Daily Links Archives: September, 2016

Citi published "A Primer on Variable Rate Demand Notes. It says, "This primer seeks to explain the basics of Variable Rate Demand Notes (VRDNs) or Variable Rate Demand Obligations (VRDOs). VRDNs are instruments with long-term nominal maturities but which bear variable, short-term interest adjusted at pre-determined intervals. A defining feature of the VRDN is the put option, whereby a holder can tender the note, with sufficient advance notice, and receive par plus accrued interest. Thanks to the features available to the VRDN issuers and holders explained in this primer, VRDNs have the liquidity and principal preservation characteristics of money market paper, allowing for pricing on the short end of the curve. VRDNs must be supported by credit/liquidity support facilities. There are four basic combinations of options, which we describe in detail below. We also explain the current conditions surrounding the VRDN market and the history of VRDNs during the 2008 crisis, as well as VRDN documentation such as the liquidity facility agreements and the indenture." It adds, "Starting in 2008, turmoil in the money markets caused tectonic shifts in the supply-demand dynamic surrounding VRDNs. At the time, much of the VRDN universe was covered by SBPAs supplemented by bond insurance. As various insurers were downgraded, tax-exempt money managers began to put the notes back in droves. Remarketings failed with increased frequency as more and more MMFs, the traditional buyer base for VRDNs, were interested in tendering their notes, not buying more.... SIFMA did eventually fall back down, especially once crossover buyers like foreigners and tax-exempt entities bought the paper because the nominal rates were so attractive. However, the lessened demand from MMFs led to a decline in the outstanding market size. That decline still continues, and the market's size is a fraction of its 2008 highs."

The Wall Street Journal writes, "Demand For Fed's Repo Program Surges, Aided By Money-Market Fund Rules." It says, "The Federal Reserve Bank of New York is seeing earlier than normal demand for its overnight "repo" facility in part thanks to new rules impacting money-market funds, indirectly lifting a key measure of short-term borrowing costs on Wall Street. The rush to put money in the repo program, which the Fed designed to soak up excess cash in money markets and help the central bank control interest rates, is sucking cash from the private market for the overnight loans known formally as repurchase agreements." The WSJ piece adds, "The Fed's facility is a boon to money-market funds, many of whom are choosing to convert to holding government only securities in advance of new rules taking effect October 14. The Fed facility helps them because it pays participants interest on their cash and gives them U.S. Treasury bonds as collateral overnight out of the Fed's portfolio. Demand for the program also comes as banks are reining in their activities around month- and quarter-end dates to make their balance sheet snapshots appear safer under post-crisis regulations. The Fed's overnight repo program on Wednesday, two days before quarter end, took in $272 billion from banks and money-market funds eligible to trade with the New York Fed, its seventh highest volume since the Fed began testing it in 2013."

ICI writes "For Money Market Funds, Massive Preparation Has Paid Off in Smooth Transition Transition" in a new "ViewPoint. It says, "By October 14, the money market fund industry must fully implement the 2014 money market fund reforms passed by the Securities and Exchange Commission (SEC), cementing major changes for investors and fund complexes. ICI has been in close constant contact with members since the rules were enacted in 2014 and has been working with operations and other professionals throughout the industry to ensure an orderly transition -- including fully informing investors -- to the new regime in October. Throughout this time, funds have been actively creating and testing new systems and tools to implement requirements under the new rule. The upcoming changes have led to significant shifts in money market fund assets. These shifts were anticipated, and the thoughtful planning by industry leaders has helped to smoothly manage the $910 billion in money market fund asset flows we have seen to date. At ICI, we believe the industry is well positioned to navigate the remaining fluctuations as the new rules take hold. To ensure a smooth transition to the new regime, money market funds have been beefing up their liquidity, investing predominantly in securities with very short maturities. Data on the weighted average maturity (WAM) and weighted average life (WAL) of money market fund holdings show a significant shortening in each category. With shorter maturities, funds will have ample liquidity to accommodate high levels of outflows before and after October 14." The piece adds, "For more than two years now, operations, investment, and legal professionals in fund complexes across the United States have been working steadily to implement the SEC's new rules. ICI has helped coordinate important work streams addressing implementation issues in the following areas: Identifying retail versus institutional investors; Preparing funds to float their NAVs, including calculating NAVs to four decimal places; Preparing for intraday processing for floating NAV money market funds; and, Enabling funds to impose liquidity fees and redemption gates. Each of these work streams requires a different area of focus and expertise, so here's more detail about each stream and what it means for investors."

