Daily Links Archives: August, 2014

A recent column on Investing.com discusses former Fed Chair Ben Bernanke's recent comments that the 2008 financial crisis could have been worse than the Depression. Writes author Brian Gilmartin: "I think former Fed Chair Bernanke was right in concluding that 2008′s recession, if left to run its course, would have been a far greater calamity for the US economy than the Great Depression, but for different reasons: 1) The money markets and the commercial-paper market was at real risk of failure, which means that S&P 500 companies couldn't have rolled short-term, high quality CP; 2.) Far more Americans through 401(k)'s and pensions had exposure to the stock and bond markets than Americans had in the late 1920′s and early 1930′s;" He incorrectly comments, "The Reserve Fund was, at that time (I believe) in 2008, one of the world's largest money-market funds [which is true] and if the Reserve Fund had "broken the buck" [sic], which means that if the Reserve Fund's NAV had moved below $1 per share, it could have resulted in a run on money markets that would have made the bank run and the Bailey Building & Loan run ("It's A Wonderful Life") look like a day in the park. (The aftermath of what happened with the Reserve Fund in 2008 is that today, the SEC is contemplating and is close to letting money market fund NAV's (net asset values) float. The thought is that the $1 money market price creates a "moral hazard" and what I told a client recently is that what retail investors will likely wind up with is whole array of "ultra-short" bond funds as money market funds, which do fluctuate minimally in price.)," He continues: "The Great Mistake in the 1930′s by the Federal Reserve is that it actually withdrew liquidity sometime in 1935–1936, which resulted in another downturn in the US economy in the late 1930′s just prior to WW II. In other words, Fed policy errors actually exacerbated the Great Depression, rather than shortened it. Both Janet Yellen (I'm sure), just like Ben Bernanke are/were both aware of the Fed's policy mistakes and are obviously loathe to make the same mistake." See also, the WSJ's "Bernanke: 2008 Meltdown Was Worse Than Great Depression".

The SEC adopted new requirements for credit rating agencies, according to a press release issued Wednesday. (Note: This new rule does not directly involve money market funds. The SEC last month, when it published its final money market reform rules, proposed its "Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule.") The new ratings agency rule's release says, "The Securities and Exchange Commission today adopted new requirements for credit rating agencies to enhance governance, protect against conflicts of interest, and increase transparency to improve the quality of credit ratings and increase credit rating agency accountability. The new rules and amendments, which implement 14 rulemaking requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, apply to credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs). The new requirements for NRSROs address internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings, and standards for training, experience, and competence of credit analysts." Here are the highlights of the rules with respect to money market securities: "Controls reasonably designed to ensure that an NRSRO engages in analysis before commencing the rating of a class of obligors, securities, or money market instruments the NRSRO has not previously rated to determine whether the NRSRO has sufficient competency, access to necessary information, and resources to rate the type of obligor, security, or money market instrument. Controls reasonably designed to ensure that an NRSRO engages in analysis before commencing the rating of an "exotic" or "bespoke" type of obligor, security, or money market instrument to review the feasibility of determining a credit rating." The information that must be disclosed includes: "A description of the types of data about any obligor, issuer, security, or money market instrument that were relied upon for the purpose of determining the credit rating. A statement containing an overall assessment of the quality of information available and considered in determining the credit rating for the obligor, security, or money market instrument, in relation to the quality of information available to the NRSRO in rating similar obligors, securities, or money market instruments. Information relating to conflicts of interest, including whether the NRSRO was paid to determine the credit rating by the obligor being rated or the issuer, underwriter, depositor, or sponsor of the security or money market instrument being rated, or by another person." Also on Wednesday,`the SEC adopted asset-backed securities reform <i:http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542776577#.U_43kMJ0yiM>`_. "The Securities and Exchange Commission today adopted revisions to rules governing the disclosure, reporting, and offering process for asset-backed securities (ABS) to enhance transparency, better protect investors, and facilitate capital formation in the securitization market The new rules, among other things, require loan-level disclosure for certain assets, such as residential and commercial mortgages and automobile loans. The rules also provide more time for investors to review and consider a securitization offering, revise the eligibility criteria for using an expedited offering process known as "shelf offerings," and make important revisions to reporting requirements."

The Employee Benefits Law Report, published by Porter Wright Morris & Arthur, wrote about the impact of SEC reforms on ERISA plans. Greg Daugherty writes: "The message of this blog is that these regulations could affect many ERISA plans because MMFs are an important part of the investment strategy of both defined contribution and defined benefit plans. Unfortunately, the regulations raise several ERISA questions and provide little in the way of answers. The SEC has acknowledged these concerns in the preamble of the regulations and has promised to work with the Department of Labor (the "DOL") to answer these questions. In the meantime, however, plan sponsors and fiduciaries should consider several issues. 1. With respect to the requirement that ERISA plan fiduciaries prudently manage plan assets, the DOL staff advised the SEC staff that a MMF's liquidity and potential for redemption restrictions is just one of many factors a plan fiduciary would need to consider in evaluating the role of a MMF in a plan's investment portfolio. This issue is a particular concern to defined benefit plans that invest in prime MMFs.... Fiduciaries should consult the fund strategy and investment policies to determine whether prime MMFs still fit in the investment strategy. Defined contribution plans generally should not have these concerns because under the "retail" exception, MMFs offered as investment options under these plans may still have a fixed $1 per share value. 2. The SEC acknowledged in the preamble that the imposition of a liquidity fee or redemption gate within 90 days of a participant's default investment to a MMF could impair the ability of the MMF to qualify for QDIA relief. The SEC cited DOL Field Assistance Bulletin in 2008-03 and said that to avoid this concern, a plan sponsor or service provider could pay the fee rather than the participant. Alternatively, the plan sponsor or other party in interest could loan the funds for the payment of ordinary expenses of the plan for a purpose incidental to the ordinary operating expenses of the plan to avoid the effects of the fee or gate. 3. With respect to the processing of required minimum distributions and certain distributions of refunds on a timely basis, the SEC was less helpful. It said generally that it seems rare that these types of issues would arise. To the extent that a redemption fee prevented a timely distribution of RMDs, the individual could file a Form 5329 with the IRS to require a waiver from excise taxes. Where Do We Go From Here? It is encouraging that the SEC and DOL are aware of these issues and have promised to provide guidance in the future. The potential problem, however, is that the DOL or the IRS could take positions in an audit that put the plan sponsors or fiduciaries on the defensive, despite the lack of guidance. What should plan sponsors and fiduciaries do in the meantime? They should review their MMF fund offerings and determine if they continue to remain appropriate investment options. They also should plan for any redemption fees or gates. Finally, they should document any decisions they make with respect to these issues. Hopefully, the SEC and DOL will provide additional guidance in the future that will make these decisions easier."

