Daily Links Archives: May, 2010

Federated Investors posted "Money Market Memo: What new reforms mean for Federated -- and you" yesterday. The piece explains the new SEC Money Market Fund Reforms. It says, "Early in 2010, the Securities & Exchange Commission adopted a series of reforms -- notably several amendments to Rule 2a-7 -- designed to improve disclosure, enhance liquidity, further limit risk and in general prevent future disruptions across the money market fund industry. Federated welcomes the following new reforms -- many of which reflect longstanding practices at the company -- that go into effect May 28 and June 30, 2010." In other news, see yesterday's Bloomberg article "Foreign U.S. Commercial Paper Issuance Falls Most in 10 Months", which says, "U.S. commercial paper outstanding sold by foreign financial companies and their domestic units fell the most in 10 months as fund managers trim holdings of the short-term debt issued by European banks." Bloomberg quotes our Peter Crane, "The funds are merely shortening maturities and letting paper roll off, rather than fleeing." Finally, see S&P's "Putnam Global Liquidity Fund Rated 'AAAm'".

Confluence is "offering a new whitepaper that addresses the impact of new Money Market Fund Reform Rule Reporting requirements for fund administrators, and provides guidelines for facilitating timely and accurate compliance," says a recent press release. It says, "To mitigate risk and provide greater transparency to investors, the U.S. Securities and Exchange Commission (SEC) recently approved Release IC-29132, commonly referred to as the Money Market Mutual Fund Reform Rule. In addition to placing limits on investments to be held in money market mutual fund portfolios, the rule requires radical changes in the frequency, content, timeliness, and delivery format of holdings reporting. There are also additional costs to fund companies." Scott Powell, Product Manager at Confluence says, "Complying with these new requirements creates significant issues for administrators relying on manual processes. When tackled manually, it is a daunting task, requiring countless hours for data collection, report creation, content confirmation, and report delivery. And with the tighter timeframes in which to file these reports, ensuring data accuracy is also a major concern." To request the white paper, click here.

Dow Jones writes "Money Fund Managers Admit Unease, Shorten Europe Exposure". It says, "U.S. money-market fund managers, who are a key link in the chain of financing European banks, admitted Tuesday they're feeling a bit uneasy in the face of the region's sovereign-debt risk. Money market fund managers are letting some commercial paper holdings expire due to the concerns, said Deborah Cunningham, Federated Investors Inc.'s (FII) chief investment officer for taxable money markets. But they're not making wholesale changes." She said, "I don't think you're seeing issuers not getting funded because of this. Nobody's withdrawing their funding." Dow Jones says, "The portrait that U.S. money fund managers paint is not one of outright panic, as occurred when credit markets locked up in 2008. Instead, they say, they're becoming more cautious, adjusting portfolios around the margins. That process, over the past month, has led to rising borrowing costs for European financial institutions. Due to a confluence of factors including credit concerns, new liquidity rules and worries about rising interest rates, U.S. money funds are holding commercial paper from European banks that is shorter in term than that held before." See also, WSJ's "Europe-Bank Lenders? Coalition of Unwilling".

MutualFundWire.com writes "Citi Swoops Into Money Market Monitoring". The news brief says, "Citi Global Transaction Services' investor services unit has launched new offerings to help its mutual fund clients comply [with] the new money market regulations from the SEC. The service will help firms with the amended reporting and disclosure requirements and will assist with monitoring liquidity, maturity and credit quality limits." (Crane Data was unable to locate a press release from Citi.) The MutualFundWire.com quotes Bob Wallace, "Citi's expanded suite of money market capabilities will enable our clients to respond swiftly and thoroughly to the required regulations without additional resources or infrastructure investments." Citi, the former Bisys unit, joins a number of other firms in offering stress testing, reporting and additional analytical tools to assist funds in complying with the SEC's recent Money Market Fund Reforms.

