Daily Links Archives: November, 2014

The Financial Times writes, "EU Cash Investors Navigate Negative Rates," which says, "Investors who want to safeguard their capital using ultraconservative money market funds are having to choose racier assets to avoid losing money. The E1tn European money market fund industry provides a cash reservoir from which companies and banks can deposit or borrow short-term money. Many euro-denominated money market funds are already yielding near negative returns -- in effect charging investors -- as they track the record-low lending rates set by the European Central Bank. In response, growing numbers of investors seeking short-term security are having to buy longer-dated or lower quality assets, according to fund managers. "The main driver has been the desire for investors to make their cash investments work harder for them," said Jason Straker, a portfolio manager at JPMorgan Asset Management. "Money market funds tend to invest only in top credit rated instruments, whereas a separately managed account offers the ability to step out of this level of credit rating and thus achieve better returns, albeit moving up the risk curve slightly." The number of separately managed money market accounts has more than doubled over the past three years and they now account for nearly a fifth of JPMorgan's $538bn global money market business, according to the company. Last month a report by Moody's, the rating agency, warned that in spite of waiving management fees many euro-denominated funds were poised to go to negative yields before Christmas. "It's a paradigm shift -- clients are not used to paying for liquidity," said David Callahan, head of money markets at Lombard Odier, which manages about E4bn. "We are looking at a fund with looser investment guidelines both further out the curve and further down the credit spectrum to try and pick up more yield."" The article continues, "The decline into negative territory followed the decision by the ECB in June to cut its deposit rate below zero -- the first central bank in the world to take such action -- in effect, charging banks to park their surplus funds there. In September, the ECB increased its levy on banks from 0.1 per cent to 0.2 per cent. But in spite of slim or non-existent returns, investors continue to find money market funds attractive, in part because of their "haven" status and also because some custodian banks are charging clients to deposit their cash reserves."

Management consulting firm Gartland & Mellina Group recently issued a white paper entitled, "Tackling Money Market Reform," a guide for broker-dealers to develop a strategy to comply with MMF reforms. It says, "The impacts of the reform are far-reaching for broker-dealers who have built not only their money market fund supporting infrastructure and processing systems around the assumption that these funds will always be priced at $1.00, but their operational policies and procedures as well. The operational and technological changes required will permeate layers of processing that currently support money market funds and would infiltrate areas that have previously excluded money market funds. As evidenced by the response to a 2013 SIFMA survey of broker-dealers, `many are expecting large time and cost expenditures to develop and implement modified procedures, controls and systems to support money market funds under the regulation. Financial intermediaries must now incur the costs of investing in enhancements to support floating NAV money market funds and the infrastructure to implement redemption fees and gates." It adds, "Same-day settlement is predicated on the basis of a stable share price and will be a challenge to support for impacted funds unless fund companies consider intra-day pricing.... A floating NAV would add complexity to reconciliation, trade exception and correction processing that does not exist for money market funds today. Interfaces will be needed between fund companies and broker-dealers to facilitate communication of liquidity fees or gates. In light of the above impacts, where should broker-dealers start to assess and implement the potential changes required to their organization to comply with the reform? The following approach provides a framework that broker-dealers can apply to better understand the impacted areas and potential changes and then develop and execute a strategy on how to meet the requirements of the reform."

The Financial Times writes, "Private Placement Option for US Money Market Funds." The article says, "Several large managers of money market funds in the US are believed to be considering launching private funds that would sidestep a regulatory clampdown designed to reduce systemic risk. The Securities and Exchange Commission, the regulator, ruled in July that institutional non-government money market funds must abandon their cherished stable $1-a-share structure by October 2016 and instead adopt the variable net asset value pricing model used by the rest of the fund industry.... The crackdown could backfire if the industry successfully tempts investors, typically corporate treasurers, with private placement-style funds not marketed to investors in general. "There are large US fund companies with large money market funds who are looking at private funds as an option they can offer to their investors," said the head of liquidity funds at one large house, who declined to be named. "I would be amazed if they are not all looking at it because it is something they are all talking about," said another industry figure. Sean Tuffy, head of regulatory strategy at Brown Brothers Harriman, a fund-servicing company, added: "I do think groups are going to find innovative and alternative ways to recreate the constant NAV institutional prime money market fund.... The variable NAV was not something the market wanted, so it makes sense that groups would look to create structures that replicate the CNAV fund." The move may unnerve US regulators. The SEC said in the summer that if its reforms led investors to seek alternative vehicles such as CNAV private funds that are not registered with the commission, "this shift could increase risk by reducing transparency of the potential purchasers of short-term debt instruments".... However, there appears to be disagreement within the industry as to whether private funds aimed at US investors could be domiciled in the US, or instead would have to be based in an offshore location such as the Cayman Islands. The latter could deter some institutions." The article adds, "There is speculation that European money market fund managers may also look at launching private funds if the EU imposes draconian regulation on its CNAV sector."