The Financial Times published a story, "South African Money Funds Break the Buck." Author Steve Johnson writes, "At least 10 South African money market funds have "broken the buck" in the wake of a central bank-led bailout of African Bank Investments, the country's biggest provider of unsecured loans. Before last week, just two US money market funds had broken the buck -- meaning their share prices fell below $1 -- since the industry's creation in 1971. They were the Reserve Primary fund, which was exposed to $785m of Lehman Brothers debt in 2008, and the Community Bankers Money fund, which lost money on derivatives in 1994. "This is very unusual. [It] will make investors look [at money market funds] more closely. I think it caught the market by surprise," said Alastair Sewell, a senior director at Fitch Ratings. The writedowns come as regulators in Europe and the US are clamping down on money market funds -- ultra low-risk funds that provide short-term funding to companies and governments -- in an attempt to reduce the risk posed by investors trying to withdraw money at the same time. In the US, the Securities and Exchange Commission is forcing prime institutional money market mutual funds to scrap their traditional stable $1-per-share structures and adopt floating prices. In Europe, the European Commission has proposed that "constant net asset value" money market funds should be forced to hold a cash buffer of 3 per cent, which opponents say would kill off the industry. The South African losses stem from a bailout of African Bank Investments (Abil) by the South African Reserve Bank, which imposed a 10 per cent "haircut" on Abil's senior debt. According to the Financial Services Board, the industry regulator, this debt accounted for 1.3 per cent of the R270bn (L15bn) of assets held by South Africa's 43 money market funds. Jurgen Boyd, deputy executive officer for collective investment schemes at the FSB, said the "majority" of the 15 funds with exposure to Abil had broken the buck, meaning the losses were sufficiently large that the unit price of the funds fell. The fund managers involved included Absa Bank, which had an exposure of 3 per cent to Abil, Stanlib (1.7 per cent and 0.7 per cent in two separate funds), and Nedgroup." The article continues, "During the 2007-2009 financial crisis, 62 money market funds (36 in the US and 26 in Europe) were bailed out by their sponsor or parent at a cost of at least $12.1bn, according to Moody's."

In the next few weeks there are several webinars on the subject of money market funds. The first is the 2014 AFP Liquidity Survey Companion Webinar, which features Crane Data President Peter Crane and is scheduled for Tuesday, August 26, from 3:00pm–4:00pm EDT. The Liquidity Survey is an annual publication from the Association of Financial Professionals. We covered the findings of the 2014 edition in our July 15 news story. "Corporate treasurers and CFOs continue to build their organizations' cash, but some are wary of investing that cash in money market funds due to low yields and the threat of reforms, according to the Association for Financial Professionals' "2014 AFP Liquidity Survey," we wrote, about a week before the reforms were adopted. The webinar will take a deep dive into the numbers and explore the possible impacts of the reforms, now that they are a reality. The panel of speakers includes Thomas Hunt, Director of Treasury Services, Association for Financial Professionals, our own Peter Crane, and Matthew Richardson, Head of Product Solutions, RBS Bank. It's free to AFP members and $50 for non-members. Next is a webinar on the SEC's money market reforms, presented by law firm Pepper Hamilton LLP and the West Legal Ed Center on September 9 from 12:00pm–1:00pm EDT. "This engaging webcast will delve into: understanding the new regulations and what this means for fund managers; how and why the SEC adopted; analysis and prospectus on the possible impact in the near term and long term." Speakers are Gregory Nowak, partner, Pepper Hamilton, and John Falco, associate, Pepper Hamilton. Here's a link with more information and direction on how to register. The cost is $97.50 after 50% Pepper discount using promotional code PHMMF50 -- CLE is available. Finally, the Mutual Fund Directors Forum is hosting a webinar on September 17 from 2:00pm–3:00pm. It's on what mutual fund company boards of directors need to know about money market fund reform and features Joan Swirsky, a partner with Stradley Ronon. "The new rules will also allow the boards of all money market funds to impose liquidity fees and redemption gates to address the risk of runs. Joan Swirsky, a partner with Stradley Ronon, will explain the added obligations the new rule amendments will place on fund boards." The webinar is free to members and $100 for non-members.

ICI released its weekly "Money Market Fund Assets" late Thursday. It says, "Total money market fund assets increased by $6.70 billion to $2.58 trillion for the week ended Wednesday, August 20, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $7.95 billion and prime funds decreased by $2.08 billion. Tax-exempt money market funds increased by $830 million. Assets of retail money market funds decreased by $950 million to $905.65 billion. Among retail funds, Treasury money market fund assets decreased by $120 million to $202.76 billion, prime money market fund assets decreased by $1.46 billion to $515.57 billion, and tax-exempt fund assets increased by $620 million to $187.31 billion. Assets of institutional money market funds increased by $7.65 billion to $1.68 trillion. Among institutional funds, Treasury money market fund assets increased by $8.07 billion to $722.64 billion, prime money market fund assets decreased by $620 million to $883.98 billion, and tax-exempt fund assets increased by $210 million to $72.01 billion." In other news, Fitch Ratings issued a release, "Fitch: Rate Moves To Trigger Flows From Deposits Into US MMFs." States Fitch, "Wider differences between the yields on US banks' interest-bearing deposits and money market funds (MMF) could drive deposit outflows after the Fed begins hiking rates, according to Fitch Ratings. Recent MMF reforms may also affect deposit flow changes as rates rise. The tiny rate differences across short-dated rate products are currently not significant enough to offer a yield advantage of one product over another. However, as rates eventually rise, Fitch expects money market funds to be more reactive to increases in the Fed's short-term policy rates than deposits. Many observers expect money market funds will attract deposit cash away from banks into higher yielding assets after a meaningful (yet difficult to gauge) rate differential is reached. The magnitude of deposit outflows is mostly expected to be driven by institutional money managers that control billions of dollars of institutional liquidity.... Slow rate increases by the Fed, which Fitch believes is a base case scenario, would allow for excess deposits to leak out of the banking system without any concern. However, rapid rate increases could draw deposits from banks at a faster rate, which Fitch believes would be a less favorable scenario for banks. Recent MMF reforms will likely influence this balancing act with some degree of outflows from MMFs into banks. New requirements for prime money funds -- including floating NAV, liquidity fees, and potential redemption gates, may make money funds a less attractive cash management product for investors. Consequently, Fitch expects that some investors will gradually take some assets out of money funds over the two-year implementation period for the reforms. Fitch believes that banks could capture at least some of the money currently invested in prime MMFs if institutional investors do not feel adequately compensated for the added risks."

