Daily Links Archives: September, 2014

The Financial Times writes "EU to revisit money market fund reforms". It says, "The European parliament's new rapporteur charged with overseeing money market fund reform has said she does not want to "destroy" the industry. The European Commission proposed last year that so-called "constant net asset value" funds, which maintain a fixed E1-a-share except in extreme circumstances, should be forced to hold a cash buffer equal to 3 per cent of their assets to help avert a repeat of the "runs" some funds suffered during the financial crisis. Industry figures say this would be uneconomic and would effectively kill off the E450bn sector.... Neena Gill, a UK Labour MEP, who will now attempt to broker a deal on money market these reforms in the new parliament, said: "I want to ensure there is a format there that enables these funds to continue to exist. I do not think it's the job of the parliament to define what sort of investments you have or not." ... She is proposing to hold a roundtable to help find potential solutions in November, with a vote likely to be held in January." In other news, Treasury Today published a story titled, "EMEA Cash Reserves Approach E1 trillion." It reads, "Cash reserves held by corporates in Europe, Middle East and Africa (EMEA) have reached a new high of nearly E1 trillion, according to research published last week. In its 'Cash to Growth: Pivot Point' research report, professional services firm Deloitte found that the 1,200 listed companies in the region have built up their cash reserves by E47 billion over the past year, bringing total cash reserves to E963 billion. This represents an increase of around E250 billion on the reserves recorded in 2007." It adds, "Almost 60% of those surveyed said they intended to invest part of their cash reserves in the coming year. Of these corporates, 54% said growth would be the main focus of their investment strategy over the next year. The research also suggests that corporates in EMEA are looking to invest cash reserves primarily in their home markets. Thirty-five percent of those surveyed said they would make investments within the EU over the next year, while 27% said they would in North America, and 21% in China. However, despite the recent boom in interest in emerging markets, respondents showed relatively little enthusiasm for investing in these markets. 13% of the companies surveyed said they planned to invest in Brazil, 8% in India and 4% in Russia."

USA Today featured a piece Friday entitled, "Investing: Market Timing is for the Birds." John Waggoner writes, "If you're terrified of a stock downturn, your best bet is to reduce your stock holdings until you're no longer terrified. Your best bet now is a money market fund, despite the fact that the average money fund yields just 0.01%. After inflation and taxes, your returns will be smaller than a hummingbird's navel. But money funds are the one investment you can be fairly confident that will be more valuable in a year than they are now. With interest rates this low, it's a good bet that the Federal Reserve will start to push up rates in the next few months, and that means higher money market yields. It's a scary world. There's a war on. Europe is teetering on recession and deflation -- a period of falling prices like the Great Depression. Stocks aren't cheap. Interest rates could rise. But the world has always been scary. The stock market has survived world wars, a Great Depression, a Great Recession, oil embargoes and enormous one-day crashes. If you need your money soon, take some chips off the table so Mr. Market isn't deciding your fate. But if you're a long-term investor, worrying about the market is for the birds." In other news, Sibos, the giant global banking conference run by SWIFT, the European banking consortium, starts today at the Boston Convention Center and runs through Wednesday. (Some money fund companies will be exhibiting, though not many.)

ICI released its latest "Money Market Fund Assets" report, which showed money fund assets increasing sharply on the week. It says, "Total money market fund assets increased by $15.08 billion to $2.59 trillion for the week ended Wednesday, September 24, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $5.96 billion and prime funds increased by $11.10 billion. Tax-exempt money market funds decreased by $1.98 billion." The release continues, "Assets of retail money market funds decreased by $2.11 billion to $900.69 billion. Among retail funds, Treasury money market fund assets decreased by $800 million to $199.57 billion, prime money market fund assets decreased by $310 million to $516.21 billion, and tax-exempt fund assets decreased by $990 million to $184.91 billion. Assets of institutional money market funds increased by $17.19 billion to $1.69 trillion. Among institutional funds, Treasury money market fund assets increased by $6.76 billion to $730.31 billion, prime money market fund assets increased by $11.41 billion to $890.49 billion, and tax-exempt fund assets decreased by $980 million to $69.81 billion."