Charles Schwab wrote an editorial to The Wall Street Journal last week entitled, "Raise Interest Rates, Make Grandma Smile." The founder and chairman of Charles Schwab Corp., wrote, "For America's 44 million senior citizens, plus tens of millions of others who are on the threshold of retirement, last month marked a watershed moment that is worth celebrating. At the end of October, the Federal Reserve announced the first step in returning to a more normal monetary policy. After nearly six years of near-zero interest rates and quantitative easing, the Fed is ending its bond-buying program and has signaled a plan to eventually begin raising the federal-funds rate, raising interest rates to more normal levels by 2017. U.S. households lost billions in interest income during the Fed's near-zero interest rate experiment. Because they are often reliant on income from savings, seniors were hit the hardest. Households headed by seniors 65-74 years old lost on average $1,900 in annual income over the past six years, according to a November 2013 McKinsey Global Institute report. For households headed by seniors 75 and older, the loss was $2,700 annually.... In total, according to my company's calculations, approximately $58 billion in annual income has been lost by America's seniors since 2008.... Because it creates a direct shot of consumer income that in turn becomes consumer spending, the return of normal market-based interest rates will increase the velocity of money in ways the policies of the last six years have not. That is a good reason to encourage the Fed to be even more aggressive and normalize monetary policy as quickly as possible. But today, let's celebrate the Fed's first steps in that direction and the monetary benefits they'll have for seniors and savers." In other news, Bloomberg ran a piece, "Fed Looking at Segregated Accounts as Rate Increase Tool," which reads, "The Federal Reserve's examination of whether to create separate accounts that banks could pledge as collateral for funding is seen by analysts as giving policy makers the opportunity to greater influence money market rates. Minutes released this week from October's Federal Open Market Committee gathering included a discussion of the potential to allow banks to utilize their over $2 trillion in excess reserves held at the Fed as a form of cash collateral for accounts they would offer to private investors.... "This could be a way for money market funds and others to put cash in a bank account that the banks keep segregated and are backed by Fed reserves," said David Keeble, head of fixed income strategy at Credit Agricole SA in New York. "This would remove excess liquidity from the system, effectively allowing non-banks to use the interest rate on excess reserves through an agent.""

Money market fund assets rose for the fifth straight week and eighth week out of nine, according to ICI's latest "Money Market Fund Assets" report. The release says, "Total money market fund assets increased by $9.82 billion to $2.65 trillion for the week ended Wednesday, November 19, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $7.41 billion and prime funds increased by $1.44 billion. Tax-exempt money market funds increased by $960 million. Assets of retail money market funds increased by $30 million to $899.87 billion. Among retail funds, Treasury money market fund assets decreased by $110 million to $199.28 billion, prime money market fund assets decreased by $240 million to $516.09 billion, and tax-exempt fund assets increased by $390 million to $184.50 billion. Assets of institutional money market funds increased by $9.79 billion to $1.75 trillion. Among institutional funds, Treasury money market fund assets increased by $7.53 billion to $766.91 billion, prime money market fund assets increased by $1.68 billion to $917.42 billion, and tax-exempt fund assets increased by $580 million to $69.68 billion." In other news, the Federal Reserve released the Minutes from its October 28-29 FOMC meeting on Wednesday. Here's an excerpt: "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." Minneapolis Fed Chair Narayana Kocherlakota dissented (arguing for a more dovish view). Also, Fed Governor Daniel Tarullo spoke about liquidity regulations and the "Net Stable Funding Ratio." Finally, the Fed issued a press release announcing, "On November 24, 2014, the Federal Reserve will conduct a fixed-rate offering of term deposits through its Term Deposit Facility (TDF) that will incorporate an early withdrawal feature."

