Daily Links Archives: April, 2014

SEC Chair Mary Jo White gave budget testimony to a House committee yesterday and briefly mentioned Money Market Funds. She said, "In June 2013, the Commission proposed additional money market fund reforms. These reforms included two alternative proposals. One is a floating net asset value (NAV) for prime institutional money market funds -- the type of funds that experienced the most significant redemptions during the financial crisis. The other proposal would provide for the use of liquidity fees and redemption gates in times of stress. These proposals could be adopted alone or together, and are designed to lessen money market funds' susceptibility to runs, improve their ability to manage and mitigate potential contagion from high levels of redemptions, and increase the transparency of their risks while preserving many of the benefits of money market funds for investors and the short-term funding markets. Staff has reviewed closely the more than 1,400 letters that were submitted, and adopting a final rule in this area is a priority for the Commission in 2014." The Bond Buyer also reports in "White: SEC Still Mulling Whether to Include Muni MMFs in Reforms," "The Securities and Exchange Commission will release new rules for the reform of money market mutual funds "in the near term," although it has not decided whether they should would apply to municipal funds, SEC chairman Mary Jo White told a House panel Tuesday." See the C-SPAN video at minute 1:04. White comments, "We are in the active stages of discussion towards adoption.... We want our proposal to be robust.... But we are considering all of the ideas and impacts and are sensitive to not damaging gratuitously the product."

ICI's weekly "Money Market Mutual Fund Assets" series said last Thursday, "`Total money market fund assets increased by $7.32 billion to $2.58 trillion for the week ended Wednesday, April 23, the Investment Company Institute reported today `_. Among taxable money market funds, treasury funds (including agency and repo) increased by $7.68 billion and prime funds increased by $4.42 billion. Tax-exempt money market funds decreased by $4.78 billion.... `Assets of retail money market funds decreased by $5.60 billion to $907.28 billion `_. Treasury money market fund assets in the retail category decreased by $1.04 billion to $200.45 billion, prime money market fund assets decreased by $1.80 billion to $518.22 billion, and tax-exempt fund assets decreased by $2.76 billion to $188.61 billion..... `Assets of institutional money market funds increased by $12.92 billion to $1.68 trillion. Among institutional funds, treasury money market fund assets increased by $8.72 billion to $702.14 billion, prime money market fund assets increased by $6.21 billion to $903.84 billion, and tax-exempt fund assets decreased by $2.01 billion to $71.05 billion. ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website."

The most recent entry on the SEC's "Comments on Proposed Rule: Money Market Fund Reform" is from Timothy W. Cameron, John Maurello, and Matthew J. Nevins, Securities Industry and Financial Markets Association (SIFMA). It says, "The Securities Industry and Financial Markets Association ("SIFMA") respectfully submits these comments on four memoranda dated March 17, 2014 from the staff of DERA (the "Staff") of the Securities and Exchange Commission (the "Commission" or "SEC"), titled, respectively: Liquidity Cost During Crisis Periods (the "Liquidity Cost Memorandum"); Municipal Money Market Funds Exposure to Parents of Guarantors (the "Municipal MMF Memorandum"); Demand and Supply of Safe Assets in the Economy; and Government Money Market Fund Exposure to Non-Government Securities (each, a Memorandum" and, together, the "Memoranda"). The Memoranda are intended to be informative for evaluating proposed new and amended rules and forms relating to money market funds in the Release, including Rule 2a-7 under the Investment Company Act of 1940, as amended ("Rule 2a-7"). SIFMA commented on the proposals in a letter to you dated September 17, 2013 (the "Comment Letter").... We welcome DERA's data-driven analysis of issues relating to proposed money market fund reforms and their potential costs and benefits. We appreciate the opportunity to comment regarding the insights the Memoranda offer as to money market fund reform. As further explained in this letter, we ask the Commission to consider the following relating to the Liquidity Cost Memorandum and the Municipal MMF Memorandum: (1) If the Commission adopts a liquidity fee, we recommend that the default level of the fee be reduced from 2% to 1%. Data in the Liquidity Cost Memorandum support that a lower default level will effectively compensate money market funds for the cost of liquidity during market turmoil. (2) The Commission should not expand the credit support diversification test to 100% of the assets of a money market fund portfolio, from the current 75%. That is, money market funds should continue to be permitted to have a 25% non-diversified basket ("25% basket").... In our Comment Letter, we recommended that the default level of the liquidity fee be reduced to 1%, subject to reduction by the fund's board (or to increase by the fund's board up to 2%). The reduced default level would better align the amount of the fee with the costs to the money market fund of liquidating assets to honor redemptions in times of market stress, without imposing a punitive charge on shareholders."