Fitch Ratings wrote Tuesday, "Fitch Ratings has withdrawn the 'AAAmmf' rating for the Williams Capital Government Money Market Fund (the Fund) managed by Williams Capital. Williams Capital will be outsourcing the management of its money market fund strategies to Northern Trust and at shareholder option funds may be transferred to into new share classes of the Prime Obligations Fund or the U.S. Government Select Fund. On September 4, 2014, the Board of Trustees of Williams Capital Management Trust, on behalf of the Fund, approved a proposal to mandatorily redeem all the shareholders of the Fund at a net asset value per share of $1.00 and thereafter to liquidate the Fund. The mandatory redemption date has been set as September 22, 2014 and the liquidation date has been set for September 29, 2014. The Fund had $202 million of total assets under management as of Sept. 16, 2014." We wrote about this in our Sept. 15 News story, "TCG Launches Govt MMFs With FDIC Insured Blocks; Williams Outsources". In other news, Trefis writes, "How BlackRock Is Dealing With Negative Interest Rates in Europe"." It says, "Earlier this month, the European Central Bank announced its decision to cut benchmark interest rates further, in what is the latest attempt by the regulator to improve economic conditions in the Eurozone.... BlackRock was the first asset manager to react to this change, with the firm announcing its intention to activate a mechanism that will help it maintain a stable share price for one of its money-market funds -- the ICS Europe Government Liquidity Fund. While the fund, with E1.4 billion ($1.8 billion) in assets under management, is a fraction of the $268.4 billion in money-market assets managed by BlackRock at the end of Q2 2014, the decision to switch to a Reverse Distribution Mechanism could extend to its larger Institutional Euro Government Liquidity Fund, and is likely to result in similar changes by competitors over coming weeks.... While banks are affected the most by a negative deposit rate, the impact on asset management firms is also noticeable -- particularly for those with a strong presence in the cash management market. As the largest asset manager in the world with $4.6 trillion in assets under management, BlackRock is clearly affected by the ECB's move. The chart ... shows the size of assets under management in money market funds for BlackRock globally. The negative deposit rate makes it very likely that yields on government securities will turn negative on certain trading days -- resulting in unwanted fluctuations in the net asset value (NAV) of funds that hold these securities. BlackRock's proposed switch to a Reverse Distribution Mechanism seeks to avoid this problem by canceling out shares in proportion to the reduction in value over a day in which returns were negative. This way, the NAV remains constant while the negative returns are absorbed by a reduction in the number of fund units. Negative returns will drag down the fees for BlackRock's cash management business as shown in the chart.... You can see how a reduction in these fees impacts the company's share value by making changes to this chart."

Fitch Ratings placed six South African funds' National Fund Credit Ratings on Rating Watch Negative (RWN). They are: Absa Money Market Fund; Investec Money Market Fund; Investec STeFI Plus Fund; Nedgroup Investments Core Income Fund; Nedgroup Investments Money Market Fund; and STANLIB Extra Income Fund. The brief says, "The RWN is driven by these funds' exposure to African Bank (unrated) following the bank's receipt of emergency support on 10 August 2014 from the South African Reserve Bank. As a result holders of senior and wholesale debt instruments issued by African Bank have had their holdings written down to 90% of face value while subordinated instruments have been written down to zero. The RWN reflects both the realised write-down on African Bank debt instruments and the potential for further credit deterioration or negative effects on instrument prices. It also affords Fitch time to determine the most appropriate way to incorporate African Bank's evolving credit risk profile into its rating analysis. The downgrade of the Absa Money Market Fund reflects the impact of the write-down of the fund's African Bank exposure on its price and income. Of the money market funds (MMFs) rated by Fitch in South Africa, Absa Money Market Fund has the highest, longest-dated exposure to African Bank. The fund recognised a capital loss because of its application of regulatory guidance on the treatment of African Bank exposures. Fitch considers the level of loss incurred inconsistent with a highly rated, stable unit value, MMF." In other news, The New York Fed, which held a workshop on the risks of wholesale funding last month, had a summary post on their Liberty Street Economics blog. It says, "The Federal Reserve Banks of Boston and New York recently cosponsored a workshop on the risks of wholesale funding. Wholesale funding refers to firm financing via deposits and other liabilities from pension funds, money market mutual funds, and other financial intermediaries. Compared with stable retail funding, the supply of wholesale funding is volatile, especially during financial crises."

Last Friday, the NY Federal Reserve Bank issued a release to "Revise the Time of Day of the Overnight Reverse Repurchase Agreement Operation for September 30, 2014." It says, "The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (FOMC). Regarding the operation to be conducted on Tuesday, September 30, 2014, the Desk will conduct the operation several hours earlier than usual, from 8:00 to 8:30 a.m. All other terms of the exercise will remain the same. This change only applies to the operation conducted on September 30, 2014. The operations conducted from Monday, September 22, to Monday, September 29, and those conducted on and after Wednesday, October 1, will be conducted at the previous time of 12:45 to 1:15 p.m. Any future changes to these operations will be announced with at least one business day's prior notice on the New York Fed's website. 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."