A press release entitled, "PIMCO's Enhanced Short Maturity Active ETF Reaches Five Year Anniversary," tell us, "PIMCO ... marks the five-year anniversary of its first actively managed exchange-traded fund, the PIMCO Enhanced Short Maturity Active ETF, or MINT. The ETF has returned 1.20 percent on an annualized basis after fees since its inception five years ago. The index, in contrast, returned only 0.07 percent since November 2009. MINT, which has $3.6 billion in total net assets, is managed by Jerome Schneider, Managing Director and head of PIMCO's short-term and funding desk. Schneider also manages the $14 billion PIMCO Short-Term Fund and the PIMCO Low Duration Active ETF, or LDUR." In the release, Schneider comments, "MINT, which was designed as an alternative to money market funds, aims to offer investors more attractive risk adjusted returns by investing in liquid short-duration investment-grade assets that are just beyond the reach of traditional cash-like vehicles." (Watch soon for the "beta" issue of Crane Data's new Bond Fund Intelligence, which will cover the ultra-short bond fund segment.) In other news, ICI released a report entitled, "Characteristics of Mutual Fund Investors, 2014," which says, "Mutual fund–owning households often hold more than one mutual fund. In mid-2014, the median number of mutual funds owned by shareholder households was four. Among these households, 50 percent owned three or fewer funds, and 50 percent owned four or more, with 14 percent reporting they held 11 or more funds. Equity funds were the most commonly owned type of mutual fund, held by 86 percent of mutual fund–owning households. In addition, 33 percent owned balanced funds, 45 percent owned bond funds, and 55 percent owned money market funds. Mutual fund holdings represented a significant portion of these households’ financial assets: 68 percent had more than half of their household financial assets invested in mutual funds."

Reuters recently featured a couple of articles on European money fund reform. A Nov. 14 Reuters piece, entitled, "Italy Opposes Cash Buffer in Proposed EU Money Market Curb," tells us, "European Union president Italy has proposed scrapping plans to make money market funds build up cash buffers against future crises, firing the opening shot in renewed negotiations over how to regulate the 1 trillion euro ($1.25 trillion) sector.... But the Italian plan also narrowed the pool of potential investors largely to retail buyers, who are less likely to cause a run on a fund because they are slower to react to market signals than better-informed corporate investors.... A source familiar with the negotiations said the compromise text was just one contribution and there remains a long way to go before Europe would be able to finalise its reforms." On Tuesday, Reuters wrote, "Curbs threaten European CNAV money market funds -- EU documents." The article explains, "A swathe of money market funds in the European Union could be wiped out under new rules proposed by a senior lawmaker in the bloc's parliament in an attempt to break a legislative deadlock. The proposal, if approved by the parliament and EU states, would force companies to switch to the other main type of money market fund whose share price floats, creating accounting issues for some of them, or put their money elsewhere.... Neena Gill, a British centre-left member of the European Parliament, has proposed in a report seen by Reuters that CNAVs -- constant net asset value funds -- should be used only by public authorities and small investors. In order to mitigate systemic risk, CNAV MMFs should only be operated in the Union as either an EU public debt CNAV MMF or a retail CNAV MMF," Gill's report said. The original draft law, written by the European Commission, had proposed that all CNAV money market funds hold a cash safety buffer equivalent to 3 percent of their assets, but Gill proposes that CNAV funds sold to retail investors are exempt. CNAV funds that invest at least 80 percent of assets in public debt should also be exempted from a buffer requirement, Gill proposes. A separate paper from the executive European Commission, seen by Reuters, estimated that CNAVs held assets worth 516.9 billion euros (L412 billion) in October, representing just over half the bloc's MMF sector. Half of CNAV investors are companies, with public sector investors and retail investors accounting for just 5 percent each. Lawmakers will debate Gill's report in coming weeks with some likely to table amendments. An earlier attempt to reach a deal ended in deadlock. Separately, EU president Italy, which is seeking consensus on the draft rules before negotiating a final deal with parliament, has backtracked from its earlier position of ditching outright the buffer requirement on CNAV funds, a document seen by Reuters showed. The 3 percent buffer has been reinstated. "CNAV MMFs should only be available to investor groups that have a proven track record not to react instantly to a decline in the net asset value of a fund," the new Italian compromise added, leaving the definition of investor groups to be decided."