A press release entitled, "PowerShares Launches Variable Rate Investment Grade Portfolio (VRIG)," and subtitled, "PowerShares and Invesco Fixed Income (IFI) partner on the first and only ETF with diversified exposure to multiple fixed income asset classes consisting of high-quality variable and floating rate securities," says, "Invesco PowerShares Capital Management, LLC, a leading global provider of exchange-traded funds (ETFs), announced today the launch of PowerShares Variable Rate Investment Grade Portfolio (VRIG). The ETF will be actively managed by IFI, which collectively has more than 34 years of experience in fixed income investing. With global interest rates at historical lows due to fiscal stimulus, VRIG offers investors a fixed income alternative that may benefit from rising short term rates. Rather than trying to time when interest rates may rise, the ETF seeks to be defensively positioned for higher short term rates, providing investors with the opportunity for current income." It quotes Dan Draper, Global Head of PowerShares, "With structural money market reform coming in October, we are pleased to be adding VRIG to our ETF lineup of variable rate products. Companies across the U.S. have not experienced real rate increases for years, but with Libor rising they may have to pay higher rates on their loans while new money market rules could also slow demand for short-term debt." The release adds, "The addition of VRIG expands PowerShares industry leadership position with more than $6B in assets under management (AUM) in floating and variable rate ETFs. VRIG will focus on investment grade assets with ample liquidity across a broad spectrum of asset classes. Broadly, the ETF will focus investments in floating rate US Treasuries, government sponsored agency mortgage-backed securities, US Agency debt, structured securities and floating rate investment grade corporates.... VRIG will primarily invest in variable and floating rate investments, which have coupons that adjust with short term interest rates. Should short term rates increase, the variable rate coupons are designed to adjust upward and produce a higher yield. Conversely, should short rates decrease, the yield of variable rate securities will be lower. Additionally, as the result of their significantly lower durations relative to fixed rate bonds, prices of variable and floating rate bonds have generally fared better in rising rate environments."

Pensions & Investments featured an article entitled, "Money market fund reform's challenges for asset owners." Written by Dreyfus' J. Charles Cardona, the piece says, "This fall, on Oct. 14, new Securities and Exchange Commission regulations will upend the longtime practice of institutional asset owners investing cash in money market funds to maintain principal while enjoying daily liquidity and earning a competitive return. Asset owners will have to re-evaluate their appetite for certain cash investment vehicles. Under the regulations, institutional prime money market funds, which hold commercial paper and other non-Treasury securities, will have a floating, market-based net asset value, rather than the traditional stable $1 per share net asset value. In addition, the regulations allow these funds to impose redemption gates and liquidity fees of up to 2% of assets to prevent abrupt outflows from funds in times of severe market stress. Broadly speaking, the SEC rule changes are intended to increase transparency and the resilience of money market funds during significant market downturns, while also maintaining the many benefits that the funds offer, such as daily liquidity, safety of principal and relatively low risk profiles. Many asset owners view the rule changes as complex and burdensome and have sought to move their money into more conservative MMFs -- basically holding only government securities -- which will still offer rapid access to cash and stable net asset values. Or they have sought out alternative vehicles, such as separately managed accounts, ultrashort bond funds and exchange-traded funds. But for others who are willing and able to cope with the new regulations and the operational complexity within institutional prime MMFs, higher potential yields might be on the horizon." See too Reuters' "U.S. money market rules already affecting markets, sparking debate".

