Daily Links Archives: April, 2012

IOSCO Issues "Money Market Fund Systemic Risk Analysis and Reform Options". It says, "Certain events during the recent financial crisis highlighted the vulnerability of the financial system, including Money Market Funds, to systemic risk. These events have prompted a review of the regulation of the role of MMFs in the non-bank financial intermediation system. In this regard, the Financial Stability Board (FSB) asked IOSCO to undertake a review of potential regulatory reforms of MMFs that would mitigate their susceptibility to runs and other systemic risks, and to develop policy recommendations by July 2012. IOSCO has mandated its Standing Committee on Investment Management (SC5) to elaborate such policy recommendations. To ensure a sound base for evaluation of these options, the FSB asked IOSCO to review: - The role of MMFs in funding markets; - Different categories, characteristics and systemic risks posed by MMFs in various jurisdictions, and the particular regulatory arrangements which have influenced their role and risks; - The role of MMFs in the crisis and lessons learned; - Regulatory initiatives in hand and their possible consequences for funding flows; and - The extent to which globally agreed principles and/or more detailed regulatory approaches are required/feasible. The objective of this consultation paper is to share with market participants IOSCO's preliminary analysis regarding the possible risks MMFs may pose to systemic stability, as well as possible policy options to address these risks." To submit comments (before 28 May 2012), e-mail moneymarket@iosco.org and include "Money Market Fund Systemic Risk Analysis and Reform Options" in the subject line. (Look for full coverage in our "News" later Monday.)

WSJ Opinion: Rosengren says "Money-Market Funds Still Need Reform". He writes, "Yet more needs to be done to prevent another damaging run on prime money-market funds. Prime funds take on substantial credit risks but -- despite the caveats in their prospectuses -- create an implicit expectation among investors for a fixed net asset value and immediate access to their money. Moreover, prime funds have no capital buffers to absorb credit losses, which implies the potential for a loss of principal. When investors become concerned about the ability of funds to maintain a fixed net asset value, a rational response is to redeem shares quickly while they are still worth $1, which is precisely what we witnessed in 2008. The degree of credit risk taken by some funds remains significant and inconsistent with investors' perceptions of a low-risk, highly liquid investment. Lehman Brothers securities were not the only distressed instruments held by money-market funds in 2008. Several other securities held by money-market funds defaulted -- including a number of complex products such as structured investment vehicles (some of which issued short-term paper collateralized by subprime mortgages), which ultimately lost significant value. More recently, more than 60 prime funds held securities in Dexia in 2011, the same year the troubled French bank needed support from the French and Belgian governments."

A CFA Institute blog entitled, "Update on Money Market Fund Reform: Standoff Continues", says, "Last month we examined the reforms that the Securities and Exchange Commission (SEC) is considering for U.S. money market funds as part of their effort to make the industry more transparent and less risky. SEC Chairman Mary Schapiro is calling for money market funds to maintain a capital buffer, restrict redemptions, and float their NAVs. Campaigns have been in full swing on both sides of this issue over the past month, with regulators reiterating calls for reforms and asset managers digging in their heels in opposition. Importantly, support within the SEC itself remains uncertain, and the reforms could very well be doomed without a majority of the five SEC commissioners' approval. That is, unless the Financial Stability Oversight Council (FSOC), a creation of the bureaucratic behemoth known as the 2010 Dodd-Frank Act, steps in. Politics may soon dominate the debate. Here are some of the new developments over past month: The SEC remains divided.... Key players continue to weigh in.... Nuclear option: FSOC intervention."