SmartMoney writes "Money-Market Funds: Will Reform Matter?" The article says, "One of the many amendments to the package of financial sector reforms would change the laws for money-market funds by removing a provision that requires these funds to include credit agency ratings of their underlying securities. In theory, the amendment could make money-market funds a riskier investment. They wouldn't include a second opinion that their underlying securities constitute a minimal credit risk. In other words, these funds could invest in riskier securities in an effort to bolster their returns, which have declined this year.... Because money-market funds are among the few financial instruments where rating agency evaluations are required by law, rather than industry practice, the provision, sponsored by Sens. George LeMieux (R., Fla.) and Maria Cantwell (D., Wash.) could hurt the big rating agencies: Moody's, Standard & Poor's and Fitch. However, in practice, even if the amendment makes it into the final version of the law, experts say little will change in the composition of these funds, which are among the least risky -- and least remunerative -- options for investors. The current language requires money-market funds to select securities from the two highest-rated categories of credit risk, as classified by nationally recognized statistical rating organizations, or NSROs." The piece quotes Peter Crane, president of Crane Data, "The ratings are an integral part of the money markets." In other news, see FT's "Cesr bans enhanced money market funds".

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $33.55 billion to $2.844 trillion for the week ended Wednesday, May 19, the Investment Company Institute reported today. Taxable government funds decreased by $15.66 billion, taxable non-government funds decreased by $19.09 billion, and tax-exempt funds increased by $1.20 billion." In other news, PIMCO posted a piece entitled, "Jerome Schneider and Paul Reisz Discuss Recent Changes and Investment Opportunities in the Cash and Short Duration Markets", which says, "Due to new money market regulations and other structural changes in the cash markets, institutional and retail investors are focusing more intently on their short-term liquidity needs and investment options. Jerome Schneider, deputy head of PIMCO's money market and funding desk, and Paul Reisz, money market and enhanced cash product manager, provide an overview of the recent developments in these markets -- including changes in 2a-7 money market regulations -- and the impact on yields and cash investment strategies."

A press release entitled, "Grail Advisors add Western Asset Management to Growing List of Strategic Partners," says, "Grail Advisors, an innovator in the development and distribution of actively-managed exchange traded funds (ETFs), today announced the firm has formed a strategic partnership with Western Asset Management Company. Grail Advisors has filed registration for an actively-managed ETF -- the Grail Western Asset Enhanced Liquidity ETF -- that will employ Western Asset's management capabilities in the short-term fixed income space. With more than $478 billion in assets under management as of March 31, 2010, Western Asset is recognized as one of the industry's largest fixed income managers. The Pasadena, California-based firm is affiliated with Legg Mason Global Asset Management." William Thomas, CEO of Grail Advisors LLC, says, "This partnership with Western Asset Management Company represents an important addition for us as we work to bring active fund managers and strategies to the ETF marketplace. Having a manager of their caliber on board adds meaningful potential to our entire actively managed ETF lineup." In other news, the replay of Monday's "Open Meeting of the SEC Investor Advisory Committee" has now been posted on the SEC's site (click on "Afternoon" to see the money fund portion).

At 3:30-4:30pm today (Wednesday), the Association for Financial Professionals (AFP) hosts a Webinar entitled, "Money Market Mutual Funds: Reviewing the New Regulations & Discussing the Outlook for Future Changes." The session description says, "Money fund expert Peter Crane from Crane Data will review recent changes to Rule 2a-7, the SEC's guidelines for money market funds. Crane will also discuss the possibility of more radical future changes to money funds' structure, such as a floating price, capital reserves or an emergency liquidity bank facility. Crane will review recent asset trends and the zero and pending rising rate environment." Registration is complimentary. The National Investment Company Service Association, or NICSA, also hosts a separate Webinar Wednesday at 2:00-3:15pm. The session is entitled, "Preparing for Amendments to Money Market Mutual Fund Rules, a Nuts and Bolts Perspective," and features Fidelity's Nancy Prior, State Street's Paul Ricci, SEC's Penelope Saltzman and ALPS Fund Services' Brad Swenson. The description says, "This webinar will provide an overview of the Money Market Mutual Fund Reform from several different perspectives including: Portfolio management, Financial Reporting, Fund Accounting, and Transfer Agency operations.... Mutual fund professionals from all aspects of the industry will learn about how the new rule impacts their area of responsibility as well as upstream and downstream departments."

