Daily Links Archives: April, 2011

Federated Investors Reported First Quarter Earnings last night and hosts a conference call Friday morning at 9 a.m. Easter. The press release says, "Money market assets in both funds and separate accounts were $271.1 billion at March 31, 2011, down $1.2 billion or less than 1 percent from $272.3 billion at March 31, 2010 and down $4.9 billion or 2 percent from $276.0 billion at Dec. 31, 2010. Money market mutual fund assets were $239.0 billion at March 31, 2011, down $1.2 billion or less than 1 percent from $240.2 billion at March 31, 2010 and down $5.8 billion or 2 percent from $244.8 billion at Dec. 31, 2010.... For Q1 2011, revenue increased by $5.9 million or 3 percent from the same quarter last year. The increase in revenue primarily reflects a decrease in voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields during Q1 2011 compared to Q1 2010 as well as an increase in average fixed-income and equity assets. These increases were partially offset by the impact of lower average money market assets. See additional information about voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields in the table at the end of this financial summary. In Q1 2011, Federated derived 50 percent of its revenue from fluctuating assets (32 percent from equity assets and 18 percent from fixed-income assets), 49 percent from money market assets and 1 percent from other products and services." See also, U.K.-based Citywire Money's "Standard Life closes money market funds".

Dreyfus' Charlie Cardona says in his comment letter on the SEC's recent NRSRO Proposal (see yesterday's News), "We believe the Proposals Provide a Framework for Higher Credit Risk in Money Market Funds. As we first commented in 2009, we believe that eliminating references to credit ratings in Rule 2a-7 is not in the best interests of money market funds and their shareholders, and is a curious result following a period of heightened concern for systemic risk. We believe the Proposals create more favorable conditions for increasing credit risk and "chasing yield," the latter of which should be of even greater concern over time when interest rates normalize and systemic passions naturally subside. We believe the Proposals Would Reduce Portfolio Holdings Transparency and Increase Client Servicing Requirements. We believe the Proposals would expand money fund sponsors' client servicing requirements. Eliminating credit ratings references would erase a significant amount of the inherent transparency associated with a money market fund investment (as provided by the risk-limiting conditions of Rule 2a-7) and would oblige fund sponsors to compensate for that loss. We Believe References to Credit Ratings in the Form N-MFP Can and Should be Retained. We respectfully request that the Commission reconsider whether Section 939A requires the Commission to propose removing references to credit ratings in the Form N-MFP. We believe that Section 939A does not require it, and we support retaining these references and disclosure items in the Form N-MFP (a) to help fulfill the expanded client servicing requirements discussed above; (b) to provide a critical tool for Commission and Staff oversight of money market fund credit quality; and (c) to perhaps even provide an industry "check" on potential yield chasing. We believe the proposed definitions of First Tier Security and Second Tier Security may not provide an equivalent standard of creditworthiness to that which currently is provided for under Rule 2a-7."

Vanguard's Gus Sauter writes in the company's comment letter on NRSROs, "We appreciate the opportunity to provide our comments to the Securities and Exchange Commission on the proposal to remove credit ratings from Rule 2a-7.... [We] are deeply committed to working with the Commission to seek regulatory solutions that will increase investor protection, strengthen investment standards, and diminish risk to the $2.7 trillion money market fund industry. We do not believe, however, that the removal of credit ratings from Rule 2a-7, and the proposed replacement standards of credit-worthiness, promote these goals. As Vanguard has stated in response to previous proposals by the Commission, we believe that credit ratings provide a valuable, independently established baseline for money market fund investments. The Dodd-Frank Act requires the Commission to replace credit ratings with 'to the extent feasible, uniform standards of credit-worthiness.' We believe the Commission's proposed credit standards may not adequately replace this baseline, and therefore, fail to achieve the stated goal of Congress. The replacement of the minimum, objective floor for eligibility under Rule 2a-7 with a subjective standard has the potential to create different standards of credit-worthiness. As a result, we urge the Commission to consider other alternatives, such as the one set forth in this letter, that may more effectively replace the objective standard provided by credit ratings and achieve Congress' goal of uniformity."