GT News, a publication of the Association of Financial Professionals, is hosting a free webinar with experts from SSgA Tuesday at 11:00am EST called "Cash Management in 2015 -- A Trinity of Challenges." The event's description says, "The combination of a rapidly changing global business environment, persistently low interest rates, and money market fund reform makes managing cash an increasingly difficult challenge. Learn more about how corporate treasurers and cash managers can optimize around these opportunities for all of their cash objectives -- daily operating, core, and strategic. With accurate stakeholder input, a realistic view of their risk profile, and investments strategies that align with both, cash professionals can craft a plan for 2015 and beyond." The SSgA panelists include: Steven Meier, CIO-Global Fixed Income, Cash and Currency, Tom Connelley, Head, Short Duration Solutions, and Yeng Butler, Head, US Cash Management. Click here to register. Also, SunGard Financial Systems is holding a webinar today at 10:00am, called "Corporate Cash Investment Study Results." The 45 minute webinar will cover SunGard's 2014 Cash Investment Study and share insights on how managers can improve their short-term cash investment strategies. The complimentary webinar will be hosted by Maryum Malik, director, SunGard's global trading business, and guest speaker Helen Sanders, director of Asymmetric Solutions Limited. (See our Nov. 5 News, "SunGard: Lack of Suitable Cash Repositories Biggest Concern of Corps," for more information or go to SunGard's web site. To register for the webinar, click here.

The Federal Reserve Bank of New York issued yet another a "Statement to Revise the Terms of the Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise" Friday. "As noted in the October 29, 2014, Statement Regarding Reverse Repurchase Agreements, the Open Market Trading Desk at the Federal Reserve Bank of New York has been conducting daily overnight reverse repo (ON RRP) operations as part of an operational readiness exercise and intends to periodically adjust the offering rate of these operations over the next month. Beginning with the operation to be conducted on Monday, November 17 the offering rate of ON RRP operations will be increased from three basis points to seven basis points. As noted in the October 29 statement, the Desk plans to maintain the offering rate at seven basis points through the operation to be conducted on Friday, November 28. All other terms of the exercise will remain the same. As an operational readiness exercise, this work is a matter of prudent planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy and no inference should be drawn about the timing of any future change in the stance of monetary policy." In other news, G.X. Clarke & Co., a boutique government bond dealer with a presence in the money markets was acquired by INTL FCStone Inc. The press release states, "INTL FCStone Inc., today announced it has reached agreement to acquire G.X. Clarke & Co., an SEC-registered institutional dealer in fixed-income securities. The closing of the transaction is subject to conditions precedent, including regulatory approvals, and is expected to occur early in 2015. Following the acquisition, G.X. Clarke & Co. will continue to be managed by six of its current partners, while the firm's founders, Mr. Griffith X. Clarke, Mr. Daniel J. Lennon and Mr. David G. Gordon, will retire.... As a wholly-owned subsidiary of INTL FCStone Inc. it will be renamed INTL FCStone LP, offering the same products and services as it currently does, with the additional support of INTL FCStone Inc.'s larger capital, operational resources and product range."

Money market funds continued their winning streak as assets increased for the fourth straight week and the 7th week out of 8, according to ICI's latest "Money Market Fund Assets" report. The release says, "Total money market fund assets increased by $9.06 billion to $2.64 trillion for the week ended Wednesday, November 12, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $1.49 billion and prime funds increased by $11.09 billion. Tax-exempt money market funds decreased by $550 million. Assets of retail money market funds decreased by $3.1 billion to $899.85 billion. Among retail funds, Treasury money market fund assets decreased by $1.02 billion to $199.40 billion, prime money market fund assets decreased by $2.07 billion to $516.34 billion, and tax-exempt fund assets decreased by $230 million to $184.12 billion. Assets of institutional money market funds increased by $12.37 billion to $1.74 trillion. Among institutional funds, Treasury money market fund assets decreased by $460 million to $759.39 billion, prime money market fund assets increased by $13.16 billion to $915.74 billion, and tax-exempt fund assets decreased by $320 million to $69.10 billion." Year-to-date, money market mutual funds assets have declined by $75 billion, or 2.7%, but they've increased by $79 billion ($74 billion of which came from institutional assets), or 3.1%, since July 23, the date the SEC passed its most recent Money Fund Reforms. Over the past 4 weeks, money funds assets have increased by $34.8 billion, according to ICI's data, and assets have increased by $80 billion over the past 3 months, according to our Money Fund Intelligence XLS. Money fund assets have grown strongly during the second half of the year over the past three years, following seasonal weakness in the first half.

