Money Market News
In a just-published "Credit FAQ piece, "What Effect Will The Certificate Of Deposit Accounts Registry Service Program Have On Fund Ratings?, S&P writes, "The recent market turmoil has prompted portfolio managers, investment managers, and treasury professionals to look for investments that add value without sacrificing yield or diversification. Recently, Standard & Poor's Ratings Services has received numerous inquiries regarding how we view the liquidity and credit quality of the Certificate of Deposit Accounts Registry Service (CDARS) program in regards to principal stability fund ratings (PSFRs), fund credit quality ratings (FCRs), and liquidity assessments."
The FAQ explains, "We have criteria regarding our assessment of certificates of deposit (CDs) and collateralized CDs for taxable and tax-exempt PSFRs, FCRs, and liquidity assessments.... Our responses to the following questions provide an indication of how we assess the risks of these securities in relation to our analysis of PSFRs, FCRs, and liquidity assessments. This Credit FAQ should be considered in conjunction with previously published criteria."
Among the Frequently Asked Questions are: "What is the CDARS program?" S&P says, "CDARS is a program offered by nearly 3,000 member financial institutions of the CDARS network and is designed to provide investors the benefit of Federal Deposit Insurance Corp. (FDIC) insurance for deposits up to $50 million. Generally, investors place large deposits with a member, who then places the investors' deposits into CDs issued by participating banks. CDs issued through CDARS generally are in amounts less than the FDIC insurance maximum so that each CD's principal and interest remains eligible for full FDIC insurance. Currently the FDIC insurance maximum is $250,000 per depositor through Dec. 31, 2013. After the extension date, the maximum amount is scheduled to return to $100,000 per depositor.... CDARS CDs' maturities generally range from four weeks to five years.... Typically, early breakage penalties exist and generally vary based on the CD's maturity."
They also ask, "How does Standard & Poor's treat noncollateralized CDs compared to CDARS CDs?" S&P answers, "In PSFRs and FCRs, noncollateralized CDs that do not qualify for FDIC insurance take on the same credit rating as was assigned to the issuing bank. Portfolio exposures no greater than 5% per issuing bank are consistent with our investment-grade PSFR criteria.... For both PSFRs and FCRs, to the extent the underlying deposits fall within FDIC coverage amounts, we classify CDARS equivalent to the U.S. sovereign credit rating. How does Standard & Poor's view the credit risk associated with CDs issued by CDARS? In our opinion, because CDARS-issued CDs are FDIC insured, we view the credit risk as equal to the U.S. government sovereign credit rating (currently 'AAA')."
Another question is, "How does Standard & Poor's view the liquidity risks associated with CDARS CDs?" S&P says, "In our opinion, potential areas of liquidity risk in CDARS CDs include: Inherent illiquidity: CDARS CDs are nonnegotiable, not DTC eligible, and are not traded in an active secondary market; Payment delays: When the FDIC has to make a payment on deposits, it pays the insured amount to the participating bank, and the participating bank pays the investors; Custodian bank failure: Another potential liquidity risk may occur where the investor's money is in the custody of a network member that has failed."
They also ask, "What other concerns does Standard & Poor's have regarding CDARS CDs?" The FAQ responds, "Early breakage penalties: CDARS CDs can have penalties from 50% to 100% of the interest due depending on the CDs' maturity. Typically, the earlier a CDARS CD is broken prior to maturity, the greater the penalty. Because the interest penalty owed may be unearned at the time of the early breakage, the assessed penalty may result in a loss of initial principal. Coverage under relevant guidelines: The FDIC insurance limits are not based solely on the CDARS CD amount, but rather on the total aggregate exposure of an individual investor at a participating bank. We would take into account how investors determine whether their aggregate deposits (including their CDARS CD exposures) are within FDIC insurance limits and CDARS guidelines."
S&P continues, "How will Standard & Poor's evaluate CDARS CDs given your PSFR criteria? We will evaluate CDARS CDs similar to the analysis for other highly rated, short-term instruments.... From a credit perspective, we deem CDs issued through CDARS to be 'AAA/A-1+' equivalent. CDARS CDs count toward our 10% limited liquidity/illiquid basket for PSFRs because these CDs are nonmarketable securities, may impose fees for early withdrawal, and may have a delay in receiving monies from FDIC insurance payments."
Finally, they ask, "How would Standard & Poor's evaluate similar FDIC products?" S&P says, "In evaluating other similar types of FDIC products, such as the Institutional Deposits Corp.'s Insured Deposit Liquidity Account and Insured Network Deposits, we would take a similar approach in applying our criteria to assess such pooled FDIC-insured accounts." Note that Crane Data has yet to see any CDARS or "pooled FDIC insurance" products appear in money market mutual funds, but that some less-regulated pools appear to be dabbling in the sector.