DWS Variable NAV Money Fund went live last week. The fund's prospectus says, "The fund is managed in accordance with Rule 2a-7 under the Investment Company Act of 1940, as amended, which governs the quality, maturity, diversity and liquidity of instruments in which a money fund may invest. The fund is a money market fund that is designed to serve as a complementary product to traditional stable value money market funds. Unlike a traditional money market fund, the fund will not use the amortized cost method of valuation and does not seek to maintain a stable share price of $1.00. As a result, the fund's share price, which is its net asset value per share (NAV), will vary and reflect the effects of unrealized appreciation and depreciation and realized losses and gains. Because the fund will not use the amortized cost method of valuation, the Advisor believes that the likelihood of redemptions by shareholders solely to avoid unrealized depreciation or realized losses will be mitigated, but there is no guarantee that the fund will not experience redemptions based upon unrealized depreciation, realized losses or other factors." DWS will host a conference call entitled, "Innovation driven investing: Preparing for new market realities" on Thursday at 1pm.

Bloomberg writes "Investors Bound for Shock If Rising Rates Sink Bonds, Cohen Says". The article says, "Investors who poured more than half a trillion dollars into bond mutual funds since 2007 will experience a market crash when interest rates rise, according to Marilyn Cohen, a Los Angeles money manager. Cohen lays out a grim scenario in 'Surviving the Bond Bear Market' (John Wiley & Sons Inc.), co-written with husband Chris Malburg. Rates will surge if the global economy strengthens or because investors lose faith in governments with growing deficits, said Cohen, whose book came out this month." The piece quotes Cohen, "The baby boomers, who really have been all-in to all kinds of bonds and bond funds since the end of the credit crisis, they've never lived through a bear market with skin in the game. It'll freak people out." Bloomberg adds, "Fixed-income mutual funds took in net deposits of $645 billion from 2008 through 2010, according to the Washington-based Investment Company Institute.... Cohen recommended putting as much as 25 percent of a portfolio in money-market funds, which invest in short-term Treasury bills and commercial paper. Their yields rise along with interest rates."

ICI's weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $36.18 billion to $2.710 trillion for the week ended Wednesday, April 20, the Investment Company Institute reported today. Taxable government funds decreased by $16.99 billion, taxable non-government funds decreased by $14.20 billion, and tax-exempt funds decreased by $4.99 billion. Assets of retail money market funds decreased by $1.87 billion to $917.21 billion. Taxable government money market fund assets in the retail category decreased by $1.16 billion to $172.24 billion, taxable non-government money market fund assets increased by $1.01 billion to $545.21 billion, and tax-exempt fund assets decreased by $1.71 billion to $199.76 billion.... Assets of institutional money market funds decreased by $34.31 billion to $1.793 trillion. Among institutional funds, taxable government money market fund assets decreased by $15.82 billion to $603.78 billion, taxable non-government money market fund assets decreased by $15.21 billion to $1.079 trillion, and tax-exempt fund assets decreased by $3.28 billion to $110.12 billion."

The Wall Street Journal writes "Charles Schwab CFO: Money Market Fund Fee Waivers Could Reach About $125M In 2Q". The brief says, "Charles Schwab Corp. Chief Financial Officer Joe Martinetto said money market fund fee waivers for the discount brokerage could 'tick up in the second quarter' and level out around $125 million. That forecast is $10 million higher than the projection Schwab gave in February, though Martinetto -- on the company's interim business update -- told investors the outlook could rise or fall by a few million. Schwab is waiving those fees on its funds because of low interest rates so that clients' returns don't turn negative. The San Francisco company waived $112 million in such fees in the first quarter and $433 million in the whole of 2010."

"BlackRock to Report First Quarter 2011 Earnings on April 21" says a press release. It says, "BlackRock, Inc. today announced that it will report results for the first quarter of 2011 prior to the opening of the New York Stock Exchange on Thursday, April 21, 2011. Chairman and Chief Executive Officer, Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, will host a teleconference call for investors and analysts at 9:00 a.m. (Eastern Time). BlackRock's first quarter earnings release will be available in the investor relations section of the Company's website, www.blackrock.com, before the teleconference call begins." Federated Investors reports earnings next Thursday, April 28. Its release says, "Federated Investors, Inc., one of the nation's largest investment managers, will report financial and operating results for the quarter ended March 31, 2011 after the market closes on Thursday, April 28, 2011. A conference call for institutional investors and analysts will be held at 9 a.m. Eastern on Friday, April 29, 2011. President and Chief Executive Officer J. Christopher Donahue and Chief Financial Officer Thomas R. Donahue will host the call."

