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In a speech Friday entitled, "Money Market Mutual Funds and Stable Funding," Federal Reserve Bank of Boston President & CEO Eric Rosengren unleashed a(​nother) broadside against money market mutual funds at the "Conference on Stable Funding," sponsored by The Federal Reserve Bank of New York and the Fed'​s Office of Financial Research. His speech says, "​As you all know, we recently passed the five-​year anniversary of the failure of Lehman Brothers. This conference is particularly appropriate because many of the issues surrounding stable funding, so relevant in the crisis, sadly remain with us today. Indeed, one of the hallmarks of the 2008 financial crisis was the severity of runs on financial intermediaries that were not traditional depository institutions. During these runs, the inability to obtain short-​term funding meant that broker-​dealers could not finance their securities portfolios. Similarly, Structured Investment Vehicles (​SIVs) and other structured financial entities could not obtain rollover financing. And as you well know, in the wake of the Lehman failure, the Reserve Primary Fund was unable to maintain a fixed net asset value (​NAV). Investors who were concerned that other funds with exposure to Lehman might not be able to maintain their NAVs ran from prime money market mutual funds (​MMMFs)."

Rosengren explains, "Many of the structural weaknesses that lie beneath these run episodes have yet to be fully addressed by market participants and policymakers. It is good that they will be discussed in various sessions at today'​s conference. Given that our time is limited, I will focus my remarks on MMMFs and, given the conference themes, the critical role that MMMFs play in short-​term credit markets, providing funding to financial intermediaries. I will first describe how prime MMMFs contributed critically to the financial instability experienced in the fall of 2008 instability that necessitated substantial government intervention, including providing insurance for MMMFs, tailoring an emergency lending facility to provide liquidity for MMMFs, and providing a variety of other emergency liquidity facilities -- in part as a result of the "​collateral damage" throughout the financial infrastructure stemming from the run on MMMFs. I would stress that these actions were taken not to prop up the financial infrastructure per se, but rather to ensure funding flows that are crucial to real economic activity."

He continues, "Second, I will describe some of the challenges posed by the structure of MMMFs, which necessitated the Securities and Exchange Commission'​s (​SEC'​s) 2010 reforms to Rule 2-​a7 as well as the Commission'​s current proposal on money market mutual fund reform. In this, I will draw heavily from the joint letter sent by all 12 of the Federal Reserve Bank presidents in response to the SEC'​s request for comment. I would like, however, to stress that while many of my comments will draw from that comment letter, my remarks today are my own and do not necessarily reflect the views of my colleagues at the Board of Governors, or the other Reserve Bank presidents who signed the letter."

Rosengren'​s speech adds, "​Third, I will discuss what I see as some needed enhancements to the SEC proposal. I will conclude that the floating NAV proposal, properly implemented, would enhance financial stability; but the proposal to allow discretionary liquidity fees and redemption gates would not enhance financial stability -- and would likely be worse than the status quo."

He says of "Money Market Mutual Funds during the Crisis," "Figure 1 shows total MMMF assets under management, which currently total approximately $​2.​6 trillion. These assets are distributed across funds that buy short-​term, tax-​free municipal securities (​approximately $​265 billion in assets), funds that buy short term government and agency securities (​approximately $​890 billion in assets), and funds that purchase short-​term corporate and financial debt instruments as well as government and agency securities. The latter, the so-​called "​prime" money market mutual funds, represent about 56 percent of total MMMF assets (​about $​1.​5 trillion)."

Rosengren writes, "Figure 2 shows the assets under management for all MMMFs, and separately for just the prime money market funds. As you can see, MMMFs grew rapidly during the period leading up to the financial crisis, but experienced a significant outflow when the failure of Lehman Brothers led the Reserve Primary Fund to "​break the buck" (​becoming unable to maintain a fixed $​1 per share net asset value). As it became apparent that some prime funds were exposed to non-​trivial amounts of credit risk, and with investors in the Reserve Primary Fund unable to access their money and facing uncertain losses, investors in other prime MMMFs began to quickly redeem their funds. In the week after the Reserve Primary Fund announcement, more than $​300 billion dollars "​ran" from prime funds. At least some of the funds redeemed from prime MMMFs were reinvested into government MMMFs, as investors sought funds that did not take credit risk. Of course, others transferred deposits to insured depository institutions."

He says, "The run on prime MMMFs would likely have been much more severe and disruptive had the Treasury not announced a temporary guarantee program, which provided insurance to money fund investors, and had the Federal Reserve not set up an emergency lending facility that provided needed liquidity to MMMFs experiencing (​or concerned that they might soon experience) significant withdrawals. These unprecedented government actions were designed to provide confidence to investors to stem the outflows from prime funds. But they were also intended to stabilize the short term funding markets, because the dramatic reduction in money fund assets meant that money market funds withdrew from their role as significant purchasers of short-​term debt instruments -- an activity critical to the functioning of short-​term credit markets and the provision of stable funding within the financial system."

Rosengren also says, "Figure 3, which shows the current composition of prime money market mutual funds, highlights why these entities are so critical to the provision of stable funding. MMMFs continue to provide important liquidity for short-​term debt instruments, such as commercial paper, asset-​backed commercial paper, and short-​term debt obligations. As I have suggested, one reason that short-​term credit froze up in the wake of Lehman'​s failure was that money market funds were not able to continue purchasing such debt, which slowed the flow of critical stable funding within the "​financial ecosystem." The result was that the Federal Reserve needed to provide liquidity not only to MMMFs directly, but also to markets where MMMFs were usually an important source of financing. By the way, it is worth noting that both the temporary guarantees provided by the Treasury and the type of liquidity facility run by the Federal Reserve are now essentially ruled out (​by the Emergency Economic Stabilization Act, and by Dodd-​Frank provisions). Thus, if MMMFs were to again experience a significant run, short-​term credit markets could not rely on the same degree of government support, and might find the shock to stable funding to be even more disruptive."

He asks, "​So where are we now? Currently we have new limitations on public-​sector safety nets for MMMFs. We have the still-​remaining risk of a significant disruption to short term credit markets, were MMMFs to again experience runs. As a result, there are reasons to remain concerned about credit risk some MMMFs may be taking. One possible source of risk is highlighted in Figure 4, which shows the European exposure of MMMFs. Roughly one-​third of the assets held by prime MMMFs are related to European firms. Of course, there are many European firms with low credit risk, but if some MMMFs get more comfortable with riskier European exposures, the financial system becomes more susceptible to a financial shock emanating from Europe."

Rosengren adds, "Figure 5 shows the reduction in MMMFs' exposure to commercial paper and asset-​backed commercial paper since the financial crisis. The decline, in part, reflects the low-​interest-​rate environment, which has led many firms to issue longer-​term debt. It also reflects the fact that many markets that relied on asset-​backed financing still have not recovered. However, money markets remain an important source of financing for these instruments."

He explains, "In summary, I would say that prime MMMFs remain a very important source of financing for short-​term debt instruments -- and thus any disruption in the MMMF sector could again impede the provision of stable funding to financial intermediaries. Many of the tools used to offset the 2008 run by MMMF investors have been ruled out by legislation. And once again, some MMMFs are beginning to take riskier positions. Thus, the financial stability concerns surrounding MMMFs remain real, five years after the financial crisis."

On "Money Market Mutual Fund Reform," Rosengren writes, "Reform remains critical because MMMFs implicitly promise to return a fixed net asset value [​sic], even as they take credit risks against which they hold no capital. A failure to keep this implicit promise during a future period of financial turmoil could risk once again freezing short-​term credit markets. The Financial Stability Oversight Council (​FSOC) has proposed three potential reforms, with the one requiring MMMFs to hold capital quite similar to proposals currently being considered in Europe. However, at this time the SEC has advanced only two proposals, only one of which was included in the FSOC proposals."

He continues, "The first SEC proposal, which was suggested by the FSOC, would treat institutional prime MMMFs like other mutual funds and allow the value of a share of the fund to float with the value of its underlying assets. But unlike the FSOC'​s proposal, the SEC'​s proposal limits this reform option to institutional prime MMMFs (​funds serving institutional investors). The incentive to run on a MMMF stems from the concern that a fund could suffer credit or other losses and would be unable to redeem shares at its "​fixed" net asset value. In that case, the first investors to ask for their funds back will get them, while later investors may not."

Rosengren writes, "The second SEC proposal, which was not suggested by the FSOC, would require the fund'​s directors to impose a fee of not more than 2 percent on all redemptions in the event that the fund'​s weekly liquid assets fell below a specified threshold. The proposal, however, gives the fund'​s directors discretion to impose a lower fee or no fee if they determine that such action is not in the best interest of the fund. This liquidity fee is intended to discourage investors from redeeming funds at a time when the MMMF is experiencing significant withdrawals. Additionally, under the proposal the fund'​s directors could, at their discretion, impose temporary "​gates" to prevent redemptions for a time. These temporary redemption gates would, the proposal envisions, prevent investors from redeeming funds -- thus ending an investor run."

Finally, he says, "In summary and conclusion, I would stress that MMMF reform is overdue. However, it is important that the reforms actually reduce the financial stability issues that remain under the current structure. Promising a fixed NAV with no capital while taking credit risk is not sustainable -- especially in potential future crises where the response of the public sector will be substantially limited, compared to 2008. MMMF runs should not be allowed to once again impede the flow of stable funding within our financial system. The SEC proposal to allow funds to impose liquidity fees and redemption gates should be dropped. This particular proposal is, in my view, worse than the status quo. It would only increase the risk of financial instability. However, I strongly support requiring a floating NAV for all prime funds, both institutional and retail, which would treat these funds like other mutual funds. Investors who want a fixed NAV can keep their funds in government-​only funds -- and those should have the vast majority of their portfolios invested in cash and government securities."

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The ICI'​s most recent "​Money Market Mutual Fund" weekly report shows money fund assets jumping in the latest week; they'​ve risen by approximately $​50 billion so far in September. Assets will have risen strongly in each of the past 3 months. ICI says, "Total money market mutual fund assets increased by $​35.​92 billion to $​2.​694 trillion for the week ended Wednesday, September 25, the Investment Company Institute reported today. Taxable government funds increased by $​20.​73 billion, taxable non-​government funds increased by $​16.​33 billion, and tax-​exempt funds decreased by $​1.​14 billion." Year-​to-​date, ICI'​s weekly series shows assets up by $​29 billion, or 1.​1%, through Sept. 25. ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which confirmed declines in repo and a jump in CD holdings. (​See Crane Data'​s Sept. 16 News, "Aug. MF Portfolio Holdings Show Drop in Repo, Treasuries, Jump in CDs.")

ICI'​s latest monthly "Trends in Mutual Fund Investing, August 2013" shows money fund assets increased by $​20.​4 billion in August after rising $​26.​8 billion in July (​they also decreased $​16.​9 billion in June and rose $​28.​3 billion in May). Money funds assets fell in all of the first four months of 2013 too (​down $​24.​5 billion in April, $​57.​6 billion in March, $​31.​7 billion in February, and $​9.​1 billion in January). YTD through 8/​31, ICI shows money fund assets down by $​60.​8 billion, or 2.​3%. The Institute'​s bond fund totals showed asset declines continuing, down $​61.​0 billion, after bond fund assets declined by $​6.​4 billion in July and by a record $​143.​1 billion in June. (​Note that assets include gains and losses and differ from "​flows".)

ICI'​s August "​Trends" says, "The combined assets of the nation'​s mutual funds decreased by $​208.​3 billion, or 1.​5 percent, to $​13.​857 trillion in August, 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 $​29.​53 billion in August, compared with an outflow of $​16.​75 billion in July."

It adds, "Money market funds had an inflow of $​19.​61 billion in August, compared with an inflow of $​26.​64 billion in July. Funds offered primarily to institutions had an inflow of $​8.​15 billion. Funds offered primarily to individuals had an inflow of $​11.​46 billion." ICI'​s "Liquid Assets of Stock Mutual Funds" remain close to record lows at 3.​8%, showing stock funds hold thin but growing buckets of cash.

ICI'​s Portfolio Holdings for August 2013 show that Repos declined by $​38.​9 billion, or 7.​9% to $​452.​1 billion (​19.​1% of assets). The decrease in repos dropped them into third place among segments of taxable money fund portfolio holdings (​behind CDs). Holdings of Certificates of Deposits, now the largest position, increased by $​51.​3 billion to $​523.​0 billion (​22.​1%). Treasury Bills & Securities, the second largest segment, increased by $​13.​0 billion to $​477.​9 billion (​20.​2%).

Commercial Paper, which fell by $​11.​9 billion, or 3.​1%, remained the fourth largest segment ahead of U.​S. Government Agency Securities; CP holdings totaled $​370.​5 billion (​15.​7% of assets). Agencies rose by $​7.​8 billion to $​352.​7 billion (​14.​9% of taxable assets). Notes (​including Corporate and Bank) fell by $​11.​8 billion to $​85.​9 billion (​3.​6% of assets), and Other holdings fell by $​2.​0 billion to $​82.​0 billion (​3.​5%).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 34,​644 to 24.​652 million, while the Number of Funds rose by 2 to 391. The Average Maturity of Portfolios remained flat at 49 days in August. Over the past year, WAMs of Taxable money funds have lengthened by 2 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 (​we will be updating our Sept. MFI XLS to reflect the 8/​31 composition data and maturity on Monday), while ICI collects a separate monthly Composition series.

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We go back to the well again today and cite yet another major comment letter on the SEC'​s recent Money Market Fund Reform Proposal. Our latest excerpts are from J. Charles Cardona, President, The Dreyfus Corporation, New York, New York. Cardona writes, "The Dreyfus Corporation ("​Dreyfus") appreciates the opportunity to respond to the "​Money Market Fund Reform" proposals (​the "​Proposals") recently issued for public comment by the U.​S. Securities and Exchange Commission (​the "​Commission") on June 19, 2013 (​the "​Release"). Established in 1951 and registered with the Commission as an investment adviser under the Investment Advisers Act of 1940, Dreyfus manages approximately $​260 billion in assets, including approximately $​167 billion in 41 domestic money market mutual fund ("​MMF") portfolios that are structured within the confines of Rule 2a-​7 under the Investment Company Act of 1940 (​the "​1940 Act") and approximately $​24 billion in two offshore, dollar-​denominated liquidity funds (​Irish-​domiciled UCITS funds). Dreyfus is a subsidiary of The Bank of New York Mellon Corporation, a global financial services company operating in 36 countries and serving more than 100 markets, and a leader in providing financial services for institutions, corporations, and high net-​worth individuals, offering investment management and investment services worldwide."

He explains, "Dreyfus supports the policy goals that the Commission set forth in the Release and at the Commission'​s Open Meeting held on June 5, 2013 (​the "​Policy Goals"), which we understand are: Lessening MMFs' sensitivity to excess redemption activity; Increasing MMFs' ability to manage through and mitigate potential contagion from high levels of redemptions; Imposing transparency and risk management overlays; and Preserving, as much as possible, the utility of MMFs."

The Dreyfus letter continues, "Though Dreyfus supports these directionally sensible policy aims, we believe a number of the Proposals are not appropriately designed to achieve the Policy Goals and are more likely to diminish, rather than preserve, the overall utility of MMFs for all MMF investors. In particular, we are concerned with: The variable net asset value ("​VNAV") alternatives (​particularly, without appropriate "​tax relief" as we discuss in Section Ill below), despite the proposed Government and retail exclusions; The Commission'​s decision not to exclude tax-​exempt MMFs ("​Municipal MMFs") from the Structural Proposals, as the Commission chose to exclude Government MMFs; and The elimination of amortized cost as a means for valuing the portfolio securities (​with remaining maturities of> 60 days) of constant net asset value ("​CNAV") MMFs."

It adds, "Dreyfus welcomes the Commission'​s intent to preserve the intrinsic value of MMFs in its proposals to exclude Government MMFs from the proposed mandates of VNAV and Standby Liquidity Fees and Gates ("​Fees and Gates") structures (​hereafter, the VNAV and Fees and Gates proposals collectively are referred to as the "​Structural Proposals") and to provide a "​retail" exception from the VNAV alternative that would allow for certain funds to maintain a CNAV. We can see how these Proposals, to some degree, can preserve the utility of MMFs for certain investors, but we believe they are not sufficient to offset the damage that will be done to the industry if the three Proposals cited above are adopted."

Cardona also writes, "Dreyfus also continues to believe that too much emphasis has been placed on stopping MMF redemptions to the exclusion of considering how a MMF'​s structure reveals how it can be expected to perform in a time of crisis. Our comments in this regard derive from our view that MMFs were not the cause of the 2008 financial crisis, but rather faced the same flight to quality from financial institutions that others faced during this period. We believe there is room within Rule 2a-​7 to enhance the credit, interest rate, and liquidity risk profile of MMFs, and increase the frequency of disclosure of MMF holdings, without harming the utility of MMFs for investors. We believe our approach can successfully mitigate systemic risk by broadly enhancing MMFs resiliency. Importantly, we do not think that improving resiliency fails to address the perceived "​structural vulnerabilities" of MMFs. Instead, we think these are complementary and not discrete objectives."

He comments, "Dreyfus further welcomes the Commission'​s consideration of Fees and Gates as a stand-​alone alternative. We believe Fees and Gates directly answer the perceived structural vulnerabilities of MMFs and the Policy Goals and should be given due consideration in that regard. We also think that Fees and Gates appropriately complement the Rule 2a-​7 enhancements we outline later in this letter, as each incentivizes more conservative and resilient MMF portfolio construction within a VNAV framework."