We learned from ignites.com that Eagle Money Market Fund and Eagle Municipal Money Market Fund (formerly named Heritage) have filed to liquidate and that new "Eagle" share classes of JPMorgan funds have been filed. A prospectus supplement filing says, "On February 12, 2010, the Board of Trustees of Eagle Cash Trust approved calling a shareholder meeting to consider approving a plan to liquidate and terminate the Money Market Fund and the Municipal Money Market Fund. The Board approved the Plan, subject to shareholder approval, upon recommendation of Eagle Asset Management, Inc., the manager to the Trust."
It says, "Eagle recommends liquidating and terminating each Fund based on anticipated Fund shareholder redemptions which would reduce each Fund's size and economies of scale. Eagle does not believe that it can continue to conduct the business and operations of the Funds in an economically efficient manner upon the anticipated redemptions, and that the expense ratio of the Funds would no longer be competitive. As such, the Board concluded that it would be in the best interests of each Fund and their shareholders to liquidate and terminate each Fund."
The filing explains, "A financial intermediary whose customers own a substantial majority of the Funds' shares has advised Eagle that the Intermediary will no longer make available to its customers or support investments in the Funds after July 9, 2010 and that it plans to make available to its customers and support investments in a proprietary class (named the 'Eagle Class') of the JP Morgan Prime Money Market Fund and JP Morgan Tax Free Money Market Fund, managed by J.P. Morgan Investment Management, Inc. The Intermediary has advised that its customers may be redeemed from the Funds and reinvested in the New Funds. Eagle and J.P. Morgan will enter into an agreement under which Eagle and its affiliates will be compensated by the New Funds and J.P. Morgan for, among other things, distribution costs, shareholder record-keeping activities, Eagle's ongoing oversight of the services provided, and the coordination and administration of the funds."
The supplement adds, "The Plan is subject to shareholder approval. The Board anticipates holding a shareholder meeting on or about August 12, 2010, to seek approval of the Plan. If the Funds' shareholders approve the Plan, each Fund will liquidate its assets on or about August 27, 2010, and distribute cash pro rata to all remaining shareholders who have not previously redeemed all of their shares. Once the distributions are complete, the Funds will terminate." (See the JPMorgan prospectus filings for the new 'Eagle' classes here.)
The Eagle funds are affiliated with brokerage Raymond James, which recently "implemented an enhanced multibank sweep program that provides greater Federal Deposit Insurance Corporation (FDIC) insurance coverage and offers more competitive interest rates." The company's website says "available cash in your brokerage account will be deposited through [Promontory Interfinancial Network's] Insured Network Deposit service into interest-bearing deposit accounts at one or more banks."
An announcement released Monday morning by the New York Fed says, "The Federal Reserve Bank of New York today announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions ('reverse repos'). This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed's traditional counterparties, the Primary Dealers."
The NY Fed says, "This announcement is pursuant to the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, which announced that the New York Fed was studying the possibility of expanding its counterparties for these operations. The additional counterparties will not be eligible to participate in transactions conducted by the New York Fed other than reverse repos. This expansion of counterparties for the reverse repo program is a matter of prudent advance planning, and no inference should be drawn about the timing of any prospective monetary policy operation."
They continue, "The initial efforts of the New York Fed will be aimed at firms that typically provide large amounts of short-term funding to the financial markets. This approach will ensure that the Federal Reserve quickly achieves significant capacity for conducting reverse repo operations while allowing the Trading Desk at the New York Fed to utilize its current infrastructure for conducting and settling such operations. Over time, the New York Fed expects it will modify the counterparty criteria to include a broader set of counterparties."
The Fed explains, "In this context, the New York Fed also published today eligibility criteria for the first set of expanded counterparties, domestic money market mutual funds. The eligibility criteria are intended to identify funds that conduct sizable transactions in the tri-party repo market and that the New York Fed anticipates would participate meaningfully in any reverse repo program it may be directed to implement. (See the RRP Eligibility Criteria for Money Funds document for more details.) In the coming months, the New York Fed anticipates that it will publish criteria for additional types of firms and for expanded eligibility within previously identified types of firms. Moreover, it anticipates publishing a New York Fed Master Repo (legal) agreement for money market mutual funds in approximately one month."