Bloomberg published a story on Friday entitled, "Money Funds Look at Loophole to Preserve $1 Share Price." Dave Michaels and Christopher Condon write, "Don't mourn the stable $1-per-share money-market mutual fund just yet. Firms including Federated are suggesting that fund companies can avoid new U.S. Securities and Exchange Commission requirements to show share-price variations by limiting holdings to very short-term corporate debt. Fund sponsors warned after the SEC adopted rules for institutional prime funds that a floating price would put off corporations such as Boeing Inc. that use the products to manage billions in spare cash. Two months later, Joseph Lynagh, head of money markets and short cash funds at Baltimore-based T. Rowe Price, is saying some fund companies will absolutely roll out products to take advantage of the loophole. T. Rowe Price, he said, isn't planning any such products. "You may see stuff engineered that camps out on that border," said Peter Crane, president of money-market researcher Crane Data LLC. "There could be a market for it." ... One aspect of the rules received little public notice. It left intact a longstanding provision that mutual funds can value debt that matures within 60 days at original cost, instead of at market prices. As a result, a fund invested exclusively in 60-day debt probably wouldn't see its share price vary from $1. The exemption "has always been there but now it takes on significance," said Jay Baris, chairman of law firm Morrison & Foerster LLP's investment management practice. "Now, if you are an institutional fund and you want to maintain a steady net-asset value, you can do it provided all your portfolio securities are under 60 days." While limiting a fund to shorter debt maturities makes it safer, a 60-day cut-off wouldn't have saved the Reserve Primary Fund. Most of the $785 million of Lehman debt it held when the bank failed was within 60 days of maturing.... Limiting investments to debt that matures in 60 days or less would require funds to give up the higher return earned by longer-term investments. With rates low, many funds use a "barbell" strategy balancing very short-term investments with longer-term debt that earns a higher yield, Crane said. The weighted average life of all prime money funds is currently 78 days, according to the Investment Company Institute, the lobbying group for mutual funds. "They have got to get out there and do six-month trades just to get some yield," Crane said.... Some prime funds already operate with short maturities. Invesco's STIC Prime Portfolio, which manages $2.8 billion, only invests in securities that mature in 60 days or less. In periods with interest rates higher than today's, the fund will "tend to have a better yield than Treasury and agency funds" though not as high as a fund that holds securities with the maximum maturity of 397 days, said Bill Hensel, an Invesco spokesman <b:>`_. Chris Donahue, chief executive officer at Pittsburgh-based Federated, which manages $240 billion in money-fund assets, doesn't offer such a fund. He said the product might grow more attractive in coming years. "In a different rate environment, that would work," Donahue said during a July 25 earnings call. "And its economics would be very comparable to the current fund." ... Corporations that park cash in money funds will eventually divide it into ones maintaining a stable $1 share price and those whose share prices float but earn a higher yield by investing in riskier corporate debt, Lynagh said. "This is where the industry will begin to differentiate itself," he said.

Bloomberg writes, "EU's Money Market Cash-Buffer Plan Faces Irish Opposition". The article says, "Ireland, home to almost a third of the European Union's E1 trillion money-markets industry, is set to oppose EU plans to make funds build up cash buffers against future crises. The proposal could force European funds, an important source of short-term financing for banks, companies and governments, to shut down, said Finance Minister of State Simon Harris. Ireland seeks support from other EU states against the plan to enforce "crude" cash buffers, which may have "horrendous" unintended consequences, he said. "Ireland shares the EU view and the commission's view that we have to better regulate shadow banking," Mr. Harris said. "To go ahead with a capital buffer structure as a regulatory instrument would damage the industry here, but also throughout the EU, and could lead to an outflow of investment from Europe." The EU money-market fund industry is concentrated in France, Ireland and Luxembourg. Funds domiciled in these three countries account for more than 95% of the EU market, according to European Commission data.... Almost E273bn of CNAV funds are domiciled in Ireland, making it the main base in the EU for such assets under management, according to EU data published last year." In other news, The New York Times published "Post-Lehman, Money Market Fund Protections Still Weak." Author Jennifer Taub, professor at Vermont Law School looks at the industry since the Lehman Brothers bankruptcy 6 years ago. "Filed before dawn on Sept. 15, 2008, the bankruptcy of Lehman Brothers Holdings Inc. spread panic through the financial system. Within hours of the filing that Monday morning, what should have been the contained demise of a venerable investment house turned into a widespread financial crisis. That part is old news. But what still deserves attention are these questions: What actually precipitated Lehman's collapse, how did the contagion spread from the firm to the credit markets and broader economy, and has this problem been fixed? A direct cause of Lehman's failure, and its spread to the credit markets, was money market funds.... Let's recall. One week before it failed, Lehman owed an astonishing $200 billion in overnight "repo" loans. Some large money market funds and other wholesale lenders, nervous about the mortgage-linked collateral backing those loans, demanded their cash. Short of a government-backed rescue, Lehman was done for. Unlike those fast-acting repo lenders that protected themselves (and their own investors) by bringing Lehman to its knees, other short-term creditors that did not run on Lehman were infected. These included the Reserve Primary Fund. Reserve Primary held about $785 million in short-term "repo" loans [sic] and other debt issued by Lehman, all worthless after Lehman's failure. Though that was a small percentage of Reserve Primary's total $62 billion portfolio, its panicked investors pulled $40 billion from the money market fund in the two days after Lehman went under. After the market closed on Tuesday, Sept. 16, the sponsor announced that Reserve Primary "broke the buck" and was now valued at 97 cents a share. The failure of Reserve Primary inspired a huge run on other money market funds.... Nervous investors redeemed $300 billion in cash that week alone…To stop the run on the money market funds, the government stepped in on the Thursday of Lehman week.... Today, the problems remain unsolved. Giant banks and broker dealers are still vulnerable to the sudden withdrawal of short-term financing by money market funds and other wholesale lenders. And despite two sets of new rules by the Securities and Exchange Commission -- one in 2010 and the other in 2014 -- investors in money market funds still have reasons to run with their cash at the first hint of trouble." Finally, see ICI's "Money Market Mutual Fund Assets", which says, "Total money market fund assets1 decreased by $16.72 billion to $2.58 trillion for the week ended Wednesday, September 17." Note that Sept. 15 is a corporate tax payment date.