Cardona adds, "​Lastly, Dreyfus agrees with the Commission that among the proposals "​not one size fits all" and that a requisite balance must be achieved between preserving the unique value of MMFs for all investors both as investments offering capital preservation, daily liquidity, and cash management transactional utility and as instruments that contribute to the capital formation process, with systemic concerns. Thus, we believe that if the Commission remains inclined to pursue a VNAV alternative, providing fund sponsors and MMF boards choice in implementation, as contemplated in the Release, offers the best chance for the Commission to achieve its Policy Goal of preserving the utility of MMFs in a VNAV environment."

He says, "The VNAV structure will diminish MMF utility substantially, without solving for redemption sensitivity in times of market crisis or improving the ability of investors to understand the risks associated with their MMF investment. The VNAV structure fails to adequately address the perceived "​first mover advantage" and should not be expected to reduce portfolio or systemic stress during times market crisis. The VNAV structure also cannot be a meaningful option for the cash management marketplace because it carries major tax and record keeping burdens and will not be supported by intermediaries provides of MMFs if adopted by the Commission. Also, and contrary to assertions made in the Release, a VNAV structure eliminates the fund'​s ability to serve investors' same-​day liquidity needs. Further, we do not believe that "​transparency of risk" is achieved through "​causing investors to experience price changes," as the Commission asserts. Transparency is achieved by making the MMF'​s overall risk profile readily available for investors to assess how a fund can be expected to perform in various market conditions. These are threshold issues for market acceptance for any sort of VNAV MMF and the record established by the Commission is insufficient to support imposing this level of disruption on MMF investors."

Finally, Dreyfus comments, "We greatly appreciate the Commission'​s intent to take a moderate approach with these Proposals and we thank the Commission for the opportunity to present our views on the issues raised by them, particularly those that, in our view, risk diminishing the utility of MMFs to a much greater extent than the Commission may estimate."

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Today, we continue citing the SEC'​s website, "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF. The latest highlighted comment is from Jonathan Curry, Global Chief Investment Officer, Liquidity, and Chris Cheetham, Global Chief Investment Officer, HSBC Global Asset Management. (​Curry, also the Chairman of the London-​based Institutional Money Market Funds Association, or IMMFA, gave the keynote address to Crane'​s European Money Fund Symposium, which began yesterday and continues through Wednesday in Dublin, Ireland.) The HSBC letter says, "We are pleased to submit HSBC Global Asset Management'​s public comment on the U.​S. Securities and Exchange Commission'​s ("​SEC") proposed "​Rules to Implement Money Market Fund Reform and Amendments to Form PF". The SEC'​s thoughtful and very thorough efforts aimed at preserving the function and the value of the money market fund product while seeking practical solutions aimed at addressing "​run" risk are appreciated. As an example, we are particularly encouraged that the proposal recognizes the value of liquidity fees and redemption gates as a serious reform option that would preserve the benefits of the product while providing an effective mechanism in times of stress."

It tell us, "Since 2009, HSBC has been consistent that further reforms are necessary and have continued to engage constructively in discussions about sensible reforms. Our letter provides a detailed description of HSBC'​s proposals for money market fund ("​MMF") reform and attempts to respond directly to many of the questions raised in the Commission'​s consultation. HSBC appreciates the opportunity to share our perspectives on MMF reform and the SEC'​s willingness to consider our comments. We would be delighted to answer any questions regarding our submission and look forward to the opportunity to discuss our views on MMF reform further."

Curry and Cheatham explain, "​HSBC Global Asset Management manages over USD 64bn in money market funds ("​MMFs") and segregated money market mandates. We manage MMFs in 15 different jurisdictions and in 11 different currencies. We have a unique perspective on the MMF industry due to the breadth of markets we offer MMFs and the fact that we are the only manager who has meaningful scale in the three largest markets for MMFs (​US 2a-​7 market, "​international" market Dublin/​Luxembourg and the French domestic market). We manage both Constant Net Asset Value ("​CNAV") funds and Variable Net Asset Value ("​VNAV") funds, adopting the same investment policies and investment process across our range of MMFs."

They continue, "​HSBC has consistently proposed since the 2009 global financial crisis, that further reforms were necessary for money market funds, especially to address "​run" risk. We have continued to engage in discussions about sensible MMF reforms, including advocating liquidity fees as a reform proposal that can be embraced by investors, regulators and providers. In summary, we continue to recommend: Liquidity reforms - MMFs should be required to maintain 10%/​30% of their assets in instruments maturing overnight/​within one week; MMFs should be required to manage shareholder concentration within a target range of [​5-​10%]; Redemption management reforms - MMFs should be empowered to impose a liquidity fee on redeeming shareholders, if deemed necessary to ensure fair treatment of redeeming and remaining investors; MMFs should be able to limit repurchases on any trading day to 10% of the shares in issue; MMFs should be permitted to meet an investor'​s redemption request by distributing a pro-​rata share of the assets of the fund rather than by returning cash to the investor i.​e. an in-​specie redemption; Structural reforms - Sponsors should be prohibited from supporting their MMFs; and MMFs should be prohibited from being rated."

HSBC'​s letter says, "We fully support the 2010 enhancements made to rule 2a-​7 in the US and the creation of a short-​term MMF definition in Europe. Both sets of regulation have reduced the risk that investors in MMFs "​run" and made them better able to operate during a period of market stress. The MMF definitions in Europe also provide clarity for investors and therefore enhance investor protection. In our opinion there are additional reforms to MMFs that should be made to further enhance their ability to operate normally during a period of market stress. Our reform proposals are based on achieving the following objectives: 1. Provide MMFs with a greater ability to meet redemptions; 2. Create a disincentive for investors to redeem; 3. Remove any existing ambiguity of risk ownership; and, 4. Reduce systemic risk created by MMF ratings."

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

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

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(Note: For those of you attending to first annual European Money Fund Symposium, which takes place today and tomorrow, welcome to Dublin!) Our latest featured Comment Letter on the SEC'​s Money Market Fund Reform Proposal comes from Lu Ann S. Katz, Head of Global Liquidity, Invesco Ltd.. Invesco'​s comment letter says, "We are writing to share our views on the proposal promulgated by the Securities and Exchange Commission (​the "​Commission") to amend certain provisions of the Investment Company Act of 1940 (​the "​1940 Act") relating to money market mutual funds ("​MMFs").... Invesco Advisers, Inc., along with its affiliates, has managed and advised MMF and other cash investment vehicles for over 30 years. As of August 31, 2013, Invesco Advisers had $​64 billion in assets under management in its 12 registered MMFs operated in compliance with Rule 2a-​7 of the 1940 Act, as amended ("​Rule 2a-​7"). 1As a leading MMF sponsor, Invesco believes that it is important for us to share our views on the proposed reforms, which would directly affect the millions of MMF shareholders whose financial needs we serve <​b:>`​_."

They write, "In summary, our views on the reforms included in the Proposed Rule are as follows: The comprehensive changes to Rule 2a-​7 promulgated in 2010 have significantly enhanced the stability and transparency of MMFs. The impact of these changes must be taken into account when considering further MMF reforms. Consideration of further reforms to MMFs must begin with a clear understanding of the objectives that the reforms are intended to achieve and the criteria used to evaluate them. Policymakers have enunciated the principal goals of additional MMF reforms as: addressing the vulnerability of MMFs to heavy redemptions and mitigating the related potential contagion risk; increasing the transparency of MMF risks and risk management practices; preserving the benefits that MMFs currently offer to investors to the greatest extent possible; preserving MMFs as a key source of funding for state and local governments and as an important cash management tool for investors; and promoting equitable treatment for all MMF investors by, among other things, ensuring that extraordinary liquidity costs for MMFs during periods of market stress are borne by the investors generating them and eliminating information advantages."

Invesco continues, "In evaluating potential reform options, it is critical for policymakers to apply criteria designed to ensure that any additional reforms: are effective in accomplishing the goals discussed above; are carefully tailored to address the particular risks policymakers seek to mitigate; preserve the utility and core features of the product valued by those who invest in and distribute MMFs; minimize the significant and potentially destabilizing effects of unintended consequences; and increase transparency regarding MMFs for both investors and regulators."

They explain, "We support Alternative 2 which, when coupled with the proposed new disclosure requirements, reflects the most appropriate balance of the cost/​benefit elements set forth above. The ability to suspend investor redemptions by imposing redemption gates when MMF liquidity is abnormally low provides the most direct, simple and effective method to achieve the central goal of additional MMF reforms: preventing investor runs and contagion risk to other MMFs. Redemption gates have been proven to be an effective means of preventing runs and providing a "​cooling off" period to mitigate the effects of short-​term investor panic. Liquidity fees would provide an appropriate and effective means to ensure that the extra costs associated with raising liquidity to meet fund redemptions during times of market stress are borne by those responsible for them."

Katz tells us, "The implementation of liquidity fees also would mitigate the '​first-​mover' advantage issue, which has been one of the Commission'​s concerns since 2008. The amount of any liquidity fee should be carefully calibrated in relation to a MMF'​s actual cost of liquidity. The fees should be restorative, not punitive, and designed to deter early redemptions. We generally support the enhanced disclosure requirements in the Proposed Rule but believe that the proposed dramatic expansion in stress testing requirements is unwarranted."

She also comments, "The floating NAV proposal in Alternative 1 would not achieve the stated objectives of MMF reform and is substantially inferior to Alternative 2 from a cost benefit perspective because: it would not deter MMF investor runs; it would reduce significantly the utility of the affected MMFs for the majority of their investors; investors have no appetite for floating NAV MMFs; it would trigger a wide variety of unintended and undesirable consequences; it would pose significant operational challenges; and the proposed distinction between "​retail" and "​institutional" funds is artificial and difficult to implement."

But Invesco adds, "If the Commission nevertheless decides to proceed with Alternative 1, the following changes are critical: retail funds should be defined with reference to shareholder social security numbers; municipal MMFs should be exempt from floating their NAVs; amortized cost pricing should be retained for stable NAV MMFs; and NAV calculations for MMFs should remain consistent with those of other mutual funds. Alternative 3 effectively would destroy MMFs by combining the undesirable features of Alternative 1 with the significant liquidity restrictions of Alternative 2, thereby to creating a uniquely undesirable product that no rational investor would select."

The comment also states, "However, while policymakers have noted that the central objective of the proposed reforms is to mitigate risks associated with MMFs, they have also recognized that eliminating these risks entirely is not feasible since the changes required to do so would be so drastic as to essentially destroy the product. The Report of the President'​s Working Group on Financial Markets: Money Market Fund Reform Options acknowledges that "​Importantly, preventing any individual MMF from ever breaking the buck is not a practical policy objective..." The critical importance of MMFs to investors and global financial markets demands that any additional reforms be well-​balanced, tailored and effective. Given regulators' stated goal of "​making the funds more resilient ... while preserving, to the extent possible, the benefits of money market funds," any further MMF reforms must be crafted within the context of a holistic cost-​benefit analysis that takes into account their full implications for financial system stability, investor choice, and continued access to short-​term financing for governments and businesses, as well as the feasibility of implementing them."

Katz says, "The plain fact of the matter is that investors cannot be forced to purchase an investment product that does not appeal to them. The fundamental features of MMFs that investors have embraced for over 40 years -- stability of principal, liquidity, administrative ease and a competitive yield -- are critical to the product'​s appeal, utility and continued viability. Our MMF clients have communicated clearly that they will seek alternative products to address their needs if MMFs are altered in such a way as to impair substantially their usefulness as a cash management tool. Likewise, the distribution partners through whom many MMF sponsors offer their products to investors must be willing and able to support changes required by the proposed reforms, otherwise they will cease to make MMFs available on their platforms. Distributors have limited resources and understandably focus their efforts on those products most likely to appeal to end investors."

She explains, "Alternative 2, when coupled with the enhanced disclosure requirements proposed in the Proposed Rule, represents the best balance of the cost/​benefit factors discussed in Section II above.... As the Proposed Rule recognizes, the possible imposition of liquidity fees and/​or redemption restrictions on a MMF, even on a temporary basis, significantly affects one of the fundamental attributes that investors value most highly in MMFs: their liquidity. It is therefore appropriate that these drastic remedies be reserved for circumstances of significant liquidity disruption. This tailored approach is in sharp contrast to the blunt prescription offered by Alternative 1, which would radically change the nature of MMFs even when they are in no real danger of a run. Furthermore, the discretion contemplated in Alternative 2 for a MMF board to determine whether and at what level to impose liquidity fees and redemption gates is appropriate and would provide the flexibility needed for the board, which is intimately familiar with the attributes of the MMFs it oversees and prevailing market conditions, to tailor a response to the particular facts and circumstances of the fund. Finally, we believe that additional education about the purpose and operation of the proposed liquidity fees and redemptions gates and the circumstances in which they might be implemented would increase greatly MMF investors' willingness to accept them."

Invesco writes, "The concept of imposing "​circuit breakers" during times of extreme volatility is not foreign to financial markets. Trading exchanges routinely impose temporary trading halts to stem potential panicked selling by investors when markets or individual security prices fall precipitously. Moreover, as noted by Commissioner Gallagher, permitting MMF boards of directors to impose temporary redemption restrictions would represent "​a change that would build on the 2010 reforms" by extending a MMF board'​s existing power under Rule 22e-​3 of the Investment Company Act to impose redemption restrictions once the board has made the irrevocable decision to wind down a MMF because it is on the verge of breaking the buck. Permitting a MMF to restrict redemptions in order to protect the fund also would complement the fund'​s existing ability to reject new shareholder purchases during periods when accepting additional assets could be detrimental to the fund."

Finally, they conclude, "As a leading MMF provider, Invesco strongly supports the Commission'​s efforts to strengthen this critically important product in a manner that enhances its stability while retaining its fundamental characteristics and continued utility for investors. Any such efforts must begin with a clear understanding of the policy goals they are intended to achieve and an appropriate set of evaluative criteria to be applied in the context of a rigorous cost-​benefit analysis. We believe that the proposed combination of liquidity fees, redemption gates and enhanced disclosure is the most effective and feasible method of achieving policymakers' stated goals. On the other hand, requiring MMFs to float their NAVs would fail to achieve the Proposed Rule'​s aim of preventing and mitigating investor runs. Furthermore, it would generate significant costs and administrative burdens that would cause large numbers of MMF investors, sponsors and service providers to reconsider their willingness to use this product. Worse still, the proposal to require MMFs to implement floating NAVs with liquidity fees and redemption gates would wholly fail the required cost/​benefit analysis and would devastate the industry by creating an essentially unmarketable product that would lead investors to abandon MMFs en masse. We respectfully request the Commission to consider carefully our views on this matter and to pursue only those reforms that advance its expressed policy goals while preserving the viability of MMFs, which have served investors’ cash management needs ably for over 40 years."

​

Since deadline passed last week for the Comments on the SEC'​s Money Market Fund Reform Proposals, there have been 205 letters of substance and over 1,​100 more form letters. Today, we excerpt from the letter from John T. Donohue, Chief Investment Officer and Head of Global Liquidity, J.​P. Morgan Investment Management Inc.. The 2nd largest manager of money funds writes, "J.​P. Morgan Asset Management ("​JPMAM") appreciates the opportunity to comment on various aspects of the Securities and Exchange Commission'​s (​the "​SEC" or the "​Commission") proposal to enhance the regulatory framework of money market funds ("​MMFs"). JPMAM is one of the largest MMF managers in the world with fund assets under management of approximately $​471 billion. Domestically, JPMAM provides investment management services for 13 MMFs registered under the Investment Company Act of 1940 (​the "​1940 Act") with assets totaling approximately $​248 billion, including the JPMorgan Prime Money Market Fund, the industry'​s largest MMF, with assets of approximately $​108 billion."

The letter continues, "JPMAM strongly supports the SEC'​s goal to reduce potential systemic risk and increase the transparency of the risks presented by MMFs while preserving their benefits. We believe the SEC'​s proposal (​the "​Proposal") and the Release present a thoughtful and well-​balanced analysis and appropriately identify significant issues that need to be considered, including the importance of the continued use and viability of MMFs to investors and the financial markets."

Its summary says, "JPMAM believes that in achieving the optimal balance of reducing systemic risk and preserving MMFs as an efficient and viable tool for investors and the financial markets, it is important to bear in mind that the reform of MMFs has been under discussion since the early days of the 2008 financial crisis. In the ensuing five years, the SEC has enacted effective reforms that have helped to reduce risk, improve liquidity and disclosure and ensure the stability of the short-​term fixed income markets. In addition, the JPMAM-​advised MMFs and other MMFs have taken certain elective steps to strengthen investor awareness by voluntarily providing important information to investors, most notably daily disclosure of market-​based net asset values ("​NAVs") calculated to four decimal places and daily and weekly liquidity thresholds, as applicable. In considering the next steps in money market reform, it is useful to take into account these recent advances and the experiences of MMFs since the implementation of the 2010 reforms."

Donohue writes, "​As set out in more detail below, we have undertaken a careful assessment of the benefits and the impact on the continued utility of MMFs presented under the alternatives set forth in the Proposal. We believe that the best option for achieving the SEC'​s objectives is a variation of the fees and gates alternative under the Proposal ("​Alternative 2") in which a board, in its discretion, may impose a gate, and potentially thereafter, a liquidity fee, among other options. We believe that a gate is the only way to effectively stop mass redemptions ("​runs"). We believe that boards should determine the appropriate threshold for imposing a gate. A specific trigger that requires board action may cause investors to redeem as a MMF gets close to the trigger, which may accelerate the run that gates and liquidity fees are designed to prevent. We also believe that the proposed 30-​day period for gating would be unacceptable for investors, as they could be denied liquidity during a crisis when it is most needed, and could be destabilizing to the short-​term liquidity markets and during a period of market stress. We believe that authorizing a board to gate for up to ten (​10) calendar days, using a similar standard to the standard under which a board is permitted to halt redemptions in connection with liquidation under Rule 22e-​3, would prevent a run and provide the board with a sufficient timeframe to consider and respond to a problem. Ten (​10) calendar days should also provide MMFs an opportunity to rebuild significant amounts of liquidity since the 2010 amendments to Rule 2a-​7 require MMFs to invest at least 30% of their portfolios in assets that can provide weekly liquidity. Further, we believe that a MMF board should have the discretion to address a problem by imposing a liquidity fee of up to 2% following the lifting of a gate for up to thirty (​30) days. Alternatively, a MMF board may elect to liquidate the MMF or re-​open the MMF with a floating NAV."