Federated Investors writes "WSJ response: "Facts are stubborn things"", which says, "On April 19, 2014, the Wall Street Journal continued its attacks on money market funds with another editorial "A False Money Fund 'Choice'." While the editorial contained many inaccuracies and omissions, the piece singled out Federated Investors for opposing a floating NAV for money market funds (MMFs). First, anyone who has followed the debate regarding the SEC's proposed reforms should know that Federated is just one of roughly 1,400 investors, members of Congress, state and local governments, corporations, trade associations and nonprofits who submitted comments to the Commission opposing the floating NAV. We are proud to be part of a broad and bipartisan coalition supporting reforms that will preserve the funds on which tens of millions of Americans depend while also addressing the concerns of regulators. Second, the Journal editorial tries to rewrite the history of the 2008 financial markets meltdown alleging that the fund industry was the beneficiary of "taxpayer subsidies" (and Federated, by opposing a floating NAV, is looking for future handouts). Nothing could be farther from the truth. In 2008, the Treasury Guarantee Program was imposed on funds by the Treasury. No claims were made under the program and U.S. taxpayers actually earned $1.2 billion from premiums. In fact, federal law now prohibits the use of Treasury cash to support money market funds. Third, the $1 stable net asset value is neither fictional nor "fudged." Money market fund accounting conforms to GAAP and is widely used for short-duration, high-quality securities. The stable NAV resulting from amortized cost protects shareholders from onerous tax and accounting effects of miniscule fluctuations in the NAV, making the funds suitable for use as cash management vehicles. Finally, floating NAV will do nothing to address the desire of regulators to eliminate runs during a time of extreme distress in the financial markets. We fully support the SEC's avowed goal to protect investors, but there is no empirical evidence that instituting a floating NAV for MMFs will prevent a run. History shows that in times of extreme market turmoil, investors will flee to quality, regardless of the structure of the product. Federated believes that voluntary gating along with the enhanced disclosures in the SEC's proposals would benefit 56 million money market investors, capital formation and market efficiency while preserving MMFs as a viable cash management tool. Gates stop runs and facilitate equitable treatment of all shareholders. It is unfortunate that the Journal apparently does not understand that during a period of extreme market stress, the predominant reason for movement of money out of commercial paper and money market funds investing in commercial paper to U.S. Treasuries and funds investing in U.S. Treasury money market funds is safety. This reflects rational investor choice and would not be affected by a floating NAV. In the end, the editorial reminds us of the wisdom of former President John Adams, who said "facts are stubborn things." Would that the Journal adhered to this axiom." Note: Federated also reported earnings last night and will host an earnings call Friday a.m. at 9am.