Bill Spivey recently posted a comment to the PWG report. Spivey writes, "Thank-you for allowing the public to comment on the report of the President's Working Group on Financial Markets – Money Market Reform Options. As you are aware, the PWG Report proposes certain fundamental changes to the regulation of money market funds to address systemic risk and reduce their susceptibility to runs. My concern is that several of the options in the PWG Report – specifically, options (a) (floating net asset values), (e) (two-tiered system with enhanced protection for stable NAV funds), (f) (two-tiered system with stable NAV funds reserved for retail investors), and (g) (regulating money market funds as special purpose banks) - would fundamentally change the money market industry for the worse, as other commenters have noted in letters to the Commission. Moreover, as other commenters also have noted, it is not clear that other options in the PWG Report – specially, options (c) (mandatory redemptions in kind), (d) (insurance for money market funds) and (h) (enhanced constraints on unregulated money market fund substitutes - would be effective in achieving the goals set out in the PWG Report, especially standing by themselves. For approximately forty years, money market funds have served an invaluable purpose as efficient cash management vehicles, with investors suffering minimal losses. Fundamentally changing the money market fund industry would serve little purpose other than to hurt investors. Moreover, money market funds were in part created to help small investors circumvent outdated banking regulations that had come to benefit only banks. Considering that history, it would be ironic for the Commission to adopt regulations to make money market funds more like banks, as options (d) and (g) would. For those reasons, I would recommend that the Commission not adopt any of those options. As argued by the Investment Company Institute in its January 10, 2011 comment letter to the Commission, the remaining option, that money market funds would have access to some form of private emergency liquidity facility, would not fundamentally change the money market industry, and an ELF would be effective in helping money market funds with significant and unexpected liquidity demands.... [T]he Commission should encourage other forms of ELF and let the market decide."

"FDIC's Bair: Money Market Industry Needs More Reform" writes Dow Jones, saying, "The money market funds industry needs more reform, a top U.S. banking regulator said Friday. During the financial crisis, money market funds 'were an accident waiting to happen, and it did happen,' Federal Deposit Insurance Corporation head Sheila Bair said. Citing the profile of investment funds that act much like banks but without the capital or access to the safety net, the official said 'I think it's just so obvious' this needs to change.... Bair's comment came in response to an audience question at an event held in New York by the Levy Economics Institute of Bard College. The main trade group for the mutual fund industry, however, opposes requirements that such funds be subject to regulation or insurance." The ICI said to Dow Jones in response, "We oppose proposals that would undermine money market funds' core value to investors.... [Money funds] are subject to risk-limiting regulations and only invest in high-quality, highly liquid, transparent assets with short maturities."

"Fitch-rated U.S. Money Market Funds Shift Portfolios Away From Repo Allocations to Time Deposits" says a press release posted yesterday. The ratings agency writes, "Fitch-rated U.S. prime money market funds (MMFs) decreased their portfolio allocations to repurchase agreements (repos) during the first quarter of 2011, reversing last year's trend, according to a new report by Fitch Ratings. Fitch-rated prime MMF allocation to repos decreased to approximately 15% of total assets from an all-time high of 21% in July 2010. The decrease in repos were offset by higher allocations to time deposits (TDs), which increased to 12% of funds' total assets from approximately 6% in July 2010. While U.S. MMFs have historically preferred repos over TDs, Fitch notes that with upcoming changes to the tri-party repo market, MMFs are increasingly revisiting other means of daily liquidity management mainly offered by offshore subsidiaries of U.S. and foreign banks.... Ongoing regulatory activities also remain a source of uncertainty with continuing debate about the structure of the money market fund industry and its degree of systemic risk. Another recent development was Fitch's update of its MMF rating criteria on April 4, 2011 as part of its periodic review of all rating criteria. The updated report provided added transparency and clarified certain elements of Fitch's criteria, however the core analytical framework outlined by Fitch in October 2009 remains unchanged, and there were no rating implications for Fitch-rated funds."