AFP features an article entitled, "Here's a 9-Point Checklist to Help Treasurers Prepare Their Portals for Money Market Fund Reform. Written by ICD's Tom Knight, it says, "October 14, 2016 is "E-Day" for U.S. corporate treasurers, as it is the effective date for Rule SEC 2a-7. Money market fund reform is nearly upon us, but this is not a late breaking story. After several years of industry deliberation, additional MMF reform was finally proposed and adopted in July 2014. It will transform the trading and risk management landscape for treasury practitioners and cash managers in profound and practical ways. Yet, the immediate consequences will vary greatly depending on your department's level of preparedness. Those treasury functions that have taken a more disciplined approach may have already taken on new liquidity portfolio diversification and optimization strategies, updated compliance guidelines, revised redemption scheduling to better synchronize with new intraday strike times, adopted new simplified tax accounting methodologies and deployed deeper exposure analytics for managing broader counterparty risks.... The following checklist will help you determine whether your treasury portal is prepared for MMF reform. Your portal should: Display VNAV share and EOD pricing. Show visibility to settlement strike times. Track the last known public price (including intraday), and show up-to-date cash positions based on that pricing. Compare VNAV MMF outflows and weekly and daily liquidity. Compare historical VNAV MMF outflows and weekly and daily liquidity in reports. Have compliance features that alert and/or block you from investing in VNAV MMFs with weekly liquidity below your established guideline. Have compliance features that alert you if a VNAV MMF in your portfolio has weekly liquidity below your established guideline. Generate gain/loss reports to streamline the simplified tax accounting method for VNAV MMF reporting. Enable you to generate what-if scenarios that show performance and exposure analytics to help generate optimal portfolios."

The Federal Reserve Board issued its latest Statement on interest rates yesterday, which says, "Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further.... Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."

Morgan Stanley filed a Prospectus Supplement for its Active Assets money market funds, including Active Assets California Tax-Free Trust, Active Assets Government Securities Trust, Active Assets Money Trust, and Active Assets Tax-Free Trust, that states, "The Board of Directors of each Fund approved the termination (the "Termination") of each Fund. The Termination is expected to occur on or about September 21, 2016. Each Fund will suspend the offering of its shares to all investors at the close of business on September 20, 2016." (See our August 15 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes.") Since July 31, these Morgan Stanley funds, along with several other Prime and Tax Exempt retail funds that appear to be liquidating, total 20.0 billion.

Bloomberg writes, "No Respite in Muni Money Market Rout Seen as Key Rate Surges." It says, "A corner of the municipal-bond market that has quietly enjoyed near-zero borrowing costs for more than six years has seen interest rates spike by nearly 7,000 percent since February as investors flee tax-exempt-money-market funds. And it may soon get worse with investors starting to price in higher benchmark rates in recent weeks. While the Federal Reserve isn't seen tightening at this week's policy meeting, U.S. central bankers may still boost rates as soon as December, futures contracts indicate. "If the Fed hikes, you could see higher short-term rates," said Anthony Valeri, fixed income strategist for LPL Financial in San Diego. Investors in munis with yields that reset periodically "will see higher yields," he said." The article adds, "Municipal money-market assets have shrunk $110 billion year-to-date, according to Bank of America Merrill Lynch data. They're now at the lowest since 1999 as investors shifted money into funds that buy only government debt, which are exempt from the new Securities and Exchange Commission rules that require floating net-asset values and impose liquidity fees and redemption suspensions under certain conditions. Since the first of the year, the yields as measured by the SIFMA Municipal Swap index, a measure of tax-exempt debt with rates that reset every week, have risen to about 0.7 percent from 0.01 percent, the rate at which it had been near for about six years."

ETF Trends writes "New Goldman Sachs Low-Duration Treasury ETF Offers Cash Alternative." It explains, "Goldman Sachs added a ultra-low-duration Treasury bond exchange traded fund in what may be a suitable alternative for investors seeking to park their cash. On Thursday, Goldman Sachs launched the Goldman Sachs Treasury Access 0-1 Year ETF (GBIL). GBIL comes with a 0.14% expense ratio. "The bond trading environment has become more complicated. We wanted our first fixed-income ETF to provide investors a low cost way to obtain the credit quality and income they look for in the Treasury markets, but with greater transparency and ease of use," Michael Crinieri, GSAM's Global Head of ETF Strategies, said in a note."" It adds, "GBIL will try to reflect the performance of the Citi US Treasury 0-1 Year Composite Select Index, which is comprised of U.S. Treasury Obligations with a maximum remaining maturity of 12 months.... The fund has an effective duration of 0.40 year." They quote Goldman, "ETF to provide a same-day creation and redemption capability, offering the potential for faster access to liquidity.... We believe this benefit enhances the versatility of the fund, offering a wider range of potential applications for investors who may need more timely access to cash." Finally, they write, "The ETF is also the first to offer same-day settlement of creations and redemptions in the short-term U.S. Treasury market, according to Goldman Sachs. GBIL allows liquidity providers or so-called authorized participants to create or redeem shares and settle within hours instead of days."