He continues, "If the SEC pursues the floating NAV alternative under the Proposal ("​Alternative 1"), we believe that the SEC should not distinguish between retail and institutional investors. In addition, we have identified a number of significant operational and transitional challenges that a transition to a floating NAV would pose to investors, the industry and the financial markets, as set forth in more detail in Appendix A. In particular, we do not believe that MMFs should be placed in an unfair position via the share price reporting mechanism (​i.​e., the ability to use a $​1.​000 share price transacted to three decimal places or $​10.​00 transacted to two decimal places) that all other funds registered under the 1940 Act enjoy through a requirement to transact at a greater level of precision. Further, we request that any discussion of a timeline to convert to a floating NAV not begin until critical tax and accounting issues have been resolved."

J.​P. Morgan adds, "To the extent that the challenges to implementing a floating NAV cannot be sufficiently addressed, we note that one of the key objectives of Alternative 1, improving the accuracy of investors' perception of the risks presented by MMFs, may also be achieved through a requirement of greater transparency. We believe that frequent disclosure of key MMF information (​i.​e., market-​based NAVs, daily and weekly liquidity levels and portfolio holdings) work to both reduce risk and aid investors' understanding of the true nature and risk of their investment. While a floating NAV also provides an incremental benefit of reducing the likelihood of inequitable treatment to shareholders by requiring MMFs to sell and redeem shares based on the current market-​based value of the securities in their underlying portfolios rounded to the fourth decimal place (​e.​g., $​1.​0000), as discussed in more detail below, we believe that this benefit can be achieved by providing MMF boards with discretionary gating powers and the power to impose a liquidity fee, tools which they can use to protect against such inequities in times of stress."

They continue, "Further, we believe that tax-​exempt MMFs should be excluded under both Alternative 1 and Alternative 2 in the same way that government MMFs are excluded. Additionally, we believe that the proposal to eliminate the "​twenty-​five percent basket" ("​the basket") for guarantees and demand features from a single entity should be modified to more effectively reduce risk."

Finally, the letter'​s summary says, "​Our views are informed by our experience in the market as well as through engagement with MMF investors and financial intermediaries who have expressed concerns about various aspects of the Proposal. Specifically, MMF investors have indicated concern about changes to the basic tenets of money funds -- stability of principal and daily liquidity. Both Alternatives 1 and 2 have the potential to significantly reduce these key benefits that MMFs provide today and the adoption of either alternative will reduce the use of MMFs. The extent of the impact appears to be dependent upon the details of the reforms adopted. The majority of these investors have stated that they would look to utilize bank deposits, direct money market securities, government MMFs and possibly look to outsource more internal investments to outside managers. Nearly all investors have expressed significant concerns with a rule that combines both alternatives."

​

Note: We hope to see some of our readers in Dublin next week at the first annual Crane'​s European Money Fund Symposium, which will take place Sept. 24-​25 at the Conrad Hotel.... Almost all of the Comments on the SEC'​s Money Market Fund Reform Proposal have now been posted (​the deadline was Tuesday; there were just under 70 letters added on Tuesday alone), but the reading and the debate will no doubt continue for some time. Today, we excerpt from the longest letter we'​ve found to-​date, an 81-​page one from Paul Schott Stevens, President and CEO, Investment Company Institute. ICI'​s press release Tuesday on the letter, entitled, "ICI Urges SEC to Further Refine Money Market Fund Proposal; Opposes Dual Burdens on Funds," says, "ICI President and CEO Paul Schott Stevens made the following statement today as ICI filed its comment letter on the Securities and Exchange Commission'​s money market fund regulatory proposal: "​While ICI welcomes the SEC'​s decision to exempt Treasury and government money market funds from structural changes, we urge the agency to extend similar exemptions to tax-​exempt funds, to preserve the important benefits they provide in the economy. We also offer an alternate method of exempting funds for retail investors from structural changes to preserve individuals' ability to use money market funds. Further, we caution the SEC against imposing dual regulations on money market funds, because doing so would drive investors into products that are less regulated and potentially riskier."

Stevens continues, "​The SEC and its staff should be commended for the work they'​ve done on this issue. The narrowed scope of this proposal reflects a deep understanding based on extensive exploration of money market funds in and after the financial crisis. It is our hope that, given its clear expertise on the issue, the SEC will recognize the need for further refinement of the proposal and how damaging the imposition of both alternatives would be on funds and, therefore, investors."

The release tells us, "​After five years of conceptual debate over money market fund regulation, the SEC has proposed two major alternatives. One option would impose a floating net asset value (​NAV) on prime and tax-​exempt funds held by institutional investors, while the other would impose liquidity fees and redemption limits, or "​gates," on funds, triggered when a fund'​s liquidity has fallen below a set level. Some commissioners also have suggested combining both proposals. ICI analyzes the two major proposals in depth, pointing out significant concerns. The Institute takes its strongest stance, however, against combining both alternatives to require prime funds and tax-​exempt to float their value and to maintain the ability to impose liquidity fees and gates."

Stevens continued, "Combining the SEC'​s two proposals represents far and away the worst outcome for investors. The Commission'​s proposal confronts investors with a choice: sacrifice stability, or face the prospect of losing liquidity under extreme circumstances. We have found that some investors place more of a premium on principal stability, while others value ready access to liquidity more strongly. Virtually every ICI member tells us, however, that no investor would purchase a floating-​value money market fund that was also subject to constraints on liquidity. Investors have other, less onerous options readily available."

The release adds, "In its comment letter, ICI argues that there is no basis for fundamental structural reform -- either floating NAV or fees and gates -- for funds that invest primarily in tax-​exempt municipal securities. Like Treasury and government funds, tax-​exempt funds are not vulnerable to widespread redemptions during crises, and in any case hold enormous amounts of liquidity and securities to meet redemptions. As the largest holder of short-​term municipal securities, tax-​exempt funds provide important benefits to the economy."

ICI also says, "While ICI supports the SEC'​s intent to exempt retail investors from any floating NAV requirement, it urges a different approach to preserve retail investors' ability to continue to invest in money market funds that provide stability and liquidity. The retail exception should apply to funds whose investors or beneficial owners are identified by Social Security numbers. This characteristic would be easier and less costly to administer than the SEC'​s proposal, which would impose limits on daily redemptions on retail funds. It would also effectively preserve stable-​value money market funds for savers in retirement plans."

The release continues, "ICI explains imposing floating NAVs on money market funds would not meet regulators' stated goals, is an inefficient means of informing investors about risks, and would place significant tax and accounting burdens on the investors of funds that are not exempt. If, however, the SEC decides to pursue a floating NAV, the SEC, the Department of Treasury, the Internal Revenue Service, and, if necessary, Congress, must first address these significant tax and accounting burdens."

It tells us, "The SEC'​s liquidity fee/​temporary gate proposal has the support of a number of ICI members because these tools, together with enhanced disclosure, directly address regulators' concerns about redemption pressures on prime money market funds. However, ICI cautions that the proposal has potential drawbacks, including reduced liquidity for investors, tax implications, and operational complexities that would have to be addressed over a number of years."

Finally, ICI'​s letter concludes, "ICI and its members appreciate the opportunity to comment on the SEC'​s proposed money market fund reforms. We remain firmly committed to working with the SEC to further strengthen money market funds’ resilience to severe market stress."

​

With the deadline for Comments on the SEC'​s Money Market Fund Reform Proposal now passed, we continue to read through the mountain of feedback. Today, we quote from the Wells Fargo Advantage Funds' comment, which, though there have been many diverse views, represents the mainstream of comment letters to date. It also addresses some of the technical disclosure issues that are causing concerns among portfolio managers. (​See the latest list of comment letters here.) The comment, "Karla Rabusch, President, Wells Fargo Funds Management, LLC says, "On behalf of Wells Fargo & Company and its subsidiaries, Wells Fargo Funds Management, LLC appreciates the opportunity to comment on the proposed amendments to rules governing money market mutual funds issued by the Securities and Exchange Commission ("​Commission") on June 5, 2013 ("​Proposals"). Subsidiaries of Wells Fargo & Company advise and distribute the Wells Fargo Advantage Funds. As of August 31, 2013, the Wells Fargo Advantage Funds had a total of approximately $​252 billion in assets under management across a broad spectrum of investments. Our fund family offers a diverse set of money market funds across multiple distribution platforms that include retail and institutional investors. Assets under management in our advised money market funds totaled approximately $​119 billion as of August 31, 2013, making Wells Fargo the ninth largest U.​S. money market mutual fund provider in the industry. In managing the Wells Fargo Advantage Money Market Funds, we emphasize conservative investment choices and make preservation of capital and liquidity our highest priority."

She continues, "While we believe the 2010 Amendments adequately reduced the risk that money market funds pose to financial stability, we do not oppose in principle additional measures to further strengthen money market funds and further reduce the risk of rapid and substantial redemptions, or "​runs," during periods of market distress. We believe, however, that any further regulatory measures must strike an appropriate balance between the costs to investors and others, including businesses, states, municipalities and other local governments that rely on money market funds as a source of short-​term credit, and any benefits in the form of a marginal reduction in run risk. We largely opposed the set of proposed recommendations issued by the Financial Stability Oversight Council ("​FSOC") in November 2012 because we believed they lacked such balance."

Wells writes, "We view the Proposals as a significant step forward from the FSOC'​s proposed recommendations. As described further in this letter, we are pleased to support a number of measures, including standalone liquidity fees and gates, further diversification requirements, and many of the proposed new disclosure requirements. We still oppose, however, a variable net asset value ("​NAV") requirement for any money market funds, whether as a standalone measure or in combination with liquidity fees and gates. Though we appreciate that the Proposals would mostly limit the variable NAV to those money market funds that have shown any susceptibility to runs -- prime institutional money market funds -- the Release does not provide a sound rationale as to why this measure will address or prevent such runs. This lack of demonstrable benefits is particularly troubling given the substantial costs to prime institutional money market fund investors, sponsors, and financial intermediaries, as well as to the businesses that rely on these funds for short-​term credit."

They add, "Finally, notwithstanding our view that liquidity fees and gates are more appropriately tailored to curtail the risk of runs than a variable NAV requirement, we strongly oppose a combination of a variable NAV requirement with liquidity fees and gates. Such a combination will exacerbate, rather than cure, the problems associated with a variable NAV requirement. It is true that liquidity fees and gates represent a much more effective solution to the problem of runs with lower costs than a variable NAV requirement; but adding an effective lower cost measure to an ineffective high cost measure will only magnify overall costs without providing any greater benefit than simply adopting the effective measure alone. In fact, we believe that the proposed combination would lead nearly all investors to abandon prime institutional money market funds for alternatives such as government money market funds -- which may not have the capacity to absorb the additional assets -- and other alternatives that may pose their own risks to the financial system."

Rabusch'​s letter continues, "We are generally and conditionally supportive of the Commission'​s proposed new disclosure rules and amendments that are designed to enhance risk transparency to investors. Money market fund shares are investments and investors are better positioned to recognize the risks of money market funds through transparency into a fund'​s key risk characteristics and disclosure of relevant information. For example, the proposed daily website disclosure of a stable NAV fund'​s market-​based NAVs would provide investors with transparency into a significant risk metric that will inform their investment decisions. Since April 1, 2013, the Wells Fargo Advantage Money Market Funds have been voluntarily publishing their mark-​to-​market NAVs on a daily basis on their website. Recognizing the benefits to investors of clearer and more prominent disclosure of the risks associated with money market funds, we offer comments on certain aspects of the disclosure proposals. i. The proposed requirements to file Form N-​MFP on a weekly basis would be unduly onerous."

It adds, "​ii. The Commission should not adopt proposed requirements to disclose detailed information regarding repurchase agreement collateral under amended Form N-​MFP because doing so would result in harm to money market funds and their shareholders. The Commission proposes to require additional disclosure with respect to the collateral underlying repurchase agreements in Form N-​MFP. We strongly oppose this requirement because we believe the information specified in the proposal may be misused in a manner that will ultimately and seriously disadvantage money market fund shareholders and increase systemic risk, while providing information that will carry little to no utility to investors."

Wells also writes, "The proposal would require that money market funds disclose certain security specific information regarding securities collateralizing repurchase agreements, including CUSIP-​level information. Based on discussions of this proposal with six broker-​dealers who we view as among the leading participants in the repurchase agreement market ("​repo broker-​dealers"), we believe that this proposal would effectively result in public disclosure of proprietary trading information about repo broker-​dealer inventories of securities and trading positions, and that, in turn, the disclosure of this information could allow competing broker-​dealers and other trading counterparties to use this information against repo broker-​dealers in trading activities. In anticipation of these potential disadvantages, repo broker-​dealers would have the incentive to, and, in our view, likely would, seek to protect themselves by allocating repurchase agreement collateral in priority to counterparties who are not required to publicly disclose proprietary information before allocating collateral, if at all, to money market funds."

They comment, "​The proposed CUSIP-​level disclosure of repurchase agreement collateral would, in our estimation, prove to be of limited worth to money market fund shareholders, who may be ill equipped to use this granular information to gain meaningful insight into the nature of the securities, or to aggregate this information in a way that would allow them to assess the potential risks to a fund posed by these securities in relation to the repurchase agreement that they collateralize. Instead we propose that money market funds report statistics, including average margin levels, on their repurchase agreements in substantially the same form and with the same frequency as the current reporting of tri-​party repurchase agreements by the Federal Reserve Bank of New York on its website."

Wells also says, "The categories of information on repurchase agreements that we propose money market funds report would be much more useful to money market fund investors and regulators than CUSIP-​level data on collateral because our proposed categories would allow for regular and efficient comparison of important current and historical risk factors regarding repurchase agreements between different funds and to the market as a whole on a standardized basis. At the same time, it would protect the counterparties' proprietary trading information and further ensure that money market funds retain access to the repurchase agreement market. iii. Money market funds should not be required to disclose acquisition dates or costs to the public because doing so would result in harm to funds and their shareholders."

They continue, "Under the Proposals, money market funds would be required to disclose on Form N-​MFP "... the purchase date (​and), the yield at purchase ... and the purchase price" for each portfolio security. We believe that such disclosure provides no meaningful information to shareholders and prospective shareholders regarding the risks of a money market fund. Instead, these proposed amendments would require disclosure of proprietary trade information that can and would be used to disadvantage money market funds and their shareholders. For example, based on our observations of actual market behavior, issuers of commercial paper would use this type of information to determine the price at which money market funds purchase their commercial paper from dealers. Upon learning that money market funds purchased the issuer'​s commercial paper from the dealer at a discount to posted issuance levels (​as is customary), an issuer can, and we believe would, compel the dealer to discontinue the practice of discounting the issuer'​s commercial paper to funds. As a result, money market funds would then be required to pay a higher price for their commercial paper than they otherwise would have if this proprietary trade information had not been required to be disclosed on amended Form N-​MFP. We support efforts to increase transparency and aid in price discovery in the money markets, but oppose disclosures that would enable money market fund competitors and counterparties to link this trade information to funds to the detriment of fund shareholders. Instead, we would suggest that price discovery might be enhanced through other methods, such as increasing the categories of securities reported through the Financial Industry Regulatory Authority'​s Trade Reporting and Compliance Engine (​TRACE) system. Trades could be reported in broad maturity categories, such as those used by the Board of Governors of the Federal Reserve System in its commercial paper market statistics. Such broad price reporting would aid in price discovery and transparency while, at the same time, protecting shareholders from the potential harm resulting from the release of money market funds' proprietary trade information."

Wells adds, "We generally support the Commission'​s proposals to further tighten money market fund portfolio diversification requirements; though we believe that to limit increasing risk of a common shock across money market funds, the Commission must end Rule 2a-​7'​s reliance on Nationally Recognized Statistical Rating Organization ("​NRSRO") ratings for purposes of defining securities eligible for money market fund investment. Defining eligible securities in terms of NRSRO ratings not only perpetuates reliance on a discredited and demonstrably unreliable means of determining credit quality, but it unnecessarily limits the diversity of issuers and guarantors of potential money market fund portfolio securities."

Finally, the letter concludes, "​We appreciate the opportunity to comment on the Proposals. We view them as a substantial step forward from the FSOC'​s proposed recommendations issued in 2012. As such, we are pleased to support certain of the Proposals that we believe constitute sensible and cost effective means to further strengthen money market funds and ensure that they do not pose systemic risk. These measures include standalone Fees and Gates, enhanced diversification requirements, and certain additional disclosure requirements. We continue to oppose a variable NAV requirement for any money market funds because we do not believe that it will help to prevent runs, but will make money markets much less useful to shareholders and lead to a migration of assets to alternatives, presenting its own set of problems. We also strongly oppose the potential combination of a variable NAV with liquidity Fees and Gates because we think it will render institutional prime money funds unusable for nearly all investors. Ultimately, however, we appreciate the work that the Commission has done in formulating the Proposals, and we look forward to continuing a constructive dialogue with the Commission to help reduce any risks of destabilizing runs on money market funds without removing key features that have made them such a popular investment options and critical source of credit to businesses, states, municipalities and other local governments."