Brian Reid, Chief Economist, of the Investment Company Institute is the first Comment letter to appear on the SEC's site on the Staff's "mini" studies. ICI's Reid writes, "The Investment Company Institute appreciates the opportunity to respond to the staff of the Division of Economic and Risk Analysis of the Securities and Exchange Commission regarding its analyses of certain data and academic literature related to money market fund reform. As required by law, the analyses demonstrate that the SEC continues to consider available data in its decision making process. Our comments are limited to the staff's analysis of "Municipal Money Market Funds Exposure to Parents of Guarantors" and its analysis of the "Demand and Supply of Safe Assets in the Economy".... Money market funds generally must limit their exposure to any one provider of guarantees or conditional demand features ("credit support provider") for portfolio securities to 10 percent of total assets; however, 25 percent of a fund's total assets may exceed the 10 percent limit under certain circumstances ("25 percent basket"). Under the SEC proposal, the 25 percent basket would be eliminated and the fund would be prohibited from acquiring any security that would result in its exposure to a credit support provider exceeding 10 percent of the fund's total assets. The SEC explained that the proposal is designed to limit the extent to which a money market fund becomes exposed to a single guarantee or demand feature provider. Based on this analysis, the staff found that although funds are exposed to guarantors above the 10 percent threshold on a regular basis, they are far less likely to be exposed to guarantors above the 15 or 20 percent thresholds. The staff concluded therefore that few funds make full use of the 25 percent basket. The analysis, however, does not appear to combine the holdings of guarantors in any one fund. Indeed, as a technical point, the 25 percent basket can be used for exposure to more than one entity.... The staff also reviewed recent evidence on the availability of domestic government securities and global "safe assets" to assist the SEC in the development of final rules regarding money market fund reform that could possibly increase the demand for these assets. Citing data from the International Monetary Fund, the staff noted that the global market for safe assets is estimated to be $74 trillion. It then concluded that given the size of the global safe assets market, the staff does not anticipate a supply problem if the SEC's final rules regarding money market funds causes an increase in demand for government securities. The global market for safe assets, however, does not represent the universe of eligible safe assets for U.S. money market funds. Rather, U.S. money market funds are generally limited to high quality U.S. dollar denominated securities of short duration (e.g., with a remaining maturity of less than 397 calendar days).... The amount of the global market for safe assets therefore is not relevant to the question of whether the supply of U.S. government securities will satisfy the demand should the SEC's final money market fund rules cause an increase in demand for these securities. A better measure of the supply of assets available to meet any increased demand for government securities would be the amount of U.S. Treasury and agency securities with maturities of less than one year and repurchase agreements backed by government securities. As of March 2014, there was about $4 trillion of outstanding U.S. Treasury and agency securities with maturities of less than one year and another $1.2 trillion in triparty repo backed by Treasury, agency, and agency mortgage backed securities."

Today is the deadline for Comments on the SEC's 4 "Mini" Studies ("Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform"). As a reminder, the SEC's March 24 release said, "The staff of the Securities and Exchange Commission today made available certain analyses of data and academic literature related to money market fund reform. The analyses, which were conducted by the staff of the SEC's Division of Economic and Risk Analysis, are available for review and comment on the Commission’s website as part of the comment file for rule amendments proposed by the SEC in June 2013 regarding money market fund reform. The analyses examine: The spread between same-day buy and sell transaction prices for certain corporate bonds from Jan. 2, 2008 to Jan. 31, 2009. The extent of government money market fund exposure to non-government securities. Academic literature reviewing recent evidence on the availability of "safe assets" in the U.S. and global economies. The extent various types of money market funds are holding in their portfolios guarantees and demand features from a single institution. The SEC staff believes that the analyses have the potential to be informative for evaluating final rule amendments for the regulation of money market funds. These analyses may supplement other information considered in connection with those final rule amendments, and the SEC staff is making these analyses available to allow the public to consider and comment on this supplemental information. Comments on this supplemental information may be submitted to the comment file for rule amendments the SEC proposed in June 2013 regarding money market fund reform (File No. S7-03-13) and should be received by April 23, 2014." (Comments may be made from the SEC's "Money Market Funds" page; there are currently no comments showing on the studies to date.)

The Wall Street Journal editorializes in "A False Money-Fund 'Choice'". It comments, "Washington lobbyists can get pretty aggressive when trying to hold on to taxpayer subsidies. But this year's prize for chutzpah goes to Federated Investors, the big Pittsburgh-based mutual fund operator. It's arguing that large financial institutions should be able to stay on the federal gravy train as a matter of consumer "choice." The issue involves money-market mutual funds, financial products that were created by regulation and were rescued from a catastrophic run in 2008 by taxpayers. Thanks to Securities and Exchange Commission regulation, money funds have been allowed to report to customers a stable $1 per share value, even when the underlying assets are worth slightly less. This has allowed the funds to present themselves to investors as safe accounts akin to insured bank deposits. When this fiction was exposed in autumn 2008, and institutional customers began to flee, taxpayers were forced to provide a guarantee to the whole industry.... Federated's defense of the status quo has unfortunately beguiled rookie SEC Commissioner Michael Piwowar. The confused Republican has lately styled himself a consumer advocate for upholding the right of institutional investors to dine at the Beltway trough. Fortunately for taxpayers, a bipartisan SEC majority seems poised to ignore him."

