The Investment Company Institute released its "2015 Investment Company Fact Book" yesterday afternoon, ahead of the Institute's General Membership Meeting (GMM) this week in Washington, May 6-8. As usual, the "Fact Book" is loaded with useful statistics and analysis of mutual funds in general, and of money market mutual funds in particular. In addition to data on fund flows for both Retail and Institutional funds, there is section on the Securities and Exchange Commission's landmark 2014 money market fund reforms, as well as commentary on the growth of the Federal Reserve's Overnight Reverse Repo Program. Among the most interesting trends, the Fact Book shows money fund assets and corporate investment in money market funds, remaining stable and flat for the third year in a row in 2014. Watch for more coverage, including reviews and excerpts of the myriad charts and tables, in coming days and in the pending May issues of both our Money Fund Intelligence and our new Bond Fund Intelligence.
Under the section, "Demand for Money Market Funds (on page 48)," the Fact Book says, "In 2014, money market funds received a modest $6 billion in net inflows. However, similar to the demand for long-term funds, demand for money market funds was not uniform throughout 2014. ` In particular, outflows from money market funds were concentrated in the first four months of 2014, during which investors redeemed $143 billion, on net. Tax payments by corporations in mid-March and individuals in mid-April were likely key drivers behind these redemptions. Outflows abated and money market funds received net inflows of $164 billion over the second half of the year. Most of these flows went to institutional share classes of money market funds."
It continues, "Institutional money market funds -- used by businesses, pension funds, state and local governments, and other large-account investors -- had a net inflow of $37 billion in 2014, following a net inflow of $27 billion in 2013. Some of the cash generated by rising corporate profits was likely held in money market funds and bank deposits. Institutions rely more heavily on money market mutual funds to manage their cash today than they did in the early 1990s. For example, in 2008, U.S. nonfinancial businesses held 37 percent of their cash balances in money market funds, up from just 6 percent in 1990. While this portion has declined since the 2007–2008 financial crisis, it remains substantial, measuring 23 percent in 2014."
ICI explains, "Part of this increased demand reflects the outsourcing of institutions' cash management activities, which were commonly done in-house, to asset managers. Depending on the size of the cash position, the asset manager may create a separate account for an institutional client with direct ownership of money market instruments or they may invest some of the cash in money market funds."
On the Retail money market fund sector the Fact Book says, "Individual investors tend to withdraw cash from money market funds when the difference between yields on money market funds and interest rates on bank deposits narrows or becomes negative. Because of Federal Reserve monetary policy, short-term interest rates remained near zero in 2014. Yields on money market funds, which track short-term open market instruments such as Treasury bills, also hovered near zero and remained below yields on money market deposit accounts offered by banks. Retail money market funds, which principally are sold to individual investors, saw a net outflow of $31 billion in 2014, following a net outflow of $12 billion in 2013."
Under the subhead, "Recent Reforms to Money Market Funds," it explains, "The U.S. Securities and Exchange Commission (SEC) has amended Rule 2a-7, a regulation governing money market funds, several times since 1983, placing greater limits on the maturity and credit quality of the securities that the funds hold, adding diversification requirements, requiring minimum levels of liquidity for the funds, and increasing their disclosure requirements. In response to the financial crisis, the SEC significantly reformed Rule 2a-7 in 2010. Among other things, these reforms required money market funds to hold a certain amount of liquidity and imposed stricter maturity limits. One outcome of these provisions is that prime funds have become more like government money market funds. To a significant degree, prime funds adjusted to the SEC's 2010 amendments to Rule 2a-7 by adding to their holdings of Treasury and agency securities."
ICI writes, "They also boosted their assets in repurchase agreements (repos). A repo can be thought of as a short term collateralized loan, such as to a bank or other financial intermediary. Repos are collateralized -- typically by Treasury and agency securities -- to ensure that the loan is repaid. Prime fund holdings of Treasury and agency securities and repos have risen substantially as a share of the fund portfolios, from 12 percent in May 2007 to a peak of 36 percent in November 2012. In December 2014, this share was 31 percent of prime fund assets, still more than double the value prior to the financial crisis and subsequent reforms."
On the 2014 MMF Reforms, it comments, "In July 2014, the SEC adopted additional rules for money market funds, further limiting the use of amortized cost for institutional funds that invest in nongovernment securities, and requiring that such funds price their shares to the nearest one-hundredth of a cent. Additionally, under the July 2014 rules, nongovernment money market fund boards can impose liquidity fees and gates (a temporary suspension of redemptions) when a fund's weekly liquid assets fall below 30 percent of its total assets (the regulatory minimum). The final rules also include additional diversification, disclosure, and stress testing requirements, as well as updated reporting by money market funds. Because the new rules will not be fully implemented until late 2016, it is not yet clear how the SEC's 2014 rules will affect investor demand for money market funds."
On the "Federal Reserve's Overnight Reverse-Repo Facility, ICI's 2015 Fact Book says, "In 2013, in an effort to gradually absorb excess liquidity from the financial system, the Federal Reserve began engaging in a new program of fixed-rate, full-allotment, overnight, and term reverse repurchase agreements. The introduction and expansion of the Fed's reverse-repo facilities over the past two years has greatly increased the central bank's role as a repo counterparty. Through these facilities, money market funds (and other market participants) lend money to the Fed overnight or for a specified term. At the end of 2014, the Federal Reserve was the repo counterparty for 52 percent of the $654 billion in repurchase agreements entered into by taxable money market funds. This share has risen from 29 percent at the end of 2013, the year the program began."
Finally, it says, "The rise, however, reflects a strong seasonal pattern. Money market fund lending to the Fed tends to spike sharply at quarter-ends, in large part because of changes in bank regulations, especially in Europe. Historically, European banks have been a major repo counterparty to money market funds. However, European banks have generally become less willing to borrow from U.S. money market funds due to regulatory pressures, especially at the end of the quarter. Therefore, money market fund lending to the Fed via reverse repo has offset a quarter-end decline in the share of fund investments in European banks. For example, in December 2013, 31 percent of the repurchase agreements held by taxable money market funds were issued by European banks. By December 2014, that value had fallen to 20 percent."