​

Comments on the SEC'​s latest Proposed Money Market Fund Reform poured in ahead of Tuesday'​s deadline. (​See the latest postings here.) The SEC will likely take a couple of days to catch up to the last-​minute letters, and interested parties will no doubt be reading for weeks to come. (​We'​ll continue excerpting from the best of the letters when we can, but we'​ll be slowed down by the approach of our Crane'​s European Money Fund Symposium next Tuesday and Wednesday in Dublin.) Today, we excerpt from Fidelity Investments' comment letter (​which is not available online yet). Fidelity'​s statement to media sums up the letter'​s contents, saying, "​1. Fidelity firmly believes that the SEC should treat municipal/​tax-​exempt money market funds the same way it treats Treasury and government money market funds by excluding these funds from any structural reforms. Municipal/​tax-​exempt money market funds are not susceptible to destabilizing runs, do not pose systemic risk, and have a resilient portfolio construction. In addition, these funds serve as a critical source of funding to state and local governments, as well as non-​profit organizations."

They add, "​2. Fidelity proposes an alternative definition of a "​retail" money market fund. The SEC'​s proposed definition does not work because of the high operational costs and shareholder dissatisfaction with limiting access to funds. We propose a definition that is based on Social Security Number account registration. This definition represents more accurately the broader universe of people that the SEC intended to capture under its definition. In addition, this definition is simple, easy to understand, easy to implement and treats all shareholders and transactions in a single fund identically."

Fidelity'​s statement continues, "​3. Fidelity believes that the floating NAV proposal is not an effective means to achieve the SEC'​s stated goal of stemming rapid and significant redemptions. This proposal would eliminate a fundamental feature of money market funds that investors have come to rely upon -- the stable NAV. In addition, this proposal involves significant costs and burdens, including new, complex tax and accounting implications for shareholders. 4. Fidelity believes that the SEC'​s liquidity fees and redemption gates proposal is a more effective means to achieve the SEC'​s goals than the floating NAV proposal. We recommend that that SEC adopt a fees and gates approach only for institutional prime money market funds. However, we recommend that the SEC reduce the redemption fee rate from 2% to 1%."

It adds, "​5. Fidelity does not support a combination of, or choice between, the liquidity fees and redemption gates proposal and the floating NAV proposal. A combined structure would impose excessive costs and burdens on the money market fund industry, shareholders, and the financial markets generally, and result in an extremely complex and confusing product. 6. Fidelity recommends that the SEC extend the compliance period for any structural reforms to three years following the effective date of a final rule. This will allow money market funds and intermediaries sufficient time to implement any structural reform."

Fidelity, by far the largest manager of money funds with over $​425 billion (​17.​2% of all assets), writes in its 56-​page submission, "Fidelity has been engaged actively in discussions regarding potential MMF reform for several years, and we believe that the SEC, the primary regulator for MMFs, is the appropriate agency to proceed with additional reform for MMFs. We support the SEC'​s efforts in drafting a thoughtful proposal, which recognizes that not all types of MMFs are the same, and we appreciate the SEC'​s attempt to craft narrowly tailored reforms targeted at the limited set of MMFs proven to be susceptible to runs."

They explain, "Appropriately, the SEC has excluded both Treasury and government MMFs from the proposed fundamental structural changes, recognizing that there is no evidence to support such reform. However, we firmly believe that the SEC also should exclude tax-​exempt MMFs from the floating net asset value ("​NAV") and fees and gates proposals. The SEC provides no basis in the Proposed Rules release for including tax-​exempt MMFs. In fact, the SEC'​s 2012 study on MMFs demonstrates that tax-​exempt MMFs have strong liquidity positions and are not vulnerable to or likely to experience significant shareholder redemptions. Moreover, tax exempt MMFs provide a critical source of low cost financing for state and local governments that will be significantly more expensive if these funds shrink dramatically following SEC reforms that make MMFs an investment vehicle that is no longer useful and attractive."

Fidelity tells the SEC, "​As part of its targeted approach, the SEC'​s stated policy objective for a floating NAV proposal is to limit its application to "​institutional" MMFs. We support the SEC'​s attempt to preserve the stable NAV for retail MMF shareholders who "​historically have behaved differently from institutional investors in a crisis, being much less likely to make large redemptions quickly in response to the first sign of market stress." `​However, the SEC'​s proposed retail MMF definition, which would limit a shareholder'​s daily redemptions to $​1 million, does not achieve the Commission'​s policy goal."

They write, "Unfortunately, the proposed definition would exclude a significant portion of what the MMF industry defines as retail assets. In response to a question from Chair White at the SEC'​s open meeting on the Proposed Rules release, the Staff indicated that the floating NAV proposal would apply only to institutional prime MMFs and, therefore, the Staff estimated that only 30 percent of all MMF assets would be subject to a floating NAV if adopted by the SEC. The SEC grossly underestimated the industry assets that would be impacted, which we estimate to be closer to 65% of all MMF assets. Therefore, we offer an alternative definition that will permit the SEC to achieve its intended policy objective of targeting institutional MMFs under the floating NAV proposal."

Fidelity continues, "As discussed in greater detail in the remainder of this letter, we have organized our comments on the Proposed Rules release as follows: I. Types of MMFs to be Excluded from Structural Reform. A. The SEC should treat tax-​exempt MMFs the same as Treasury and government MMFs and exclude all tax-​exempt MMFs from the floating NAV and fees and gates proposals. B. The proposed definition of a retail fund will not work as intended and we propose an alternative definition based on Social Security number account registrations."

They say, "II. Structural Reforms. A. The liquidity fees and redemption gates proposal is a more effective means to achieve the SEC'​s goals than the floating NAV proposal. The SEC should adopt a fees and gates approach for institutional prime funds, with certain modifications. B. The floating NAV proposal is not an effective means to achieve the SEC'​s stated goal of stemming rapid and significant redemptions, which could be achieved through disclosure. The SEC should not adopt a floating NAV for MMFs. C. The SEC should not combine, or offer a choice between, the liquidity fees and redemption gates proposal and floating NAV proposal."

Fidelity adds, "III. Diversification, Stress Testing, and Disclosure Changes. A. We support the SEC'​s efforts to enhance MMF portfolio construction and recommend some alternative options with respect to the proposed diversification changes. B. We offer some changes to the proposed MMF stress testing requirements that would meet the objective of creating a uniform standard across the industry. C. We recommend some modifications to the SEC'​s proposed disclosure changes. IV. The costs for Fidelity to implement the floating NAV proposal, the fees and gates proposal, the definition of a "​retail" MMF, and disclosure changes are estimated to be $​37 million."

The letter also explains, "MMFs are subject already to extensive oversight and regulation in the United States under the Investment Company Act of 1940, together with the rules promulgated thereunder. These comprehensive regulations and rules include portfolio construction constraints, investor protections, extensive disclosure requirements, and broad financial reporting and recordkeeping requirements. In 2010, the SEC significantly strengthened Rule 2a-​7, which governs MMFs, by imposing more stringent constraints on fund maturity, liquidity, and quality, as well as new requirements on fund disclosure, operations, and oversight. In addition, mutual fund investors are afforded protections under state law and other federal statutes, such as the Investment Advisers Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934."

Finally, they add, "For decades, MMFs have been attractive investment vehicles for shareholder capital, due to their convenience, high credit quality, and liquidity. MMFs seek to provide a stable, constant NAV and daily access to money, with a competitive yield versus bank deposits and direct investments. MMFs are utilized by a broad spectrum of investors, from small, individual investors, to large, institutional investors. As the SEC recognizes, "[​t]​he combination of principal stability, liquidity, and short-​term yields offered by money market funds ... has made money market funds popular cash management vehicles for both retail and institutional investors".... The SEC must identify clearly and evaluate robustly the costs and benefits of additional reforms. The SEC'​s goal of targeting reform at institutional prime MMFs strikes the proper balance."

​

As we await the crush of last-​minute SEC MMF Reform Proposal Comment Letters (​they'​re due by the end of Tuesday), we excerpt from another of the recent substantial postings, this one from Barbara Novick, Vice Chairman, and Richard Hoerner, CFA, Managing Director, Head of Global Cash Management, BlackRock. The 23-​page comment says, "BlackRock, Inc. ("​BlackRock") is pleased to have the opportunity to provide comments to the Securities and Exchange Commission the "​Commission") on the proposals for Money Market Fund Reform (​the "​Proposed Rule"). We commend the Commission for issuing a thoughtful set of proposals that address many of the concerns raised by us and other market participants in the money market fund ("​MMF") reform debate. As outlined in the Proposed Rule, several other critical issues need to be considered and addressed prior to adoption of any final rules. Our letter identifies some of the challenges associated with the proposed structural changes and recommends potential solutions."

The letter explains, "BlackRock and its predecessor companies have been involved in the management of MMFs since 1973, and today, BlackRock manages approximately $​192.​6 billion (​as of June 30, 2013) in Rule 2a-​7 MMF assets regulated by the Commission. BlackRock also manages substantial cash management assets in bank collective funds regulated by the Office of the Comptroller of the Currency and in Undertakings for Collective Investment in Transferable Securities products regulated by the European Securities and Markets Authority. Our success in building this business came not because we always offer the highest yield; we have grown because we have earned our clients' trust through multiple interest rate cycles and a wide variety of market events. We believe cash management is a distinct investment category, different from other fixed income strategies. We understand the importance of putting safety and liquidity first, not as a marketing message, but as the foundation of our investment philosophy."

Novick and Hoerner continue, "The Commission and the industry have struggled to find the best way to strengthen the regulatory structure of MMFs since the financial crisis of 2008 and the historic "​breaking of the buck" by the Reserve Primary Fund. We and our clients remain immensely grateful for the work of the Commission and various other Government agencies during and following the financial crisis in 2008. The swift, decisive and collective actions taken by multiple agencies were essential in restoring confidence and order to the markets. After the 2008 crisis, we and others in the industry worked collaboratively with the Commission to modify Rule 2a-​7 under the Investment Company Act of 1940, as amended (​the "​Investment Company Act"), to enhance the liquidity and safety of MMFs; the result was the implementation of reforms in 2010 (​referred to herein as the "​2010 MMF Reforms") that imposed tighter restrictions on MMFs' portfolio maturity, credit quality and liquidity guidelines, expanded portfolio disclosure requirements and increased transparency to investors. Furthermore, we recognize the benefits of protecting MMF investors and the broader financial system."

They continue, "One of the many challenges in the dialogue around MMF reform subsequent to the 2010 MMF Reforms has been identifying which issues could and should be solved through regulatory reform. We commend the Commission for acknowledging in the Proposed Rule that the key issue to be solved by further MMF reform is "​stopping the run" while preserving, as much as possible, the benefits of MMFs. MMFs play a unique role in the economy by providing short-​term funding to commercial and municipal borrowers through purchases of commercial paper and other short-​term debt while providing short-​term investments and liquidity to a broad array of institutional and retail investors. Adopting regulatory reform that focuses on the specific issues of "​run risk" while narrowing the scope to the most susceptible funds and preserving the benefits of MMFs is critical."

BlackRock tells us, "From the outset, we endorsed the idea of attempting to solve for systemic risk issues when considering additional reform proposals. In particular, we have focused on the "​run risk" and have engaged in this dialogue with regulators, clients and issuers in a serious and constructive manner for several years. In a number of papers and comment letters, we have indicated that any additional reforms that are adopted for MMFs should provide a mechanism for halting mass client redemptions while preserving the benefits of MMFs as both a liquidity management tool for investors and as a critical source of short term funding in the capital markets. In our letter to the Financial Stability Oversight Council dated December 13, 2012, we explicitly explored both floating net asset value ("​NAV") and standby liquidity fees and gates, each of which present challenges but warrant serious consideration."

They add, "This letter focuses on four key aspects of the Proposed Rule: The benefits and challenges of the structural approaches in the Proposed Rule; An exemption for all Municipal MMFs; Defining retail and institutional clients; and A series of technical operational issues. Our discussion and analysis addresses each of these aspects while keeping in mind the primary goal of preserving the benefits of MMFs and the functioning of the short term funding markets while providing a mechanism for managing potential mass redemptions in a MMF. BlackRock supports a number of the proposals in the Proposed Rule including: Focusing on Prime MMFs for the Floating Net Asset Value ("​FNAV") proposal, while exempting Government MMFs; Proposing standby liquidity fees and gates as a standalone proposal for consideration; Increasing transparency to investors through MMF portfolio information disclosures; and Increasing stress testing for funds.

The letter says, "We continue to believe, however, that the following challenges remain with the Proposed Rule: The combined structural proposal, requiring FNAV and standby liquidity fees and gates, is not workable for investors; The focus of any final rule (​FNAV or standby liquidity fees and gates) should be only on Prime MMFs; All Municipal MMFs should be exempted like Government MMFs; Ten basis point rounding should be used by FNAV MMFs; and The definition of "​retail" funds as proposed is not adequate and needs to be redefined. In each section, we provide recommendations to address these challenges that we believe will make the proposals in the Proposed Rule more palatable to investors, thus better preserving the benefits of the funds for both investors and borrowers."

BlackRock also comments on the floating NAV, "We don'​t believe that an FNAV MMF would decrease the incentive for investors to redeem shares in times of stress, nor do we believe that the additional transparency, if any, that a floating NAV would provide, would limit runs. In our experience, clients decide to redeem from a MMF in times of crisis based on their assessment of the quality of assets, duration of assets and liquidity levels and their assessment of whether those are deteriorating in an unusually dramatic way."

On the combination of floating NAV and fees/​gates, they write, "If one of the stated objectives of the further reforms is to preserve the benefits of MMFs and have a viable product for investors to use, this proposal is not workable. A rational investor would not purchase a MMF, with the strict portfolio requirements of Rule 2a-​7, that has both a floating NAV and has the prospect of a liquidity fee and gate. As we have already noted in this letter, certain investors require a stable NAV in a MMF product. Other investors need continuous access to their funds and cannot use a MMF that has gates and fees. As a result, if both of these proposals are combined and required in a single fund, the number of investors that would be eliminated from using the product is too great—​leaving only a small number who would find this product viable."

BlackRock also adds, "If the Commission exempts "​retail" funds from certain of the proposals, we believe that "​retail" should be defined by the type of investor investing the funds. Retail MMFs should be limited to investors with a social security number, and participant-​directed retirement plans. This definition creates a front-​end qualifying test that is operationally easier to implement as the test is only performed once when an investor opens an account or is given access to a fund. The current proposed definition creates ongoing operational testing and additional, unnecessary costs for monitoring.... Defining retail money market funds by limits on redemptions is operationally difficult and could lead to a two-​tiered approach to MMFs that may lead to gaming behavior by investors. If the simpler front-​end approach is adopted, this potential gaming behavior would be eliminated."

Finally, they add, "In conclusion, we are supportive of further MMF reform that seeks to mitigate "​run risk" and continues to preserve the benefits of the product for both investors and issuers. To that end, we make the following recommendations to the Commission: Choose one of the proposed structural reforms in the Proposed Rule: either FNAV or the liquidity fees and gates; Resolve cross-​agency issues and provide clear guidance simultaneous to finalizing a new 2a-​7 rule; Focus only on Prime MMFs and clearly exempt Government and Municipal MMFs from further structural reforms; Retail MMFs should be limited to investors with a social security number, and participant-​directed retirement plans; Mandate increased disclosure to investors; Allow for amortization cost accounting for funds that are exempt from FNAV provided the MMF each day calculates its mark-​to-​market share price using basis point rounding and publicly discloses it; and, Allow for sufficient time to finalize guidance, address operational issues and educate end investors."

​

Crane Data released its September Money Fund Portfolio Holdings dataset Thursday, and our collection of taxable money market securities with data as of August 31, 2013, shows declines in Repos and Treasuries, and a jump in CDs and "​Other" holdings (​which includes Time Deposits). Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) inched up by $​1.​1 billion in August to $​2.​416 trillion. (​Portfolio assets rose $​68.​9 billion in July, fell $​30.​1 billion in June, increased $​25.​8 billion in May, and fell $​9.​9 billion in April and $​34.​6 billion in March). (​Note that our Portfolio Holdings collection is a separate data series from our monthly Money Fund Intelligence XLS and daily MFI Daily collections.) Besides the jump in CDs and Other and the big drop in Repo and Treasuries in August, Agencies, VRDNs, and CP inched lower. CDs remained the largest holding among taxable money funds, followed by Treasuries then Repo, then CP, Agencies, Other, and VRDNs. Money funds' European-​affiliated holdings (​including repo) inched higher following a jump last month from 29.​6% to under 29.​8%. Below, we review our latest portfolio holdings statistics.

Among all taxable money funds, Certificates of Deposit (​CD) holdings increased by $​17.​6 billion to $​510.​6 billion, increasing to 21.​1%; they remain the largest segment of money fund composition. Treasury holdings decreased by $​10.​5 billion to $​474.​9 billion (​19.​7% of holdings) and remained in the second place spot. Repurchase agreement (​repo) holdings decreased by $​16.​5 billion to $​447.​6 billion, or 18.​5% of fund assets. Commercial Paper (​CP), the fourth largest segment, dipped by $​337 million to $​414.​3 billion (​17.​2% of holdings). Government Agency Debt decreased by $​3.​6 billion; it now totals $​348.​6 billion (​14.​4% of assets). Other holdings, which include Time Deposits, rose by $​17.​9 billion to $​174.​6 billion (​7.​2% of assets). VRDNs held by taxable funds fell again by $​3.​5 billion to $​45.​8 billion (​1.​9% of assets). (​Crane Data'​s Tax Exempt fund data is released in a separate series.)