Finally, they add, "The ultimate size and terms of reverse repo operations will depend on the directive from the Federal Open Market Committee to conduct such operations. In terms of operational details, the New York Fed anticipates that any transactions would be: offered to primary dealers and the broader set of counterparties, conducted at auction for a fixed (not floating) rate, settled through the tri-party repo system, and held against all major types of collateral in the System Open Market Account (SOMA), including Treasury securities, agency debt securities, and agency MBS securities. Further program parameters will be decided and announced at future dates. Related documents and information about counterparties for reverse repurchase agreements will be available at www.newyorkfed.org/markets/rrp_counterparties.html."
The New York Fed's Eligibility Criteria says money fund participants must have "net assets of no less than $20 billion for six consecutive months." Crane Data's latest Money Fund Intelligence XLS shows that 29 out of 329 taxable money fund portfolios are currently larger than $20 billion. These 29 portfolios represent $1.357 trillion in assets, or 52.2% of the total taxable assets outstanding. The 10 largest money fund portfolios (as of 2/28/10) include: JPMorgan Prime MM ($151.5B), Fidelity Cash Reserves ($128.0B), Vanguard Prime MMF ($109.9B), JPMorgan US Govt MM ($77.9B), Fidelity Instit MM: Prime MMP ($71.0B), BlackRock Lq TempFund ($69.4B), Fidelity Instit MM: MM Port ($67.9B), Fidelity Instit MM: Govt Port ($63.9B), Federated Government Obl ($47.6), and Federated Prime ObIigations ($42.7B).
This month in our March issue, Money Fund Intelligence revisits Western Asset Management, the ninth largest money fund manager worldwide and the 10th largest in the U.S. We interview money fund veteran and Lead Liquidity Portfolio Manager Kevin Kennedy, and Head of New York Operations & Client Service/Marketing Michael Van Raaphorst. We excerpt from the full article below.
Crane Data's flagship newsletter writes, "Western Asset Management was formed in December 2005 following the swap of Citigroup's asset management for Legg Mason's brokerage unit. The core liquidity management team, which manages over $140 billion, has been in place since the early 1990's. The funds will complete their rebranding by June, shedding the last vestiges of their former Citi monikers."
We first asked, "Q: What are the biggest challenges managing a money fund historically, and today? Kennedy, who has been in the business roughly 30 years, responds, "Historically, it has been managing effectively your average maturity throughout varying interest rate environments. That emphasis is shifting. There is more concern about liquidity and spread risk in today's environment. Some of those risks have been addressed by the amended 2a-7 guidelines, specifically the new liquidity requirements and the new Weighted Average Life (WAL) limitation for money market funds."
He continues, "Today's zero interest rate environment presents an unprecedented industry challenge. Coupled with the more restrictive 2a-7 rules, it certainly makes it more difficult as the industry could become more commoditized. Some of the fund strategies have been implemented in the past -- for instance using a longer Weighted Average Maturity (WAM) -- won't be available to us or our competition any longer."
Kennedy adds, "More recently, the markets have been working very well. Liquidity is plentiful and spreads are very narrow. Volatility remains a concern. Everybody, obviously, will remember what we've gone through. We are still extremely cautious when it comes down to various exposures. We believe that this will be viewed as the bigger risk going forward, not necessarily the Fed. Although when the Fed starts tightening, that will also be a significant challenge across the industry."
We also asked, "Q: Is the zero rate environment survivable? Kennedy comments, "It is. To tell you the truth if I thought the Fed would be on hold this long, I would've had my doubts.... But despite the fact that the industry has lost a sizeable chunk of assets, it's still a huge industry. I think that's a tribute to the confidence that investors have in money market funds in general. Retention has been good. Fee waivers are something that will continue for the next several months and that certainly strengthens the hand of the bigger players in the industry. Thankfully, we are one of those bigger players."
He tells us, "We think that the Fed will be more active in draining reserves, whether it be interest on deposits, reverse repos, or the issuance of SFP Treasury bills. All these things will be the first step towards bringing the fund's rate a little bit higher. Initially that'll just mean that it'll trade closer to the upper end of the 0 to 25 basis point target range. But that alone will provide a little bit of relief to the money fund industry."
Look for more excerpts from our Western Asset interview in coming days, or e-mail Pete to request the full article in the March issue of Money Fund Intelligence.
The March issue of Crane Data's Money Fund Intelligence newsletter goes out this morning (along with our MFI XLS, Crane Index and other monthly performance ranking products). The latest issue features the articles: "Final MMF Reforms Out: Funds Await Next Steps," "Looking for a Legg Up: The New Western Asset," and "Quotes on the Business of Money Market Funds." The monthly "News" also discusses the Crane Money Fund Indexes hitting new record lows, and asset outflows continuing from money funds. Money Fund Intelligence also features performance rankings and statistics on over 1,300 money market mutual funds.