The Wall Street Journal blogged Wednesday, "Fed's Fisher Says Delay in Raising U.S. Interest Rates Could Cause Recession." The article explained, "Dallas Federal Reserve President Richard Fisher said he's concerned that if the central bank waits too long to raise interest rates it could throw the U.S. economy into recession, speaking in an interview in the German daily Handelsblatt. If the Federal Reserve acts too late, inflation, and the economy's reaction, could be all the stronger, "plunging the economy into the next recession," he said. "It's like duck hunting, you need to aim ahead of the target, otherwise you miss," he said. Mr. Fisher said interest rates could move higher sooner than markets anticipate. "The markets assume that it will happen in summer. I think it could happen earlier -- but of course I could be wrong," he said." In other news, the Financial Times wrote "Europe Money Fund Yields Set to Go Negative". Here's an excerpt: "Risk-averse investors seeking short-term safety will soon have to pay for the privilege as yields on ultraconservative money market funds are set to go negative. Euro-denominated money market funds, which act like cash reservoirs in which companies and banks can deposit or borrow short-term money, are yielding virtually nothing even after many funds waived management fees and refused fresh deposits to avoid diluting existing investors' returns. But yields for a big part of the E1tn industry are set to decline below zero within the coming weeks as they track the record-low lending rates set by the European Central Bank, according to a report by Moody's. "It's not a question of if but when," said Yaron Ernst, managing director of Moody's managed investments group."

Fitch Ratings published a new report Tuesday on RRP, "Treasury Money Funds Prove Reliant on Fed's Reverse Repos." It says, "As the Federal Reserve's reverse repo program continues to see record demand from money market funds, treasury funds in particular are proving to be the most reliant on the facility, according to Fitch Ratings. On Sept. 30, 102 counterparties bid a record of $407 billion at the program. However, only $300 billion was accepted because of the program's cap, leaving 21 bids unfulfilled, and the remainder with a yield of 0%. Eligible treasury money funds allocated an average of 39% of their assets to the RRP at the end of the quarter, far outpacing eligible government and prime funds, which allocated 19% and 10% on average, respectively, according to data from Crane Data. Earlier this quarter, one treasury fund invested 66% of its cash in the RRP, the highest allocation to the program ever by a single fund. Constrained by a limited supply of eligible investments, money funds have consistently been the largest participants in the RRP, comprising over 95% of its total investment on Sept. 30. To comply with recent regulatory changes, banks have reduced their short-term wholesale borrowing -- a primary source of money fund investment -- particularly at quarter ends. Shortages of treasury securities and bank paper, including repos backed by treasury collateral, have led to high RRP allocations among money funds, particularly treasury funds. The shortage of supply has the largest impact on treasury money funds because of their limited investment universe. Unlike prime funds, which can invest in an array of short-term instruments, treasury funds are restricted to treasury securities and in some cases repos backed by treasury collateral. These dynamics are clear when looking at money fund portfolio allocations to the RRP at quarter-end, as three eligible treasury funds allocated more than 50% of their assets to the RRP, and eight treasury funds invested between 26%-50% of their cash in the facility. On the other hand, only one prime money fund invested more than 25% of its portfolio in the RRP. Clck here for more information.