The Financial Times writes, "SEC money market fund reforms help push Libor rates higher," which says, "Forget Janet Yellen. Mary Jo White just raised interest rates. While everyone has been watching the Federal Reserve chair for clues on whether there will be a change in monetary policy this month, new rules from the Securities and Exchange Commission, chaired by Ms. White, have sent a number of key rates up regardless. The SEC's long-awaited and much-needed money market fund reforms come into effect next month, reducing the attractiveness of funds that invest in commercial paper and other short-term debt issued by banks. Assets in these so-called prime funds have fallen by about $330bn to $789bn over the past three months, causing a collapse in demand for short-term paper and a big jump in Libor, the London interbank offered rate." The FT piece adds, "The current rate may be slightly elevated. Prime funds are expecting still more money to flee in the weeks before the October 14 deadline, perhaps another $200bn, but because the exact amount is not yet clear some funds are being prudent and pulling back almost entirely from the market. They will return next month. On the other hand, while demand has been temporarily reduced, so has supply, with commercial paper issuers coming to market in fewer numbers since the start of the summer." See also, WSJ's "Prime Money Market Funds Are Bracing for More Outflows"."

Bloomberg writes "There's a $300 Billion Exodus From Money Markets Ahead." The article says, "With a seismic overhaul of the $2.6 trillion money-market industry weeks away from kicking in, money managers are bracing for a last-minute exodus of as much as $300 billion from funds in regulators' cross hairs. Prime funds, which seek higher yields by buying securities like commercial paper, are at the center of the upheaval. Their assets have already plunged by almost $700 billion since the start of 2015, to $789 billion, Investment Company Institute data show. The outflow has rippled across financial markets, shattering demand for banks' and other companies' short-term debt and raising their funding costs." The piece continues, "For the biggest institutional prime funds tracked by Crane Data LLC, the weighted average maturity of holdings fell to an unprecedented 10 days as of Sept. 12. It's not just floating net-asset values that investors are avoiding. Prime funds can also impose restrictions such as redemption fees. Amid the tumult, money-fund assets have held steady because most of the cash leaving prime and tax-exempt funds has streamed into less risky offerings focusing on Treasuries and other government-related debt, such as agency securities and repurchase agreements. These funds are exempt from the new rules, which the U.S. Securities and Exchange Commission issued in 2014." Finally, Bloomberg adds, "With the Fed's target rate still not far from zero, money-fund investors looking to pad returns may overcome their aversion to prime funds. Institutional prime funds' seven-day yield was 0.24 percent as of Sept. 12, compared with 0.17 percent for government funds, according to Crane Data." They quote BNY Mellon Cash Investment Strategies' Tracy Hopkins, "You'll see the prime-fund space continue to shrink until we hit mid-October.... After that, I would not be surprised to see assets return, once customers get accustomed to the floating NAVs and want to earn incremental yield over government money-market funds."