As we've been discussing, The SEC released the full text of its final 'Money Market Fund Reform' rules last week, and the 220-page text contained no surprises. MFI recaps the new rules and discusses what might happen next. Visit the SEC's Final Rules page to see the whole text, and note that a new version, "Rule 2a-7 Amendments Adopted by SEC in February 2010 Marked to Show Changes from Previous Rule 2a-7" has been posted. (Watch for the more condensed Federal Register version to appear in coming days.)
This month, Money Fund Intelligence revisits Western Asset Management, the ninth largest money fund manager worldwide and the 10th largest in the U.S. We interview money fund veteran and Lead Liquidity Portfolio Manager Kevin Kennedy, and Head of New York Operations & Client Service/Marketing Michael Van Raaphorst. Look for excerpts from our "profile" in coming days, or e-mail info@cranedata.us for the latest issue.
Our Crane Money Fund Indexes continue to set record lows, though help from the ultra-low yields may soon be on the way in the form of slightly higher Treasury and repo rates. The Crane 100 Index, an average of the 100 largest taxable money funds, had a record-low 7-day yield of 0.04% as of Feb. 28. The Crane 100 had a 30-day yield of 0.05% as of month-end, and a 1-year return of 0.19% through 2/28/10. Our broader Crane Money Fund Average yielded a mere 0.02% (7-day annualized) and 0.03% (30-day), respectively, at month-end.
As part of Ignites' Exchange webinar series, Crane Data's Peter Crane recently moderated a session entitled, "The Future of Money Funds," featuring Federated Investors' Debbie Cunningham and Goodwin Procter's John Hunt. Below, we excerpt from Hunt's comments on possible future regulatory changes and options. (Note: The full Exchange webinar is archived, available only to Ignites subscribers.)
Hunt asked, "Are there prospects for new regulations? I think it's very likely that there will be. I'll note that at the SEC's January 27th Open Meeting, Chairman Shapiro and other commissioners said as much. The SEC said as much as well in the adopting release to the recent money market fund rules. Exactly what those changes will be, however, is not really clear, and this is the portion of the program that involves the reading of tea leaves."
He said, "One change that the SEC is likely to propose will address the use of stable share prices for the purposes of sales and redemptions of money market fund shares. The SEC has been looking at this issue at least since it was raised in the Treasury's blueprint for financial reform.... [I]t has been a subject of discussion at the President's Working Group on Financial Markets, which includes representatives of the SEC. I think it's fair to say that changing the rules on the use of a stable share price will have a significant effect on money market funds, as well as the mutual fund industry. There are a number of people in the mutual fund industry that note the correlation of the growth of money market funds with the growth of mutual funds as a whole. As a result, any proposal that is perceived to have a significant and adverse effect on money market funds, I think will face extremely stiff resistance."
Hunt explained, "As I see it, any proposal to change the rules governing the use of stable share prices will likely involve one of two approaches. The first approach will be the nuclear option, and that is to ban their use entirely. As I said, this is likely to face stiff resistance. Another approach would be to create a two-tiered system of money market funds along the lines proposed by the American Bar Association in its comments to the proposed amendments last summer. Under this approach, one type of fund would be permitted to maintain a stable share price, but subject to strict risk-limiting conditions. The other type would be required to use the share price based on market value, but be permitted to adhere to more liberal risk-limiting conditions."
"Another change suggested by the Treasury's blueprint, which would be likely to come from outside the SEC, would involve required emergency liquidity facilities or some other type of credit support to money market funds. As I see it, changes along these lines could be a requirement that the funds' sponsor or adviser commit to purchase from the fund any security that is no longer an eligible security or which fails to meet certain minimal credit risk standards. Or it could be some other kind of support for the fund's share price if the shadow price falls below a specified threshold," he said.
Hunt told Ignites listeners, "I think a more likely option is some type of government support, either something like the government's temporary guarantee program established in October of 2008 in which most non-Treasury money market funds participated in, or some sort of insurance coverage for a specific dollar amount of an investor's interest in a fund, similar to FDIC insurance provided to bank deposits. A third option, which would be especially relevant I think for money market funds intended for retail investors, would require the funds to reorganize such as a special purpose bank as proposed by the Group of 30 in January 2008 with those banks receiving some kind of government backing."