A press notice entitled, "ICI to Host Money Market Fund Summit," says, "The Investment Company Institute (ICI) will host a one-day summit on Monday, May 16, bringing together top analysts and industry leaders to discuss the current state of the money markets, progress to date in strengthening money market funds since the financial crisis, and the future of money market fund regulation. The summit will feature the following topics and speakers: Keynote: F. William McNabb III, Chairman and CEO of The Vanguard Group, will deliver the opening address. Luncheon speaker: Doug Holtz-Eakin, President of American Action Forum, will speak at the luncheon. Role of money markets: Lou Crandall, Chief Economist at Wrightson, ICAP, LLC, and Paula Tkac, Vice President and Senior Economist at Federal Reserve Bank of Atlanta, will speak on a panel along with other industry experts about money markets today, as they are moving past the financial crisis. The global view: Along with other industry leaders, Anthony Carfang, Partner and Director at Treasury Strategies, Inc., will discuss the global money market fund industry. 2010 money market fund regulations: In a panel moderated by Karrie McMillan, General Counsel of ICI, Travis Barker, Chairman of the Institutional Money Market Funds Association in London, and others will discuss the topic of money market fund regulatory changes since the 2008 financial crisis. Possible future regulatory changes: Paul Schott Stevens, President & CEO of ICI will moderate a panel about the future of money market fund regulation. Panelists include Andrew J. 'Buddy' Donohue, Partner, Morgan, Lewis, & Bockius LLP and former Director of SEC's Division of Investment Management, and Erik R. Sirri, Professor of Finance, Babson College, who will provide their insights in this forward-looking discussion. The complete program is posted on ICI's events page. Event location and attendance details: The St. Regis Hotel, 923 16th Street & K Street, NW, Washington, DC 20006.

Reuters writes "Money funds face multipronged threat to existence". The piece says, "Life is only going to get harder, analysts say, for money market funds, which are already imperiled by an environment in which ultra-low short-term interest rates make good returns scarce. Three new regulatory changes, all originating from the Dodd-Frank financial reform legislation, are set to take a toll on the funds' ability to earn returns and hold on to clients. One has already been implemented: a new method for assessing bank deposit insurance fees by the Federal Deposit Insurance Corp has made it harder for money funds to engage in repo agreements with U.S. banks, which no longer see an advantage in borrowing cash in overnight loans and using surplus securities as collateral. Rates money funds can earn lending cash in the repo market now are down into the single digits, and likely to stay low, even as the market itself stabilizes." Reuters adds, "If the April 1 implementation date of the new FDIC assessment added pressure to money funds, the July 21 start of two other changes to the short-term rates environment threatens them even more. Banks will get two years of unlimited insurance on nondemand deposit transactions, while also gaining new power to pay interest on demand deposits, such as checking accounts."

William Dudley of the Federal Reserve Bank of New York spoke yesterday in Tokyo on "Regulatory Reform of the Global Financial System". Dudley says, "The interconnectedness of the financial system also caused shocks to spread quickly. For example, the failure of Lehman Brothers led to losses at the Reserve Fund, which precipitated a widespread money market mutual fund panic. It also led to actions by U.K. bankruptcy authorities that had the effect of freezing the assets owned by hedge fund and other clients of the firm and this encouraged such investors to pull assets from other institutions perceived to be weak. These and other propagation channels in turn, led to virtual stoppage of lending and borrowing activity in the money markets and, ultimately, a credit crunch that reverberated throughout the global financial system.... But the focus will not just be on large financial firms. Activities and practices that occur outside of the core institutions are also important. For example, the activities of money market mutual funds is one area receiving close scrutiny. As you know, a run on the money market funds developed in the fall of 2008 when the Reserve Fund broke the buck when Lehman Brothers failed. This underscored a critical structural weakness of money market mutual funds created by the convention that the net stable asset value could be fixed at par. When a money market mutual fund incurs losses that cause it to "break the buck," this encourages investors to rush to withdraw their funds from other funds before they break the buck. The result can be a run on money market mutual fund assets. In the United States, the Securities Exchange Commission has already tightened the rules with respect to liquidity, quality and the average maturity of so-called 2a-7 fund assets, but there is still more to be done to address the remaining vulnerabilities."