Among Prime money funds, CDs still represent one-​third of holdings, or 33.​2%, followed by Commercial Paper (​26.​9%). The CP totals are primarily Financial Company CP (​15.​7% of holdings) with Asset-​Backed CP making up 6.​2% and Other CP (​non-​financial) making up 5.​1%. Prime funds also hold 7.​2% in Agencies, 6.​7% in Treasury Debt, 15.​7% in Other Instruments, 5.​7% in Other Notes, and 7.​2% in Other (​including Time Deposits). Prime money fund holdings tracked by Crane Data total $​1.​540 trillion, or 63.​7% of taxable money fund holdings' total of $​2.​416 trillion.

European-​affiliated holdings increased by $​6.​8 billion in August to $​721.​0 billion (​among all taxable funds and including repos); their share of holdings rose to 29.​8%. Eurozone-​affiliated holdings rose too (​up $​3.​0 billion) to $​384.​7 billion in August; they now account for 15.​9% of overall taxable money fund holdings. Asia & Pacific related holdings inched down by $​572 million to $​289.​6 billion (​12.​0% of the total), while Americas related holdings fell by $​5.​3 billion to $​1.​405 trillion (​58.​1% of holdings).

The Repo totals were made up of: Government Agency Repurchase Agreements (​down $​11.​5 billion to $​221.​0 billion, or 9.​2% of total holdings), Treasury Repurchase Agreements (​down $​5.​1 billion to $​156.​4 billion, or 6.​5% of assets and Other Repurchase Agreements (​up $​80 million to $​70.​2 billion, or 2.​9% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​up $​2.​3 billion to $​241.​5 billion, or 10.​0% of assets), Asset Backed Commercial Paper (​up $​377 million to $​94.​9 billion, or 3.​9%), and Other Commercial Paper (​down $​3.​0 billion to $​77.​8 billion, or 3.​2%).

The 20 largest Issuers to taxable money market funds as of August 31, 2013, include the US Treasury (​19.​7%, $​475.​3 billion), Federal Home Loan Bank (​8.​2%, $​196.​9 billion), Deutsche Bank AG (​2.​6%, $​63.​6B), Federal Home Loan Mortgage Co (​2.​6%, $​63.​2B), Bank of Tokyo-​Mitsubishi UFJ Ltd (​2.​4%, $​58.​7B), JP Morgan (​2.​4%, $​58.​7B), Bank of Nova Scotia (​2.​4%, $​57.​8B), Sumitomo Mitsui Banking Co (​2.​4%, $​57.​4B), BNP Paribas (​2.​4%, $​57.​1B), Bank of America (​2.​4%, $​56.​8B), Barclays Bank (​2.​3%, $​55.​2B), Federal National Mortgage Association (​2.​3%, $​54.​7B), Citi (​2.​1%, $​49.​5B), Societe Generale (​2.​0%, $​48.​5B), RBC (​2.​0%, $​47.​7B), Credit Suisse (​1.​9%, $​45.​2B), Credit Agricole (​1.​8%, $​42.​2B), Toronto-​Dominion Bank (​1.​7%, $​39.​9B), Natixis (​1.​5%, $​36.​9B), and Bank of Montreal (​1.​5%, $​36.​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 ($​45.​3B, 10.​1%), Deutsche Bank ($​44.​2B, 9.​9%), Barclays ($​37.​1B, 8.​3%), BNP Paribas ($​35.​8B, 8.​0%), Credit Suisse ($​26.​5B, 5.​9%), Citi ($​25.​7B, 5.​8%), Goldman Sachs ($​25.​3B, 5.​7%), Societe Generale ($​23.​6B, 5.​3%), RBS ($​21.​8B, 4.​9%), and Credit Agricole ($​18.​9B, 4.​2%).

The largest increases among Issuers of money market securities (​including Repo) in August were shown by: Natixis (​up $​6.​2B to $​36.​9B), Federal Home Loan Bank (​up $​6.​1B to $​196.​9B), DnB NOR Bank ASA (​up $​5.​8B to $​31.​0B), Bank of Tokyo-​Mitsubishi UFJ Ltd (​up $​5.​0B to $​58.​7B), and BNP Paribas (​up $​4.​0B to $​57.​1B). The largest decreases among Issuers included: Deutsche Bank (​down $​8.​3B to $​63.​6B), UBS (​down $​6.​3B to $​10.​2B), RBC (​down $​5.​8B to $​47.​7B), Credit Agricole (​down $​4.​8B to $​42.​2B), and Federal National Mortgage Corp (​down $​3.​8B to $​54.​7B).

The United States is still by far the largest segment of country-​affiliations with 48.​8%, or $​1.​180 trillion. Canada increased slightly and remained in second place (​9.​3%, $​223.​5B) ahead of France (​8.​8%, $​212.​2B). Japan was again fourth (​7.​3%, $​176.​2B) and the UK (​6.​1%, $​147.​4B) remained fifth. Germany (​4.​2%, $​101.​3B) remained ahead of Australia (​3.​9%, $​93.​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.​8%, $​92.​6B), the Netherlands (​2.​7%, $​64.​8B) and Switzerland (​2.​6%, $​62.​1B) continued to round out the top 10.

As of August 31, 2013, Taxable money funds held 23.​5% of their assets in securities maturing Overnight, and another 13.​0% maturing in 2-​7 days (​36.​6% total in 1-​7 days). Another 20.​8% matures in 8-​30 days, while 24.​8% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 13.​4% of taxable securities, and just 4.​5% matures beyond 180 days.

Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated last Wed. and Thursday, and our MFI International "​offshore" Portfolio Holdings will be updated late today (​the Tax Exempt MF Holdings were released Saturday). 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.

Finally, note in the recent comment letter from the Boston Fed'​s Eric Rosengren (​see this weekend'​s "​News"), a suggestion is made for more frequent portfolio holdings disclosure. He writes (​late in the letter), "​We strongly support the enhanced disclosure requirements contained in the Proposal. As proposed, MMMFs would be required to disclose current and historical instances of sponsor financial support; Daily Liquid Assets and WLA levels; current NAV rounded to the fourth decimal place; and daily net flows. The SEC also proposes to require MMMFs to promptly file (​within one business day) a new Form N-​CR when certain significant events occur, and to eliminate Form N-​MFP'​s 60-​day public dissemination delay."

Rosengren continues, "We encourage the SEC to implement additional steps to enhance disclosure such as requiring weekly or even daily disclosures of portfolio holdings. During times of stress, uncertainty regarding portfolio composition could cause a MMMF'​s investors to redeem if they believe the fund could be exposed to distressed assets. More frequent disclosure alleviates this uncertainty. In addition, we suggest that the SEC consider requiring MMMFs to publicly disclose their ten largest investors on a weekly or monthly basis. Such disclosure would allow investors to better assess the shareholder concentration risk in the fund. A fund with a small number of large investors is more likely to experience large redemptions, and is thus more exposed to liquidity risk compared to a less concentrated fund."

​

Given the increasing volumes of Comment Letters on the SEC'​s "​Proposed Rule: Money Market Fund Reform" starting to appear, Crane Data will temporarily increase the frequency of our "News" coverage (​normally updated at night for each business day). This weekend we feature money fund nemesis Eric Rosengren, President of the Federal Reserve Bank of Boston who says, "I am writing on behalf of the 12 Federal Reserve Bank Presidents, all of whom are signatories to this comment letter. We appreciate the opportunity to provide comments on the Securities and Exchange Commission'​s ("​SEC") Money Market Fund Reform; Amendments to Form PF release (​the "​Proposal") issued on June 5, 2013. The SEC took a very important step towards Money Market Mutual Fund ("​MMMF") reform by issuing this Proposal, which includes two principal reform alternatives: (​i) a floating net asset value per share ("​NAV") requirement for prime institutional MMMFs, and (​ii) stand-​by liquidity fees and temporary redemption gates for non-​government MMMFs that breach a pre-​determined trigger."

Rosengren continues, "We applaud the SEC Commissioners' and staff'​s continued efforts in this area. We believe the SEC is well-​positioned to implement meaningful reforms that not only better protect investors but also address the risks to financial stability posed by MMMFs. In our previous comment letter to the Financial Stability Oversight Council ("​FSOC"), we noted that more than one of the FSOC'​s proposed alternatives could address these risks. Accordingly, we welcome the inclusion of the floating NAV alternative in the current Proposal. We strongly support this alternative, especially if certain enhancements are undertaken. However, we do not support the stand-​by liquidity fees and temporary redemption gates alternative, as these mechanisms do not meaningfully reduce the risks that MMMFs pose to financial stability."

He tells the SEC, "We briefly discuss the risks to financial stability posed by MMMFs, particularly prime MMMFs, in Section I. Section II offers observations on the floating NAV alternative, including several suggestions for increasing its effectiveness. Section III outlines our concerns with the stand-​by liquidity fees and temporary redemption gates alternative. Finally, Section IV discusses the proposed enhancements to portfolio disclosure and diversification requirements."

Rosengren explains, "​MMMFs serve an important function in the short-​term credit markets by acting as intermediaries between investors seeking a highly liquid, diversified fixed income investment, and a variety of corporate and government entities seeking short-​term funding. As a result, disruptions in MMMFs' ability to function as credit intermediaries can have a significant negative impact on the broader financial system. On numerous occasions over the past few years, government officials and academics have discussed the risks that MMMFs pose to financial stability. These risks were also highlighted in the FSOC'​s 2013 annual report. As currently structured, MMMFs permit redemptions and purchases at a constant NAV (​generally $​1.​00), take credit risk, and have no mechanism to absorb losses. Investors therefore have an incentive to "​run" from a fund when they perceive its market-​based NAV to be less than its transaction (​or reported) NAV. The risks associated with this structure were evident in September 2008, when investors fled from prime MMMFs into government MMMFs, exacerbating disruptions in the short-​term credit markets."

He says, "The U.​S. Government used multiple approaches to restore liquidity to credit markets, some of which targeted MMMFs directly and many of which indirectly helped to restore MMMFs to normal functioning. In 2010, the SEC amended Rule 2a-​7, enacting several new or enhanced requirements aimed at strengthening the stability of MMMFs. Despite these important changes, MMMFs remain a significant risk to financial stability. Indeed, a November 2012 study by SEC staff found that the Commission'​s 2010 reforms were "​not sufficient to address the incentive to redeem when credit losses are expected to cause funds' portfolios to lose value or when the short-​term financing markets ... come under stress." As such, we strongly urge the SEC to proceed with additional reforms."

The Fed Presidents' letter continues, "We agree with the SEC'​s position that a floating NAV requirement, if properly implemented, could recalibrate investors' perceptions of the risks inherent in a fund by "​making gains and losses a more regularly observable occurrence." Because a constant NAV MMMF generally draws risk-​averse investors, it is likely that given an appropriate transition period, the investor base would either change or become more tolerant of NAV fluctuations, lowering the risk of destabilizing runs. Indeed, a floating NAV fund may actually attract investors seeking a higher yield for their cash investment during times of broad financial market stress. Further, the floating NAV alternative reduces investors' incentives to redeem by tempering the "​cliff effect" associated with a fund "​breaking the buck." The first mover advantage is reduced because redemptions would be processed at a NAV reflective of the market-​based value of the fund'​s underlying securities."

They explain, "While we are supportive of this alternative, we have identified several issues that should be addressed to further enhance its efficacy.... The effectiveness of a floating NAV option depends on funds' ability to properly value money market instruments. To the extent that investors believe that a fund'​s "​true" market-​based NAV is below its reported NAV, they will be incented to redeem before other investors. One often-​mentioned challenge to valuing non-​government related money market instruments is the infrequency of secondary market transactions for such instruments. Even under the current fixed NAV regime, however, funds are able to value such instruments using a combination of matrix pricing and model-​based valuation methodologies. As such, MMMFs subject to the floating NAV requirement would also be able to value their portfolio securities on a daily basis for the purposes of computing a transaction NAV. While the resulting prices may serve as a natural starting point for market-​based NAV computations required under this alternative, we encourage the SEC to continue its efforts to increase the transparency of fixed income markets to further enhance price discovery."

Rosengren also comments, "On November 19, 2012, the FSOC presented three reform alternatives as part of its Proposed Recommendations Regarding Money Market Mutual Fund Reform. In a comment letter submitted to the FSOC on behalf of the Presidents of the 12 Federal Reserve Banks on February 12, 2013, we noted that all three alternatives had "​the potential to increase the resiliency of MMFs and reduce their susceptibility to runs." Of these three presented alternatives, the SEC has chosen to present the floating NAV alternative in their current proposal. Accordingly, we continue to fully support this alternative and urge the SEC to pursue this option and consider ways in which the benefits of a floating NAV could be enhanced, such as continuing to monitor funds' procedures for determining that amortized cost accurately reflects fair value and eliminating the "​retail" exemption."

Finally, he adds, "We continue to believe that the liquidity fees and temporary redemption gates alternative does not constitute meaningful reform and that this alternative bears many similarities to the status quo. Investors will still have an incentive to be the first to redeem and the price of those early redemptions (​before the trigger is breached) may still be inaccurate and unfair to remaining shareholders if such redemptions occur under a fixed NAV regime. We understand that among the many comment letters the SEC will receive on this Proposal, our position supporting the floating NAV alternative may well be in the minority, as it has been throughout this important debate. Indeed, to the extent that the fees and gates alternative resembles the status quo, it would be an attractive option if the only goal were to minimize the costs of adjustment within the MMMF industry. From a financial stability perspective, however, we believe that the floating NAV is the far better choice. We are grateful for the opportunity to comment on this Proposal and, again, applaud the SEC Commissioners and staff for moving forward with this initiative. We welcome the opportunity to elaborate on or further discuss any aspect of this letter."

​

Federated Investors appears to have beaten Schwab (​see yesterday'​s "​News") as the first major fund complex to weigh in on the SEC'​s "​Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" web page. (​There is normally a one-​day lag for the SEC to post the letters, so we should see Schwab'​s full letter today.) The first of what will likely be a number of weighty treatises, is labelled, "John D. Hawke, Jr., Arnold and Porter, LLP on behalf of Federated Investors. It says, "We are writing on behalf of our client, Federated Investors, Inc. and its subsidiaries ("​Federated"), to provide initial comments in response to the Securities and Exchange Commission'​s (​the "​Commission'​s") proposed rules on money market fund ("​MMF") reform (​the "​Release"). We appreciate the Commission'​s work in re-​claiming jurisdiction over MMF reform efforts from the Financial Stability Oversight Council ("​FSOC"), which has attempted to usurp the Commission'​s jurisdiction through its legally questionable initiation of the Dodd-​Frank Section 120 process. We also appreciate the efforts of the Commissioners and staff in developing a Release that explains the Commission'​s goals and that acknowledges what the Commission knows and does not know about the impact of the alternatives proposed. This is an initial letter on behalf of Federated, intended to inform the Commission of our overall analysis while we and others continue to develop more detailed comments responsive to specific issues raised by the Release. Federated will be filing additional comment letters during the next few days."

The letter explains, "We note that the Release is 698 pages long and includes well over 1000 questions and requests for data. In view of the very large number of questions posed in the Release and the amount and complexity of the cost data and other information requested, we renew our previously filed request that the Commission extend the comment period so that Federated and others may complete efforts to assemble data to respond more fully to the questions and information requests in the Release. Federated has almost 40 years of experience in the business of managing MMFs and, during that period, has participated actively in the money market as it has developed over the years. Through its MMFs and related services, Federated has served the cash management and investment needs of millions of individual and institutional investors of all sizes, including thousands of intermediaries who, through omnibus accounts, provide Federated-​sponsored MMFs to millions of their individual and institutional investors."

Hawke writes, "Federated believes MMFs do not require dramatic regulatory change that would restructure the product and undermine its utility for investors. The 2010 amendments to Rule 2a-​7, augmented by industry practices, have made MMFs substantially more resilient and transparent. We believe any further MMF reform should be designed to preserve the utility of MMFs for investors and be targeted to address very narrow circumstances, such as the type of once-​in-​a generation scenario experienced in 2008, or where one or more individual MMFs experiences a large credit event or other event likely to cause an unusual rush to redeem. Based upon the Commission'​s own statements, these types of circumstances, which have the potential to result in material dilution or unfair treatment of shareholders or a risk of contagion for the broader financial markets, appear to be the Commission'​s concerns as well. However, as discussed briefly below and as will be discussed in more detail in forthcoming comments:"

He continues, "​1) Imposing a floating NAV requirement on a large subset of MMFs, as proposed in "​Alternative One," would destroy key operational features that make MMFs useful to investors and would be enormously costly to investors and the economy, without furthering the Commission'​s goal of preventing or reducing the risk of large shareholder redemptions in a crisis. Indeed, it appears that the primary purpose of the floating NAV proposal is to increase awareness among sophisticated institutional investors in prime MMFs of trivial fluctuations in estimated "​market-​based" valuations of the MMFs' portfolios by forcing them to transact in prime MMF shares at these minutely fluctuating valuations. The resulting operational, accounting, tax, legal and other burdens associated with a floating NAV, which have not been addressed in the current proposal, will drive away users and lead to a dramatic shrinkage of MMFs. The delays in transactions resulting from the requirement for "​market-​based" pricing will further undermine the utility of MMFs and introduce new risks. These issues would need to be completely resolved and the resolutions implemented -- not merely discussed -- before a floating NAV could be imposed, unless the regulatory goal is to eliminate, or dramatically shrink investors' use of, MMFs."

Federated'​s letter tells us, "​2) The proposed exemptions in Alternative One do not alleviate the disruptive effects of the proposal. For example, the proposed "​retail" exemption from the floating NAV requirement for MMFs that limits redemptions to no more than $​1 million per day, which is included in Alternative One to narrow its application and thereby lessen its impact, creates its own set of complex operational and compliance problems that would make the exemption difficult or impossible to implement. The exemption for government MMFs, intended to provide investors with a stable value option, also is problematic, as further discussed below. Thus, Alternative One, if adopted, will have an even broader practical impact than may have been intended by the Commission. Meeting the requirements of the exemptions would impose restrictions and burdens upon a MMF and its shareholders every day, rather than only in times of economic uncertainty. These restrictions would limit MMF shareholders' access to their liquid assets and disrupt their normal use of MMFs on a daily basis."