The band Busker, which features Deutsche Asset Management's Paul Dubanowitz and Kevin Bannerton, has recorded a Boston Marathon Tribute, entitled, "We Run". The YouTube video is "Dedicated to all the runners of this year's Boston Marathon and honoring all those affected by last year's tragic events. We are Boston... We Run. Written and recorded by local recording artists, Busker. www.buskermusic.com." See also, The Wall Street Journal's "China's Yu'e Bao Fund Posts Strong Growth in First Quarter". It says, "A Chinese money-market fund affiliated with Internet giant Alibaba Group Holding Ltd. nearly tripled in size during the first quarter, even as a slide in Chinese interest rates suggested it could struggle to maintain such growth in the future. Funds invested in Yu'e Bao -- which means "leftover treasure" in Chinese -- totaled 541.28 billion yuan ($87 billion) at the end of the first quarter, compared with 185.34 billion yuan at the end of last year. Details of the fund's performance were disclosed on Friday by Tianhong Asset Management, which manages the fund on behalf of Alibaba's electronic-payment affiliate, Alipay."

Crane Data has posted the preliminary agenda and is now accepting registrations for its 2nd Annual European Money Fund Symposium (www.euromfs.com), which will be held Sept. 22-23, 2014, at The London Tower Bridge Hilton in London, England. Crane Data's first European event, held last September in Dublin, attracted over 100 attendees, sponsors and speakers, and we expect our London event to be even bigger and better, and to remain the largest money fund conference in Europe. European Money Fund Symposium offers "offshore" money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals. Attendee registration for our 2014 Crane's European Money Fund Symposium is $1,500 (or 900 GBP). Thanks for your support, and we hope to see you in London! Finally, also visit www.moneyfundsymposium.com to learn more about our big U.S. show, Crane's Money Fund Symposium which will be held June 23-25, 2014, in Boston, and www.moneyfunduniversity.com to learn more about our "basic training" event, Crane's Money Fund University, which will take place January 22-23, 2015, in Stamford, Conn.

Federated Investors' Senior PM Sue Hill wrote last week in "In short: The downside of qualitative," "What is good for the Federal Reserve is not always good for the market. Markets don't like subtlety and certainly not uncertainty, but that is what the Fed now thinks is the best strategy for policy decisions in an economy that is recovering at such a slow pace. By switching from quantitative to qualitative forward-rate guidance at the latest Federal Open Market Committee meeting, it was understandable that Fed policymakers would be concerned about how their message would be perceived by the markets. And rightly so, since its projection chart -- the so-called dots chart -- and Chair Janet Yellen's press conference "around six months" comment afterward showed that some members were expecting higher rates earlier than previously thought. By pulling back from a concrete figure of 6.5% unemployment as a threshold for increasing rates to guidance that takes a broader look at the economy, the Fed has put the market in a position of prediction more than reaction. The volatility of the last few weeks and past few days shows how market-watchers don't handle this well. And that is even after a subsequent speech by Yellen and the minutes from its mid-March meeting, released this week, that were not just dovish, but generally in keeping with policymakers' expressed view on rates since late last year. The content of the minutes was actually not particularly surprising, and the market reaction -- or overreaction -- reflects more a difficulty in understanding what the Fed was trying to say than anything else. With an increased emphasis on the importance of Fed communications going forward, we expect the market's attempts to interpret these messages to be a continued source of volatility."

The Wall Street Journal wrote last week, "J.P. Morgan's Dimon Would Like Corporate Cash to Find a New Home". It said, "Deposits are the lifeblood of banks, so turning them away would be folly. Or so it would seem. J.P. Morgan Chase chief James Dimon suggests that may soon happen, at least when it comes to the business of holding idle corporate cash or nonoperational deposits. In his annual letter to shareholders, Mr. Dimon noted these are "hugely unprofitable," especially given new rules governing the amount of liquid assets banks must hold. As a result, Mr. Dimon wrote, "banks probably will minimize this type of deposit, and clients will seek other alternatives, probably in the money markets."" The piece continues, "So while executives might like to stop holding so much corporate cash, that service will likely stay in place as a loss leader. And, in the longer run, such deposits at banks will come down -- albeit for reasons other than that they have become a burden. A shift is likely to be driven by an eventual turn in short-term interest rates, prompting corporate customers to move money to capture yield. Many expected such an outflow would begin once the government ended unlimited insurance on noninterest-bearing deposits at the end of 2012. But by the end of 2013, such deposits at U.S. commercial banks had grown to $2.61 trillion, up 3% from the prior year and more than 50% over four years. This could be a testament to the continued belief the largest banks still are too big to fail -- so that even though the deposits are no longer explicitly guaranteed, depositors enjoy implicit government support. And with interest rates still at superlow levels, there just isn't enough compensation for corporate clients to take on the additional risk of moving money elsewhere."