USA Today published a column, "Keeping Your Cash Safe: What New SEC Rule Means," by Sharon Epperson at CNBC. Epperson writes about the differences between money market mutual funds and money market deposit accounts. "Millions of investors use money market mutual funds to stash "cash" in their portfolios, since they're generally viewed as safe, convenient short-term investments -- and there are major changes on the horizon designed to make them safer. But are money funds the safest place for your cash? Many consumers don't know what distinguishes money market funds and money market accounts offered at their local bank or how to assess which is the safest place for their hard-earned dollars.... Money market mutual funds are investments and are not insured. The funds invest in low-risk, highly-liquid investments like U.S. Treasury security (T-bills), certificates of deposit (CDs) and corporate commercial paper. They are regulated by the SEC and their value is determined by underlying investments, but they are not guaranteed investments. Money market deposit accounts, like savings accounts, are FDIC insured. A money market account is like a "souped-up" savings account that can also invest your money in treasury notes, CDs and other short-term investments to give you a slightly better yield than a regular savings account. As with a savings account, the federal government insures your deposits in a money market account up to $250,000. Money market account rates are currently better than money market fund yields. Historically, money market funds have had higher yields than bank deposits. But with interest rates so low, yields on money market funds after expenses are near zero. While the average yield on a money market fund is 0.01%, savings and money market account rates are about 0.10% on average. Some online banks offer money market account rates of almost a full percent, according to Bankrate.com. Where is the safest place for your cash? It depends on how you'll use it. If you need the money for emergencies -- to pay household bills if you lose your job or fix the boiler or roof of your home -- you may want to put those funds in a money market account at the bank. On the other hand, if you want to keep some of your investment portfolio in "cash," a money market fund may be the easiest way to make sure you have funds on the sideline that can readily be moved into other investments. For most investors, it's probably a good idea to have a little money in both."

Wall Street and Technology posted an article by James Sanford, portfolio manager and financial advisor for Sag Harbor Advisors called "SEC Reforms: What Floating NAVs Mean for Money Market Funds and Accounting Software." Writes Sanford, "The SEC just passed a rule that changes the way money market accounts are valued, but it's not just investors that will be impacted. It could also change the way accounting software keeps track of capital gains and losses. Money market funds used to be treated as fixed prices equal to $1 per share -- similar to savings accounts where a dollar is worth a dollar, regardless of time. But under the new SEC rule, money market funds will be priced on a floating system that reflects market movements. In simple terms, the accounts will have capital gains and losses that must be accounted for under the current tax code. The SEC voted July 23 to implement a floating net asset value (NAV) for prime institutional money market funds, as opposed to the previous NAV that remained fixed at $1. This is an attempt at providing more transparency into a fund's underlying market value. Since mutual funds are currently fixed at "$1 par," there is technically no capital gains/losses, but that will change once the floating system is implemented. Accounting software will need to reflect the 1099Bs capital gains and losses unless this tax code is changed. The SEC has discussed with the Treasury Department how to make these gains/losses nontaxable, but as of now, the issue isn't resolved [sic]. This change could soon force all accounting firms to embed tax accounting software that reflects these new gains and losses. Money market accounts are a $2.6 trillion industry that impacts nearly every investor who parks cash, so this new SEC rule has large ramifications for a large number of investors, as well." [`Note: The article sppears to be unaware of the tax relief granted by the Treasury and IRS for floating rate funds, once they go live in late 2016.] Also, Employee Benefit News published a piece called, "What Plan Sponsors Need to Know About Money Fund Changes." Author Robert Lawton, Lawton Retirement Plan Consultants, offers some advice for plan sponsors, "Since it is likely that your 401(k) plan uses a prime money market fund, you will need to explain this change to plan participants. Most are under the impression that they can't lose any money in your money market fund. In other words, participants tend to believe these funds are like savings accounts. That may no longer be true. Ask your investment adviser to investigate the underlying credit quality of the investments in the money market fund you use. If it is weak, you may wish to consider changing your money market fund."