The Hill's Congress Blog features the piece, "Proposed SEC Money Market fixes are a bad idea". A recent post by Rep. Gwen Moore (D-Wis.) says, "The financial crisis remains fresh in the minds of the American people and the passage of the Dodd-Frank act -- which I supported -- was a positive first step, putting in place the most comprehensive financial regulatory measures since the Great Depression. Attention is now being focused on the Securities and Exchange Commission (SEC) proposal to either "float" the net asset value (NAV) of money market mutual funds (MMFs) or to not permit full redemption of investor funds on demand. As a member of the House Committee on Financial Services, the SEC proposals would critically undermine the viability of MMFs, and undermine the ability for businesses and local governments to find short-term financing.... [R]eforms to MMFs have already helped the industry maintain investor confidence and weather two significant market disruptions: the downgrade of U.S. debt and the Greek/Euro Zone debit crisis. This is why the latest calls for reform are perplexing, since Congress passed Dodd-Frank six months after the SEC amended Rule 2a-7 related to MMFs governance and Congress chose not to modify the fixed NAV at that time. Nonetheless, there have been proposals for additional regulations of MMFs based on the logic that investors in MMFs may mistakenly believe they are federally backed or insured and that MMFs remain susceptible to bank-style runs because they are not insured or backed. The name Money Market Fund does speak for itself. They are funds invested in markets. But if that is not enough, MMFs already must explicitly and clearly disclose that they are not federally backed.... Both SEC proposals would frustrate those aims by either ending cash equivalency by floating the NAV or imposing a pseudo margin requirement on investments in MMFs by not permitting full withdrawal. The SEC is to be commended for the 2010 MMFs reforms, but the most recent proposals to change Rule 2a-7 must be reexamined."

With less than two months to go, preparations are heating up for our 4th annual Crane's Money Fund Symposium. We expect a record turnout (possibly approaching 500) for our 2012 Symposium, which will be held June 20-22, 2012, at The Westin Convention Center in Pittsburgh. (Crane Data's big annual money fund event attracted almost 400 speakers, sponsors, and attendees in Philadelphia last year.) For the full agenda and for more information, visit www.moneyfundsymposium.com. We're encouraging attendees to register and to make hotel reservations early this year due to the expected record turnout and due to the NHL Draft being in Pittsburgh the same week. Crane's Money Fund Symposium offers money market portfolio managers, investors, issuers, and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Crane's Money Fund Symposium 2012 is still $750; exhibit space is $3,000; and sponsorship opportunities are $4.5K, $6K, $7.5K, and $10K. Our mission is to deliver a better and less expensive conference alternative to money market fund professionals and investors, and we hope to see you in Pittsburgh this summer! Crane Data is also assisting German conference company IQPC with a new European Money Fund Summit, which is tentatively scheduled for November 19-20, 2012, in Frankfurt, Germany. Finally, mark your calendars for next year's Money Fund University, which is tentatively scheduled for Jan. 23-24, 2013, in New York City.

ICI's latest "Data Update: Prime Money Market Funds' Holdings" says, "In October and December, we discussed how portfolio managers of U.S. prime money market funds have addressed the ongoing debt crisis in the eurozone. In February, we responded to commentators suggestions that U.S. prime money market funds' increase in eurozone holdings in January reflected a renewed appetite for risk. Here is a look at the latest monthly data on these funds' holdings by home country of issuer. In March, prime funds' eurozone holdings declined as a percentage of assets. We will revisit the topic in mid-May with updated analysis once April figures become available." ICI's latest summary, which uses Crane Data's monthly Money Fund Portfolio Holdings series, shows total Eurozone holdings falling to 14.6% in March in Prime money funds from 15.5% in February. This percent is up from a low of 12.0% in December, but down considerably from the peak of 31.1% in May 2011. France represented 5.0% of Prime holdings in March vs. 5.5% in February, 3.3% in December and 15.7% in May 2011. ICI also released their latest weekly "Money Market Mutual Fund Assets" Thursday evening. The tiny increase broke a seven-week streak of outflows.

Counsel Melanie Fein is the most recent comment letter to the SEC and PWG. She blasts Boston Fed President Eric Rosengren's recent "Money Market Mutual Funds and Financial Stability" anti-money fund tirade, writing, "I am a former Fed attorney who has been involved in regulatory matters affecting the banking industry as well as the mutual fund industry for three decades.... I have represented both banks and MMFs and thus have a client-related as well as academic interest in the outcome of the debate over whether structural changes are needed for MMFs. I have been greatly troubled by statements made by Federal Reserve officials that I believe distort the facts concerning MMFs and their role in the financial system. In particular, I am concerned about proposals advocated by yourself and other Fed officials that do not appear to be supported by the level of economic analysis that is called for given what is at stake -- the survival of MMFs as efficient investment vehicles valued by millions of individual and institutional investors and which play an important role in the financial system. Some of the proposals and public statements seem disingenuous and have an amateurish "shooting from the hip" quality that I feel is beneath the dignity of the nation's central bank. For example, the assertion in your speech that "prime funds played a critical role in the amplification of financial problems in recent years" is unsupported by any facts, analysis or elaboration whatsoever other than a reference to the Reserve Primary Fund's "breaking the buck" which was an event that many believe was caused by the Fed itself."