The SEC Investment Advisory Committee page features links to yesterday's Webcast of the Investment Advisory Committee, Meeting Notice, Agenda and Discussion, and Comments. Look for a recap of the meeting in Crane Data's News tomorrow once we've transcribed the money fund comments from yesterday's webcast. See also the Investment Advisory Committee's May 3 letter from the Investor as Purchaser Subcommittee. Yesterday's meeting featured the SEC's Bob Plaze discussing the history of money funds and the problems with a floating NAV. The Powerpoint agenda says, "Resolved: Money market funds should not be required to use a floating NAV. Money market funds play a vital role as cash management vehicles for millions of Americans and as liquidity facilities for short-term borrowers. They have an extraordinary history of stability, with only two instances of failure in three decades of regulation under Rule 2a-7. If the Commission believes that the stability of money market funds can be improved, then it should consider appropriate prudential measures. Mandating a floating NAV, however, would put the continued viability of money market funds at risk and be detrimental to the interests of America's retail investors." (This resolution was put forth but has not been voted on by the Committee yet.)

A late Friday press release "Confluence Helps Fund Administrators Manage New Complex Money Market Fund Reporting Mandates" says, "Confluence, a global leader in investment management data automation, today announced new software to help fund administrators manage complex Money Market Fund Reform Rule reporting recently mandated by the U.S. Securities and Exchange Commission (SEC). Unity Regulatory Reporting delivers an automated solution to the complex challenge of preparing and filing the SEC's required Form N-MFP, via eXtensible Markup Language (XML), and repurposing the same content to create and deliver the necessary web reporting. This automated solution simplifies report generation and delivers complete reports to efficiently comply with the new five-day mandatory turnaround cycle." The release adds, "With the deadlines for Money Market Fund Reform reporting fast approaching, Confluence recommends that fund administrators take action now to understand the data and delivery requirements of the rule and to identify data sources." In other news, see, New York Times' "Fears Intensify That Euro Crisis Could Snowball", which says, "Those steps were not enough to prevent a flare-up in money market funds, a crucial but little-noticed corner of the financial system in which American investors provide more than $500 billion in short-term loans to help European banks finance their daily operations. The cash comes from conservative funds that hold the savings of big American corporations and individual American consumers." See also Dow Jones Financial News' "European regulators prepare for next stage".

ICI's weekly "Money Market Mutual Fund Assets" release says, "Total money market mutual fund assets increased by $24.23 billion to $2.878 trillion for the week ended Wednesday, May 12, the Investment Company Institute reported today. Taxable government funds increased by $25.48 billion, taxable non-government funds increased by $280 million, and tax-exempt funds decreased by $1.53 billion." See also the press release, "BNY Mellon Asset Servicing and Investor Analytics to Provide Money Market Stress Test Service for Six ING Funds," which says, "BNY Mellon Asset Servicing, the global leader in securities servicing, and Investor Analytics, a global leader in risk measurement and risk management solutions, have been selected by ING Funds to model the impact of interest-rate shocks, credit risk shocks and liquidity risk shocks on its six money market funds. This service, available through BNY Mellon's strategic alliance with Investor Analytics, will help money market funds comply with Rule 2a-7 issued by the U.S. Securities and Exchange Commission (SEC). The rule, which became effective May 5, 2010, requires money market funds to examine combinations of potential stresses." The release quotes Joseph Keenan, MD at BNY Mellon Asset Servicing, "Our selection by ING reinforces our commitment to providing a broad range of services to the mutual fund industry. We see this capability as a foundation for providing risk analysis and stress testing for our clients globally as regulatory pressures continue to rise."

ICI's latest quarterly "Worldwide Mutual Fund Assets and Flows" says, "Mutual fund assets worldwide increased 2.3 percent to $22.88 trillion at the end of 2009.... Net outflows from money market funds also decelerated, with $206 billion of net outflows, from $283 billion in outflows in the previous quarter.... Money market funds had net outflows of $638 billion in 2009, compared to net inflows of $891 billion in 2008.... Money market fund assets dropped 4.4 percent to $5.3 trillion in the fourth quarter." ICI's tables show the U.S. with 66.2% ($3.832 trillion) of the worldwide market, followed by Ireland (12.4%, or $720.5 billion; note that Ireland doesn't break out money fund assets but the vast majority of the country's assets are money funds), France (11.7%, or $693.2 billion), Luxembourg (8.0%, or $461.5 billion), Australia (4.5%, or $236.7 billion), Italy (1.5%, or $80.9 billion), Korea (1.2%, or $62.2 billion), and Canada (1.0%, or $51.7 billion). (Crane Data tracks "offshore" money market funds in our Money Fund Intelligence International product.) In other news, see WSJ's "Bond, Money-Market Funds Draw Cash" and BusinessWire's "Fitch: Money Market Funds May Access Federal Reserve Repo Facility".