The New York Fed issued a "Statement to Revise the Terms of the Overnight Reverse Repurchase Agreements," which states, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (FOMC). The Federal Reserve continues to enhance operational readiness and increase its understanding of the impact of RRPs through technical exercises. In further support of its objectives, the FOMC instructed the Desk to change the design of these RRP operations. Effective Monday, September 22, 2014, each eligible counterparty will be limited to one bid of up to $30 billion per day, an increase from the current $10 billion per-counterparty maximum bid limit, and each operation will be subject to an overall size limit of $300 billion. Each submitted request must include a rate of interest, subject to a specified maximum, which would apply only in the event that the total amount of offers received by the New York Fed exceeds the overall size limit of the operation. If the sum of the bids received is less than or equal to the overall size limit, awards will be made at the specified offering rate to all submitters. If the sum of the bids received is greater than the overall size limit, awards will be allocated using a single-price auction based on the "stopout" rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stopout rate and all bids at this rate awarded on a pro rata basis at the stopout rate. The stopout rate will be determined by evaluating all bids in ascending order by submitted rate up to the point at which the total quantity of offers equals the overall size limit. The offering rate will be set at 0.05 percent (five basis points)." It continues, "The operations will be open to all eligible RRP counterparties, will use Treasury collateral, will settle same-day, and will have an overnight tenor." In other news, the Federal Reserve Board's Federal Open Market Committee met on September 16-17, discussing interest rates and winding down the asset purchase program <i:http://www.federalreserve.gov/newsevents/press/monetary/20140917a.htm>`_. "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress -- both realized and expected--toward its objectives of maximum employment and 2 percent inflation. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

A press release from S&P says, "Standard & Poor's Ratings Services is in the process of reviewing its criteria for rating fixed-income funds, primarily money market funds, whose principal stability is the focus of its analysis, according to [its] "Advance Notice Of Proposed Criteria Change: Principal Stability Fund Ratings." It explains, "In our review, we will primarily focus on criteria we apply to ratings on such funds in Australia and New Zealand.... As part of this effort, we plan to publish a request for comment outlining our proposed criteria for rating funds in Australia and New Zealand, as well as our proposed and related changes to the criteria we apply globally. This follows the release of our updated rating criteria for global principal stability fund ratings on June 8, 2011. Before publishing our final criteria, we will consider all market feedback received as part of this process. We have three objectives for our proposed criteria: to enhance the transparency of our criteria and the rating process; to help market participants better understand our approach to assigning ratings on funds seeking to maintain principal stability; and to support continued, improved global consistency in our approach to principal stability fund ratings." It continues, "Under the proposed criteria, we plan to retire the regionally specific criteria applied to the ratings on funds in Australia and New Zealand and instead apply the global criteria. This would result in applying our global criteria to assessments of management, credit quality, investment maturity, liquidity, portfolio diversification, index and spread risk, and security-specific risks for those funds in Australia and New Zealand. More specifically, the proposal would include changes from the criteria we used to rate those funds so they will be in line with our global criteria. In conjunction with the review of the criteria we apply to principal stability funds in Australia and New Zealand, our proposal to update the global criteria includes changes to certain diversification thresholds for lower rated funds, among other changes."

Yesterday, Sept. 15, was the sixth anniversary of the Lehman Brothers bankruptcy, and six years ago today, September 16, the money market industry was rocked when the Reserve Fund "broke the buck," only the second fund ever to decline below $1.00. We covered it extensively in the days that followed, including this article "Reserve Primary Fund "Breaks the Buck" Following Run on Assets." We wrote, "In just the second case of a money market mutual fund "breaking the buck," or dropping below the $1.00 a share level, in history, The Reserve's Primary Fund cut its NAV to $0.97 cents.... The top-ranked fund, which held $785 million in Lehman Brothers CP and MTNs, was besieged by redemptions over the past two days. Assets of the total portfolio, which is largely institutional but which includes some retail assets, declined a massive $27.3 billion Monday and Tuesday to $35.3 billion. The next day, Sept. 17, 2008, Crane Data wrote "Ugly All Over: Putnam Inst Closes: Lehman AAA on Warning, Outflows." We wrote, "`Things have gone from bad to extremely ugly in the money market fund world over the past two and a half days since The Reserve's Primary fund "broke the buck." Putnam just announced that it is closing its Putnam Prime Money Market Fund effective today, Moody's has put Lehman Brothers AAA-rated money funds on review for downgrade, and asset outflows, while not as bad as some suggest, were ugly through yesterday. Money fund assets declined by $78.7 billion yesterday, though the Reserve run accounted for $32.3 billion of the decline, according to our Money Fund Intelligence Daily." Read more about the tumultuous events of six years ago in our September 2008 Crane Data News Archives. Treasury Secretary Jacob Lew released a statement yesterday recognizing the 6th anniversary of the Lehman Brothers bankruptcy. It says, "Six years ago this month, our financial system was shocked to its core. The damage this crisis unleashed spread throughout our economy, and the result was massive job loss, waves of business failures, devastating home foreclosures, decimated retirement accounts and an economy on the brink of another Great Depression. It was set in motion by weaknesses in our system -- including irresponsible leverage, excessive risk-taking, reckless and too often predatory lending, and inadequate oversight. Because of the immediate crisis response, the effective policies put in place by the Federal Reserve, both presidents Bush and Obama, the resilience of the American people and the determination of our businesses, our economy is stronger today than it was when the crisis erupted."