The Federal Reserve of New York’s Liberty Street Economics blog published a piece on "Gates, Fees, and Preemptive Runs." Authors Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi write: "In the academic literature on banks, "suspension of convertibility" -- that is, preventing the exchange of deposits at par for cash -- has traditionally been seen as a potential means of preventing economically damaging bank runs. In this post, however, we show that giving a financial intermediary (FI) the option to suspend convertibility may ultimately increase the risk of runs by causing preemptive runs. That is, investors who face potential restrictions on their future access to cash may run when they anticipate that such restrictions may be imposed. This insight is relevant for policymaking in today's financial system. For example, in July 2014, the Securities and Exchange Commission adopted rules that are intended to reduce the likelihood of runs on money market funds (MMFs) by giving the funds' boards the option to halt (or "gate") redemptions or to charge fees for redemptions when liquidity runs short, actions analogous to suspending the convertibility of deposits into cash at par. Our results show that the option to suspend convertibility has important drawbacks: A bank, MMF, or other FI with the option to suspend convertibility may become more fragile and vulnerable to runs. In other words, we show that instead of offering a solution, policies relying on gates and fees can be part of the problem." The authors, who speak for themselves and not the NYFED, conclude, "Giving an FI the option to impose gates or fees may be destabilizing because the option itself can trigger damaging runs that otherwise would not have occurred. This result is likely to hold for a variety of adjustments to the assumptions in our model, because the intuition is stark: The possibility of a fee or any other measure that is costly enough to counter investors' strong incentives to run amid a crisis will give investors a strong incentive to run preemptively to avoid such measures. Even though our model does not address how runs on FIs can create large negative externalities for the financial system and the real economy, one important policy implication is clear: Giving FIs, such as MMFs, the option to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs." Another recent post on the Liberty Street Economics blog is on "Financial Stability Monitoring." Authors Tobias Adrian, Daniel Covitz, and Nellie Liang write: "We define systemic risk as the potential for widespread financial externalities -- whether from corrections in asset valuations, asset fire sales, or other forms of contagion -- to amplify financial shocks and in extreme cases disrupt financial intermediation. Potential financial externalities may have cyclical causes. For example, in an economic expansion, leverage might proliferate throughout the financial sector, which in turn could increase the potential for asset fire sales. Potential financial externalities may also have structural roots, as with money market mutual funds, which in their current form are susceptible to runs by their own investors and consequently tend to always create the potential for asset fire sales and other forms of contagion. This paper offers a strategy for monitoring cyclical financial vulnerabilities, and also discusses policy options for addressing them."

Below, we quote from one of the commentaries we missed on the SEC's recent MMF Reforms. PNC Funds writes, in "2014 Money Market Fund Reform: What You Need to Know, "The 2014 reforms are intended to further strengthen money market mutual funds and enhance their transparency. The rules themselves have no deliberate immediate impact on how money market funds operate as the compliance date for the most significant changes is not for another two years. PNC Capital Advisors and PNC Funds are evaluating the impact of the new rules on our current money market fund offering. As we approach the compliance deadlines mentioned above, we will provide additional updates. In the meantime, we will continue to manage the funds using our cash management philosophy that places the utmost importance on capital preservation, liquidity, and transparency for our clients. Under each fund's current structure, the new SEC reform requirements would be applicable as shown below. As we continue our evaluation of the new rules, this may change." PNC also published "SEC Money Market Reform Frequently Asked Questions", which says, "What are the reforms being enacted? The SEC has enacted several structural and operational changes to money market mutual funds. These changes include requiring a floating net asset value for prime institutional (and tax-exempt) money market funds, possible fees and suspension of redemption provisions for both retail and institutional funds under certain scenarios, and additional disclosure and stress testing requirements for all money market funds. The approved changes have no immediate impact to either the accounting treatment or liquidity provisions of money market funds. The compliance date for floating net asset value (NAV) and redemption fees and gates for affected funds is two years after the final rule release is published in the Federal Register."

Deutsche Bank's DWS family of funds has finally changed its name to reflect the better known Deutsche brand. The new website explains, "As an extension of the Deutsche Asset & Wealth Management brand, effective August 11, 2014, the following "DWS" funds were renamed "Deutsche funds" and, where applicable, CUSIP numbers were changed. Fund numbers, NASDAQ symbols and investment objectives did not change as a result of this." (See the list of funds here.) Deutsche is the 18th largest manager of U.S. money funds (with $33.1 billion) and the 14th largest manager of MMFs worldwide (with $73.1 billion). Below is a list of the new fund names and symbols, mapped to the old names. (These changes will be reflected in the September issue of Money Fund Intelligence.) The changes include: DWS CAF Govt & Agency Port (CAAXX) is now Deutsche CAF Govt & Agency Port (CAAXX), DWS Cash Mgmt Pro Funds Inv (MPIXX) is now Deutsche Cash Mgmt Pro Funds Inv (MPIXX), DWS Cash Mgmt Pro Funds Svc (MPSXX) is now `Deutsche Cash Mgmt Pro Funds Svc (MPSXX), DWS Cash Reserves Prime Ser (ABRXX) is now Deutsche Cash Reserves Prime Ser (ABRXX), DWS Cash Reserves Prime Ser Inst (ABPXX) is now Deutsche Cash Reserves Prime Ser Inst (ABPXX), DWS CAT Govt Cash Inst (DBBXX) is now Deutsche CAT Govt Cash Inst (DBBXX), DWS CAT Govt Cash Managed (DCMXX) is now Deutsche CAT Govt Cash Managed (DCMXX), DWS CAT Govt Cash MF (DTGXX) is now Deutsche CAT Govt Cash MF (DTGXX), DWS CAT Govt Cash Service (CAGXX) is now Deutsche CAT Govt Cash Service (CAGXX), DWS CAT Prem MM Sh MMP Res (CXPXX) is now Deutsche CAT Prem MM Sh MMP Res (CXPXX), DWS CAT Prem MM Sh MMP Svc (CSAXX) is now Deutsche CAT Prem MM Sh MMP Svc (CSAXX), DWS CAT Tax-Exempt Service (CHSXX) is now Deutsche CAT Tax-Exempt Service (CHSXX), DWS CAT Tax-Exempt T-F MF Inv (DTDXX) is now Deutsche CAT Tax-Exempt T-F MF Inv (DTDXX), DWS Daily Assets Fund Instit (DAFXX) is now Deutsche Daily Assets Fund Instit (DAFXX), DWS Davidson Cash Eq T-E Port (CHDXX) is now Deutsche Davidson Cash Eq T-E Port (CHDXX), DWS Davidson Cash Equiv Plus Govt (CDPXX) is now Deutsche Davidson Cash Equiv Plus Govt (CDPXX), DWS Deutsche Cash Mgmt In (BICXX) is now Deutsche Cash Mgmt In (BICXX), DWS Deutsche Cash Res In (BIRXX) is now Deutsche Deutsche Cash Res In (BIRXX), DWS ICT Treasury Port Inst (ICTXX) is now Deutsche ICT Treasury Port Inst (ICTXX), DWS ICT Treasury Port Invest (ITVXX) is now Deutsche ICT Treasury Port Invest (ITVXX), DWS ICT Treasury Port Premier (ITRXX) is now Deutsche ICT Treasury Port Premier (ITRXX), DWS ICT Treasury Port S (IUSXX) is now Deutsche ICT Treasury Port S (IUSXX), DWS MM Prime Cash Inv Tr A (DOAXX) is now Deutsche MM Prime Cash Inv Tr A (DOAXX), DWS MM Prime Cash Inv Tr S (DOSXX) is now Deutsche MM Prime Cash Inv Tr S (DOSXX), DWS MM Prime DWS MMF (KMMXX) is now Deutsche MM Prime Deutsche MMF (KMMXX), DWS MM Series Instit (ICAXX) is now Deutsche MM Series Instit (ICAXX), DWS NY Tax Free Money Fund (NYFXX) is now Deutsche NY Tax Free Money Fund (NYFXX), DWS NY Tax Free Money Fund Inv (BNYXX) is now Deutsche NY Tax Free Money Fund Inv (BNYXX), DWS Tax Free Money Fund Invest (BTXXX) is now Deutsche Tax Free Money Fund Invest (BTXXX), DWS Tax-Exempt CA MMF Inst (TXIXX) is now Deutsche Tax-Exempt CA MMF Inst (TXIXX), DWS Tax-Exempt CA MMF Premier (TXCXX) is now Deutsche Tax-Exempt CA MMF Premier (TXCXX), DWS Tax-Exempt Cash Instit (SCIXX) is now Deutsche Tax-Exempt Cash Instit (SCIXX), DWS Tax-Exempt Cash Managed (TXMXX) is now Deutsche Tax-Exempt Cash Managed (TXMXX), DWS Tax-Exempt Money Fund (DTBXX) is now Deutsche Tax-Exempt Money Fund (DTBXX), and DWS Tax-Free Money Fund S (DTCXX) is now Deutsche Tax-Free Money Fund S (DTCXX).