This Weekend Wall Street Journal writes "Money-Market Funds: How Low Can They Go?". It says, "The price of safety keeps going up. Nearly three years after a large money-market mutual fund 'broke the buck,' triggering a wave of panic selling, the funds' yields are near all-time lows. Average yields on money funds are currently 0.06%, compared with 2.76% in March 2008, according to research firm Crane Data LLC. Blame it in part on the Federal Reserve's rate cuts in 2007 and 2008, along with recent regulations mandated by the Securities and Exchange Commission to bolster the safety of money funds. In the latest blow, yields on a key investment source for the funds—the repurchase, or 'repo,' market -- dropped unexpectedly this past week when a change in deposit-insurance fees, combined with a sudden shortage of Treasurys, roiled the short-term-rate markets." The Journal adds, "Meanwhile, further regulations now under consideration could add another layer of costs for investors." The piece quotes Pete Crane of Crane Data, "The overall 'safety sacrifice' in money-fund yields could grow to 0.25% as rates return to normal levels." ICI President Paul Schott Stevens comments, "On the trinity of values that fund investors see in money funds, the stability and convenience trumps the yields." The article adds, "The silver lining for savers is that once rates start rising, money funds will reflect those higher rates more quickly."

ICI's "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets increased by $8.26 billion to $2.744 trillion for the week ended Wednesday, April 6, the Investment Company Institute reported today. Taxable government funds decreased by $10.462 billion, taxable non-government funds increased by $18.11 billion, and tax-exempt funds increased by $610 million. Assets of retail money market funds decreased by $3.16 billion to $922.66 billion. Taxable government money market fund assets in the retail category decreased by $1.30 billion to $173.76 billion, taxable non-government money market fund assets decreased by $2.88 billion to $545.99 billion, and tax-exempt fund assets increased by $1.02 billion to $202.91 billion.... Assets of institutional money market funds increased by $11.42 billion to $1.821 trillion. Among institutional funds, taxable government money market fund assets decreased by $9.16 billion to $615.53 billion, taxable non-government money market fund assets increased by $21.00 billion to $1.090 trillion, and tax-exempt fund assets decreased by $410 million to $115.62 billion. ICI reports money market fund assets to the Federal Reserve each week. Revisions are due to data adjustments, reclassifications, and changes in the number of funds reporting. Historical weekly money market data back to January 2008 are available on the ICI website."

Dow Jones writes "Under Fleming, Morgan Stanley Asset Management shows gains", which says, "Getting MSIM firing on all cylinders is a key priority for Morgan Stanley, which along with other banks is grappling with higher capital ratios from new financial regulations. Asset management is appealing because it uses less capital than other businesses, though Morgan Stanley still trails some of its biggest rivals there by measures including assets under management and profit margin.... So far, efforts to revamp the business have focused on shuffling management in areas such as global liquidity, which includes Morgan Stanley's proprietary money market funds, and boosting distribution capabilities with the firm's Morgan Stanley Smith Barney brokerage joint venture, another unit led by Fleming. The asset management business also jettisoned its retail mutual fund business, selling Van Kampen Investments to Invesco last June. By some measures, those changes are having an impact. Morgan Stanley's assets under management among money market fund managers rose by $2.7bn, or 5.6%, over the past year as of February 28, while many competitors lost market share, according to Crane Data. To be sure, Morgan Stanley ranks just 17th on the data provider's list of money market family rankings by assets. Any growth in the category also isn't leading to a big windfall for banks. Low interest rates have forced firms to waive fees there so clients' returns don't turn negative."

