A new posting entitled, "How Do Prime MMFs Manage Their Liquidity Buffers?" written by SEC staffers Viktoria Baklanova, Isaac Kuznits and Trevor Tatum, tells us, "Based on data filed by money market funds (MMFs) on Form N-MFP, this article offers insights about the composition of prime MMFs' liquidity buffers. The analysis shows that prime MMFs mainly rely on government securities and repos to meet their daily and weekly liquidity thresholds. Prime MMFs' investments in government securities increased during the pandemic, reaching an all-time high of 38% of their portfolios in August 2020." (Note: Thanks to those who attended our Money Fund Wisdom Product Training webinar Tuesday. For those that missed it, you can see the replay here.)
They explain, "Many investors use MMFs to manage their liquidity needs given that MMFs invest in short-term, high- quality debt securities that, under normal market conditions, exhibit limited price volatility. MMFs typically provide somewhat better returns than holding assets in cash. Institutional investors, in particular, make significant subscription and redemption requests on a frequent basis, especially during stressed market conditions. To meet investor needs for liquidity, MMFs are expected to hold a sufficient amount of assets that can be quickly converted to cash. Since 2010, SEC rules have included minimum liquidity requirements for MMFs, including a minimum of 10% of investments in daily liquid assets (DLA) and a minimum of 30% of investments in weekly liquid assets (WLA). MMFs report the size of their DLA and WLA to the public daily on their websites. MMFs also report these metrics to the SEC monthly on Form N-MFP. Using these data, this article examines the composition of prime MMFs' daily and weekly liquidity buffers from October 2016 through May 2021, a period that includes the heightened market volatility in March 2020 and the economic uncertainty that followed."
The SEC piece states, "If an MMF's portfolio falls below the 10% DLA or 30% WLA threshold, it may not acquire any assets other than DLA or WLA until these thresholds are met. A prime MMF may impose liquidity fees or temporarily suspend redemptions if the fund's WLA declines below 30% of its total assets. To date, no MMF has used these tools. On average, prime MMFs have historically maintained DLA and WLA well above the regulatory minimums."
It continues, "DLA are expected to be readily available to meet investor redemptions and generally include cash and securities that mature within one business day (or have a daily demand feature). In addition, MMF holdings of Treasury securities qualify as having daily liquidity. WLA include cash, securities that mature within five business days (or that funds can redeem for cash within one week), Treasury securities, and certain government agency securities with remaining maturities under 60 days."
The piece says, "Prime MMFs can invest in a broad range of short-term, high quality fixed-income instruments such as U.S. Treasury bills, federal agency notes, bank obligations such as certificates of deposit (CD) or time deposits (TD), commercial paper (CP), repos, and obligations of states, cities, or other types of municipal agencies. Because many of these assets do not qualify as daily or weekly liquid assets, unexpected and rapid shareholder redemptions from a fund may cause DLA or WLA to fall below their regulatory minimums. For example, at the onset of the pandemic in March 2020, investors withdrew $125 billion from prime MMFs causing a general reduction of WLA, which approached the 30% threshold for some funds and fell below 30% in one case. However, according to Form N-MFP filings, no prime MMF reported DLA declining below the 10% threshold in March 2020, suggesting that these funds maintained available liquidity to meet daily redemptions up to 10% of the funds' total assets."
It adds, "The data show that nearly all prime MMF investments in repos have historically been used to meet DLA and WLA thresholds.... In addition, most prime MMF investments in government securities are used as WLA.... In contrast, only a small portion of total CP investments by prime MMFs are used as DLA (5% of the total CP investments, on average) and WLA (11% of the total CP investments, on average) (Figure 10). Lastly, only 18% of prime MMF investments in banks' CD and TD, on average, are used as DLA and 22% of these investments, on average, are used as WLA."
In other news, The Wall Street Journal writes, "Assets in Ant Group's Flagship Money-Market Fund Tumble to 2016 Levels." The article explains, "Assets under management at Ant Group Co.'s highly popular money-market fund fell to their lowest level in years after pressure from China's regulators forced the company to sit out an industrywide boom. Data for the second quarter, released Wednesday, showed that the Tianhong Yu'e Bao money-market fund had the equivalent of $120.4 billion of assets at the end of June, down 20% percent from three months earlier to a level last seen in late 2016. Last autumn, before Chinese regulators forced Ant to call off its blockbuster initial public offering, the giant fund had more than $180 billion in assets under management."
It tells us, "At its peak in early 2018, the fund managed assets totaling 1.69 trillion yuan, the equivalent of $260.6 billion at present exchange rates, and was the largest such vehicle in the world. It used to produce returns far in excess of Chinese bank deposit rates by buying bank certificates of deposit and other higher-yielding products. Its rapid growth and large size drew regulatory scrutiny at the time, leading Ant to impose investment caps and open up its Yu'e Bao money-market investing platform to rival products. The caps were subsequently scrapped after the giant fund started shrinking and losing investors to other funds."
The Journal states, "More recently, the original Tianhong Yu'e Bao fund has come under fresh pressure. In April this year, as part of a five-point overhaul of Ant, Chinese financial regulators ordered Ant to reduce the flagship fund’s assets under management further. Officials said the fund, which serves hundreds of millions of small investors, would need to shrink to avoid posing a risk to the financial system, though they didn't specify an appropriate size for it, people familiar with the matter said. In response to the April order, the fund has refrained from chasing better yields or actively promoting itself to investors, the people said."
They write, "Tianhong didn't go into detail about why the fund's assets shrank significantly. The money-market fund's seven-day annualized yield was 2.093% at the end of June, slightly lower than that of some rival funds sold on the same platform. For the second quarter, Tianhong reported a net return rate of 0.5255% and 4.5 billion yuan in profit after fees."
Finally, the WSJ quotes Aidan Shevlin, head of International global liquidity portfolio fund management at J.P. Morgan Asset Management, "The bigger a fund is, the more troublesome it could potentially be if it runs into problems." He said `China's biggest funds tied to e-wallets were also very widely owned. "So if anything were to happen, that would be very concerning." (For more on Chinese money funds, see our June 24 News, "Asian Money Fund Symposium Recap: JPMAM's Shevlin on Chinese MMFs," and our June 18 News, "Worldwide MF Assets Jump in Q1'21 Led by US, China; Europe Sees Drop.")