Bloomberg wrote on Friday, "BlackRock Money Market Fund Prepares for Negative Yields. The article says: "BlackRock Inc., the world's biggest money manager, told investors in a $1.4 billion-euro ($1.8 billion) liquidity fund that it will take measures to maintain the fund's stable share price after interest rates in Europe turned negative. Blackrock wrote to investors giving 14 days notice of its intention to switch on the Reverse Distribution Mechanism for the ICS Europe Government Liquidity Fund, the New York-based firm said in an e-mailed statement today. BlackRock said the only alternatives outside triggering the mechanism would be to close or wind down the fund. The move follows the European Central Bank's decision to cut the deposit rate to minus 0.20 percent this month, helping drive yields on money market instruments lower and making trading conditions tougher for managers. Record-low yields on government debt have already led some money-market funds to waive fees to keep returns positive. "The 14 days' notice helps to signal to our client base really that negative yields are here to stay," Bea Rodriguez, BlackRock's head of cash management in Europe, said.... "It is the only realistic solution," said Blackrock's Rodriguez. "It's not particular to us, we are really just catching up on this. It's more operationally intense to put this mechanism in place but it's the only way of being able to keep the fund open." BlackRock runs two other euro-denominated liquidity funds -- the 19.4 billion euro Institutional Euro Government Liquidity Fund and the 1.2 billion euro Institutional Euro Asset Liquidity fund." The article continues, "Blackrock said in the statement that it expects money-market funds to still be able to provide returns in line with short-term euro yields and act as a valuable alternative to investors to hold their operating cash. "To most people, whether you have 100 shares at 99 cents or 99 shares at a dollar doesn’t matter, but in money fund land, it raises the specter of breaking the buck -- anything that implies that you're losing money becomes a big deal," Peter Crane, president of money-market researcher Crane Data LLC, said in an interview. "They would much rather find a way to keep the value of the shares stable and yet to cover those negative yields."" See also, Bloomberg's editorial "BlackRock Money Market Funds Refuse to Lose Value". Reuters broke the story Friday with "Blackrock moves to protect net asset value of money market fund", writing, "Global fund manager BlackRock said on Friday it had written to investors in one of its money market funds to tell them it planned to trigger a clause aimed at protecting the value of the fund's assets. The move, called a Reverse Distribution Mechanism, will allow the firm to rebalance the net asset value of the fund so that it remains stable even though yields elsewhere may be negative."

ICI released its latest "Money Market Fund Assets" report, which showed money fund assets increasing for the 5th week out of the past 6. It says, "Total money market fund assets increased by $6.52 billion to $2.59 trillion for the week ended Wednesday, September 10, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $6.14 billion and prime funds increased by $1.53 billion. Tax-exempt money market funds decreased by $1.15 billion." The release continues, "Assets of retail money market funds decreased by $470 million to $902.53 billion. Among retail funds, Treasury money market fund assets decreased by $160 million to $200.65 billion, prime money market fund assets increased by $320 million to $515.62 billion, and tax-exempt fund assets decreased by $630 million to $186.25 billion. Assets of institutional money market funds increased by $6.99 billion to $1.69 trillion. Among institutional funds, Treasury money market fund assets increased by $6.30 billion to $727.04 billion, prime money market fund assets increased by $1.21 billion to $892.00 billion, and tax-exempt fund assets decreased by $520 million to $71.32 billion." Also, American Banker published an opinion piece, "A Simple Fix for the Repo Market" by Scott Hein and Drew Winters. "The most recent financial crisis exposed significant problems with the repurchase agreement market. Unfortunately, policymakers are now gravitating toward a roundabout solution when there is a better, simpler alternative.... To improve the stability of the market, policymakers such as Federal Reserve Bank of Boston president Eric Rosengren have proposed raising capital requirements for companies that own broker-dealers. In theory, holding more capital would make broker-dealers less likely to fall into financial distress. They would therefore be able to maintain access to funding in the repo market." They continue, "An alternative solution exists that would be both less costly and easier to implement. Broker-dealers should be required to provide collateral that any lender would be willing to take, such as Treasury securities.... Rather than use higher capital requirements as an indirect solution to instability in the repo markets, it is far better to address the problem head-on. Low-quality credit securities were at the center of the last financial crisis. Returning to traditional money market securities is the surest way to prevent a reoccurrence." Finally, in the latest of a series of articles on money fund reform, the National Law Review published a piece called "New Money Market Fund Rules Require Review by Retirement Plan Sponsors." The article was written by attorneys from McDermott Will & Emery.