BMO Capital Markets features in its "Fixed Income Strategy Market Update, a piece entitled, "Treasury Takes Issue with Issuance. BMO's Natan Magid writes, "The Q4 refunding announcement today revealed Treasury would look to reduce issuance due to an improving fiscal outlook, but was reluctant to reduce Bill auctions since they only represented 11% of marketable debt outstanding. Instead, Treasury would cut next week's 3yr auction by $1 bn to $26bn, and may look to cut the 2yr auction by $1 bn as well. The size and pace of reductions will depend on the extent of the fiscal improvement, but these new auctions sizes would be kept steady through Q1 2015 if the TBAC's recommendations are accepted.` Regarding the potential for higher cash balances, Treasury already announced on Monday that it would target a $200 bn cash balance for the end of the year, but will continue to analyze the TBAC's recommendation to hold a $500 bn cash balance <b:>`_. The higher cash balance will be achieved mostly with higher Bill issuance, but "Treasury's ability to run higher cash balances in FY 2015 ... may be somewhat constrained by debt limit considerations."" In other news, U.S. News and World Report ranked the top performing Ultra-Short Bond Funds as of 9/30/14 The top 3 are: BBH Limited Duration Fund (1.8% 1-year return), AMG Managers Short Duration Government Fund (1.3% 1-year return), and Metropolitan West Ultra Short Bond Fund (1% 1-year return).

The SEC posted a primer entitled, "Ultra-Short Bond Funds: Know Where You're Parking Your Money. It says, "Ultra-short bond funds are mutual funds that generally invest in fixed income securities with extremely short maturities, or time periods in which they become due for payment. Like other bond mutual funds, ultra-short bond funds may invest in a wide range of securities, including corporate debt, government securities, mortgage-backed securities, and other asset-backed securities. If you are considering investing in an ultra-short bond fund, keep in mind that ultra-short bond funds can vary significantly in their risks and rewards. In fact, some ultra-short bond funds may lose money despite their investment objective of preserving capital. The level of risk associated with a particular ultra-short bond fund may depend on a variety of factors, including: Credit Quality of the Fund's Investments -- It's important to know the types of securities a fund invests in because ultra-short bond funds may experience losses due to credit downgrades or defaults of their portfolio securities. Credit risk is less of a factor for ultra-short bond funds that principally invest in government securities. By contrast, if you invest in an ultra-short bond fund that invests in bonds of companies with lower credit ratings, derivative securities, or private label mortgage-backed securities, you'll generally be subject to a higher level of risk. Maturity Dates of the Fund's Investments -- The maturity date of a security is the date that it becomes due for payment. An ultra-short bond fund that holds securities with longer average maturity dates will be riskier than a fund with shorter average maturity dates — assuming the funds are otherwise similar. Sensitivity to Interest Rate Changes -– Generally, when interest rates go up, the value of debt securities will go down. Because of this, you can lose money investing in any bond fund, including an ultra-short bond fund. In a high interest rate environment, certain ultra-short bond funds may be especially vulnerable to losses. Before you invest in any ultra-short bond fund, be sure to read about a fund's "duration," which measures how sensitive the fund's portfolio may be to changes in interest rates." Finally, note that Crane Data plans to launch a new publication, Bond Fund Intelligence, to cover the largest ultra-short bond funds, ETFs, "enhanced cash" vehicles, and separate accounts in this space. Contact us at info@cranedata.com for more information or to receive the beta issues of our pending Bond Fund Intelligence.

Money market funds continued their positive momentum this week as assets increased for the third straight week and the 6th time in 7 weeks. ICI's latest "Money Market Fund Assets" release says, "Total money market fund assets1 increased by $5.93 billion to $2.63 trillion for the week ended Wednesday, November 5, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $2.75 billion and prime funds increased by $7.51 billion. Tax-exempt money market funds increased by $1.18 billion. Assets of retail money market funds increased by $920 million to $903.16 billion. Among retail funds, Treasury money market fund assets decreased by $1.96 billion to $200.42 billion, prime money market fund assets increased by $2.13 billion to $518.40 billion, and tax-exempt fund assets increased by $750 million to $184.34 billion. Assets of institutional money market funds increased by $5.01 billion to $1.73 trillion. Among institutional funds, Treasury money market fund assets decreased by $800 million to $758.94 billion, prime money market fund assets increased by $5.38 billion to $902.58 billion, and tax-exempt fund assets increased by $430 million to $69.42 billion." The previous week, MMF assets increased by $6.1 billion and the week before they rose $12.8 billion. In other news, Time Magazine published the article, "A Shadow Falls on China," on shadow banking in China. "Will the next global financial crisis be manufactured in China? That's a question raised by the most recent report on the shadow-banking sector, from the Financial Stability Board (FSB), a group in Switzerland that coordinates the work of the world's financial regulators. Shadow banks are that mysterious collection of hedge funds, money-market funds and private lenders that operate outside the regulatory scrutiny of the formal banking sector."