A press release entitled, "Treasury Strategies and ICI to Discuss Treasurers' Reaction to Possible Money Market Fund Reforms" says, "A new report, "Money Market Fund Regulations: The Voice of the Treasurer," examines corporate treasurers' views and likely reaction to three concepts being pursued by the Securities and Exchange Commission to change the fundamental nature of money market funds. The ICI commissioned Treasury Strategies to study treasurers' response to three concepts -- floating net asset value, redemption holdback, and a capital buffer. Treasury Strategies, Inc., the leading consulting firm in the area of treasury, payments and liquidity management, will unveil its findings in a webinar with members of the media. The presentation begins at 11:00 a.m. EDT. Cathy Gregg, Partner at Treasury Strategies, will lead the review of key study findings. ICI Chief Economist Brian Reid will also provide insights related to policy issues." The Conference call will be Thursday, April 19, 2012 at 11:00 a.m. EDT. To join, click here. The U.S. dial-in number is 1-877-668-4493, the guest access code is: 663 671 310 and the password is: voice. A participant number is provided upon login to webinar.

A statement entitled, "Federal Reserve Board issues a consent cease and desist order and civil money penalty against the Bank of New York Mellon (BNYM)" says, "The Federal Reserve Board on Monday issued a consent cease and desist order and assessed a $6 million civil money penalty against the Bank of New York Mellon (BNYM), New York, New York, a state-chartered bank that is a member of the Federal Reserve System. The order addresses allegations that BNYM breached certain representations and warranties made to Federal Reserve Bank of Boston in connection with BNYM's participation in the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The Board announced the creation of the AMLF in 2008 to assist money market mutual funds in meeting the demand for redemptions by investors and to foster liquidity in the asset-backed commercial paper market and money markets more generally. The AMLF was closed on February 1, 2010. The Federal Reserve Board alleged that BNYM breached certain representations and warranties in its Letter of Agreement with respect to the collateral BNYM pledged to the AMLF. BNYM timely repaid all amounts borrowed under the AMLF."

"Union Station Gets Dressed Up for the SEC" says a blog posting by the Chamber of Commerce's Alice Joe. She comments, "DC Metro riders passing through Union Station may notice the stop has a new look. Beginning today, the Chamber's Center for Capital Markets Competitiveness is running an ad blitz, covering the station with questions about why regulators intend to revamp money market mutual funds when they work so well for American businesses, cities, and investors as a cash management tool. With the station's location next to the Securities and Exchange Commission (SEC), the right regulators will be confronted with important and unanswered questions about pending reforms.... Before regulators embark on wholesale changes to money market mutual fund regulation, they need to ask themselves more questions: Why will more regulation fundamentally change the structure and characteristics of money market mutual funds? Have we identified the specific problem through empirical evidence to justify the changes? Why now? Will the cumulative effect of this proposal along with Dodd-Frank mandated rules impair the capital markets so broadly that it will impair business' ability to raise needed capital? Why these solutions? Do these changes address the perceived problem? Do the benefits outweigh the risks? There haven't been satisfactory answers to these questions, but by getting in front of regulators in a highly visual way, we hope to force their attention to the many questions that remain."

Investment News writes "Federated not done shopping for money market funds". It says, "Federated Investors Inc.'s pending acquisition of $5 billion in money market fund assets from Fifth Third Bancorp is seen as the start of a buying spree for the firm. Low interest rates, increased capital requirements for banks and the possibility of further money fund regulation are forcing smaller money market players to rethink their role in the business, according to observers. Federated president and chief executive Chris Donahue thinks that his firm could be the beneficiary of banks' being "more open" to selling, particularly as potential regulation by the Securities and Exchange Commission begins to take form.... Despite the possibility of further tightening of regulation, Mr. Donahue sees money funds as a good long-term investment."