The National Law Review published a recap of the SEC's money market reforms. It's a nice summation of the rules, written by Vedder Price. "On July 23, 2014, on a 3-2 vote, the SEC adopted amendments to certain rules under the 1940 Act, including Rule 2a-7, that govern money market funds. According to the SEC, the rule amendments seek to: (1) limit money market funds' susceptibility to heavy redemptions during periods of market stress, (2) improve money market funds' ability to deal with potential contagion from heavy redemptions, (3) increase risk transparency in money market funds, and (4) preserve, to the extent possible, the benefits of money market funds for investors. The primary rule changes include the requirement for certain money market funds to operate using a floating NAV rather than a stable NAV, and the ability of money market funds to impose liquidity fees and redemption gates in certain circumstances to stem redemptions. In addition, the SEC adopted other rule and form amendments applicable to money market funds, including enhanced diversification and disclosure requirements.... The new rule amendments become effective on October 14, 2014. The compliance date for the floating NAV, liquidity fees and redemption gates amendments is October 14, 2016. The compliance date for the diversification, disclosure and stress testing amendments is April 14, 2016. The compliance date for reports on new Form N-CR is July 14, 2015." The National Law Review also posted a companion article, "SEC Re-Proposes Amendments to Remove References to Credit Ratings from Money Market Fund Rule," which was also penned by Vedder Price. "On July 23, 2014, the SEC re-proposed, with changes, amendments to Rule 2a-7 under the 1940 Act and Form N-MFP that were initially proposed in March 2011 and intended to comply with the requirements of the Dodd-Frank Act that any references to credit ratings in the SEC's regulations be removed and replaced with other standards of creditworthiness.... The re-proposed amendments to remove credit ratings would affect the following elements of Rule 2a-7: (1) determination of whether a security is an eligible security and the distinction between first and second tier securities, (2) credit quality standards for securities with a conditional demand feature, (3) requirements for monitoring securities for ratings downgrades and other credit events and (4) stress testing. As re-proposed, the definition of "eligible security" would be amended to remove references to credit ratings provided by nationally recognized statistical rating organizations (NRSROs). Under the proposed rule amendments, an eligible security would be a security with a remaining maturity of 397 calendar days or less that a money market fund's board of directors (or its delegate) determines presents minimal credit risks, which determination includes a finding that the security's issuer has an exceptionally strong capacity to meet its short-term obligations. This single standard would eliminate the current distinction between first and second tier securities under Rule 2a-7 and therefore the SEC also is proposing to remove the current prohibition on money market funds from investing more than 3% of their assets in second tier securities."

The Federal Reserve posted testimony by Governor Daniel Tarullo before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, on Tuesday. Tarullo discussed capital surcharges for Global Systemically Important Banks (GSIBs) with a penalty based on short-term wholesale funding, among other things. On GSIBs, Tarullo said, "An important remaining Federal Reserve initiative to improve GSIB resiliency is our forthcoming proposal to impose graduated common equity risk-based capital surcharges on U.S. GSIBs. The proposal will be consistent with the standard in section 165 of the Dodd-Frank Act that capital requirements be progressively more stringent as the systemic importance of a firm increases. It will build on the GSIB capital surcharge framework developed by the BCBS, under which the size of the surcharge for an individual GSIB is a function of the firm's systemic importance. By further increasing the amount of the most loss-absorbing form of capital that is required to be held by firms that potentially pose the greatest risk to financial stability, we intend to improve the resiliency of these firms. This measure might also create incentives for them to reduce their systemic footprint and risk profile. While our proposal will use the GSIB risk-based capital surcharge framework developed by the BCBS as a starting point, it will strengthen the BCBS framework in two important respects. First, the surcharge levels for U.S. GSIBs will be higher than the levels required by the BCBS, noticeably so for some firms. Second, the surcharge formula will directly take into account each U.S. GSIB's reliance on short-term wholesale funding. We believe the case for including short-term wholesale funding in the surcharge calculation is compelling, given that reliance on this type of funding can leave firms vulnerable to runs that threaten the firm's solvency and impose externalities on the broader financial system."