CFO Magazine writes "Weighing Your Next Move", which is subtitled, "Rock-bottom interest rates and new regulation call for a reexamination of short-term cash investments." It says, "Moving corporate cash to boost returns by a basis point or two could earn a CFO or treasurer a well-deserved dressing-down. But that doesn't mean that finance executives who manage growing pools of idle cash can stand pat with their current investing strategies. Safety and liquidity require constant vigilance -- maybe even more so this year. Big changes on the regulatory front, for example, could affect the returns of money-market funds and create opportunities for corporate investors to earn a bump in yield. And the Fed's market support is slowly ending, which may force companies to reposition money to maintain a government guarantee on cash accounts." The piece also says, "Money funds suit treasurers who don't want the hassle of doing instrument-level credit research and administration, says Peter Yi, director of money markets in the fixed-income group at Northern Trust." It adds, "Performance outliers among money funds also deserve a close look, says William Dombek, a managing director in The Bank of New York Mellon's financial markets and treasury services division."

The Federal Reserve announced that its "Board authorizes small-value offerings of term deposits under the Term Deposit Facility". It says, "The Federal Reserve Board has authorized up to five small-value offerings of term deposits under the Term Deposit Facility (TDF) to be conducted in coming months. The Board had indicated in its announcement on April 30 that it anticipated conducting such small-value offerings. These small-value offerings are designed to ensure the effectiveness of TDF operations and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures. The development of the TDF and the small-value TDF offerings are a matter of prudent planning and have no implication for the near-term conduct of monetary policy. The Board also approved a basic structure for the small-value TDF offerings. Similar to many money market instruments, the term deposits offered will be simple fixed-rate instruments with maturities of 84 days or less and will be issued primarily through competitive single-price auctions." In other news, Reserve posted two releases late last week -- "Reserve Yield Plus Fund to Distribute $7 Million" and "U.S. District Court Issues Orders Granting Federal Interpleader Application And Scheduling Adjudication Of Proposed Distribution Plan For Reserve International Liquidity Fund, Ltd.."

Sunday's New York Times writes "Greek Debt Woes Ripple Outward, From Asia to U.S.". It says, "The fear that began in Athens, raced through Europe and finally shook the stock market in the United States is now affecting the broader global economy, from the ability of Asian corporations to raise money to the outlook for money-market funds where American savers park their cash.... American money-market investors are already feeling nervous about hundreds of billions of dollars in short-term loans to big European banks and other financial institutions." The Times quotes J.P. Morgan's Alex Roever, "Apparently systemic risk is still alive and well." The article continues, "With so much uncertainty about Europe and the euro, managers of these ultra-safe investment vehicles are demanding that European borrowers pay higher rates. These funds provide the lifeblood of the international banking system. If worries about the safety of European banks intensify, they could push up their borrowing costs and push down the value of more than $500 billion in short-term debt held by American money-market funds. Uncertainty about the stability of assets in money market funds signaled a tipping point that accelerated the downward spiral of the credit crisis in 2008, and ultimately prompted banks to briefly halt lending to one other." For more on money funds' exposure to Europe, see JPMorgan's latest "Short-Term Fixed Income", the Federal Reserve's Commercial Paper Outstandings (which lists "Foreign CP" totals) or our latest Money Fund Intelligence XLS Portfolio Composition figures. Also, see the release "Federal Reserve, European Central Bank, Bank of Canada, Bank of England, and Swiss National Bank announce re-establishment of temporary U.S. dollar liquidity swap facilities".

ICI's weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $18.82 billion to $2.853 trillion for the week ended Wednesday, May 5, the Investment Company Institute reported today. Taxable government funds decreased by $6.57 billion, taxable non-government funds decreased by $13.33 billion, and tax-exempt funds increased by $1.08 billion. Assets of retail money market funds decreased by $2.60 billion to $980.15 billion. Taxable government money market fund assets in the retail category decreased by $280 million to $152.30 billion, taxable non-government money market fund assets decreased by $2.58 billion to $614.36 billion, and tax-exempt fund assets increased by $260 million to $213.49 billion. Assets of institutional money market funds decreased by $16.22 billion to $1.873 trillion. Among institutional funds, taxable government money market fund assets decreased by $6.28 billion to $680.24 billion, taxable non-government money market fund assets decreased by $10.75 billion to $1.050 trillion, and tax-exempt fund assets increased by $810 million to $142.96 billion." Note that Crane Data's Money Fund Intelligence Daily has shown asset inflows for two days in a row, so money funds are clearly benefit from the correction in stocks and the broader market turmoil.