Stradley Ronon's John Baker and Joan Swirsky tell us that the SECs Final Rules on Money Market Fund Reform have been published in the Federal Register, which starts the clock ticking 60 days from now on the 18-month phase-in for additional disclosures and the 2-year phase-in period for the floating NAV and emergency gates and fees. The Federal Register version comes in at 249 pages, an easier load on printers than the original 869-page version. (Alas, it's just smaller print and 3 columns though.) Swirsky tells us that now, "Effective dates are 60 days from publication, and compliance dates are 9 and 18 months and 2 years from the effective date. I count to Oct. 14 as the effective date if publication is tomorrow." This makes: `July 14, 2015 - the compliance date for Form N-CR; April 13 2016 - the compliance date for the remaining reforms other than float/fees/gates; Oct. 14, 2016 - compliance date for those fundamental reforms. She adds, "The dates should be included in the publication so we can confirm. `If the reforms to eliminate ratings from Rule 2a-7 and to further tighten diversification are approved, the SEC expects to make those effective April 16, 2016 as well." In other regulatory news, we also were made aware of a primer on "U.S. Money Market Fund Reform" from Irish law firm Arthur Cox. Written by Kevin Murphy (who is scheduled to speak at our European Money Fund Symposium Sept. 22-23 in London), Sarah Cunniff, and Dara Harrington, it says, "[The] narrow decision of the SEC to impose a mandatory variable net asset value ("VNAV") for prime institutional constant net asset value ("CNAV") money market funds in the US is of little relevance to the EU in its quest for money market fund reform. It was always going to be a question of timing as to whether it would be the US or the EU who was going to be first to issue its reforms on money market funds. What the funds industry hoped for was a global solution to money market fund reform -- a reasonable objective given that both the EU and the US were looking at money market fund reform at the same time. Sadly a global solution has not emerged today. The real impact on the SEC decision to impose mandatory VNAV on prime institutional CNAV money market funds can be gleaned from the exemptions to that requirement.... As a result of these significant exemptions, we already know from submissions made to the SEC that as much as 54% of current prime CNAV money market funds in the US will retain their assets and conservatively 75% of the assets of existing CNAV money market funds in the US will remain in those CNAV money market funds. Accordingly, the key message from an EU perspective is that, with the exception of one segment of CNAV money market funds in the US (i.e. prime institutional money market funds), the SEC has clearly decided to retain CNAV money market funds."

Late last week, Vanguard published a Q&A interview with CEO Bill McNabb, where MMFs were a hot topic. Said McNabb: "It's encouraging to see a solution set forth by the SEC on this issue. While some surely will find faults with various provisions, we believe the SEC took a balanced and thoughtful approach. We also believe that a money market fund is a high-quality, low-risk investment option for investors with short-term savings goals. The majority of Vanguard's individual investors who invest in money market funds will not be affected by the new rules. On the institutional side, we will likely see a change in how institutional investors use money market funds with the shift to a floating net asset value (NAV). As we understand it, these investors have time to adapt to these changes, as the compliance date for the floating NAV and fees and gates is a [couple] years out." On FSOC, he said: "There is a big question around whether the Financial Stability Oversight Council, a federal regulatory committee created as part of the Dodd-Frank reform legislation that was enacted in 2010, will designate mutual fund companies like Vanguard as "systemically important financial institutions," or SIFIs. We believe a SIFI designation could have considerable negative effects on Vanguard and our clients, who are working hard to save for retirement and other goals. Among other things, a SIFI designation would, in our view, create a tax of sorts on designated asset managers and would ultimately be a cost burden that fund shareholders may have to bear. We feel strongly that asset managers and mutual funds are already properly regulated by the SEC with extensive investor protections -- in particular those established under the Investment Company Act of 1940. We worry that a SIFI designation could pose a conflict with the "40 Act" by restricting the ability of asset managers to act in the best interest of their shareholders." On July 23, McNabb had more to say on the SEC's most recent reforms. "With these changes, and the significant safeguards it adopted in 2010, the SEC has issued a strong response to those who believe institutional money market funds pose systemic risk.... Vanguard remains confident in the stability of its money market funds, and continues to manage the funds conservatively and with extreme prudence, focusing on the highest-quality short-term money market instruments."