Finally, he added, "In addition to those 'big picture' type of issues, I think there will be tinkering with Rule 2a-7 in the near-term and over the next several years.... I think there's a good chance that there could be additional guidance provided by the SEC on the new stress testing and know-your-customer requirements.... I think it's also possible that we could see further rulemaking to remove the references to NRSROs in Rule 2a-7 and related rules.... But you have to wonder whether they've given up on that prospect. Even if the SEC doesn't further limit or prohibit [second tier securities], I do think it's likely that in response to the new rules that there could be new kinds of products that are going to be designed for money market funds.... As these products start to test the limits of Rule 2a-7 ... I think it's likely that there could be further no-action relief."
Note: Hunt is scheduled to speak at Crane's Money Fund Symposium on July 26th on the topic of "Parent Backing, Bailouts, No-Action Letters."
Fidelity Investments, the largest manager of money market mutual funds with over $490 billion (according to Crane's Money Fund Intelligence XLS as of 2/28), mailed its annual "2009 Shareholder Update" earlier this week. The mutual fund behemoth says it ended 2009 with $1.502 trillion in assets under management; money funds represented almost $488 billion, or 32.5% of this total. We excerpt from the annual report, which contains a number of comments and statistics on money funds, below.
Chairman Edward C. Johnson 3d writes in his annual letter, "In 1974, we started offering money market funds to retain assets when the stock market was floundering. We were among the first to offer a stable $1 net asset value (NAV), and we added a check-writing feature to our money funds, figuring that if we made it easy for people to get their money out, they'd be more likely to put it in."
Johnson says, "Today, we believe -- unlike the views of some competitor institutions -- that money market mutual funds perform a critical function in the U.S. economy. Having an intelligently managed and competitive marketplace for the investment savings of institutions and individuals -- which comprises more than just the banking industry -- should lead to a healtier investment environment and better serve the financial interests of the country."
He continues, "The right amount of intelligent regulation of money market mutual funds can only be a major help to both investors and those responsible entities that need cash. A healthy marketplace leads to a fair marketplace, and Fidelity is generally supportive of industry and regulatory efforts aimed at improving the overall safety and liquidity of money market funds. However, we also believe that regulatory changes should be carefully weighed so as not to undermine the potential benefits of money market funds."
Finally, in its "Money Market Funds" commentary, the annual report says, "Fidelity's money market funds outpaced at least 80% of their competition for the 14th consecutive year. Liquidity demands, interest rate volatility and rcredit quality improved in 2009, creating a more stable environment for Fidelity's money market fund managers. The group once again successfully achieved its two primary goals -- preserving the $1 net asset value and maintaining shareholder liquidity."
Once again, we feature excerpts from the SEC's Money Market Fund Reforms, the new changes to money fund regulations, or Rule 2a-7 of the Investment Company Act of 1940. Today, we look at the Rule's new "Stress Testing" mandate.
The SEC writes, "We are adopting amendments to rule 2a-7 to require the board of directors of each money market fund to adopt procedures providing for periodic stress testing of the money market fund's portfolio. Almost all of the commenters who addressed this matter supported requiring stress testing of fund portfolios, although several suggested changes from our proposal. Under the amended rule, a fund must adopt procedures that provide for the periodic testing of the fund's ability to maintain a stable net asset value per share based upon certain hypothetical events. These include an increase in short-term interest rates, an increase in shareholder redemptions, a downgrade of or default on portfolio securities, and widening or narrowing of spreads between yields on an appropriate benchmark selected by the fund for overnight interest rates and commercial paper and other types of securities held by the fund."
They continue, "Commenters differed on whether we should specify details for stress testing in addition to these hypothetical events. Because different tests may be appropriate for different market conditions and different money market funds, we believe that the funds are better positioned to design and modify their stress testing systems and have not included more specific criteria in the rule."
The SEC explains, "The amendment requires the testing to be done at such intervals as the fund board of directors determines appropriate and reasonable in light of current market conditions. This is the same approach that rule 2a-7 takes with respect to the frequency of shadow pricing. The rule does not, however, specifically require the board to design the portfolio stress testing, as may have been suggested by our proposing release. We agree with the many commenters that asserted that the board may not have sufficient expertise to construct appropriate stress tests for a fund. Each board may, of course, consider the extent to which it wishes to become involved in design of the stress tests."
They explain, "The rule also requires that the board receive a report of the results of the stress testing at its next regularly scheduled meeting, as proposed, and more frequently, if appropriate, in light of the results. We have added the requirement for more frequent reporting in light of results because we believe that the board should be apprised of test results when they indicate that the magnitude of hypothetical events required to cause the fund to break a buck (such as changes in interest rates or shareholder redemptions or a combination of factors) is slight when compared with actual conditions."