SIFMA, formerly the Bond Market Association, will host its annual Asset Management Account (AMA) Roundtable and its Operations Conference April 28-30 in Boca Raton, Fla. This year's event will include a panel on "Money Market Reform," which will be moderated by Joan Ohlbaum Swirsky of Stradley Ronon Stevens & Young and which will feature Pete Crane of Crane Data, John Hammalian of BNY Mellon/Dreyfus, Craig Collier of Thomson Reuters, and Mark Heckert of Interactive Data. SIFMA's AMA Roundtable includes presentations and networking for brokerage and "cash" account product managers. The group is seeking more attendees (registration is $375) -- e-mail Theresa Andino at tandino@sifma.org for a meeting registration form. The description for the MMF Reform panel says, "Money market fund reform is coming! It has been top-of-mind for regulators and market participants alike over the past year, but a final rule is expected around Q2 2014. This panel will explore the current landscape of the money market fund industry, explore the floating NAV and "gates" regulatory proposals under consideration at the SEC, and help you understand what changes may be necessary in operations, customer relations, and across your firm to implement these reforms."

GTNews Offers a "Guide to Investing Operating Cash", underwritten by State Street Global Investors (SSgA). The description says, "This guide is written to support treasury practitioners whose responsibility is to invest short-term surplus cash. While most companies are likely to have varying cash balances over the course of a year, it is appropriate for treasurers to try to consider cash as falling into three separate categories for investment purposes: operating cash, short-term strategic cash and longer-term cash. The focus in this guide is on investing the operating cash used to finance working capital. We consider a number of key questions to help treasury practitioners to review any existing policy and processes, as well as to design new ones. The guide also includes a document highlighting the key elements to include in a standalone short-term investment policy, and the points to cover when developing investment management procedures." In other news, the ICI released its latest "Money Market Fund Assets", which says, "Total money market fund assets decreased by $17.70 billion to $2.61 trillion for the week ended Wednesday, April 9, the Investment Company Institute reported today. Among taxable money market funds, treasury funds (including agency and repo) decreased by $12.04 billion and prime funds decreased by $3.37 billion. Tax-exempt money market funds decreased by $2.29 billion."

Fitch writes in a "South African Money Market Funds Sector Review", "Fitch Ratings has completed a sector review of South African money market funds (MMFs), which resulted in the affirmation of the National Fund Credit Ratings (NFCRs) and National Fund Volatility Ratings (NFVRs) of the following six MMFs at 'AA+(zaf)'/'V1(zaf)' -- Absa Money Market Fund, Investec Corporate Money Market Fund, Investec Money Market Fund, Nedgroup Investments Corporate Money Market Fund, Nedgroup Investments Money Market Fund, and STANLIB Corporate Money Market Fund.... As of end-February 2014 the funds' combined assets under management (AUM) was approximately ZAR133bn, equivalent to just over half of the total domestic AUM in the MMF sector in South Africa as of end-December 2013, according to statistics from the Association for Savings and South Africa (ASISA). Total domestic AUM in the South African fund management industry continues to rise, reaching ZAR1.4trn in December 2013. MMFs account for around 20% of that total -- a declining proportion of the total in relative terms, but broadly stable in cash terms. The MMF sector is evenly split between institutional and retail investment. As in other jurisdictions, corporate treasurers are major users of MMFs, as part of their cash management strategy.... Fitch monitors the rated funds continuously, based on a monthly review of portfolio holdings as well as summary statistics on the portfolio and investment activities. The MMFs are constant net asset value (NAV) funds, therefore: The funds are regulated by South Africa's Financial Services Board under the Collective Investment Schemes Control Act of 2002 (CISCA, specifically Notice 80 of 2012). Changes have been proposed to CISCA, including the introduction of a monthly mark-to-market process. The new regulations also pave the way for variable net asset value MMFs. All of the Fitch-rated MMFs in South Africa have a constant net asset value. Therefore the NFVRs are driven by the market risk exposure of the underlying portfolios, which may not necessarily be reflected in the funds' NAVs. The new regulatory proposals also envisage that all MMFs hold at least 4% of the portfolio in assets in liquid form. This falls below the level proposed by regulators in Europe (10%) and the requirement in Fitch's Global Money Market Fund Rating Criteria (published 13 January 2014) of 10%."