PricewaterhouseCoopers (PWC) Ireland issued a News update entitled, "10 key points from the SEC's final US Money Market Fund rule - No major surprises, but big open questions." The first three points are called "impacts" from the reforms: "1. Potential structural changes within MMF industry. The floating NAV requirement may drive institutional prime MMF shareholders to move their cash to government MMFs or non-MMF alternatives that offer reasonable principal protection and slightly higher yield. This would likely cause industry repositioning as traditional sponsors -- and new market entrants -- innovate new products to meet investors' short-term cash management needs. Furthermore, institutional prime MMF advisers may decide that Rule 2a-7's risk-limiting provisions for MMFs are not worth the headaches without the stable NAV their funds have traditionally enjoyed. 2. Implementation challenges. MMFs and their sponsors will need to make necessary operational and compliance modifications to their systems and controls in order to implement floating NAV and fees/gates requirements by mid-2016. Two years may appear to be a long time, but in our view the challenges are significant (several comments on the proposed rule from key industry participants asserted that three years was a more reasonable implementation period). The SEC's Division of Investment Management has formed a working group to monitor the rule's impact and consider pragmatic solutions to assist with implementation challenges. There may be opportunities for engagement with SEC staff to work through these issues. 3. Will the reforms work? Until the next market crisis, it is difficult to know if the rule will achieve the objective of stabilizing MMFs, deterring investor runs, and preventing systemic ripple effects on other funds and financial asset prices - all without undermining the popularity of the $3 trillion industry among retail and individual investors. This is a clear concern of the industry who commented heavily on the proposal and of the regulators who made several changes to the proposed rule in response." The next 6 points are called "key changes from the proposals." They include: 4. Reduced flexibility for government money market funds, 5. Retail MMF definition improved, 6. More flexibility for MMF boards when imposing fees/gates, 7. Amortized cost accounting remains for retail and government funds, 8. Refined stress testing, and 9. Modest relief for municipal MMFs. The 10th point is: "10. SEC to share the spotlight with industry, investors, and ... FSOC (again). MMF advisers and other service providers will begin assessing the rule's major impacts on systems, reporting, technology, and board communications. Meanwhile, investors -- especially institutional investors -- will evaluate the desirability of MMFs as their default home for short-term cash. Finally, the Financial Stability Oversight Council (FSOC), which has long been vocal on the need for MMF reform, will be weighing in on the sufficiency of the SEC's new reforms and providing clues as to whether the rule will impact its next steps for designating certain asset managers as systemically important. It remains to be seen whether the European Commission will align itself with the changes to be implemented in the US, or whether the two regulatory regimes ultimately will differ substantially." PWC writes, "The clock is now ticking MMFs have two years to implement the floating NAV and fees/gates requirements. MMFs also have 18 months to implement additional requirements for diversification, stress testing, disclosure, and reporting (Form PF and Form N-MFP), and nine months to implement requirements for reporting material events on a new Form N-CR." Note: Report authors Ken Owens and Sarah Murphy from PwC Dublin will be presenting on "Tax, Accounting, and Floating NAV Issues at Crane's European Money Fund Symposium, Sept. 22-23 in London.

The Wall Street Journal writes "The Safety and the Risk in Ultrashort Bond Funds". It says, "Ultrashort-term bond funds are a popular haven for investors looking to earn more than the near-zero yields of money-market mutual funds -- without locking up their money in a certificate of deposit or taking a lot of interest-rate risk with longer-term debt funds. The question now is how these funds will perform when interest rates eventually rise and whether the funds will see an exodus of investors. Investors pumped nearly $2.5 billion in net new cash into ultrashort bond mutual funds in the first half of 2014, boosting their assets to $64.45 billion, according to Chicago-based investment researcher Morningstar. That comes after net inflows of nearly $10.7 billion and $9.5 billion in 2013 and 2012, respectively.... Most observers expect the Federal Reserve to begin lifting short-term rates sometime next year. Ultrashort funds should be able to reinvest maturing debt at higher yields when rates rise. Still, prices could fall somewhat, unlike those of money funds, which almost always stay at a steady $1 a share. "These are not money-market funds. You could see modest losses," Ms. Bush says. Many investors lost money in the funds in the 2008 financial crisis, when bonds that the funds held defaulted or were downgraded. The average ultrashort fund lost 7.9% that year, according to Morningstar. But some funds had taken on more risk than investors expected, with holdings in longer-term debt or mortgage bonds, and some lost more than 30% of their value.... Still, by keeping interest rates artificially low, the Fed has created a scenario in which money may flood out of ultrashort funds, believes Peter Crane of Crane Data, a research firm in Westboro, Mass., that focuses on money-market funds. The Fed's aggressive approach to keeping rates very low drove "the wrong kind of people" into bond funds from safer money-market funds, he contends. "You have all these retirees who just need income," Mr. Crane says. "They don't understand the principal risk." If ultrashort funds suffer a small loss due to rising rates, these investors will be surprised and begin to sell, compounding those losses, he says."

Reuters recently published "Unlikely Booster for Money Market Funds: Beat-Up Puerto Rico Bonds" The piece, by Tim McLaughlin, reads, "Money market funds run by Fidelity and American Beacon are relying on an unlikely source to juice up their returns: beat-up bonds issued by cash-strapped Puerto Rico. The funds have accepted the U.S. territory's debt as collateral on their short-term loans to Wall Street banks, and in exchange for that added risk are receiving a higher interest rate, according to public filings. As a result, American Beacon's $767 million fund has one of the best one-year returns in the industry, while Fidelity this year used at least one loan backed by Puerto Rico bonds to generate a yield about 20 basis points higher than U.S. Treasuries or bank certificates of deposit. The strategy comes as the money market fund industry seeks to retain investors spooked by new U.S. regulations, and could stir up worries about market risk that emerged after the 2008 financial meltdown, according to analysts. So far, repurchase agreements backed by some of the riskiest collateral make up just 3 percent of the $2.4 trillion in taxable money market fund assets, according to research firm Crane Data LLC. But that could grow if the improved returns among those using riskier collateral prove to be a draw for investors." It continues, "Money market fund sponsors downplay the collateral risk associated with repurchase agreements, saying their ultimate backstop is the bank on the other side of each transaction." "Prime money market mutual funds only enter into repurchase agreements with counterparties that represent 'minimal credit risk,'" Fidelity Investments, the largest U.S. money market fund sponsor, told Reuters in a statement. Reuters adds, "The $13 billion Fidelity Retirement Money Market Fund recently reported a $126 million repurchase agreement with Merrill Lynch, which had a yield of 0.38 percent and featured Puerto Rico bonds as most of the deal's collateral, according to fund disclosures. About 10 percent of the fund's repurchase agreements are backed by collateral considered more risky, according to Fidelity disclosures. Fidelity's fund returned one basis point for investors over the past year, a typical performance in the industry." In other news, ICI says in its latest "Money Market Fund Assets," "Total money market fund assets increased by $12.78 billion to $2.57 trillion for the week ended Wednesday, August 6, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $8.85 billion and prime funds increased by $700 million. Tax-exempt money market funds increased by $3.23 billion." Prime Institutional MMFs fell by $5.7 billion to $882.9 billion (34.4% of total assets) according to ICI's data for the week ended 8/6/14