"Money Market Rates Fall to Year Lows on FDIC Fee Increase, T-Bill Dearth" writes Bloomberg. The article explains, "U.S. money market rates dropped to about one-year lows as a change in deposit insurance fees makes some banks reluctant to lend securities and the Treasury reduces issuance of bills to avoid exceeding the debt limit. The average rate for overnight federal funds, known as the fed effective rate, fell to 0.09 percent yesterday, the lowest since June. The rate was 0.18 at the start of the year. The average rate for borrowing and lending Treasuries for one day in the repurchase agreement market fell to 0.028 percent, the lowest since at least May 3, 2010, or as far back as index data is provided by the Depository Trust & Clearing Corp." Bloomberg quotes Bank of America Merrill Lynch's Brian Smedley, "The new FDIC assessment structure, while intended to better protect taxpayers from large bank failures, has distorted activity in the short-term rates markets. This change will discourage opportunistic borrowing by insured banks in the fed funds and repo markets in particular, as banks will avoid leveraging their balance sheets unnecessarily to reduce the fees they pay the FDIC."

"FDIC Rule Jolts US Short-Term Lending Markets" writes Dow Jones. The article says, "A new rule intended to strengthen oversight of the banking system in the wake of the financial crisis jolted U.S. short-term lending markets on Monday, raising anxiety about higher borrowing costs in the broader economy. The rate for some Treasury notes turned steeply negative in the securities repurchase, or repo, market, on Monday. Many market participants including dealers had to pay dearly to obtain Treasurys. If that persists, it could hurt money market funds and their investors by reducing the rates of return such funds can earn in short term lending markets. So far, the tensions in the markets have been mild compared to the 2008 financial crisis, when the money market essentially seized up. But some market participants cautioned that inefficient functioning of the short-term lending markets, perceived widely as the oil that greases the broader economy, could hurt liquidity in the Treasury market and push up bond yields. That would raise the borrowing costs for U.S. consumers, businesses and the federal government." It continues, "The rule, which the Federal Deposit Insurance Corporation implemented on April 1, pushed U.S. banks to refrain from lending out their Treasury holdings, which has caused a broad supply squeeze in overnight repos. Banks and companies use the repo market to borrow either Treasurys or cash for trading, investments or to fund short-term obligations." Dow Jones quotes Ted Ake of Societe Generale, "The FDIC's rule and the Dodd-Frank bills are causing unintended consequences." See also, CNBC's Blog "Crescenzi: The House of Pain -- The Money Market" and WSJ's variation of the above Dow Jones story, "New Fee Shakes Up a Lending Market".

Investment News writes "SEC pitches plan to prevent 'breaking the buck'". It says, "To prevent another instance of a money market fund's 'breaking the buck,' the Securities and Exchange Commission is discussing placing capital requirements on such funds. The idea could trump the Investment Company Institute's proposal to create a liquidity bank, to which all money market funds would contribute. The bank would help backstop funds in case of an investor panic.... Although the fund industry 'largely supports' the notion, the support has been 'somewhat tentative,' Robert Plaze, associate director of the Division of Investment Management at the SEC, said via a video hookup during a panel discussion last week at the ICI's Mutual Funds and Investment Management Conference. Given that tepid response, the SEC is discussing other ideas such as those suggested by Fidelity Investments, which opposed the notion of a liquidity bank in its comment letters to the President's Working Group. Under the Fidelity proposal, money market funds would create a capital reserve or an 'NAV buffer' by charging investors more over a period of time, said Norman Lind, head of trading for the taxable- and municipal-money-market desks at Fidelity Management and Research Co., the investment adviser for Fidelity's family of mutual funds."

Investment News asks, "Is the Fed raising rates on the QT?" The story says, "The Federal Reserve and the Treasury Department quietly have taken the first tangible steps to raising interest rates, according to bond manager Dave Pequet. With little fanfare, the Treasury Department announced March 18 that it would start selling a $142 billion portfolio of mortgage-backed securities acquired during the financial crisis. On March 23, the Federal Reserve, which owns about $944 billion of mortgage-backed instruments, announced it would start a new, 'gradually expanding' round of small reverse-repurchase transactions, said Mr. Pequet, president of MPI Investment Management Inc." In other news, ICI reported its latest "Money Market Mutual Fund Assets". It says, "Total money market mutual fund assets increased by $3.94 billion to $2.736 trillion for the week ended Wednesday, March 30, the Investment Company Institute reported today. Taxable government funds increased by $7.22 billion, taxable non-government funds increased by $260 million, and tax-exempt funds decreased by $3.54 billion." Finally, Crane Data competitor iMoneyNet announced the release of "Detailed Money Market Holdings Data."

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