Wells Fargo's latest "Portfolio Manager Commentary" says, "At its current pace, the Fed's asset purchases will end sometime in the fourth quarter of 2014, and if "considerable time" really means six months, as we have been told, then we are looking at our first rate hike in the April–June 2015 time frame. So, how does that square with the committee's forecast for a 1% federal funds rate at the end of 2015? In the past, others have noted a disconnect between the FOMC's economic and federal funds forecasts, so this could just be a similar situation. Alternatively, it could also mean that since the policy of optimal control not only calls for rates to be lower for a longer period of time than other models might call for, there could also be a more rapid rise in rates once policy shifts. Market participants who are expecting a gradual tightening on the order of 25 basis points (bps; 100 bps equals 1.00%) every other meeting or so may be surprised at the magnitude of rate hikes when they do occur, and portfolios positioned for a gradual increase may find themselves terribly out of sync with market conditions. But who can really blame them? For a group that has promoted transparency in an effort to provide clearer forward guidance for investors about its monetary policy, the Fed left the waters very muddied after this meeting. Is there a surprise rate spike in store? While interest-rate movements are not solely dependent on central bank intentions -- at least not yet -- and market forces still determine the path of interest rates, those forces are not exclusively influenced by the invisible hand. Regulatory activities can create incentives that alter the behavior of market participants and affect activity and pricing, sometimes wildly. One market that is ripe for such a disruption is the federal funds market."

Federated Investors wrote last week "The end of low-rate frustration is almost in sight", They said, "From a rate perspective, the frustration is ending. We haven't seen the light at the end of the tunnel yet, but we can at least imagine seeing it. The Federal Open Market Committee (FOMC) meeting last month furthered this optimism when new chair Janet Yellen announced the continuation of its monthly tapering of asset purchases, lowering the amount of Treasuries and agencies being purchased to $55 billion from $65 billion per month. The Fed also moved away from the quantitative approach to forward guidance that had been in place. It is not that the Fed was saying that unemployment and inflationary statistics are no longer important, but rather that they felt a broader, less-quantitative approach was merited. The FOMC statement indicated that the current target range would be in place for a considerable period of time after QE ends, which, if the Fed keeps on the current pace of reduction, could be in late 2014. Or will it? In her question-and-answer press conference after the FOMC announcement, Yellen went on to describe "considerable" as around six months. Many analysts felt Yellen misspoke, perhaps flustered by the peppering of reporters' questions, but FOMC members didn't race to soften her comments. Maybe more telling was the summary of economic projections released at the time of the announcement; here, the majority of FOMC members thought that tightening would commence in 2015, with an average projection for the fed funds target at year-end 2015 in excess of 1%. With that outlook, in the second half of 2014 we would expect to see a slight steepening of a yield curve that is quite flat now. The bond market seems to bear this out by the fact that few are buying March bonds. With an expectation that rates might actually be increasing, the portfolio strategy is not to buy the longest thing out there at this point in time. Instead, investors are keeping weighted-average-maturities relatively steady, buying more floating-rate positions and shortening the barbell."

The Federal Reserve Bank of New York issues a "Statement to Revise Terms of Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise" late Friday, which says, "As noted in the September 20, 2013, Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has been conducting daily, overnight fixed-rate reverse repo operations as part of an operational readiness exercise. Beginning with the operation to be conducted on Monday, April 7, the maximum allotment cap will be increased from its current level of $7 billion per counterparty per day to $10 billion per counterparty per day. All other terms of the exercise will remain the same. As an operational readiness exercise, this work is a matter of prudent advance 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 change in the stance of monetary policy in the future."

ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $13.12 billion to $2.63 trillion for the week ended Wednesday, April 2, the Investment Company Institute reported today. Among taxable money market funds, treasury funds (including agency and repo) decreased by $3.02 billion and prime funds decreased by $11.39 billion. Tax-exempt money market funds increased by $1.29 billion. Assets of retail money market funds increased by $1.04 billion to $922.76 billion. Treasury money market fund assets in the retail category decreased by $220 million to $203.64 billion, prime money market fund assets increased by $890 million to $524.28 billion, and tax-exempt fund assets increased by $370 million to $194.84 billion. Assets of institutional money market funds decreased by $14.17 billion to $1.71 trillion. Among institutional funds, treasury money market fund assets decreased by $2.80 billion to $714.68 billion, prime money market fund assets decreased by $12.28 billion to $915.34 billion, and tax-exempt fund assets increased by $910 million to $76.98 billion." Money fund assets have fallen for 5 straight weeks and have decreased by $89 billion, or 3.3%, year-to-date.