The Association of Financial Professionals held a webinar last week that explored "What the New Money Fund Rules Mean for Treasurers." Today, AFP published a recap of the webinar, which featured Jim Gilligan, CTP, FP&A, assistant treasurer for Great Plains Energy, and Tom Hunt, CTP, director of treasury services, AFP. "Treasurers who have not given much consideration to what they are going to do should begin preparations before this grace period is up," Gilligan said. "Look at your investment policy and consider changes to that," he said. "You may want to look and see if your investment policy will allow you to invest in money market funds that have a floating NAV. You may also have to see if you are allowed to use funds that have gates or redemption fees. If you're going to invest in funds that have those restrictions, make sure your investment policy allows those." One major concern for some treasury departments is the impact on the commercial paper (CP) market. For example, Great Plains Energy has significant short-term borrowing through the CP market, Gilligan explained. "I personally believe we're going to see a contraction in the CP market, created by a shift in investors' money from existing funds that purchase CP products to other funds not subject to a floating NAV and redemption gates," he said. "That will possibly cause CP issuers to develop alternative markets for CP, and/or lead to issuers turning to their short-term credit facilities, which are typically more expensive than the CP market issuances." There could also be a shift to other certificates of deposit and time deposits, Hunt noted. The 2014 AFP Liquidity Survey revealed a large balance in bank products. "Maybe there's a new investment out there; maybe it's separately managed accounts," he said. "If you want a stable NAV, where are you going to go to find that if you're not comfortable with some of the things that are in your money fund that weren't in there previously?" Based on recent data, it certainly looks like the MMF investment landscape is about to change. The Liquidity Survey asked corporate treasurers and CFOs if a floating NAV was imposed on prime funds while a stable NAV remained on government funds. Twenty-seven percent of respondents said they would not invest in prime funds altogether, while 28 percent said they would move money into government funds. "So we do expect some money to move," Hunt said. "But whether it moves out of prime into government funds, back into Treasuries or bank deposits remains to be seen." (Note: Crane Data's Peter Crane will be participating in AFP's "2014 Liquidity Survey Companion Webinar" on August 26.) In other news, money fund portal provider Cachematrix sent out a press release related to money fund reform. Cachematrix has anticipated this outcome and understands that upcoming modifications will provide many new opportunities for the entire industry. From Cachematrix President Dave Agostine: "Cachematrix's expertise operates at the intersection of technology and corporate cash management. Having expected these changes, we stand ready to help banks and asset managers evolve with the changing landscape of corporate liquidity management." Cachematrix provides the integration expertise, as well as the trading and reporting functionality that allows corporations and banks to seamlessly adapt and benefit from the new regulations. George Hagerman, Founder and CEO of Cachematrix, says, "The SEC's recent changes to Rule 2a-7 is presenting an exciting new landscape for banks and asset managers. I see this as a tremendous opportunity for banks to provide enhanced technology solutions and expanded product offerings to their corporate customers that will not just meet, but exceed, the new demands of corporate cash management."

Standard & Poor's issued a release today, "Principal Stability Fund Ratings Will Likely Hold Steady Amid Money Market Fund Reform. It reads, "In evaluating the impact these reforms have on Standard & Poor's principal stability fund ratings (PSFRs) -- or MMF ratings -- we focus on whether they could impair a MMF's ability to maintain its principal value. Additionally, the amendments have a two-year implementation period that gives investment managers, fund complexes, and shareholders the benefit of time to digest the amendments and react accordingly. Important to note, however, is that the new tools provided by these amendments are untested. As such, during a time of market stress, the tools and their usage could result in unintended and unanticipated consequences for the market. Our current assessment is that it is unlikely that the amendments to the rules will affect our MMF ratings. We continually evaluate our criteria to determine whether changes to the criteria are warranted to maintain the standards we believe are consistent within each rating category. Standard & Poor's rates 420 funds globally for principal stability with assets totaling US$2.3 trillion. Of that amount, 70% are domiciled in the U.S., representing nearly 300 funds with assets of $1.6 trillion. Of the U.S.-domiciled funds we rate, 53% are prime and municipal, and the remaining 47% is in government funds (including Treasury)." On trends in the marketplace, S&P states, "We understand that the market expectation is that these amendments, as currently structured, are likely to lead to some flows out of prime funds and into government funds. It is understood to be likely because the current yield difference between those types of funds is compressed enough such that shareholders may not feel compelled to keep their funds parked in prime funds as the new rules take effect. However, while flows will likely occur in the near term, the two-year period before implementation, coupled with shareholder understanding, tolerance, and acceptance of the floating NAV, may be enough that flows could slow or even reverse. This may be more noticeable if rates rise and the spread between the yields on those funds revert to historical levels. The amendments could further skew short-term investment options with regard to supply and demand. Fund managers have expressed to us their observations that a shortage of investment products seem to exist in the "30 days and in" space, especially from those issuers in the financial sector.... In addition, further consolidation could be a result of the amendments. This could lead to smaller fund sponsors finding it difficult to justify the additional operational costs that the amended rules may dictate. That may be an unintended consequence of the SEC's amendments as concentration of several large managers would seemingly be in contrast with diversification and liquidity."