Northern Trust launched a new Euro VNAV money market fund. The press release, entitled, "Northern Trust Helps Investors Navigate Negative Interest Rate Environment," says, "In response to the continued negative yield environment, the asset management arm of Northern Trust has launched a variable net asset value (VNAV) fund as part of its money market fund range. The Euro Liquidity Fund is designed to operate in both negative return environments and positive yielding markets and supports institutional investors requirements for liquid, diversified and high quality cash management products." David Blake, director of international fixed income at Northern Trust Asset Management, comments, "We anticipate the current negative Euro cash investment rate environment will persist for some time and the effect this has on interest accrual does not support a constant net asset value fund or structure particularly well. By launching our VNAV fund, we offer investors greater transparency whilst meeting their objectives for security and liquidity, despite the lower return environment." Earlier this year, the US Securities and Exchange Commission ruled that institutional money market funds will be required to convert to VNAV fund accounting within two years. In Europe, the European Commission is deliberating a similar proposal. "Regardless of the return environment, we believe VNAV is the future structure for money market funds due to their ability to allow continued access to high quality, same-day liquidity," said Wayne Bowers. "Northern Trust's VNAV Euro fund offers transparency, an unchanged investment philosophy and a long term structure that satisfies investor demand as well as regulatory concerns." Separately, Investment Week brings depressing news in, "IMMFA's Chris Oulton Passes Away." It says, "Founder and vice chairman of the Institutional Money Market Funds Association, Chris Oulton, has passed away at the age of 55. The long-term board member of IMMFA was a stalwart supporter of the European money market fund industry over 15 years. Over that period, he was head of institutional cash management at Investec Asset Management and Insight. He spoke often at seminars, explaining the merits of money market funds, and was widely regarded as an expert within the industry in his 30-year career. Oulton's former colleagues at Federated Investors (UK), described him as a "true, generous and loyal friend, one who always gave of his time and was a gentleman in the true sense of the word", adding "he will be sorely missed by many, and we offer our sincere condolences to his wife Annie and his four children."" Crane Data also wishes to extend our deepest sympathies and condolences to Oulton's family, friends and colleagues.

Debbie Cunningham, CIO of Global Money Markets at Federated Investors, writes in her November "Month in Cash" commentary, "Pleasant Surprises from the Fed," "If the recent Federal Reserve policy statement tells you anything, it's that no one can predict with certainty what the policymakers will do. Last year the Ben Bernanke-led Fed stunned the market by not beginning to taper the amount of assets it was buying monthly, known as quantitative easing (QE). Last week came another surprise -- although, thankfully, a positive one. The consensus was that little news would come from the Federal Open Market Committee (FOMC) meeting at the end of the month: it would stay the course, end QE and retain dovish language in regard to when it will raise the federal funds rate. If anything, we thought there might be a surprise to the downside. But instead the statement defied expectations by taking a more hawkish tone.... But just when it seemed Chair Janet Yellen had indeed traded soft coos for sharp talons, the rest of the statement was hedge after hedge! First came the announcement that if labor and inflation data disappoints, the FOMC won't hesitate from holding off on a rate liftoff. And then came a warning that even when the dual mandate data gives the go signal, it will likely keep the red light on: "economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." So in the end, we are back in the same place: waiting for rates to rise. On the RRP changes, Cunningham said, "`Business is not back to usual for cash management, however. The New York Fed again altered the rules for its overnight Reverse Repo Program. Despite the breakdown at September quarter end due to its imposing of a new $300 billion cap, the cap remains. Yet this time, the Fed is trying to encourage higher bids by showing it will offer higher rates, but in a controlled and obtuse way. For instance, it will offer seven basis points from Nov. 17-28 and ten basis points from Dec. 1-12. And the bank introduced an additional $300 billion of term repo to be offered in January. We understand the Fed's overall reason for the RRP and term repo -- as additional tools to support the fed funds rate, especially in window dressing scenarios -- and we appreciate that Yellen is trying to put a floor on rates. But as to why it had to be orchestrated in such a complex way is not, well, clear. The end of QE won't add much supply to the market -- $15 billion helps, but not overly so -- and Libor didn't budge, so neither did our investment strategy. We again stayed mostly in the six-month maturity range, grabbing floaters when we could, and weighted average maturity for government bonds at 45-55 and asset-backed at 40-50."