The latest update on the SEC's "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" website is from Federated Investors' counsel Peter J. Germain, who writes, "I am writing as a follow up to our visit with the SEC staff on March 11th. First, I wanted to thank you for taking time out of your schedules to meet with us on the subject of money market fund reform. As you may recall, during our meeting a request was made for information as to the total amount of cash sweep assets in prime money market funds. Since the date of our meeting we have made numerous attempts to ascertain that information. For example, we queried iMoneyNet, the ICI, Peter Crane and Treasury Strategies. Unfortunately, there does not appear to be reliable industry data indicating the total amount of sweep assets in prime money market funds. Federated has looked at its own records and has been able to determine that as of January 31, 2014, it had approximately $48.8 billion in prime sweep assets out of a total of $89.7 billion in prime assets. You may want to consider looking at the 54.4% of prime sweep assets as a rough proxy for industry numbers in the absence of other available data. There is a consensus that prime sweep cannot be adapted for a floating NAV fund. It also presents a challenge for implementing an retail exemption, due to its omnibus nature. Bank products are the most common alternatives to prime funds in sweep programs, followed by retail repurchase agreements, so any sweep money leaving prime funds would likely migrate to these products. I hope this information is helpful. Please call me at the number below if you have any questions. Thank you again for meeting with us."

The latest figures from the Federal Reserve Bank of New York (under "Temporary Open Market Operations") show Fed reverse repos totaling $242 billion as of March 31. The site explains, "To implement monetary policy, short-term repurchase and reverse repurchase agreements are used to temporarily affect the size of the Federal Reserve System's portfolio and influence day-to-day trading in the federal funds market." Wells Fargo Securities' Garret Sloan explained Tuesday in his daily commentary, "Participation in the Federal Reserve reverse repo program rose to a record high of $242 billion yesterday, surpassing the previous record of $197 billion that was set on December 31. Participation in the program had declined in early-to-mid March as the increase in Treasury collateral available put upward pressure on repo rates which reduced the demand for the 5 basis point Federal Reserve program. However, the amount of Treasury collateral is beginning to decline as there will be a net pay down this week just shy of $17 billion which should put downward pressure on repo rates. The decline in supply is expected to continue as the Treasury will cut bill sizes as we approach the deadline for the filing and payment of taxes on April 15. The weighted average Treasury repo rate did increase yesterday to 9.9 basis points but now that quarter end is behind us it is expected to fall back to the 6 basis point range as repo is opening this morning at 5-6 bps." Note: Crane Data will release its March 31 Money Fund Portfolio Holdings collection next Tuesday, April 8.

ETF Trends writes "Short-Term Bond ETF Options as SEC Mulls Money Market Reform". The article says, "Ultra-short-duration bond exchange traded funds have garnered attention as an alternative to money market funds with the SEC set to implement structure changes in coming months. However, the SEC could scale down rules to exempt some investors.... While mom-and-pop investors may be exempt from floating money funds, the SEC can still draw up provisions requiring investors to pay a withdrawal fee during times of stress or even face a hold on money. On Monday, the agency released a series of memos that showed empirical evidence for imposing redemption fees during volatile markets, which suggests the SEC is considering a combination of both floating share prices with curtailing redemptions during certain times. Any changes in the money markets could support the growing fixed-income ETF market, notably ultra-short-duration bond funds as a cash alternative. For instance, the PIMCO Enhanced Short Maturity ETF (NYSE: MINT) has a 0.57% 30-day SEC yield and a 0.69 year effective duration. The Guggenheim Enhanced Short Duration Bond (NYSE: GSY) has an average 0.33 year duration and a 0.98% 30-day SEC yield. The iShares Short Treasury Bond ETF (NYSE: SHV) has an effective duration 0.36 year and a 0.07% 30-day SEC yield. The SPDR Barclays 1-3 Month T-Bill (NYSE: BIL) has an effective duration 0.09 year and a -0.08% 30-day SEC yield."

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