Finally, the SEC writes, "As proposed, the report must include: (i) the date(s) on which the fund portfolio was tested; and (ii) the magnitude of each hypothetical event that would cause the money market fund to break the buck. The report also must include an assessment by the fund's adviser of the fund's ability to withstand the events (and concurrent occurrences of those events) that are reasonably likely to occur within the following year. Finally, as proposed, funds are required to maintain records of the stress testing for six years, the first two years in an easily accessible place."
Today, we examine the "Cost Benefit Analysis" section of the SEC's new Money Market Fund Reforms, which were released last Tuesday afternoon. (Note that the more condense "Federal Register" version of the rules has yet to be posted, but should be within days.) The SEC writes (starting on page 120), "The Commission is sensitive to the costs and benefits imposed by its rules. We have identified certain costs and benefits of the amendments and new rules."
It says of the new rules' "Benefits," "We believe that the amendments to rule 2a-7's risk-limiting conditions are likely to produce broad benefits for money market fund investors.... [C]ommenters agreed that the proposed rule 2a-7 amendments concerning second tier securities, maturity, and liquidity would benefit money market funds and their investors. The amendments should reduce money market funds' exposure to certain credit, interest rate, spread, and liquidity risks. For example, limiting money market funds' ability to acquire second tier securities will decrease money market funds' exposure to credit, spread, and liquidity risks. Reducing the maximum weighted average maturity of money market funds' portfolios will further decrease their interest rate sensitivity."
The rule continues, "It also will increase their ability to maintain a stable net asset value in the face of multiple shocks to a money market fund, such as a simultaneous widening of spreads and increase in redemptions, such as occurred during the fall of 2008. Introducing the weighted average life limitation on money market funds' portfolios will limit credit spread risk and interest rate spread risk to funds from longer term floating- or variable-rate securities. In addition, fund portfolios with a lower WAM and a 120-day maximum WAL will turn over more quickly, and the fund will be better able to increase its holdings of highly liquid securities in the face of illiquid markets than funds operating under a maximum 90 day WAM limitation."
The SEC says, "We believe that the new liquidity requirements will decrease liquidity risk. As discussed above, they are designed to increase a money market fund's ability to withstand illiquid markets by ensuring that the fund further limits its acquisitions of illiquid securities and that a certain percentage of its assets are held in daily and weekly liquid assets. Under the general liquidity requirement, moreover, each money market fund must assess its liquidity needs on an ongoing basis and take additional actions as appropriate in order to manage its liquidity. Together, these requirements should decrease the likelihood that a fund would have to realize losses from selling portfolio securities into an illiquid market to satisfy redemption requests, which could put pressure on the fund's ability to maintain a stable net asset value."
They say, "We believe that a reduction of these credit, interest rate, spread, and liquidity risks will better enable money market funds to weather market turbulence and maintain a stable net asset value per share. The amendments are designed to reduce the risk that a money market fund will break the buck, and thereby prevent losses to fund investors. To the extent that money market funds are more stable, they also will reduce systemic risk to the capital markets and provide a more stable source of financing for issuers of short-term credit instruments, thus promoting capital formation. If money market funds become more stable investments as a result of the rule amendments, they may attract further investment, increasing their role as a source of capital."
On "Costs" (see page 125), the SEC says, "We recognize that our amendments regarding second tier securities, portfolio maturity, and liquidity will impose costs on some money market funds. For example, yields might decrease in funds depending on their current positions in second tier securities, less liquid securities, and longer term instruments because those instruments typically offer above average yields. We note that the yield offered by a security is tied to its risk. It is important to consider our rule amendments' impact on money market fund yields in this context."
Money fund assets inched lower by $1.63 billion to $3.166 trillion in the week ended Feb. 24 according to the ICI's most recent weekly stats. ICI also reported monthly assets for January 2010, which showed money fund assets declined by $100 billion, or 3.0%. ICI also released Porfolio Holdings Totals which showed that taxable money funds added repo and sold government agencies, Treasuries, CP and CDs during the month.
The weekly "ICI Reports Money Market Mutual Fund Assets says, "Taxable government funds decreased by $3.60 billion, taxable non-government funds increased by $4.26 billion, and tax-exempt funds decreased by $2.28 billion.... Assets of retail money market funds decreased by $7.07 billion to $1.049 trillion.... Assets of institutional money market funds increased by $5.44 billion to $2.117 trillion. Among institutional funds, taxable government money market fund assets decreased by $1.66 billion to $806.75 billion, taxable non-government money market fund assets increased by $8.11 billion to $1.158 trillion, and tax-exempt fund assets decreased by $1.00 billion to $151.87 billion."