It states, "​3) The elimination of the amortized cost method of accounting to price shares of stable value MMFs, and its replacement with the "​penny rounding" method, would be very costly to implement and would cause severe operational problems for MMFs, create settlement bottlenecks and delays for investors and intermediaries, introduce new risks from potential technology breakdowns and systems failures at pricing vendors, and potentially impose systemic risks on payment systems and markets. For retail and government MMFs, these costs would be incurred to show minute, irrelevant fluctuations in "​market-​based" estimates of MMF share NAVs that are rounded to the nearest penny, thus adding immense costs to get to a result that is identical to the current calculation -- $​1.​00. Disclosure of an amortized cost method MMF'​s shadow price would inform shareholders of the same minute fluctuations in the estimated value of its portfolio as disclosure of the unrounded penny rounding price, for a fraction of the cost and less risk and inconvenience for shareholders."

Hawke adds, "​4) While Federated does not believe that further structural MMF reforms are necessary, Alternative Two is the only current alternative that would address the policy concerns identified by the Commission, while preserving the utility of MMFs for investors and the short-​term financing provided to corporate and governmental issuers. It provides tools MMF directors may use if necessary to protect investors from material dilution and prevent "​fire sales" of MMF portfolio holdings if a MMF comes under extraordinary redemption pressure."

He writes, "The Commission needs to make critical modifications to Alternative Two, however, in order for these additional tools to operate effectively and to minimize their potential impact on shareholders. Specifically, Alternative Two should be modified to (​a) permit directors to implement a liquidity fee or suspend redemptions temporarily before the end of the business day, so the board can respond whenever the directors find that unimpeded redemptions could result in material dilution or other unfair results to investors and shareholders, (​b) reduce the maximum period that redemptions may be suspended to ten calendar days, and subject liquidity fees to the same limitation, and (​c) include tax exempt funds in the exemption proposed in paragraph (​c)(​2)(​iii). Federated also urges the Commission to make it clear that the purpose of the provision is to protect, and not to penalize, shareholders and that it therefore is to be used only in extreme circumstances that could result in unfair results for shareholders."

Federated'​s letter continues, "​5) The direct and indirect costs of implementing the proposals -- particularly the floating NAV imposed under Alternative One and the elimination of the amortized cost method of valuing shares contained in both Alternatives -- on investors, on corporate, state and local government issuers, on financial institutions, and on the economy, will be staggering, with no offsetting benefits. A final rule containing these elements cannot meet the cost/​benefit and statutory considerations required for a Commission rulemaking, particularly when there are alternatives that meet the Commission'​s goals with far less disruption and costs. A targeted provision authorizing temporary suspension of redemptions, under the circumstances described above, would fulfill the Commission'​s statutory obligations."

They also say, "​6) The disclosure and reporting proposals in the Release contain many useful elements, but also other elements that would be excessively costly and burdensome without a corresponding benefit to investors or systemic stability. The Commission'​s definition of sponsor financial support is overly broad and would capture many routine transactions that are not indicative of stress. Daily disclosure of current weekly liquid assets and flows in conjunction with Alternative Two has the potential to be destabilizing, because it could result in reactionary redemptions that are not based on the MMF'​s true liquidity levels. The lot level reporting contemplated under Form N-​MFP would be a wasteful, inefficient and inequitable means of evaluating pricing in the money markets, and could be used by other market participants to trade to their advantage and the MMF'​s disadvantage. These proposals must be more carefully tailored before any final rules are adopted."

Federated continues, "​7) While aggregating parents and subsidiaries for purposes of diversification reflects a practice already followed by Federated and many other MMF managers, the other proposed changes to the diversification requirements would seriously impair the operations of MMFs or create arbitrary restrictions without contributing to the goal of investor protection. Although clarification of the current stress testing requirements would be helpful to MMFs and their directors, the proposed wholesale expansion of stress testing would be a waste of resources and of the directors' limited time."

They add, "​8) Regardless of what reforms the Commission decides to impose on prime MMFs, tax exempt funds should (​a) be excluded from both Alternative One and Alternative Two, because tax exempt funds resemble government MMFs more closely than prime MMFs, (​b) retain the ability to rely on the so-​called "​25% basket" when diversifying guarantees and demand features, which is essential to their operations, and (​c) remain exempt from the 10% daily liquid asset requirement."

Finally, the Federated letter comments, "​9) The proposed amendments, if adopted, will not directly affect LGIPs that operate within the governmental fund exclusion in Section 2(​b) of the Investment Company Act. Adoption of the proposals as currently drafted (​particularly Alternative One) would, however, impose a large burden on state and local governments and the Government Accounting Standards Board ("​GASB") to address and resolve the relationship between the amendments and the use of the amortized cost method of accounting by external pools that operate as "​2a7-​like" LGIPs. We do not anticipate that the end result would be a transformation of LGIPs to floating NAV funds."

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Charles Schwab becomes the first of the major money fund providers to respond formally to the SEC'​s recent Money Market Fund Reform proposal, filing a 30-​page comment letter. (​The manager hosted a call for reporters this morning and sent out their letter to press, but it isn'​t available online yet.) The comment, written by President Marie Chandoha, says, "Charles Schwab Investment Management ("​Schwab") appreciates the opportunity to provide comments on the Securities and Exchange Commission'​s ("​Commission" or "​SEC") June 2013 proposal, "Money Market Fund Reform; Amendments to Form PF". Schwab is one of the largest managers of money market fund assets in the United States, with 3 million money market fund accounts and $​168 billion in assets under management as of June 30, 2013. The overwhelming majority of Schwab'​s fund offerings are used by retail investors who use money market funds to manage their cash. Even in the current environment, with historically-​low yields on money market funds, our retail clients continue to value the convenience of this product."

She continues, "Approximately 88% of Schwab'​s money market fund assets are in sweep funds, with the balance in purchased funds. Sweep accounts automatically invest idle cash balances while providing investors with convenience, liquidity and yield. These sweep accounts facilitate trading in brokerage accounts, allowing individuals to seamlessly buy and sell stocks, bonds, and mutual funds. Individuals also can write checks, pay bills electronically and use debit cards on these accounts. In the context of the proposed money market fund reforms, sweep accounts present a number of unique challenges, which we will highlight in this letter."

Chandoha explains, "​The proposed rules are the culmination of a multi-​year effort by the Commission and the money market fund industry to find a balanced approach to reform. Schwab applauds the Commission for taking the time necessary to build consensus within the agency, for conducting the necessary research to support the proposed rules, and for its willingness to engage in substantive dialogue with Schwab and other industry participants during the process. We also appreciate the Commission'​s clear signal that one of its goals is, in the words of Chairman Mary Jo White, "​to preserve the economic benefits of the product.""

She tells us, "​The Commission has, in our view, made a good faith effort to strike an appropriate balance that will increase investor confidence in money market funds while also ensuring that the product retains its critically important role as a valued cash management tool for individual investors, corporations, municipalities, states and non-​profit organizations. While we generally support the SEC'​s proposal, we believe the proposed rule has a number of significant flaws that need resolution before the rule is finalized. We also have concerns that the costs of the proposal, both in terms of the cost of implementation and with regard to the impact on the larger financial system, may outweigh the benefits. We offer the following comments in an attempt to strengthen the proposal and better achieve the desired balance."

The "Executive Summary" states, "Schwab generally supports the SEC'​s proposed money market fund reforms and recommends that the final rule combine the two alternatives proposed, subject to the recommended changes outlined in this letter, for maximum effectiveness: requiring institutional prime funds to have a floating net asset value (​NAV), and allowing a fund'​s board to impose liquidity fees and gating of all prime, municipal and government money market funds whenever the board believes doing so is in the best interest of the fund. Not surprisingly for a 698-​page rule proposal, we have a significant number of concerns about the proposed rule, and we make a number of suggestions for changes that we believe would make the rule less burdensome to implement without compromising the rule'​s effectiveness."

It continues, "While we detail all of those recommendations in the following pages, we want to highlight those which we believe to be most critical: 1. We recommend that the daily redemption limit for retail investors, which serves as the dividing line between "​institutional investors" and "​retail investors," be increased from $​1 million to $​5 million per business day. The $​1 million redemption limit could significantly impact retail investors by triggering unexpected violations of the threshold and presenting a host of operational challenges. Those challenges, as well as the likelihood of inadvertent violations of the threshold, decrease markedly at the $​5 million level. We also recommend that the Commission create a "​Large Trade Order Notification" system that would allow retail investors to redeem more than the maximum daily redemption amount provided they have requested and received approval from the fund for such a transaction at least three days in advance."

Chandoha'​s letter also says, "​2. We recommend that the daily redemption limit be applied on a per-​account basis, rather than on a per-​shareholder basis. We do not believe there is any realistic way to track a particular shareholder in real time to a total of $​1 million (​or, as we recommend, $​5 million) in redemptions across multiple accounts, particularly if those accounts are of different types (​e.​g., a retail brokerage account, a 529 college savings account, and a 401(​k) employer-​sponsored retirement account). While we recognize that this allows investors an opportunity to "​game" the system by opening multiple accounts, we share the Commission'​s view that virtually any distinction between institutional and retail investors could potentially lead to "​gaming behavior." We believe that very few investors will want to go through the trouble of opening and managing multiple accounts for that purpose."

It adds, "​3. We recommend that municipal (​tax-​exempt) money market funds be exempted from the floating NAV proposal. Our data illustrates that owners of municipal money market funds are overwhelmingly retail investors and their past behavior in times of market stress indicates there is less risk of a run in these funds. Municipal money market funds are also much more liquid than prime funds, and data shows that even at the height of the 2008 financial crisis, these funds were exceptionally resilient. Moreover, municipal funds are home to only about 10% of the assets under management across all money market funds. We do not believe that municipal funds pose a systemic risk."

Schwab writes, "​4. We request that the rule confirm the treatment of registered investment advisers in the context of the definition of "​retail" and "​institutional" investor. Investment advisers have discretion to trade on behalf of their clients, and most advisers bundle the trades of their underlying clients into a single trade. Investment advisers are neither shareholders of record nor beneficial owners and, therefore, under the proposed rule would not be subject to the proposed redemption limit. However, investment advisers also are not "​omnibus account holders," as defined in the proposed rule, and therefore are not expressly exempt from that limit."

Later they say, "​6. We recommend that the tax issues identified by the Commission in its proposal be resolved by the appropriate regulator prior to the rule taking effect. We support exempting shareholders of a floating NAV money market fund from being required to report gains and losses unless the gains or losses exceed 50 basis points. 7. While generally supporting the Commission'​s proposed reforms to money market fund `​diversification requirements and the proposed enhancements to disclosure, Schwab has a number of recommendations for changes to these areas of the proposal. We oppose the proposed enhanced stress-​testing requirements, because we believe that they will be difficult to comply with and provide little added benefit for understanding the risks in a money market fund."

Chandoha adds, "Finally, it is critically important to observe that Schwab has expended considerable effort attempting to determine the costs of implementing the proposed rule and has concluded that the Commission has vastly underestimated those costs in its analysis. We believe the costs are so significant as to warrant careful consideration by the Commission of whether those costs outweigh the benefits of the proposed rule. The Commission should consider not only the implementation costs that each industry participant will incur to modify its systems and procedures to comply with the rule, but also the larger repercussions the proposed changes to the money market fund industry will have on the broader financial system."

Schwab closes its "​Executive Summary" by saying, "The proposed rule, even if the Commission were to adopt every one of Schwab'​s recommendations for modifications, could still have an enormous impact on individual investors, on money market funds generally, on the stability of the financial system and on the economy as a whole. We urge the Commission to consider and evaluate the unintended consequences before a final rule is issued. We believe, for example, that if investors flee prime funds for government funds during a transition to a new regulatory regime, this could spark the kind of systemically-​risky run that the rules themselves are intended to prevent. And we question whether there is adequate capacity in non-​prime money market funds and other types of cash-​management products to absorb the potential outflows from prime money market funds that will result from the changes contemplated by the Commission in its proposed rule. We also believe that the proposal has the potential to transfer risk to other parts of the financial system by increasing the amount of assets in either less-​regulated products or in bank products. The ramifications of what amounts to a fundamental overhaul of a $​2.​6 trillion industry need to be carefully considered by the Commission before its members vote for final approval of this rule."

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With less than a week to go in the SEC'​s Comment Period for its Proposed Money Market Fund Reform Rules the letters are beginning to stack up, and they should start coming in in droves as we approach the Sept. 17 deadline. The latest is a 21-​page heavyweight critique from Melanie L. Fein of the Fein Law Offices, with a paper entitled, "The SEC'​s Money Market Fund Proposal: An Inappropriate Use of the Investment Company Act to Address a Bank Regulatory Problem." Fein writes, "The SEC'​s Proposal seeks to address a problem originating in the banking industry, not the MMF industry, and whose solution lies in banking regulation, not MMF regulation. The problem is one of excessive reliance on short-​term credit to fund long-​term assets by banks operating with insufficient capital, liquidity, or risk controls. That problem, combined with flawed bank credit underwriting standards, was at the root of the financial crisis. The problem must be addressed by banking regulators under the banking laws, not the SEC under the Investment Company Act."

She explains, "The Federal Reserve'​s insistence that the SEC impose drastic regulatory measures on MMFs is geared to shift the problem where it doesn'​t belong and subsidize the banking industry at the expense of MMFs and their investors. Statements by Fed officials indicate they want MMFs to serve as captive lenders to the commercial paper market in a crisis. The SEC'​s Proposal would do the Fed'​s bidding and place MMF shareholders at risk for the irresponsible behavior of large banking organizations. MMF shareholders would be held hostage to the emergency funding needs of institutions that banking supervisors have allowed to become too-​big-​to-​fail and too-​big-​to-​manage. The Proposal would force MMFs and their shareholders to prop up banks and the bank commercial paper market in a crisis -- a function that Congress intended to be performed by the nation'​s central bank, not MMFs and their investors."

Fein explains, "​It is inappropriate for the SEC to pursue measures under the Investment Company Act that in reality are bank regulatory ambitions masquerading as MMF reforms. The Fed'​s proposals, embedded in the SEC'​s rulemaking, have serious implications for market efficiency and the future viability of MMFs, with uncertain long-​term structural implications for the financial system as a whole. Rather than attempt to solve bank regulatory problems by subjecting MMFs to inappropriate regulatory actions, the SEC should abandon the Proposal. Instead, the SEC should recommend that the Fed and other banking regulators pursue supervisory measures to address systemic risks that arise when too-​big-​to-​fail banks rely excessively on short-​term credit to fund long-​term assets with insufficient capital, liquidity, or risk controls."

She continues, "The Fed has said it currently is mulling over whether to seek public comment on possible approaches to address this problem, including by imposing an additional capital requirement on banks that rely excessively on the short-​term markets. The SEC should encourage the Fed to pursue that process, which will address the problem directly, rather than adopt costly and unnecessary changes under the Investment Company Act that will harm MMF investors and have potentially disruptive and unpredictable consequences for the short-​term credit markets."

Fein tells the SEC, "This paper argues that the problem the Proposal seeks to address is one not caused by either MMFs or deficient MMF regulation. Rather, the problem arises from a history of lax supervision of banking organizations by federal banking regulators who allowed banks to expand beyond traditional limits into complex financing activities without adequately understanding or supervising the risks they generated."

She says, "The problem has many manifestations but boils down to excessive reliance on short-​term funding by banking organizations that operated with insufficient capital, liquidity, or supervisory oversight. These institutions used the short-​term markets to sell high-​risk loans made in violation of their own credit underwriting standards and disguised with credit ratings obtained by offering guarantees they could not realistically meet. The solution to the problem is not to emasculate the short-​term credit markets by eviscerating MMFs but rather to impose appropriate limits on banks that access to those markets."

Fein adds, "The floating NAV and redemption penalties in the SEC'​s Proposal are unlikely to prevent heavy redemption activity by institutional prime MMF shareholders during a crisis. Indeed, they could have the opposite effect by encouraging investors to withdraw from MMFs precipitously to avoid the redemption penalties or a decline in portfolio value, thereby exacerbating the very problem sought to be averted."

Finally, she concludes, "​Federal Reserve officials have said they are contemplating ways to deal with the problem directly, including by requiring banks that over-​rely on short-​term funding to maintain additional capital. The SEC should encourage the Federal Reserve to pursue that process rather than heed the central bank'​s unwarranted demands for drastic and costly regulatory changes to MMFs under the Investment Company Act. The Fed-​inspired Proposal threatens to destroy an investment product valued by millions of investors and could have potentially disruptive and unpredictable consequences for the short-​term credit markets."

​

Wells Fargo Advantage Money Market Funds latest "​Portfolio Manager Commentary" discusses a number of major issues in the repurchase agreement, or "​repo," market. Head of Money Funds David Sylvester and his team write, "Repurchase agreement (​repo) rates have been excruciatingly low of late, which has depressed yields on other types of money market instruments. We'​ve noted before the linkage between rates on repos and municipal variable-​rate demand notes (​VRDNs), which have become close substitutes for one another, but a similar relationship exists between repos and other instruments. If rates in one part of the market rise, investors moving from repos to that sector serve to contain that rise while, at the same time, their departure from the repo market relieves downward pressure on yields there."

