricing in adjustments to the federal funds rate to take place somewhere around the beginning of 2015, but during the past month, those futures contracts have slid forward, toward an anticipated mid-​late 2014 adjustment to rates. The opportunity comes because that move might not be warranted --Bernanke made it clear that QE and the federal funds rate are two different issues, and a change to the actual target rate was still "​far in the future." In the period since the FOMC statement and Bernanke'​s press conference, two separate Fed officials have stepped forward to warn that these moves were out of line with the Fed'​s thinking."

Finally, Cunningham adds, "Repo rates remained very, very low throughout June, ending the month in the one-​three basis point range. A number of factors are coming together, however, as we head into July, to provide some expected relief. With the end of second quarter 2013, and some supply coming into the marketplace, we should see repos trading in the high single digits soon. Repos should also get some help, surprisingly, from the $​59.​4 billion dividend payment from Fannie Mae to the U.​S. Treasury. The Fannie Mae payment had initially been seen as a negative for repo rates, as it could reduce the Treasury'​s need for short-​term financing, but the Treasury has since provided guidance that even with the influx of Fannie Mae money, it would still need to go to the markets for short-​term cash. With that assurance, the net effect then is that Fannie Mae will be moving out of the cash market and the repo space, allowing some breathing room for others."

Last week, the Federal Reserve Bank of New York'​s William Dudley also discussed the recent Fed statements. Dudley'​s remarks say, "​At its meeting last week, the FOMC decided to continue its accommodative policy stance. It reaffirmed its expectation that the current low range for the federal funds rate target will be appropriate at least as long as the unemployment rate remains above 6.​5 percent, so long as inflation and inflation expectations remain well-​behaved. It is important to remember that these conditions are thresholds, not triggers. The FOMC also maintained its purchases of $​40 billion per month in agency MBS and $​45 billion per month in Treasury securities, with a stated goal of promoting a substantial improvement in the labor market outlook in a context of price stability."

He explains, "In its statement, the FOMC said that it may vary the pace of purchases as economic conditions evolve. As Chairman Bernanke stated in his press conference following the FOMC meeting, if the economic data over the next year turn out to be broadly consistent with the outlooks that the FOMC sees as most likely, which are roughly similar to the outlook I have already laid out, the FOMC anticipates that it would be appropriate to begin to moderate the pace of purchases later this year. Under such a scenario, subsequent reductions might occur in measured steps through the first half of next year, and an end to purchases around mid-​2014. Under this scenario, at the time that asset purchases came to an end, the unemployment rate likely would be near 7 percent and the economy'​s momentum strengthening, supporting further robust job gains in the future."

Dudley tells us, "​Here, a few points deserve emphasis. First, the FOMC'​s policy depends on the progress we make towards our objectives. This means that the policy -- including the pace of asset purchases -- depends on the outlook rather than the calendar. The scenario I outlined above is only that -- one possible outcome. Economic circumstances could diverge significantly from the FOMC'​s expectations. If labor market conditions and the economy'​s growth momentum were to be less favorable than in the FOMC'​s outlook -- and this is what has happened in recent years -- I would expect that the asset purchases would continue at a higher pace for longer."

He continues, "Second, even if this scenario were to occur and the pace of purchases were reduced, it would still be the case that as long as the FOMC continues its asset purchases it is adding monetary policy accommodation, not tightening monetary policy. As the FOMC adds to its stock of securities, this should continue to put downward pressure on longer-​term interest rates, making monetary policy more accommodative. Third, the Federal Reserve is likely to keep most of these assets on its balance sheet for a long time."

Dudley adds, "Fourth, even under this scenario, a rise in short-​term rates is very likely to be a long way off. Not only will it likely take considerable time to reach the FOMC'​s 6.​5 percent unemployment rate threshold, but also the FOMC could wait considerably longer before raising short-​term rates. The fact that inflation is coming in well below the FOMC'​s 2 percent objective is relevant here. Most FOMC participants currently do not expect short-​term rates to begin to rise until 2015."