A press release entitled, "Moody's: Money market funds likely to reduce ABCP investments with new US and European regulation," says, "The overall volumes that money market funds (MMFs) invest globally in asset-backed commercial paper (ABCP) will likely fall as the prime MMF industry shrinks, says Moody's Investors Service in a report published today. Nevertheless, ABCP will remain an important source of investment diversification for MMFs. Moody's report, entitled "Prime MMFs -- Global: ABCP Will Remain a Source of Investment Diversification." VP & Senior Analyst Marina Cremonese comments, "Among money market funds that invest in ABCP, the share of ABCP assets relative to overall portfolio assets will likely only decline moderately. This is credit positive because the funds will not lose the benefit of investment diversification even as their investment strategies become more conservative." Moody's adds, "In the US, money market fund reforms -- effective as of October 2016 -- are causing an industry shift toward government MMFs at the expense of prime MMFs. The reforms will also impose multiple diversification thresholds on ABCP programs, which will make investing in ABCP more complex for MMFs. Meanwhile, in Europe, money market fund reforms -- likely effective from 2019 -- might restrict ABCP investments, by constraining the type of ABCP that MMFs can hold, as well as their maximum exposure. Despite a 15% drop in the volume of rated ABCP outstanding between March 2012 and March 2016, rated prime MMF portfolios held 7.6% of their assets in ABCP in March 2016 compared to 7.9% in March 2012. Currently, just a bit more than half of rated prime MMFs invest in ABCP. Of Moody's rated funds, 46% have no ABCP exposure, whilst 71% have an exposure of less than 10%."

Wells Fargo Asset Management's latest "Portfolio Manager Commentary says, "Reform-related cash flows out of prime and municipal money market funds so far can be broadly classified into three categories. The first type of cash flow is sponsor- or advisor-driven. In this case, the money market fund sponsor or advisor has decided to convert its prime or municipal money market funds from its current strategies to one that doesn't have a floating net asset value (NAV) and/or the ability to impose fees and gates -- in other words, a government fund strategy. Additionally, given a perceived lack of interest from current and prospective shareholders, some fund complexes have determined that they no longer wish to offer such a product and have liquidated their prime and/or municipal money market funds altogether. Of note is that this type of conversion has affected both institutional and retail funds, which suggests fees and gates, rather than the variable NAV, is the main focus of the decision-making process. By and large, the prime-to-government conversions or prime fund liquidations have already occurred, with only a small amount still to liquidate between now and October 14. These changes amounted to an estimated $272 billion at the end of May (Crane Data). In addition, we've also seen approximately $100 billion of sponsor-driven flows from municipal funds into government funds. The second type of reform-related cash flow in the money markets has been intermediary-driven. This occurs when an organization (such as a brokerage, wealth advisory, or trust department) with some sort of trust or custody relationship of client assets decides that it will not support funds that have either a variable NAV or can impose fees and gates. Characteristics of these holdings are that they typically cover a large number of clients with fairly small balances as part of an overall relationship, and the money market fund component is usually a sweep product. Other types of holders, though, can be large, institutional relationships, and the cash holdings in money market funds are usually there for a reason -- for example, either required by something like a trust document or bond indenture or serving as a temporary investment vehicle in anticipation of making scheduled payments, such as what would occur with a concentration account associated with mortgage- or asset-backed securities. Intermediary-driven changes to prime and government funds seem to have characterized the bulk of the fund flows during the summer. The third wave of fund flows has yet to occur in any meaningful way. Direct holders of the funds have not only been silent as to their intentions for their cash positions but also have yet to make significant changes that are related to money market reform. These clients typically have large cash balances, trade directly with funds or through investment portals, and are institutional in nature (think corporate or state treasurers, other investment managers, or endowments or trusts, for example). One thing portfolio managers think they know about this type of money, based on cash-management surveys conducted over the past few years, is that some of it will flow from prime funds to government funds. Portfolio managers also know that these flows likely will occur sometime before the implementation date of October 14. However, two big unknowns are shaping portfolio management strategies: when the flows will occur and what the size of the flows will be. As a result of this uncertainty, portfolio managers have implemented strategies to bring their liquidity position to a very high level -- maybe even verging on 100% -- by October 14 with the goal of meeting liquidity needs."