Bloomberg writes "SEC Deadlock on Money Funds May Prompt FSOC Intervention". The article says, "Divisions at the U.S. Securities and Exchange Commission could prompt a panel of regulators from other agencies to intervene in a debate over strengthening rules governing the $2.6 trillion money-market fund industry, three people familiar with the situation said. If the SEC is unable to reach agreement, the Financial Stability Oversight Council, established by the 2010 Dodd-Frank Act to monitor large risks to the economy, may decide to officially designate money funds as "systemically important." That would increase pressure on the SEC to overcome industry opposition and internal disagreements to propose new rules." The piece adds, "The FSOC could intervene into the money-market debate in one of two ways -- by declaring the industry's activities systemically important or by designating individual funds as a systemic risk. If the FSOC declared the sector as risky, the SEC would have to either propose rules or explain why it is unable to do so." In other news, ICI's latest "Money Market Mutual Fund Assets says, "Total money market mutual fund assets decreased by $6.15 billion to $2.584 trillion for the week ended Wednesday, April 11, the Investment Company Institute reported today. Taxable government funds decreased by $3.28 billion, taxable non-government funds increased by $40 million, and tax-exempt funds decreased by $2.91 billion."

Fitch published a brief entitled, "Popular Short-Term ETFs Offer Higher Yield, But Add Risk". It says, "Fitch Ratings notes the growing popularity of short-term fixed-income Exchange Traded Funds, or ETFs. These are short-term bond funds that market themselves as a close alternative to money market funds. We note one example that underscores the growing popularity of this product in PIMCO Enhanced Short Maturity Strategy ETF (MINT). The objective of MINT is the maximum current income consistent with preservation of capital and daily liquidity, identical to that of MMFs. The fund has reached $1.5 billion in the 2.5 years since its inception in November 2009. MINT currently offers a 0.96% 30-day yield versus an average 0.03% yield delivered by taxable MMFs, according to iMoneyNet. That's a sizable difference, and one that underscores the allure for investors in traditional MMFs. Investors also benefit from additional transparency with actively managed ETFs, as they are obligated under Securities and Exchange Commission rules to disclose their portfolio holdings daily versus monthly for MMFs. Still, while the additional yield could attract investors that target certain and specific expected return with their cash investments, we believe the attendant risks of these vehicles should be understood, thoroughly analyzed, and not be confused with conservatively managed MMFs. The higher yields from alternative short-term cash management vehicles entail additional credit, interest rate, and liquidity risks that must be considered by investors. Our analysis of PIMCO's MINT holdings (as of April 4, 2012) showed close to 30% of the fund's assets invested in securities that would not be eligible for MMF holdings, including some investments in "junk" rated securities (0.61% of the fund's assets). Furthermore, the fund duration of close to one year implies that this fund assumes significantly higher interest rate risk relative to an average Fitch-rated prime MMF, whose WAM stood at 38 days (0.1 year) at the end of February 2012. Additionally, ETF investors are highly dependent on secondary market activities for their liquidity, which could be constrained during times of market stress and when investors may need their cash the most. A reliance on secondary market liquidity for these "near-cash" investments may prove too volatile relative to some investor expectations and risk appetites."

The Atlanta Fed's 2012 Financial Markets Conference, Financial Reform: The Devil's in the Details" features several sessions involving money market funds and "shadow banking" (see yesterday's "News" on the Bernanke speech). But today, we link to a paper on German money funds entitled, "Sturm und Drang in money market funds: when money market funds cease to be narrow." The Abstract says, "This paper investigates the returns and flows of German money market funds before and during the liquidity crisis of 2007/2008. The main findings of this paper are: In liquid times money market funds enhanced their returns by investing in less liquid papers. By doing so they outperformed other funds as long as liquidity in the market was high. Investing in less liquid assets, however, widens the narrow structure of money market funds and makes them vulnerable to runs. During the shortening of liquidity caused by the subprime crisis illiquid funds experienced runs, while more liquid funds functioned as a safe haven." See also the Powerpoint on this paper as well as the presentation from ICI's Sean Collins'. Watch for more news from the Atlanta Fed conference tomorrow as a "Policy session" on Money Market Mutual Funds, including panelists Eric Rosengren, President and CEO, Federal Reserve Bank of Boston, Barry Barbash, Partner, Head of Asset Management Group, Willkie Farr & Gallagher, Karen Dunn Kelley, Senior Managing Director and Chief Executive Officer, Invesco Fixed Income, and Zoltan Pozsar, Visiting Scholar, International Monetary Fund takes place at 10:30am.