Finally, he says, "Some commentators have interpreted the recent shift in the market-​implied path of short-​term interest rates as indicating that market participants now expect the first increases in the federal funds rate target to come much earlier than previously thought. Setting aside whether this is the correct interpretation of recent price moves, let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants."

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Below, we excerpt from the recent money fund "​profile" in the June issue of our MFI newsletter, a piece entitled, "British Portal Invasion: MyTreasury'​s Meadows." MFI writes: This month'​s Money Fund Intelligence interviews Justin Meadows, CEO of the U.​K.-​based online money market fund trading "​portal" MyTreasury. The company recently entered the U.​S. market, and hired money fund veteran Paul Rice as Managing Director, Americas. We discuss the portal'​s history, recent initiatives and other major money fund issues in Europe and the U.​S. with Meadows below.

MFI: Tell us about your history. Meadows: MyTreasury actually started off as a project funded by the European Commission back in 2004.... What we did was put together a project with quite a few European [​corporate] treasury departments, funds, banks, and software providers. We did two years of initial research, and during the course of that we actually got over 200 corporate treasuries in various European organizations involved in the testing and validation of what we produced. That was through our contact with the European Association of Corporate Treasurers.... Having over 200 involved is why we believe we'​ve ended up with something that actually works for treasurers, because it was largely designed and tested by them.

The project really focused on money market funds, time deposits and commercial paper, but funds were always at the forefront of that. When we completed the research we got a few strong messages back.... One was they wanted a direct trading platform, fully disclosed, not the omnibus trading platform which wasn'​t strongly supported at all.... [​I]​nvestors didn'​t want to be dis-​intermediated in their relationships with the banks and the funds either, so that was a key thing. Another thing when they were looking for complete automation; they didn'​t want something that involved manual interference.... The other thing [​was that to] get this off the ground we needed to find a strong partner to link with who had credibility in the market.

We ended up with ICAP largely because of the feedback that we'​d been given. First of all, ICAP is the world'​s largest interdealer broker, so it has relationships, globally, with the all the banks and funds. So, we wouldn'​t start from scratch in that respect.... We thought funds and banks could be well delivered by ICAP and that has proved to be the case.... We have been given the space and the resources to build it.... We'​ve got all the support and all the benefit of having a major player in the market and somebody with all the technical skills that we need to deliver the platform and the integration needed for automation.

MFI: Was it originally just European-​domiciled funds? Meadows: Yes, it was. We started up as a European money market, or actually just "​offshore" money market fund portal, for European corporate treasurers. When we did our first trade we had two investors and two money market funds on the platform. Now, in the offshore space, we have ... all the IMMFA funds, and we have quite a few others as well. In the U.​S. space, we either already have or we are just finishing up turning live those major funds families that account for about 92% of institutional assets.

MFI: When did you guys enter the U.​S.? Meadows: We are really only entering with trading now.... It'​s been a very slow process.... We are different from most portals which operate under seller and dealer agreements, or distribution agreements. We operate under a license agreement, and we regard ourselves as technology providers, not distributors, because we have this direct model. We don'​t open accounts on behalf of anybody. We don'​t take delegated trading authority on behalf on anybody. We'​re not signatures on accounts. So with this in mind, we just simply facilitate a complete view of the market and the secure execution of transactions.... It helped that we are cheap, if I can use that term. All our fees are based on wide distribution to a large number of clients, high volume low cost, and full automation. We got there in the end.

MFI: Can you talk about the size of the portal? Meadows: We service about $​70 billion on the platform.... That is almost all money market funds at the moment, but time deposit and CD trading is beginning to build. There was about $​500 billion traded through the platform last year. We have almost 500 share classes in about 250 different funds at the moment.... It is fairly evenly divided [​between currencies]. To be honest our Euro assets have kept up despite what has been going on over there. Dollar is probably our fastest growing, partly of course because we are coming into the US now. But before when we were just offshore, it started with almost all GBP and then Euro started growing quite significantly.... At the moment, our initial US clients are bringing just under $​10 billion on board, but it is growing quite quickly. The rest is Dublin and Luxemburg.

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