Reuters writes "US bank cost may raise on money fund move - Barclays". The piece says, "U.S. bank borrowing cost could spike higher in the coming weeks, if money market mutual funds were to put more cash into Treasury bills and repurchase agreements rather than bank commercial paper, Barclays Capital said on Wednesday." It quotes Abate's research note, "Given the importance of money funds in providing bank funding, we believe a modest reallocation away from bank paper and toward repo and bills could have a significant effect on Libor." Reuters adds, "The $2.9 trillion money market fund industry is a key source of short-term financings for banks. Their reluctance to invest in commercial paper issued by banks and other companies in the wake of the collapse of Lehman Brothers exacerbated the global credit crisis in September 2008." In other news, Federated Investors' Debbie Cunningham writes "Rate lows are in the rearview mirror" in her latest "Month in Cash" commentary. She says, "Cash yields crept steadily higher throughout the month as investors continued to anticipate the onset of a new monetary tightening cycle in the United States." Finally, see "State Street Launches New Suite of Services for Money Market Funds."

We recently learned of yet another name change in the money fund business. After seeing the website had changed, we searched SEC filings and found that Accessor Government MMF has changed its name to Forward Government MMF. The filing says, "Also at the January 13, 2010 meeting of the Board of Trustees of the Trust, the Trustees, including all of the Independent Trustees, approved, on behalf of each of the Funds: (i) the replacement of the word 'Accessor' in each of the Funds' names with the word 'Forward'.... Accordingly, effective May 1, 2010, all references in the Prospectuses and the SAI to the current names of the Funds shall be changed to the new names set forth opposite their current names below: `Accessor U.S. Government Money Fund [to] Forward U.S. Government Money Fund." The Accessor change follows Invesco removing the AIM from its funds and Columbia switching to BofA funds. Look for the new fund names and lineups to appear in the May issue of Money Fund Intelligence and MFI XLS, and in today's issue of Money Fund Intelligence Daily.

Crane Data President Peter Crane will present a Webinar for the Association for Financial Professionals (AFP) entitled, "Money Market Mutual Funds: Reviewing the New Regulations & Discussing the Outlook for Future Changes on Wednesday, May 19, 2010, from 3:30 p.m.-4:30 p.m. ET. The session description says, "Money fund expert Peter Crane from Crane Data will review recent changes to Rule 2a-7, the SEC's guidelines for money market funds. Crane will also discuss the possibility of more radical future changes to money funds' structure, such as a floating price, capital reserves or an emergency liquidity bank facility. Crane will also review recent asset trends and the zero and pending rising rate environment." Registration is complimentary. See also ICI's new publication, "Understanding the Risks of Bond Mutual Funds: Are They Right for Me?", which says, "Bond mutual funds -- like all mutual funds -- involve investment risk, including the possible loss of principal. A fundamental principle of investing known as the risk/reward tradeoff means that when you make an informed decision to assume some risk, you also create the opportunity for reward. Investors should be aware of the risks and potential for losses associated with bond mutual fund investing.... Investing in bond mutual funds usually entails less risk -- and less reward -- than investing in stock mutual funds. Similarly, bank accounts and money market funds entail less risk and less reward than do bond mutual funds."

Bloomberg writes "Funds May Exit Reverse Repos in Seven Days Under Fed Terms", which comments, "The Federal Reserve Bank of New York said money-market mutual funds would be able to exit reverse repurchase agreements within seven days if policy makers use them when the central bank begins draining the record amount of cash added to the banking system. A seven-day put option would allow funds participating in the reverse repo program to have a percentage of investments in relatively liquid assets, the New York Fed said on its website today. Firms in the more than $3 trillion U.S. money-market mutual fund industry should be able to sell 10 percent of their assets in one day and 30 percent within a week under Securities and Exchange Commission guidelines. A reverse repo contract isn't considered liquid beyond seven days." In other news, see Boston Globe's "A case of regulatory jitters, which quotes former Fidelity executive Robert Pozen, "Money market funds should not be deemed systemically risky just because two funds ... lost 6 cents on a dollar."

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