The piece continues, "We'​ve also discussed the relationship between dealer inventories of government securities and repo rates and noted that a change of $​10 billion in the amount of inventory to be financed has generally led to roughly a 1-​basis-​point (​bp; 100 bps equals 1.​00%) change in repo rates. Up to this point, changes in the aggregate size of dealer holdings of government securities have resulted from fluctuations in the amount of issuance by the Treasury, or from buying and selling by the Federal Reserve (​Fed) as it implements monetary policy. We are, however, beginning to see adjustments in dealer positions being driven by shifts in bank capital requirements, and these changes appear to be as significant and long-​lasting as anything that'​s come from the Fed'​s quantitative easing (​QE) programs."

Wells explains, "​Regulations surrounding risk-​weighted Tier 1 capital ratios, which require banks to hold capital in an amount calculated largely on the risk profile of the asset, have received most of the attention over the past few years. But now, in a further effort to constrain balance sheet leverage, global banking authorities have also incorporated the supplementary leverage ratio, which requires banks to hold additional capital on a non-​risk-​adjusted basis. Banks in the U.​S. are expected to be required to comply with this additional ratio, which calls for certain levels of regulatory capital to be held as a percentage of what'​s called the total leverage exposure. Unlike the Tier 1 capital ratio, the total leverage exposure calculation also includes assets and other exposures that may be off the bank'​s balance sheet. These expected changes to the U.​S. capital standards, following the proposal by international standard setters, are already having an effect on the repo market."

They add, "But for banks seeking to comply with the new ratio, there is a much easier and cheaper solution than raising scarce and expensive capital: shrink assets. And if institutions needed to shrink assets quickly and at relatively low cost, they would most likely shed the most high-​quality and liquid assets on the books: U.​S. Treasury securities. Now these also happen to be the ones that have the lowest risk weighting (​which means they are the most levered on a risk-​weighted basis), so if it strikes you as odd that banking regulation would force banks to become, on balance, more risky, you'​re probably not alone. But banking regulators may feel they have this base covered with the risk-​weighted Tier 1 capital ratios and the supplementary capital buffers for the G-​SIBs."

After discussing some additional regulatory influences, Wells writes, "This has significant implications for the repo market, which has already shrunk from $​2.​7 trillion at the end of 2012 to $​2.​5 trillion by the end of July. Because banking regulators see cheap wholesale funding as a root cause of the recent financial crisis, and the repo market is at the heart of the wholesale funding market, it'​s likely that shrinking the repo market is an objective of the changes in the leverage exposure calculations and not an unintended consequence. We know of several primary dealers in government securities who have cut the size of their Treasury positions by more than half, and we suspect there are others that will follow suit. This is difficult news for the taxable money market funds, which have nearly one-​fifth of their assets invested in repos."

Sylvester and Co. tell us, "Most repos in money market funds mature on the following business day and thus help money market funds meet the minimum requirements for investment in daily and weekly liquid assets imposed by the 2010 amendments to Rule 2a-​7. While other types of securities meet the daily and weekly liquid asset definition, they, too, are in short supply, so any contraction in the repo market definitely presents a challenge for money market fund portfolio managers."

Note: The piece contains a table of "Repos in taxable money market funds as of 7-​31-​13 (​sourcing Crane Data) that shows Prime funds with $​182 billion in repo (​12% of the $​1.​512 trillion total), Government funds with $​172 billion in repo (​39% of the $​441 billion) and Treasury funds with $​110 billion in repo (​24% of the $​463 billion total). The Total in Repo holdings is $​464 billion, or 19%, of the $​2.​416 trillion in Taxable MMFs tracked by Crane Data.

Wells also says, "But the Treasury repo market will not be the only market to contract as banks seek to shed other assets with a zero risk weighting. While the U.​S. operations of foreign banks are not included at this time, the Fed has called for foreign banks to form intermediate holding companies that comply with U.​S. banking regulations, so it'​s likely to be only a matter of time before this reaches them. In addition to managing sizable repo books, the U.​S. branches of foreign banks also happen to be significant depositors of excess reserves at the Fed. Unlike U.​S. banks, these foreign-​bank branches are not liable for the Federal Deposit Insurance Corporation (​FDIC) insurance assessment; as a result, the 25 bp interest on excess reserves (​IOER) is more attractive to them on a net basis considering they'​ve been able to borrow funds, often in the repo market at less than 10 bps, and collect 25 bp from the Fed. Now with the prospect of both sides of that trade becoming wrapped into the revised exposure measure, the foreign banks won'​t want to hold excess reserves any more than the U.​S. banks do now. Since the total amount of reserves in the system is set by the Fed'​s monetary policy (​and, contrary to many op-​ed articles authored by people who should know better, can'​t be lent to borrowers) this should push the real cost of reserves down even further below the Fed'​s target rate."

They explain, "All of this dovetails nicely with the revelation that a staff presentation was made to the Federal Open Market Committee (​FOMC) at its July 30–​31 meeting regarding an expansion of the Fed'​s reverse repo program (​RRP). From the minutes of that meeting, we learned that: "In support of the Committee'​s longer-​run planning for improvements in the implementation of monetary policy, the Desk report also included a briefing on the potential for establishing a fixed-​rate, full-​allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates. The presentation suggested that such a facility would allow the Committee to offer an overnight, risk-​free instrument directly to a relatively wide range of market participants, perhaps complementing the payment of interest on excess reserves held by banks and thereby improving the Committee'​s ability to keep short-​term market rates at levels that it deems appropriate to achieve its macroeconomic objectives.""

Sylveter, et. al., explain, "​A fixed-​rate, full-​allotment facility would imply one where the Fed sets a rate each day and approved counterparties can lend them an unlimited amount at that rate. The Fed is currently using the excess reserves from banks to finance a massive inventory of long-​term Treasury and mortgage backed securities that were acquired through its QE programs. Because the Fed can'​t sell these securities in any meaningful size without severely depressing the market in those securities, it would be very helpful to them to obtain financing from a new source that wouldn'​t be subject to these more severe capital requirements. At the same time, it would be helpful to the market to find a new source of daily liquid assets from a counterparty of unquestionable creditworthiness. From money market funds facing a shortage of collateral for repos that are largely being used to meet their regulatory requirements to hold liquid assets, to the derivatives markets looking for collateral to pledge against their transactions, there is a generalized need for high-​quality collateral that could be met with what the Fed holds."

Finally, the piece adds, "An RRP would also help the Fed better control short term rates now that the sea of excess reserves has all but eliminated the federal funds market. It would better enable the Fed to put a floor on money market rates once it decides to hike rates, and there is less likely to be a gap between money market yields and the Fed RRP rate. This gap between the effective federal funds rate and the FOMC'​s target has been a persistent problem since the Fed began paying IOER in December 2008. Originally, policymakers thought that IOER would itself provide a floor to the federal funds rates, since it seemed unlikely any bank would lend at a rate below what the Fed would pay on reserve balances in a risk-​free transaction. For years, federal funds had traded near the Fed'​s target rate, at least until the onset of the financial crisis in the summer of 2007. But in adopting IOER, the policymakers failed to consider that the government-​sponsored enterprises, who keep large balances at the Fed, were ineligible for IOER payments. Rather than leave those deposits at the Fed and collect nothing, they continued to sell into the federal funds market. Since banks were flush with deposits and excess reserves, the federal funds market lacked buyers, and the effective rate has consistently been below the target rate ever since." (Click here to read the full Wells "​Portfolio Manager Commentary".)

​

The September issue of Crane Data'​s Money Fund Intelligence was sent to subscribers yesterday. The latest issue of our flagship monthly newsletter features the articles: "MFI Subscribers Oppose Float, Fear Reg Changes," which reviews the results of our recent MFI Survey on the SEC'​s MMF Reform Proposals; "European Union Proposes 3% Buffer for CNAV MMFs," which discusses the recent EU regulatory proposal for European money funds; and, "Battle Shifts to Muni MMFs as Funds Brace for Floating," which cites a recent webinar and SEC meeting arguing to exempt Tax Exempt money funds from the floating NAV requirement. We'​ve also updated our Money Fund Wisdom database query system with August 31, 2013, performance statistics and rankings, and our MFI XLS was also sent out Monday morning. (MFI, MFI XLS and our Crane Index products are available to subscribers at our Content center.) Our August 31 Money Fund Portfolio Holdings are scheduled to go out Wednesday, Sept. 11.

Our MFI Subscriber Survey piece says, "Crane Data recently surveyed MFI subscribers about the SEC'​s latest Money Market Fund Reform Proposals and some other issues. As expected, the responses indicate that the vast majority oppose the floating NAV option for prime institutional funds and most believe the stable NAV is a crucial element to MMFs. MFI e-​mailed the brief survey questions to its over 1,​100 recipients and received 62 responses. Respondents included primarily money fund managers and sales professionals, but also a number of money fund investors, money fund service providers, and others."

The September issue'​s lead story tells us, "Crane Data'​s 2013 Money Fund Intelligence Subscriber Survey: SEC MMF Reform Proposal and Major Issues first asked readers to tell us which of the SEC'​s three reform options (​floating NAV, gates or combination) is the best alternative. Our respondents replied: a. Floating net asset values for Prime Institutional MMFs (​11.​3%, 7 responses). b. Emergency liquidity fees and "​gates" for MMFs (​30.​6%, 19). c. A combination of floating NAVs and fees/​gates for MMFs (​3.​2%, 2). d. Neither option, only additional disclosures (​50.​0%, 31). e. Other, please specify (​12.​9%, 8). The "​Other" responses included several for "​gates only" and one for "​capital buffer"."

Our story on the European Union'​s recent shocking proposal comments, "The European Union issued a release on "​shadow banking" and proposed rules on money market funds last week, which include a controversial 3% "​NAV buffer" mandate for Constant NAV funds. The "​proposed new rules for money market funds [​aim] to ensure that MMFs can better withstand redemption pressure in stressed market conditions by enhancing their liquidity profile and stability," says the EU release. Reaction to the proposal to-​date has been almost uniformly negative, but thankfully for fund providers and investors the legislative process in Europe could take years and may involve revisions or a significant compromise."

The piece cites the EU'​s Q&​A on MMFs, which asks, "How would the new rules work?" It answers, "The proposed Regulation requires: certain levels of daily/​weekly liquidity in order for the MMF to be able to satisfy investor redemptions (​MMFs are obliged to hold at least 10% of their assets in instruments that mature on a daily basis and an additional 20% of assets that mature within a week); clear labeling on whether the fund is short-​term MMF or a standard one (​short term MMFs hold assets with a residual maturity not exceeding 397 days while the corresponding maturity limit for standard MMFs is 2 years); a capital cushion (​the 3% buffer) for constant NAV funds that can be activated to support stable redemptions in times of decreasing value of the MMFs' investment assets; customer profiling policies to help anticipate large redemptions; some internal credit risk assessment by the MMF manager to avoid overreliance on external ratings."

The article on Battle Shifts to Muni MMFs as Funds Brace for Floating explains, "In what could be a preview of some comment letters, recent lobbying appears to be focusing on exempting tax-​exempt money funds from the floating NAV mandate. In late August, the GFOA, ICI, and Chamber of Commerce hosted a webinar entitled, "​Money Market Fund Regulation: The Impact on Municipal Finance," which discussed the potential and myriad impacts of the SEC'​s proposed changes on municipal investors and issuers." See the latest issue and future "​News" postings for more details, or contact us to request the latest issue.

Finally, we also reminded subscribers of the upcoming Crane'​s European Money Fund Symposium, which will take place in two weeks (Sept. 24-​25) at The Conrad Hotel in Dublin, Ireland. We currently have 75 attendees registered, and we'​re expecting close to 100 in total. This should make our inaugural event the largest money fund conference outside the U.​S. (​We already of course hold the title of largest U.​S. event with our annual Money Fund Symposium, which attracted 450 in Baltimore this past June.)

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Last week, Fitch Ratings published a brief paper entitled, "Continued NAV Stability Amidst Money Fund Reform yesterday, which discusses regulatory proposals, "​shadow" (​or market) NAVs, and transparency. Fitch'​s press release tells us, "The Securities and Exchange Commission'​s (​SEC) June proposal for money market fund (​MMF) reform has placed a heavy emphasis on funds' market (​or '​shadow') net asset value (​NAV). However, relatively benign market conditions, conservative portfolio management and previous regulatory reforms enabled Fitch-​rated U.​S. prime MMFs to maintain a stable market NAV since the financial crisis. In addition, earlier this year many of the largest MMF managers began publicly disclosing some funds' daily market NAV. The voluntary disclosures increase transparency for investors, consistent with the SEC'​s objectives. Thus far, few investors consistently review funds' posted market NAVs, as expected given the stability for most funds. However, the market NAVs will likely receive greater attention during periods of market volatility, for instance when short-​term interest rates rise. Increased scrutiny of market NAV by investors may incentivize fund managers to construct portfolios more conservatively." (​Note: Watch for our September Money Fund Intelligence and August 31 Performance Data to be published later this morning.)

The report explains, "On June 5, 2013 the SEC issued proposed reforms to MMFs, with a heavy focus on funds' market NAV. Under one of the proposals, institutional prime MMFs will be required to float their NAV, in contrast to the current practice of a stable $​1.​00 NAV. The SEC argues that this will desensitize investors to NAV movements and help reduce redemptions from institutional prime MMFs in times of stress. In case substantial redemptions do occur, the SEC contends that a floating NAV will invalidate the first-​mover advantage that is inherent in stable NAV funds. The SEC has requested market comments on its initial proposal and will finalize the new rule in a couple of months in its current or modified form."

It tells us, "In addition, the SEC has proposed that all MMFs (​not just institutional prime) publicly provide daily and historical disclosures of their market NAV. Currently MMFs are required to disclose their market NAV on a monthly basis with a two-​month lag. While this aids investors in evaluating funds on a historical basis, this is a stale statistic for short-​term money market investments. Aside from the SEC, the Financial Stability Oversight Council (​FSOC) in 2012 put forth a number of MMF reform recommendations, including to float the NAV of all MMFs (​not just institutional prime). While the FSOC has deferred to the SEC for now, it may revisit the topic of MMF reform if it deems the SEC’​s final rule to be inadequate in reducing systemic risk."

Fitch writes, "Starting in early 2013, in anticipation of the SEC'​s reform proposals, many large MMF sponsors began voluntarily publicly disclosing some funds’ market NAV on a daily basis. This disclosure is a significant improvement in timeliness over the current regulatory requirements. Nevertheless, fund sponsors are being cautious to balance the increased transparency with potential confusion among investors who may not be familiar with the metric. Sponsors are typically displaying market NAV only for select institutional funds that may have more sophisticated shareholders. In addition, fund sponsors have increased their focus on investor education."

The report continues, "Fitch-​rated U.​S. prime MMFs have maintained stable market NAVs since the financial crisis due to relatively benign market conditions, conservative portfolio management and regulatory reforms (​see chart on page 1). For the most part, short-​term markets have been relatively stable since 2007–​2009, minimizing fluctuations in the value of MMF portfolio securities. At the same time, money fund managers have proactively reallocated portfolio holdings away from, or shortened maturity limits of, riskier issuers in times of increased volatility such as the Eurozone crisis and the U.​S. debt ceiling crisis of 2011. The value of securities issued by strong issuers, or at shorter maturities, fluctuates less at times of stress, contributing to a more stable market NAV."

It adds, "Regulatory reforms enacted by the SEC in 2010 have also contributed to the stability of MMF market NAVs. The reforms mandated that MMFs hold higher levels of liquidity and have shorter portfolio maturities, among other things. These changes resulted in MMFs being able to better handle shareholder redemptions without having to sell portfolio securities at a loss, as well as reduce funds' sensitivity to credit and interest rate changes. Fitch-​rated funds’ current high levels of liquidity, at 26% daily and 40% weekly liquid assets, as of the end of July, continue to support the stable market NAVs."

Fitch also writes, "Despite the industry'​s efforts to increase transparency, investors have not shown sustained interest in reviewing funds' market NAV on a daily basis. Anecdotal evidence indicates that few investors check the disclosures consistently. This may be due to the relative difficulty of comparing market NAV across funds run by different sponsors, since disclosures are not standardized on sponsors' websites. Shareholders may become more attuned to funds' NAV if the information is displayed in a standardized form on trading platforms like MMF portals."

Finally, the says, "In addition, as there is little movement in the market NAV of most funds, investors may find the disclosures of little value in the current market environment. However, market NAVs may receive greater attention during periods of market volatility, for instance when short-​term interest rates rise. This may be the case particularly as the information is integrated into investors' trading platforms such as MMF portals. Overall, increased transparency is healthy. Heightened scrutiny of market NAV by investors may incentivize fund managers to construct portfolios even more conservatively than before. However, increased attention paid to market NAV may present MMFs with the risk of shareholders preemptively redeeming shares if the market NAV falls below $​1.​0000 (​say, to $​0.​9999), even for a fund that is not experiencing stress otherwise."

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As we approach the SEC'​s September 17 comment deadline (​see their "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" page), some serious feedback is beginning to appear. The latest, a comment from Lance Pan, CFA, Director of Investment Research and Strategy, Capital Advisors Group offers what could become the blueprint for the final regulations -- a dual floating or market pricing alongside a penny-​rounding transaction regime. Pan writes in "Capital Advisors Group'​s Comments on the Recent Money Market Fund Reform Proposal by the Securities and Exchange Commission, "We commend the Commission for tackling the tremendous task of analyzing mountains of data before putting forth the reform alternatives for public comment. We seek to weigh in on the subject from the perspective of an institutional asset manager.`​We support the mandatory daily disclosure of market-​based NAVs as the published share prices and penny-​rounded NAVs for shareholder activities <​b:>`​_. In our opinion, floating NAVs provide no more informational value than market-​based NAVs."