Bank of America Merrill Lynch published an update on Asset Managers and Money Funds entitled, "Money market reforms creating some noise – outlook for flows, firms, & the rate market." The piece, written by Michael Carrier and Mark Cabana, says, "Money market fund (MMF) regulations that are coming into effect on October 14th have and will continue to impact money market flows and short-term interest rates in the market. The regulations target the prime and tax-exempt part of the market ($1.0T in assets) and favor government MMFs. In this note, we discuss the 2014 and 2010 MMF regulations, the timeline, the potential flow & firm impact, and short-term interest rate implications." It explains, "Post the GFC (Global Financial Crisis), the SEC has passed two sets of MMF rules - 2010 and 2014. The 2014 amendments to Rule 2A-7, taking effect this October, aim to increase pricing transparency (and risk awareness), by requiring institutional prime and tax-exempt MMFs to report and trade on intraday fund NAV (vs. the prior fixed $1 NAV). The rule also enables fund boards to impose redemption fees of up to 2% and suspend redemptions for up to 10 days within a given 90-day period, in order to facilitate orderly redemptions of troubled MMFs. In addition to the 2014 amendments, in 2010 the SEC passed other rules targeting MMF liquidity, credit quality, and maturity, among other focus areas.... Since the new rules make prime and tax-exempt funds more complex (floating NAV for institutional and redemption fees/gates for retail and institutional), users have and will likely continue to favor government MMFs in our view. Thus far, about $570B has moved out of prime funds ($90B from tax-exempt) and $745B has moved into government funds, but we still see the potential for another $100-300B in assets to move between now and the Oct 14th deadline. However, post the deadline and depending on normalizing yields, we expect some of the assets to return to prime funds, possibly up to 25% of the recent outflows." Finally, they write, "Among public asset managers, FII and LM [Federated Investors and Legg Mason, which owns Western Asset Mgmt.] have the greatest proportion of their AUM in money market funds, including institutional prime and tax-exempt. We expect a modest negative mix shift in asset manager MMF segments, with less than 1% revenue impact for all firms, though FII could be a bit higher, depending on where the assets end up. That said, the MMF regulations could motivate smaller players to exit the MMF business and lead to share gains for the larger MMF firms."

Prime assets fell broke below the $800 billion level, their lowest level in almost 20 years (since 1997). ICI's latest "Money Market Fund Assets" report shows MMFs overall decreasing $29.5 billion in the latest week. Prime funds fell $37.3 billion after falling $54.1 billion last week; they've declined in 14 out of the past 15 weeks (-$374.8B) and have averaged outflows of $25.0 billion a week since June 1. Government funds gained just $9.2 billion in the past week. Since Oct. 29, 2015, Prime assets have fallen by a massive $669.1 billion, or 45.9%. Govt MMFs have increased by $741.5 billion during this same time (up 73.2%) while Tax Exempt MMFs have fallen by $94.6 billion (-38.6%). YTD in 2016, Prime MMFs are down by $494.5 billion, or 38.5% while Govt MMFs are up by $534.3 billion, or 43.8%. Over the past 6 weeks, Prime MMFs have fallen by 200.7 billion and they've fallen by 332.2 billion over the past 13 weeks. (Govt MMFs have risen 213.8 billion over 6 weeks and 357.7 billion over 13 weeks.) ICI's latest release says, "Total money market fund assets decreased by $29.49 billion to $2.69 trillion for the week ended Wednesday, September 7, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $9.18 billion and prime funds decreased by $37.31 billion. Tax-exempt money market funds decreased by $1.36 billion. Assets of retail money market funds increased by $2.75 billion to $934.05 billion. Among retail funds, government money market fund assets increased by $6.98 billion to $503.62 billion, prime money market fund assets decreased by $3.08 billion to $312.82 billion, and tax-exempt fund assets decreased by $1.16 billion to $117.62 billion. Assets of institutional money market funds decreased by $32.23 billion to $1.76 trillion. Among institutional funds, government money market fund assets increased by $2.20 billion to $1.25 trillion, prime money market fund assets decreased by $34.23 billion to $476.43 billion, and tax-exempt fund assets decreased by $200 million to $32.73 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $1.755 trillion, while Prime assets are now at $789.3 billion. The release explains, "Assets of retail money market funds decreased by $2.35 billion to $931.19 billion. Among retail funds, government money market fund assets increased by $6.00 billion to $496.51 billion, prime money market fund assets decreased by $6.17 billion to $315.90 billion, and tax-exempt fund assets decreased by $2.18 billion to $118.77 billion…. Assets of institutional money market funds decreased by $8.15 billion to $1.79 trillion. Among institutional funds, government money market fund assets increased by $42.21 billion to $1.25 trillion, prime money market fund assets decreased by $47.88 billion to $510.66 billion, and tax-exempt fund assets decreased by $2.48 billion to $32.93 billion." ICI adds, "Notes: In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." Crane Data's latest Money Fund Intelligence XLS shows Prime assets lost $131 billion in August, their third worst month ever. (Prime MMFs lost 142 billion in November 2015 when Fidelity Cash Reserves converted from Prime to Government and they lost 448 billion in September 2008 when Reserve Primary Fund "broke the buck".)