Another Comment Letter on the President's Working Group Report on Money Market Fund Reform was posted late last week. This one, from Association for Financial Professionals, Benefit Resource, Inc. Blue Cross Blue Shield of Massachusetts, CacheMatrix, Catholic Health Initiatives, California ISO, CareSource, Centerline Capital Group, Crawford & Company, Grass Valley USA LLC, Miami-Dade County Public Schools, Solix, Inc., University of Colorado – Treasurer's Office, and WellCare Health Plans, Inc., says, "On behalf of the Association for Financial Professionals (AFP) and the undersigned companies, we are writing to provide and members of the Commission with our thoughts on an option currently being discussed relating to money market reforms. Our group of corporate treasurers and financial professionals fully support amending the current rules governing money market funds (MMFs) in a manner that encourages clear and concise transparency that not only protects investors, but provides them with the necessary information needed to make the most sound and practical investment decisions for their organizations. As such, we have concerns regarding one option to eliminate the stable net asset value (NAV) in favor of a floating NAV. The signees of this letter represent a broad spectrum of financial disciplines, and their organizations represent a wide variety of industries.... Our group recognizes that concerns about the liquidity of MMFs played a role in exacerbating the financial crisis that began in September 2008. As a result, we are largely supportive of rules already enacted by the Securities and Exchange Commission (SEC) to improve the liquidity and transparency of MMFs. The impact of many of these rules, including the monthly reporting of each fund's shadow NAV, has not yet been fully felt in the market. We believe that these new rules instituted significant changes that will, on their own, substantially reduce the liquidity concerns and systemic risks posed by MMFs. We oppose the proposal to eliminate the stable NAV in favor of a floating NAV, as we believe it would greatly reduce investors' interest in utilizing MMFs as a cash management and investment tool, whether applied to all investors or just institutional investors. For purchasers of MMFs, the return of principal is a much greater driver of the investment decision than return on principal. For a large number of institutional investors, the potential of principal loss would preclude investing in floating NAV MMFs."

"Downgrades Could Limit Investment Pool for Money-Market Funds" writes WSJ.com. The article, written by Anusha Shrivastava, says, "The ongoing review of more than a hundred banks by Moody's Investors Service is shrinking the pool of debt U.S. money-market funds can purchase. By mid-May, the ratings firm could downgrade 114 European banks and nearly half a dozen U.S. banks, including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase and Morgan Stanley. Such downgrades would mean conservative money-market funds, which only buy the highest-rated debt, would not be able buy commercial paper from these banks. Already, some investors have reduced the length of time they lend to issuers whose ratings are on watch for downgrades and "some have allowed maturing paper to roll off," said Stewart Cutler, director and head of money market origination at Barclays. This leaves the buyers searching for other places to park their cash, generally U.S. government debt and non-financial commercial paper."

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $15.20 billion to $2.590 trillion for the week ended Wednesday, April 4, the Investment Company Institute reported today. Taxable government funds decreased by $8.35 billion, taxable non-government funds decreased by $7.89 billion, and tax-exempt funds increased by $1.04 billion. Assets of retail money market funds decreased by $80 million to $908.16 billion. Taxable government money market fund assets in the retail category decreased by $530 million to $188.18 billion, taxable non-government money market fund assets decreased by $670 million to $526.32 billion, and tax-exempt fund assets increased by $1.12 billion to $193.66 billion. Assets of institutional money market funds decreased by $15.13 billion to $1.682 trillion. Among institutional funds, taxable government money market fund assets decreased by $7.82 billion to $685.19 billion, taxable non-government money market fund assets decreased by $7.22 billion to $904.75 billion, and tax-exempt fund assets decreased by $90 million to $91.65 billion."