Virtus Investment Partners' CEO George Aylward discussed exiting the money market fund business in Virtus's 3Q earnings call recently. The transcript on Seekingalpha.com states, "Regarding the money market funds, as we pointed out in the press release, they were liquidated in October. These funds were low-fee, noncore and an immaterial part of the business. We made the decision that the economics and requirements to offer money market funds were not compelling, so we exited that business. As mentioned in our press release, last week we liquidated our 3 money market funds, which represented a noncore component of our business. At September 30, 2014, the money market funds had $1.2 billion of assets that represented 2% of total assets. From an earnings perspective, the liquidation has no impact on run rate investment management fees due to a 0 basis point net fee rate for the quarter as a result of substantial fee waivers given the low interest rate environment." In other news, T. Rowe Price said MMF fee waivers were up in 3Q. On fee waivers, they report, "Money market advisory fees and other fund expenses voluntarily waived by the firm to maintain positive yields for investors in the third quarter of 2014 were $14.6 million, an increase of $0.7 million from the comparable 2013 quarter. For the first nine months of 2014, the firm has waived $43.9 million in such fees compared with $36.8 million in the 2013 period. The firm expects it will continue to voluntarily waive such fees for the remainder of the year and into 2015." Northern Trust also saw higher fee waivers, according to Northern's 3Q earnings report. "Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $16.7 million, compared to waived fees of $15.3 million in the prior year third quarter." Also, Bloomberg wrote, "`Treasurers Clinging to Liquidity, JPMorgan Survey Shows." It says, "The scars of 2008 are still fresh for company treasurers and investment officers as they keep half of their firms' cash in bank deposits, according to a global survey by JPMorgan Chase & Co. The 300 cash managers surveyed are favoring liquidity over yield even as half of them face declining earned interest. They're putting just a quarter of their assets in money-market funds that face tougher rules from U.S. regulators, the survey shows."

Moody's Investors Service published a report entitled, "Negative Yields Alone Will Not Trigger Downgrades of Euro Money Funds." It reads, "The persistent low interest rate environment and ultimately the European Central Bank's (ECB) decision to cut its deposit rate to -0.2% in September 2014 have significantly eroded returns for euro-denominated money market funds. Yields on most euro money market funds (MMFs) are nearly zero, and this is despite the fact that managers are already waiving most or all of their management fees. In our view: Rated euro-denominated MMFs could hit negative yields in a few weeks. Safety and liquidity will cost investors money if they remain in these funds. At this stage, the question is not if but rather when prime euro MMFs will post negative yields. The exact timing would depend on each portfolio's structure (maturity and credit allocation) and fee policy. MMF investors will then have to make a choice between paying for the safety and liquidity of an MMF or investing in positive yielding products with weaker liquidity and riskier credit profiles. Negative yields alone will not trigger MMF rating downgrades. Funds that can operate within a negative yield environment and continue to meet the investment promise they made to their shareholders are unlikely to experience a rating change, provided that their portfolios' credit and stability profiles under Moody's MMF rating methodology remain consistent with their current ratings. These include variable net asset value (VNAV) MMFs or constant net asset value (CNAV) MMFs that have established a share class reduction mechanism and have informed their shareholders. Negative yields, however, will exert pressure on managers, forcing them to alter their investment strategy which may, in turn, negatively impact ratings.... [I]n a negative yield environment, money market funds will likely face their biggest challenge yet." (Note: While Euro money fund yields have inched lower from 0.02% to 0.01% in October, assets have jumped from 87.8 billion euros to 95.9B.) Also, Money Magazine published a piece, "Why Your Money is Still Not Safe Enough in Money Funds," written by Sheila Bair, former chair of the FDIC. She writes, "The law of unintended consequences often comes into play when regulations get too complex. Take the Securities and Exchange Commission's new rules to reduce the risk of runs on money-market mutual funds." Finally, Reuters wrote, "U.S. Fed Rewards Most Reverse Repos in Over Four Weeks"." The brief says, "The U.S. Federal Reserve awarded $186.28 billion in fixed-rate reverse repurchase agreements on Friday, the highest amount in more than four weeks, due to strong investor demand for ultra short-dated, risk-free assets at month-end."

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