The front page of Monday's Wall Street Journal featured a story entitled, "SEC Preps Mutual Fund Rules." The piece, which doesn’t involve money market funds, says, "The Securities and Exchange Commission is preparing new rules to boost oversight of mutual funds, hedge funds and other firms as part of an effort to gain insight into whether the $50 trillion asset-management industry poses risks to the financial system, according to people familiar with the discussions. The SEC is in the early stages of developing requirements, including that asset managers such as Fidelity Investments and BlackRock Inc. give regulators more data about their mutual-fund portfolio holdings and conduct stress tests on their funds to determine how they would weather economic shocks such as a sudden change in interest rates. The SEC staff is developing the rules with the five-member commission but has yet to complete a formal proposal." (Note: Money market mutual funds aren't mentioned in the story, but already have portfolio disclosure and stress testing requirements.) The Journal also published a story Monday, "Expecting Trouble? Here Are Investments to Ponder." It begins, "It may be time for investors to seek out safe harbors." It then talks about one of those safe harbors, cash. Mr. [Will] Hepburn says his firm [Hepburn Capital Management], which was building cash positions for part of the summer, prefers conservative money-market funds such as those focused on U.S. government debt. "If stocks drop 10%, your money-market fund has 10% created buying power when you go back into the stock [market]." He suggests avoiding higher-yielding money-market funds, since some of them may invest in junk bonds [sic]." Finally, the Financial Times wrote "Future of Money Funds Questioned." "On the face of it, an unprecedented series of losses is the last thing the money market industry needs right now. As FT reported last month, at least 10 South African money market funds -- ultra low-risk vehicles that provide short-term funding to governments and companies -- have "broken the buck," meaning their price has fallen below R1 a unit. This is such a rare event in global money market circles that only two other so-called constant net asset value (CNAV) funds have broken the buck in the 43-year history of the sector, both of them in the US."

The Canada-based Centre for Research on Globalization published a strange, poorly-written and ill-informed paper called "Central Banks Lend Massively to the Shadow Banking Sector: The Role of "Money Market Funds." Eric Toussaint writes, "Money Market Funds (MMFs) are financial corporations in the United States and Europe, rarely controlled and little subject to regulations as they act without banking licences. They are closely akin to shadow banking. Supposedly the MMFs act with prudence but the reality is very different. This is cause for great concern given the vast quantities of money they handle, and the sharp drop in their profitability since 2008. In the United States, they managed $2.7 trillion in 2012, a significant drop from the $3.8 trillion in 2008. As investment funds the MMFs collect capital from investors (banks, pension funds, etc.) and use it to make short-term, often day to day, loans to banks and businesses. During the 2000s MMF financing has become an essential short-term source of liquidities for banks. The biggest are Prime Money Market Fund, Created by JP Morgan, the biggest bank in the United States, is worth $115 billion. Wells Fargo the 4th largest bank in the United States has an MMF managing $24 billion. Goldman Sachs the 5th biggest bank controls an MMF worth $25 billion. US banks also operate MMFs in Europe; JP Morgan (E18 billion euros), BlackRock (E11.5 billion), Goldman Sachs (E10 billion), alongside European banks such as BNP Paribas (E7.4 billion), and Deutsche Bank (E11.3 billion). Some MMFs also operate in British pounds. Michel Barnier (European Commissioner for the Internal Market and Services) has announced that he would like regulations to be imposed on this activity, but this is most likely to remain nothing more than a statement of good intentions." In other news, a Canadian press release entitled, "Stone Asset Management Limited to Terminate Money Market Fund, says, "Stone Asset Management Limited today announced plans to terminate the Stone & Co. Flagship Money Market Fund Canada. Effective September 5, 2014 units of the Fund will no longer be available for purchase and will be terminated on or about November 7, 2014."

Bloomberg's Businessweek took a closer look at the Fed's RRP facility in the article, "Money Funds Urge Wary Fed to Accept Closer Embrace on Rate Floor." Christopher Condon wrote: "The people who help manage $2.6 trillion of money-market mutual funds have a message for the Federal Reserve: When the time comes to raise interest rates, you may have to rely on us more than you would like. The managers are urging the Fed to be open to expanding a program intended to help nudge short-term rates higher by removing cash from the financial system through overnight transactions with money funds. Some Fed officials, such as New York Fed President William C. Dudley, are concerned that depending too heavily on the program could increase instability in a financial crisis. The fund managers warn that the Fed risks undermining the program altogether if it sticks with current constraints on borrowing through the facility. "They need to be flexible," David Sylvester, head of money-market funds at the investment unit of San Francisco-based Wells Fargo & Co., said in an interview. "They are in uncharted waters in trying to raise rates." The program -- called the overnight reverse repurchase facility -- exists because the Fed will face an unprecedented situation when it eventually moves to tighten credit in response to a recovering economy, most likely sometime next year. The Fed's usual means for doing so, raising its benchmark federal funds target rate to make it more expensive for banks to borrow from one another overnight, may not work this time. That's because the central bank has spent the past six years quadrupling its balance sheet to more than $4 trillion in an effort to stimulate the economy, flooding the banking system with excess reserves. As a result, banks have less need to borrow reserves from each other in the fed funds market, and consequently raising the fed funds rate -- which has been near zero since 2008 -- won't be effective in controlling short-term borrowing costs, market participants say. "It doesn't seem there are enough participants in the fed funds market at this point to actually allow that to occur," said Deborah Cunningham, chief investment officer for global money markets at Pittsburgh-based Federated Investors Inc." It goes on, "Comments from Fed governors reflect sharp divisions. St. Louis Fed President James Bullard said the Fed will probably use the program to borrow "several hundred billion" dollars from money funds, while Philadelphia Fed President Charles Plosser said "we may not need the reverse repo facility at all." ... The minutes and other comments revealed a continuing debate at the Fed over how deeply officials want to engage with non-bank counterparties, according to Alex Roever, head of U.S. interest-rate strategy at JPMorgan Chase & Co. in Chicago. "The view within the FOMC is evolving," he said. "But if they want to keep a floor under those rates, they’ll need to deal with those counterparties." While the reverse repo facility is maintaining that floor with about 95 participating funds and their $10 billion caps, fund managers point out the tool hasn't been tested in a scenario where the Fed is seeking to increase interest rates." Also, in other news, ICI released its weekly "Money Market Fund Assets" yesterday, saying, "Total money market fund assets decreased by $8.73 billion to $2.59 trillion for the week ended Wednesday, September 3, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $10.87 billion and prime funds increased by $1.00 billion. Tax-exempt money market funds increased by $1.14 billion."