Bloomberg follows the money in its piece, "Half Trillion Dollar Exodus Magnifies Treasury Bill Shortage." They write, "One of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government. Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp. Boeing Co., the world's largest maker of planes, and the state of Maryland are already looking to make the switch to avoid the possibility of any potential losses. With the $1.39 trillion U.S. bill market accounting for the smallest share of Treasuries in six decades, the extra demand may help the world's largest debtor nation contain its own funding costs as the Federal Reserve moves to raise interest rates." "Whether investors move into government institutional money-market funds or just buy securities themselves, there will be a large demand" for short-dated debt, Jim Lee, head of U.S. derivatives strategy at Royal Bank of Scotland Group Plc's commented to Bloomberg, "That will lower yields." The piece adds, "He predicts investors may shift as much as $350 billion to money-market funds that invest only in government debt." It goes on, "Peter Crane, president of money-market researcher Crane Data LLC, anticipates fund values will remain stable because the underlying assets mature so quickly and are easily replaced. The shortest-term commercial paper comes due in two days. Any exodus will be limited to about 10 percent of prime fund assets because the yield advantage over government-only funds will increase as the Fed starts raising rates, he said." In other news, The Wall Street Journal explores how financial advisors are dealing with reforms in "Advisers Weigh Impact of New Money Fund Rules." Daisy Maxey writes, "Some financial advisers are reassuring their retail clients who own money-market funds that new regulations requiring a floating share price won't affect them. But some institutional clients in money-market funds may consider moving their money into other types of money funds or other fixed-income products. With a two-year transition before the rules go into effect, advisers are now seeking more information on how the changes will be implemented." "It's way too early to clearly see what the ramifications are going to be across the board on the individual-investor level," the piece quotes Andre Pineda, an adviser with Cary Street Partners." Also, Pensions & Investments wrote "Money Market Changes Worry DC Executives." The article says, "New rules governing money market funds provide a quantum of solace but also a dose of uncertainty to defined contribution plan executives managing capital appreciation options."

Federated Investor's Debbie Cunningham posted her August "Month in Cash" column, "About That Elephant in the Room," where she touched on rates and reforms. "Before we discuss what's happening -- and more accurately, what isn't -- on the rate front, let's get the elephant in the room out of the way. As most if not all of you know by now, the Securities and Exchange Commission has adopted new rules for money-market funds, the most notable of which will require net asset values (NAVs) to fluctuate on institutional prime and institutional municipal money-market funds -- Treasury, government and retail funds are exempt. First, it's important to understand this change won't take effect for two years. But I do expect our industry to begin to react sooner than that with new options and products for clients. Might the SEC-mandated changes impact money-market rates? Potentially. Let's say some institutions opt to move into products other than money funds, such as bank CDs. That could have the effect of lowering money fund demand. Maybe the economy continues to improve, driving up the use of corporate finance and commercial paper. That could have the effect of boosting the supply of potential money-fund portfolio securities. Together, less demand/more supply could conspire to push up money-fund security yields. But if that were to happen, the higher yields very well could lure back investors who left the market, raising demand again and driving down yields." On rates she continues, "As for the current money-market environment, there was little movement along the cash-yield curve over the past month -- rates remained stubbornly low, save for a slight steepening on longer end of the curve that corresponds both to the end of quantitative easing and the initial moves up in the target funds rate. The consensus is still for a May-June 2015 tightening, a view the statement from this week's Fed policymakers meeting did nothing to dispel despite grumblings from a few regional Fed presidents that the target rate should be raised sooner and despite second-quarter inflation numbers that were reported the same day and came in right in line with Fed targets. I think what's most important for dictating the path of short-term rates is what happens with the employment, housing and inflation. The employment picture is pretty strong and continues to strengthen, but both inflation and housing have stuck in a sort of two-steps-forward, one-step-back mode. You'll get good number on housing starts, then the home price drops in certain regions. You'll get CPI up one month, then PPI down, or energy prices up and health-care down. It's all fuzzy and a bit uncertain, and I think that's the way rate policy will be for the time being." Note: Federated also released an "Overview of key SEC changes to money-market fund rules, a handy reference that encapsulates all of the SEC reforms. See alsom Bloomberg's "Half-Trillion-Dollar Fund Exodus Magnifying U.S. Bill Shortage".

Bloomberg's July 31 article "Money Fund Rules Seen Triggering Commercial Paper Jam", looks at the impact of SEC reforms. It says, "Corporate treasurers say a crackdown on money-market funds threatens to squeeze their access to the short-term financing they use for everything from paying the rent to meeting their payrolls. Companies from pesticide maker FMC Corp. to power generator Great Plains Energy Inc. are preparing for investors to back away from the commercial-paper market after regulations passed last week requiring some money-market funds to let their net-asset values fall below the traditional $1 a share floor. The shift may trigger a retreat from prime funds that are big buyers of the short-term corporate IOUs, precipitating an increase in borrowing costs. The rules being implemented by the U.S. Securities and Exchange Commission leave the $1 trillion commercial-paper market facing its biggest upheaval since it seized seven years ago amid the global credit crisis. A drop in demand may drive up borrowing costs on the debt, which typically matures in 270 days or less." James Gilligan, assistant treasurer at Great Plains, told Bloomberg, "I know the SEC believes others will pick up the slack of the commercial-paper market, but I'm not optimistic about that. The impact will be a contraction of investors, which will reduce the demand for commercial paper, which will drive up borrowing costs." The Bloomberg piece adds, "About $320 billion to $500 billion may exit prime money-market funds before the new rules become fully effective in 2016, according to calculations by Barclays Plc and Bank of America Merrill Lynch. Those funds hold about 25 percent of their $1.4 trillion of assets in commercial paper, according to Bank of America." The article continues, "A measure of 30-day U.S. commercial paper rates is at 13 basis points, below the 18 basis-point average for the last five years, according to data compiled by Bloomberg. A basis point is 0.01 percentage point. Gilligan, who is also a member of the Association for Financial Professionals, was one of the signatories of a letter the group sent to SEC Chair Mary Jo White opposing the proposed rule changes to allow fund asset values to float. 'A shrinking commercial paper market could force large, creditworthy companies that are currently able to sell commercial paper into other areas of debt markets,' the association said in the July 22 letter."

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