Bloomberg writes "Bank-Supported Muni Market Faces 'Headwinds,' Moody's Says". The article says, "The market for bank-supported municipal debt, including variable-rate demand bonds, may face "headwinds" this year because of possible cuts in bank ratings, Moody's Investors Service said. Top short-term ratings for both Bank of America Corp. and Citigroup Inc. (C) are under review for a downgrade, according to the credit-rating company. Losing the top grade may cause interest rates on $34.7 billion of municipal bonds to spike as money-market funds redeem the debt and dealers can't resell it, Moody's said in an e-mailed statement." Moody's says, "Issuers whose remarketings fail or who are unable to arrange extensions or replacements for expiring support facilities may face severe cash-flow pressure as they confront higher interest cost and accelerated amortization." The Bloomberg piece explains, "Variable-rate demand bonds are long-term securities offering short-term interest rates because investors can demand their money on short notice and turn the bonds in for sale to another buyer. To assure investors there will be money available, governments hire banks to provide standby bond purchase agreements or letters of credit."

Federated Investors' latest "Month in Cash" is entitled, "The futures market is saying what Ben won't." Taxable Money Market CIO Debbie Cunningham says, "The fed funds futures market continues to signal a blip up in rates by year-end, a move neither Federal Reserve Chairman Ben Bernanke nor official Fed policy reflects. Perhaps that's understandable. Bernanke has said he knows how to fight inflation but not deflation, so if he errs, he's likely to err on being too slow to pull in the reins, not too fast. But what the money markets and the broader markets are telling us is that while the low-rate environment is likely to stick around for a while, that doesn't mean the target funds rate necessarily will stick around at the historically low levels of the past few years. As we noted last month, "exceptionally low" doesn't have to translate into the current 0% to 0.25% target range. It also doesn't mean the Fed's current hands-off directive on fed funds "until late 2014" is set in stone. A lot can happen between now and the end of the year, of course. But from a rate perspective, we continue to see an improving tone in the money markets. Repo rates remained in the mid- to high-teens in the past month, considerably higher from where they started the year."

Crane Data's Peter Crane is scheduled to speak at the 30th Anniversary New York Cash Exchange, hosted by the Treasury Management Association of New York May 23-25 at the New York Hilton. Crane will present a session entitled, "Money Funds After the Makeover: Cash Investing Strategies," along with Barclays' Joseph Abate and Federated Investors' Debbie Cunningham. The session description says, "Money market mutual funds and cash investors continue to adjust to regulatory changes and market events and turmoil. Money fund expert Peter Crane will lead a panel with Barclays Capital's Joseph Abate and Federated Investors' Debbie Cunningham on the new Rule 2a-7 proposals and other money market changes, and how they have altered and will continue to alter the investment landscape. The session will also discuss what investors should be aware of in analyzing their money funds and cash investments and will review recent trends, regulations, and concerns in the money markets." Note also that all three presenters will be among those speaking at Crane's Money Fund Symposium, which will take place in Pittsburgh on June 20-22. Visit www.moneyfundsymposium.com for more details.

A Bloomberg editorial entitled, "Money-Market Funds Should Kick Their Buck-a-Share Habit", says, "Money-market funds, like their Wall Street banking kin, are learning how to fend off new regulations meant to prevent a replay of the financial crisis of 2008. One fund company, Federated Investors Inc., is even threatening to sue. The ploys seem to be working, and might even derail proposals to make the $2.6 trillion industry safer. That would be a shame because the Securities and Exchange Commission, which regulates the funds, is only halfway through a job it started more than two years ago. The agency should finish its work by adopting additional measures to prevent the sort of panicked run on the funds that helped kick the credit crunch into high gear. Here's where we stand: In 2010, the SEC ordered money-market funds to hold more cash, have investments that mature more quickly and diversify their portfolios. To the lobbyists and some of the biggest fund companies, this stopgap was enough. They say they have all the evidence they need: Money-market funds withstood the turmoil of Europe's sovereign-debt crisis, last summer's congressional debt-ceiling stalemate and the loss of the U.S.'s prized AAA credit rating. True, money funds weathered these threats. But let's be honest: At no time were markets on the verge of matching the 2008 global financial meltdown, when disaster was averted only through intense government and central bank intervention."

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