Western Asset, Legg Mason's fixed income subsidiary, announced the launch of the Western Asset Short Term Yield Fund (LGSTX), a short term bond fund that seeks to generate high current income while maintaining a low sensitivity to interest rate volatility. The fund will invest in U. S. dollar-denominated investment grade fixed income securities. The total portfolio duration is expected to be one year or less. The strategy "may be appropriate for investors seeking the potential for greater yield than cash equivalent securities while mitigating volatility via a low duration fixed income portfolio." The fund has both US and Cayman spokes and the ticker symbols are -- Class FI: LGSYX; Class I: WTYIX; Class IS: LGSTX. The fund's SEC filing says, "The fund invests in U.S. dollar denominated investment grade fixed income securities, including corporate debt securities, bank obligations, commercial paper, asset-backed and mortgage-backed securities, structured instruments and securities issued by the U.S. government and its agencies and instrumentalities, U.S. states and municipalities, or foreign governments. Foreign securities will generally be limited to issuers, including banks, corporations and foreign governments, located in the major industrialized countries. The fund is not a money market fund and does not seek to maintain a stable net asset value of $1.00 per share. Under normal circumstances, the effective duration of the fund's portfolio, as estimated by the subadviser, is expected to be one year or less. Duration is a measure of the underlying portfolio's price sensitivity to changes in prevailing interest rates.... The fund expects to maintain a dollar-weighted average effective maturity of not more than 18 months, but in any event will maintain a dollar weighted average effective maturity of not more than three years. The "average effective portfolio maturity" of the fund is a weighted average of all the maturities of the securities in the portfolio, computed by weighting each security's effective maturity, as estimated by the subadviser, by the market value of the security." The portfolio management team consists of Stephen Walsh, Kevin Kennedy and Martin Hanley. On fees, the prospectus says, "Total annual fund operating expenses after waiving fees and/or reimbursing expenses [are]: Class FI 0.70; Class I 0.45; Class IS 0.35."

Marketwatch published commentary yesterday by Robert Powell titled "Your 'Safe' Money Market Fund May Be At Risk." Powell, editor of Marketwatch's Retirement Weekly, writes "The Securities and Exchange Commission earlier this summer released new money-market mutual regulations that those saving for retirement might want to review, especially if they are among the millions who have invested on average anywhere from 2% to 6% of their 401(k) in such funds. The new rules, which don't go into effect until the fall of 2016, separate money-market mutual funds into two distinct groups: retail-money market funds, which will be allowed to keep the long-standing $1 per share value and institutional prime money market funds, which will have a floating net-asset value (NAV) that would fluctuate based on the under market-based value of fund assets. In other words, these funds can break a buck." He continues, "So what needs to change? Well, plan participants who invest in money-market mutual funds should check whether their funds will be among those that will have a floating NAV or a fixed $1 per share NAV. What's more, they should check whether their money-market fund will have redemption fees and liquidation windows. Next, plan participants will have to evaluate, if they have a floating rate money-market fund, whether they want so-called safe money to rise and fall in value, even if it's only be a small amount. And finally, the new regulations should give plan participants yet one more reason to review their retirement plan."

Bloomberg writes, "Euro-Area Money Market Rates Fall Below Zero for First Time." The article says, "A gauge of overnight borrowing costs in euros fell to a negative level for the first time as the European Central Bank's penalty charge on deposits damped money-market rates and yields in the region tumbled." (Note: Crane Data will be hosting its 2nd Annual European Money Fund Symposium Sept. 22-23 in London, where rates and regulations will be major topics of discussion. Visit www.euromfs.com for details and to register.) The Bloomberg piece continues, "The euro overnight index average, or Eonia, fell to minus 0.004 percent, signaling banks would receive no interest for making the loans, compared with 0.011 percent yesterday. Borrowing costs are tumbling after the ECB lowered its deposit rate to minus 0.1 percent on June 5 in an attempt to boost the flow of cash into the economy and stave off the threat of deflation. Bonds surged across the region this week after ECB President Mario Draghi's comments at the Federal Reserve Bank of Kansas City's annual economic symposium in Jackson Hole, Wyoming, fueled speculation that officials may announce new stimulus as early as their Sept. 4 monetary-policy meeting." Finally, note too that Crane Data's latest Money Fund Intelligence International shows that Euro Money Market Fund rates all remain above zero as of Friday's data.

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