The letter says, "If the basis point rounded NAV approach is adopted, we propose a NAV stability band between $​0.​995 and $​1.​005 beyond which fees and gates may be imposed. This approach provides tax and accounting justification for maintaining the funds' current distinction and preserves some operational attractiveness.... We view fees and gates as ineffective because of probable shareholder expectations that the tools will not be deployed due to fund sponsors' self-​preservation motives."

Pan explains, "We propose an emergency redemption price of market-​based NAV plus a 1% liquidity fee when thresholds are breached (​defined as weekly liquidity < 30% or market-​based NAV < $​0.​995).... We are strongly opposed to the use of gates. However, if gates must be implemented, we propose allowing redemptions of up to 50% of remaining balances.... We propose making sponsor support explicit, committed and disclosed prior to an event occurring."

He tells us, "Most institutional investors use money market funds as cash management vehicles, and often consider them to be close substitutes for bank deposits without explicit government support.... Institutional investors tend to demand a very high level of certainty regarding available liquidity since the money market funds are the source of cash for expenditures.... While naturally desiring higher levels of income, institutional investors will not rationally violate the first two objectives of capital preservation and liquidity in pursuit of higher return potential."

Pan adds, "When the first two objectives cannot be satisfied simultaneously, investors may be willing to pay for liquidity, albeit reluctantly, under extreme market conditions. However, the costs must be commensurate with the expected returns of the associated instruments.... The high concentration and interdependence of institutional shareholders requires an understanding of each shareholder'​s assessment of others' likely behaviors in times of market distress. They often are also cognizant of the potential for a fund advisor, as an agent, to place its self-​preservation interests before the interests of shareholders -- individually or collectively."

He also writes, "We think that the credit, liquidity and other measures enacted following the 2010 amendment are generally adequate for normal to moderately stressed market conditions. Additional reforms should primarily address emergency situations.... We believe that the Commission'​s primary objective should be the stability of the short-​term financing market. hareholder or sponsor interest is secondary.... Runs in a single fund from idiosyncratic causes should not be the primary reform objective. Instead, preventing runs in other funds should be the focus.... We think that lower systemic risk in money market funds should not result in higher systemic risk elsewhere, including in less regulated private liquidity funds or more concentrated fund sponsors."

Finally, Capital Advisors says, "We agree with the Commission that influencing shareholder expectations and behavior is important, but we believe the proposed changes are too stringent.... We recognize that the final rule revisions likely will be imperfect, as there are pros and cons for all conceivable alternatives. The final rule should represent the best balance between long-​term funding market stability and the utility of money market funds."

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The London-​based Institutional Money Market Funds Association (​IMMFA), the trade group that represents triple-​A rated, stable value ("​U.​S.-​style") money market funds in Europe, released a statement yesterday in reaction to the European Union'​s "​proposed rules on money market funds." IMMFA writes, "​The European Commission has today released the proposal for a new Regulation for money market funds: "Regulation of the European Parliament and of the Council on Money Market Funds." IMMFA members are committed to providing high quality, effective products but this ill-​considered Regulation will effectively mandate a conversion to variable NAV MMF to the detriment of investors, issuers and the economy in general. IMMFA supports the introduction of minimum liquidity requirements, "​know your client" policies, the use of trigger-​based liquidity fees and gates and enhanced transparency. These reforms would make MMF even stronger and meet regulators' desire to reduce run risk in MMF whilst maintaining them as an effective product for investors." (Note: IMMFA Chairman Jonathan Curry will be giving the keynote address at our upcoming European Money Fund Symposium, which will take place Sept. 24-​25 in Dublin.)

Susan Hindle Barone, Secretary General of IMMFA, comments, "Some of the measures in today'​s EC proposal will make a positive contribution to the robustness of money market funds, but there are several which are extremely unhelpful, to investors and to the short-​term debt markets in general. We reject the assertion that there is a greater degree of systemic risk inherent in constant NAV money market funds. The European Commission has not demonstrated that CNAV funds are more susceptible to run-​risk than VNAV funds and the discrimination between these two accounting techniques is unjustified."

The release explains, "IMMFA does not believe that requiring a 3% capital buffer for CNAV MMF will enhance systemic stability. Holding capital is inappropriate for investment funds and would fundamentally change the nature of the relationship between the investor, the fund manager and the CNAV fund. With the requirement for a 3% capital buffer, IMMFA expects that CNAV providers will convert their funds to VNAV. It is uneconomic for an asset manager to hold 3% capital against a MMF. Even assuming that a 3% capital buffer were affordable, its imposition would require European domiciled CNAV MMF to raise E14bn, E10bn by banks and E4bn by independent asset managers. Assuming banks are currently levered x20 – x25, reassigning the capital from other business to cover the MMF buffer would withdraw E200bn-​E250bn from the European economy."

They explain, "The result is a de facto abolition of CNAV funds leading to fewer choices for investors. The proposals conflict with three of the FSB'​s five key principles (​appended below) for new regulatory measures aimed at shadow banking concerns. Focus: The EC has not demonstrated that CNAV funds are more susceptible to run-​risk than VNAV funds; the 3% buffer requirement does not target a cause of systemic weakness. Proportionality: With no material difference in risk between these two types of fund, it is disproportionate to impose a 3% capital buffer on one type but not on the other. Effectiveness: Given the SEC'​s decision to reject the use of capital buffers for US MMF, there is now a serious risk that cross border arbitrage opportunities will be created. There are no material differences between the money markets in US and the EC to justify such a markedly different regulatory response."

IMMFA writes, "Amortised cost accounting is a pragmatic way to evaluate the fair value of money market instruments, is compliant with UCITS and has been accepted by the FASB as compliant with GAAP. The prohibition of amortised cost accounting will make it impractical to operate MMF and offer liquidity on a '​same-​day' basis, damaging the value money market funds have for investors and therefore the value the funds have for the broader economy."

Finally, they add, "Beyond these fundamental issues, there are numerous other prescribed changes which would make the continued operation of MMF difficult whilst apparently achieving little in terms of the stated aims. These would include: Removal of fund ratings – problematic to investors; An excessively prescriptive credit analysis process; Restriction on eligible assets – specifically the restrictions on ABCP; Finally, the transition period for these changes is given as 6 months. This will not be practicable given the extensive operational and educational changes which would be necessary."

A separate release, entitled, "ICI Global and ICI Disappointed with EU Proposal for Money Market Fund Regulation," commented, "ICI Global Managing Director Dan Waters and ICI General Counsel Karrie McMillan made the following statement about the European Commission'​s proposal for the regulation of money market funds published today: "​ICI and ICI Global support additional regulation that will strengthen money market funds in the European Union and protect their investors. But any new rules must be created through a transparent process supported by strong research and public dialogue. Unfortunately, the proposal released today neither serves investors nor meets those basic standards for rulemaking.""

They add, "In particular, it'​s troubling that the proposal would impose a 3 percent capital requirement for constant net asset value money market funds -- a proposal that two major bodies have already rejected. Both the European Systemic Risk Board and the U.​S. Securities and Exchange Commission have cited concerns about the ongoing cost of capital requirements and the possibility that capital requirements could drive many, if not most, money market fund sponsors out of the business, thereby depriving investors, issuers, and economies of the benefits these funds provide. The 3 percent capital NAV buffer is simply economically infeasible, operationally complex, and impracticable."

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The European Union issued a release on "​shadow banking" and proposed rules on money market funds on Wednesday, which include a controversial 3% "​NAV buffer" mandate for Constant NAV funds. The "Commission'​s roadmap for tackling the risks inherent in shadow banking, says "The Commission has today adopted a communication on shadow banking and proposed new rules for money market funds (​MMFs). The communication is a follow-​up to last year'​s Green Paper on Shadow Banking (​IP/​12/​253). It summarises the work undertaken so far by the Commission and sets out possible further actions in this important area. The first of these further actions -- the proposed new rules for money market funds -- is unveiled today and aims to ensure that MMFs can better withstand redemption pressure in stressed market conditions by enhancing their liquidity profile and stability." The Commission also released a document entitled, "New rules for Money Market Funds proposed -- Frequently Asked Questions." (​Note: Crane Data will be hosting its first European Money Fund Symposium in less than 3 weeks, Sept. 24-​25, in Dublin, Ireland, so we expect this proposal to be a major topic of discussion.)

EU Internal Market and Services Commissioner Michel Barnier comments in the first release, "We have regulated banks and markets comprehensively. We now need to address the risks posed by the shadow banking system. It plays an important role in financing the real economy and we need to ensure that it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors."

On "Background," the EU'​s statement explains, "Shadow banking is the system of credit intermediation that involves entities and activities that are outside the regular banking system. Shadow banks are not regulated like banks yet engage in bank-​like activities. The Financial Stability Board (​FSB) has roughly estimated the size of the global shadow banking system at around E51 trillion in 2011. This represents 25-​30% of the total financial system and half the size of bank assets. Shadow banking is therefore of systemic importance for Europe'​s financial system."

It explains, "​Since the beginning of the financial crisis back in 2007, the European Commission has undertaken a comprehensive reform of the financial services sector in Europe. The aim is to establish a solid and stable financial sector -- essential for the real economy -- by addressing the shortcomings and weaknesses highlighted by the crisis. But risks must not be allowed to accumulate in the shadow banking sector, in part because new banking rules could be pushing certain banking activities towards this less highly regulated shadow banking sector."

The EU communication continues, "Money market funds (​MMFs) are an important source of short-​term financing for financial institutions, corporates and governments. In Europe, around 22% of short-​term debt securities issued by governments or by the corporate sector are held by MMFs. They hold 38% of short-​term debt issued by the banking sector. Because of this systemic interconnectedness of MMFs with the banking sector and with corporate and government finance, their operation has been at the core of international work on shadow banking."

It adds, "Main elements of today'​s communication on shadow banking and draft regulation on money market funds: The Communication sets out the issues at stake in relation to the shadow banking system and the measures already taken to deal with the risks related to shadow banking such as the rules governing hedge fund activity (​MEMO/​10/​572) and reinforcing the relationship between banks and unregulated actors (​the provisions related to securitisation exposures in the revised Capital Requirements legislation (​MEMO/​13/​272)."

The statement continues, "It outlines the priorities identified on which the Commission intends to take initiatives in areas such as: [​P]​rovision of a framework for money market funds the new rules proposed today (​MEMO/​13/​764) cover money market funds (​MMFs) that are domiciled or sold in Europe and aim to improve their liquidity profile and stability: Liquidity management: MMFs would be required to have at least 10% of their portfolio in assets that mature within a day and another 20% that mature within a week. This requirement is there to allow the MMFs to repay investors who want to withdraw funds at short notice. In order to avoid that a single issuer bears undue weight in the net asset value (​NAV) of an MMF, exposure to a single issuer would be capped at 5% of the MMF'​s portfolio (​in value terms). For standard MMFs, a single issuer could account for 10% of the portfolio. Stability: to take account of the constant NAV, MMF'​s propensity to require sponsor support to stabilise redemptions at par, the new rules would require this type of MMF to establish a predefined capital buffer. This buffer will be activated to support stable redemptions in times of decreasing value of the MMFs investment assets."

It also addresses, "[​T]​ransparency of the shadow banking sector: to be able to monitor risks in an effective manner and intervene when necessary, it is essential to collect detailed, reliable and comprehensive data on this sector. [​S]​ecurities law and the risks associated with securities financing transactions (​principally securities lending and repurchase transactions). These transactions can contribute to an increase in leverage and strengthen the pro-​cyclical nature of the financial system, which then becomes vulnerable to bank runs and sudden deleveraging. Furthermore, the lack of transparency of these markets makes it difficult to identify property rights (​who owns what?), monitor risk concentration and identify counterparties (​who is exposed to who?)."

The Priorities also include: "[​P]​rovision of a framework for interactions with banks. The high level of interconnectedness between the shadow banking system and the rest of the financial sector, particularly the banking system, constitutes a major source of contagion risk. These risks could notably be addressed by tightening the prudential rules applied to banks in their operations with unregulated financial entities. Furthermore, particular attention will be paid to the supervision arrangements of shadow banking entities/​activities in order to ensure that specific risks are adequately addressed. Certain areas such as the set-​up of resolution tools for non-​bank financial institutions and a structural reform of the banking system require further analysis and will be clarified later."

Finally, the statement adds, "Ultimately, the aim is to ensure that the potential systemic risks to the financial sector are covered and that the opportunities for regulatory arbitrage are limited in order to strengthen market integrity and increase the confidence of savers and consumers. The Commission'​s communication is in line with the Financial Stability Board'​s recommendations, which will be endorsed by the G20 Leaders in Saint Petersburg on 5-​6 September 2013."

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As we mentioned in our "Link of the Day" Friday, the Financial Stability Board, an international regulator organization based in Basel, Switzerland, published "Policy Recommendations to Strengthen Oversight and Regulation of Shadow Banking. The FSB'​s statement from late last week says, "The Financial Stability Board (​FSB) is publishing today policy recommendations to strengthen the oversight and regulation of the shadow banking system. These recommendations take into account public responses received on the consultative documents issued on 18 November 2012. The FSB has focused on five specific areas in which policies are needed to mitigate the potential systemic risks associated with shadow banking: (​i) to mitigate the spill-​over effect between the regular banking system and the shadow banking system; (​ii) to reduce the susceptibility of money market funds (​MMFs) to "​runs"; (​iii) to assess and align the incentives associated with securitisation; (​iv) to dampen risks and pro-​cyclical incentives associated with securities financing transactions such as repos and securities lending that may exacerbate funding strains in times of market stress; and (​v) to assess and mitigate systemic risks posed by other shadow banking entities and activities."

The press release explains, "The documents published today comprise: A report entitled An Overview of Policy Recommendations that sets out the FSB'​s overall approach to addressing financial stability concerns associated with shadow banking, actions taken to date, and next steps. A report entitled Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos that sets out recommendations for addressing financial stability risks in this area, including enhanced transparency, regulation of securities financing, and improvements to market structure (​ref. (​iv) above). It also includes consultative proposals on minimum standards for methodologies to calculate haircuts on non-​centrally cleared securities financing transactions and a framework of numerical haircut floors. [​And] a report entitled Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities that sets out the high-​level policy framework to assess and address risks posed by shadow banking entities other than MMFs (​ref. (​v) above). As far as other shadow banking policy areas are concerned, the Basel Committee on Banking Supervision will complete its work in area (​i) above in 2014, and the International Organization of Securities Commissions has already set out final policy recommendations for areas (​ii) and (​iii) above in its reports Policy Recommendations for Money Market Funds and Global Developments in Securitisation Markets."

The document entitled, "Strengthening Oversight and Regulation of Shadow Banking: An Overview of Policy Recommendations," discusses, "2.​2. Reducing the susceptibility of money market funds (​MMFs) to "​runs"." It tells us, "MMFs provide a deposit-​like instrument to investors, especially when they are redeemable on short notice and at par. Through their placement of investor funds, MMFs extend credit, and are also an important provider of short-​term funding for the regular banking system as well as for other non-​bank chains of credit intermediation that involve maturity transformation and leverage. MMFs demonstrated their vulnerability during the crisis when a large segment of MMFs experienced contagious investor runs, necessitating large scale support from sponsors or the official sector to maintain stability in the MMF sector. Absent such support, credit intermediation dependent on MMFs' funding would have been cut back dramatically. In order to address the demonstrated systemic risks of contagious investor runs on a large segment of MMFs, the International Organization of Securities Commissions (​IOSCO) has developed policy recommendations that provide the basis for common standards for the regulation and management of MMFs across jurisdictions." (​See IOSCO'​s report here.)

The report continues, "The FSB has endorsed the IOSCO recommendations, including the requirement that MMFs that offer stable or constant net asset value (​NAV) to their investors should be converted into floating NAV where workable. Where such conversion is not workable, the FSB believes that the safeguards required to be introduced to reinforce stable NAV MMFs' resilience to runs should be functionally equivalent to the capital, liquidity, and other prudential requirements on banks that protect against runs on their deposits." (​See FSB'​s previous Consultative Document on Shadow Banking here.)

It adds, "National and regional authorities are currently reviewing their existing approaches to regulating MMFs in light of the IOSCO recommendations. In the US, home to the world'​s largest MMF market, the Financial Stability Oversight Council (​FSOC) issued for consultation in November 2012 proposed recommendations to support the implementation of structural reforms to mitigate the vulnerability of MMFs to runs. The Securities and Exchange Commission (​SEC) also recently proposed rules that would reform the way that MMFs operate in order to make them less susceptible to runs. It is considering the following two alternatives that could be adopted alone or in combination: (​i) Floating NAV – Prime institutional MMFs would be required to transact at a floating NAV. Government and retail MMFs would be allowed to continue using stable NAV. (​ii) Liquidity fees and redemption gates – Non-​government MMFs would be permitted to use liquidity fees and redemption gates to reduce run risks in times of stress."

The FSB writes, "In the EU, the second largest MMF market, the European Commission organised in 2012 a public consultation on the asset management regulatory framework including possible ways to strengthen MMFs' resilience to systemic risks (​e.​g. investor runs). [See document here.] An impact assessment has been prepared with a view to make a proposal for a MMF regulation in the second half of 2013. Meanwhile, the European Systemic Risk Board (​ESRB) also published recommendations on stable NAV MMFs in December 2012 that include: mandatory conversion of stable NAV MMFs to floating NAV MMFs in order to reduce the shareholders' incentive to run when the MMF has experienced a loss; additional liquidity requirements; additional public disclosure on important features; and more detailed reporting by MMFs. IOSCO will launch a peer review process in 2014 to examine the implementation by national/​regional authorities of its recommendations in this area. The results will be reported to the FSB so that they can be included in the overall monitoring and reporting of national/​regional implementation progress in the shadow banking area."

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