The Institute's monthly asset series says, "Money market funds had an outflow of $102.72 billion [to total $3.217 trillion] in January, compared with an outflow of $852 million in December. Funds offered primarily to institutions had an outflow of $83.82 billion. Funds offered primarily to individuals had an outflow of $18.89 billion." The number of money funds (portfolios) in ICI's monthly report fell 704 from 705 the prior month and from 774 a year ago. "Liquid Assets of Stock Mutual Funds" remained at a record low of 3.6%.
Certificates of Deposit remained the largest holding in taxable money funds at 23.2%, or $657.6 billion. (This total includes $101.5 billion, or 3.6%, in Eurodollar CDs.) Repurchase agreements, or repos, moved into the No. 2 spot with 19.1% ($539.6 billion), moving ahead of No. 3 U.S. Government Agency securities ($505.6 billion, or 17.9%). Taxable money funds added $50.0 billion to repo holdings, while they decreased government agencies by $48.3 billion, decreased Treasury holdings by $37.7 billion, and decreased CP holdings by $25.5 billion.
Commercial Paper ranked fourth among taxable money funds' holdings in January according to ICI's "Month-End Portfolio Holdings" report with $494.8 billion, or 17.5% of assets. U.S. Treasury Bills and Other Treasury Securities combined for $376.9 billion, or 13.3% of assets (5th place), while Corporate Notes ($123.0 billion, or 4.3%), Bank Notes ($56.3 billion, or 2.3%), and "Other" securities made up the remainder. Average maturities of taxable money funds rose by two days to 51 days.
We continue to wade our way through the massive SEC Money Market Fund Reform release. Today, we've chosen to focus on a couple of sections. Though most of the release appears as expected, we found some interesting changes among the new portfolio disclosure requirements. These should provide a bonanza to data collectors and publishers like ourselves, but may cause confusion and information overload to many. (Look for Crane Data to add new data points to its products and website as they become available.)
Under "Disclosure of Portfolio Information, the new rules say, "As amended, rule 2a-7(c)(12) will require funds to disclose monthly with respect to each security held: (i) the name of the issuer; (ii) the category of investment (e.g., Treasury debt, government agency debt, asset backed commercial paper, structured investment vehicle note); (iii) the CUSIP number (if any); (iv) the principal amount; (v) the maturity date as determined under rule 2a-7 for purposes of calculating weighted average maturity; (vi) the final maturity date, if different from the maturity date previously described; (vii) coupon or yield; and (viii) the amortized cost value. In addition, the amendments require funds to disclose their overall weighted average maturity and weighted average life maturity of their portfolios.... The amended rule requires funds to post the portfolio information, current as of the last business day of the previous month, no later than the fifth business day of the month." (Oct. 7, 2010, is the deadline for this website disclosure.)
The release also says, "We are adopting a new rule requiring money market funds to provide the Commission a monthly electronic filing of more detailed portfolio holdings information. The information will permit us to create a central database of money market fund portfolio holdings, which will enhance our oversight of money market funds and our ability to respond to market events." Money funds must report the above information on Form N-MFP, plus: "NRSROs designated by the fund, the credit ratings given by each NRSRO, and whether each security is first tier, second tier, unrated, or no longer eligible; ... whether the instrument has certain enhancement features; ... the percentage of the money market fund's assets invested in the security; whether the security is an illiquid security ...; and 'Explanatory notes'"
It adds, "Form N-MFP also requires funds to report to us information about the fund, including information about the fund's risk characteristics such as the dollar weighted average maturity of the fund's portfolio and its seven-day gross yield. Money market funds also must report on Form N-MFP the market-based values of each portfolio security and the fund's market-based net asset value per share.... Under rule 30b1-7, the information contained in the portfolio reports that money market funds file with the Commission on Form N-MFP will be available to the public 60 days after the end of the month to which the information pertains.... [T]he first mandatory filing will be due on December 7, 2010, for holdings as of the end of November 2010."
Note: ignites.com will be hosting a Webinar (available to subscribers only) at 10:00 a.m. moderated by our Peter Crane and featuring Federated Investors' Debbie Cunningham and Goodwin Proctor's John Hunt on "The Future of Money Funds." JPMorgan Securities' Alex Roever and Cie-Jae Brown will also hold a conference call at 11:30 a.m. on the Rule 2a-7 Amendments and Revival of Supplemental Financing Program.
The SEC posted the full text of its Final "Money Market Fund Reform" Rules late Tuesday afternoon. The summary says, "The Securities and Exchange Commission is adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments will tighten the risk-limiting conditions of rule 2a-7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the maximum weighted average maturity of portfolio holdings, and improving the quality of portfolio securities; require money market funds to report their portfolio holdings monthly to the Commission; and permit a money market fund that has 'broken the buck', or is at imminent risk of breaking the buck, to suspend redemptions to allow for the orderly liquidation of fund assets. The amendments are designed to make money market funds more resilient to certain short-term market risks, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share."
The Release No. IC-29132 says under "Dates," "The rules, rule amendments, and form are effective May 5, 2010.... The "Compliance Dates section of the release (p. 101) says, "The amendments to rules 2a-7, 17a-9 and 30b1-6T, and new rules 22e-3 and 30b1-7, and new Form N-MFP become effective May 5, 2010. Unless otherwise discussed below or in this Release, the compliance date is the date of effectiveness.... Except as indicated below, the compliance date for amendments to rule 2a-7 related to portfolio quality, maturity, liquidity, and repurchase agreements, is May 28, 2010. Funds are not required to dispose of portfolio securities owned, or terminate repurchase agreements entered into, as of the time of adoption of the amendments to comply with the requirements of the rule as amended. Fund portfolios must meet the new maximum WAM and WAL limits by June 30, 2010." NRSRO disclosure is Dec. 31, 2010; public website disclosure is Oct. 7, 2010; and non-$1 processing is due by Oct. 31, 2011.
The new Money Market Fund Reform rules say, "The severity of the problems experienced by money market funds during 2007 and 2008 prompted us to review our regulation of money market funds. We sought to better understand how we might revise rule 2a-7 to reduce the susceptibility of money market funds to runs and reduce the consequences of a run on fund shareholders. Our staff consulted extensively with staff from other members of the President's Working Group on Financial Markets. We talked to many market participants, and reviewed a report from a 'Money Market Fund Working Group' assembled by the Investment Company Institute, which recommended a number of changes. Our June 2009 proposals were the product of that review and were, we explained, a first step to addressing regulatory concerns we identified."
The SEC continues, "We received approximately 120 comments on the rule, including approximately 45 comments from investment companies and their representatives, 22 from debt security issuers, and 30 from individuals, including investors and academics. The comment letters reflected a wide variety of views on most of the topics discussed in the Proposing Release. The investment companies generally supported those aspects of the proposal that were similar to those recommended in the ICI Report. Most of them strongly objected to changes that would affect the stable net asset value that today is the principal characteristic of a money market fund.... Many fund commenters pointed to the historical stability of funds and urged us to be modest in our changes to rule 2a-7. Some others, however, pointed to the near-cataclysmic events of September 2008 in supporting more substantial changes."
The release's introduction says, "As we stated in the Proposing Release, we recognize that the events of 2007-2008 raise the question of whether further changes to the regulatory structure governing money market funds may be warranted. Accordingly, in the Proposing Release we requested comment on additional, more fundamental regulatory changes, some of which we recognized could transform the business and regulatory model on which money market funds have been operating for more than 30 years. For example, we requested comment on whether money market funds should move to the 'floating net asset value' used by other open-end investment companies.... We have continued to explore possible more significant changes to the regulation of money market funds in light of these comments and through the staff's work with members of the President's Working Group. We expect to issue a release addressing these issues and proposing further reform to money market fund regulation."
Finally, the SEC's "Discussion" says, "Today we are adopting the amendments we proposed last June to the rules governing money market funds, with several changes made in response to the comments we received. As described below in more detail, we believe these amendments will make money market funds more resilient and less likely to break the buck. They will further limit the risks money market funds may assume by, among other things, requiring them to increase the credit quality of fund portfolios and to reduce the maximum weighted average maturity of their portfolios, and by requiring for the first time that all money market funds maintain liquidity buffers that will help them withstand sudden demands for redemptions. The rule amendments require fund managers to stress test their portfolios against potential economic shocks such as sudden increases in interest rates, heavy redemptions, and potential defaults."
It continues, "They provide investors with more timely, relevant information about fund portfolios to hold fund managers more accountable for the risks they take. They will improve our ability to oversee money market funds. And finally, they provide a means to wind down the operations of a fund that does break the buck or suffers a run, in an orderly way that is fair to the fund's investors and reduces the risk of market losses that could spread to other funds. We believe that these reforms collectively will better protect money market fund investors in times of financial market turmoil and lessen the possibility that the money market fund industry will not be able to withstand stresses similar to those experienced in 2007-08. Thus, we believe that each of the rules and rule amendments we are adopting is necessary or appropriate in the public interest and consistent with the protection of investors and the policies and purposes of the Investment Company Act."
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