Wells Fargo announced plans to merge two Tax Exempt MMFs in a filing. The Prospectus Supplement for Wells Fargo Municipal Money Market Fund says, "At a meeting held on August 9-10, 2016, the Wells Fargo Funds Trust Board of Trustees unanimously approved the merger of the Wells Fargo Municipal Money Market Fund ("Target Fund") into the Wells Fargo National Tax-Free Money Market Fund ("Acquiring Fund"). The merger was proposed by Wells Fargo Funds Management, LLC, investment manager to the Wells Fargo Funds. The merger is subject to the satisfaction of a number of conditions, including approval by the shareholders of the Target Fund at a special meeting of the shareholders expected to be held in December 2016. The merger is intended to be a tax-free transaction and it is anticipated that no gain or loss will be recognized by shareholders as a result of the merger for U.S. federal income tax purposes. Additionally, fund shareholders will not incur any sales loads or similar transaction charges as a result of the reorganizations. The merger, if it is approved by shareholders and all conditions to the closing are satisfied, is expected to occur in January 2017. Prior to the merger, shareholders of the Target Fund may continue to purchase and redeem their shares subject to the limitations described in the Target Fund's Prospectus. No shareholder action is necessary at this time. Additional information, including a description of the proposed merger and information about fees, expenses, and risk factors, will be provided to shareholders of the Target Fund in a Prospectus/Proxy Statement that is expected to be mailed to shareholders in October 2016. The Prospectus/Proxy Statement will provide information regarding the date, time and location of the shareholder meeting where the merger will be considered. Only shareholders of record as of the close of business on September 30, 2016 will receive the Prospectus/Proxy Statement and will be entitled to vote at the meeting or any adjournment(s) thereof."

The Federal Reserve Bank of New York published a "Statement Regarding Reverse Repurchase Transaction Counterparties," which says, "Effective today, the New York Fed is revising the RRP Counterparty Eligibility Criteria for government-sponsored enterprises and money market funds. A money market fund (an open-end management investment company that is organized under the laws of a State of the United States, registered under the Investment Company Act of 1940, that holds itself out as a money market fund, and is in compliance with the requirements of Rule 2a-7 under such Act) must have, measured at each month-end for the most recent six consecutive months, either net assets of no less than $5 billion or an average outstanding amount of RRP transactions of no less than $1 billion. A GSE (a government-sponsored enterprise chartered by the U.S. Congress) must have an average daily outstanding amount of RRP transactions of no less than $1 billion for the past three months or have an average daily amount outstanding of overnight money market transactions of no less than $100 million over the past three months. As a result of these changes, the number of expanded reverse repo counterparties is expected to be around 150. All interested firms that are deemed to be eligible will be added to the RRP counterparty list. All RRP counterparties are expected to satisfy the continued eligibility criteria. The New York Fed may remove an entity from the RRP counterparty list if such counterparty fails to continue to meet any of the eligibility criteria."

Marketwatch's Chuck Jaffe writes "Your money-market fund is about to undergo some changes." The opinion piece says, "The [prime to government conversion] change is mostly under the radar, and will have no real impact on risk or return. It's part of an industry-wide overhaul of the money-fund business that would be getting a lot of attention if the group had a decent yield and investors felt it was anything more than a parking place for their cash.... Under the new rules, institutional and municipal money-market funds will move from the stable $1 share price to a floating net asset value. Retail funds sold to individual investors will maintain the buck as their pricing standard. Further, the rules allow for all money funds to temporarily prevent investors from making withdrawals -- or to impose fees on redemptions -- during times of extreme volatility. Funds are moving from prime funds to government funds because the rule changes don't apply to retail funds that invest only in the debt of the federal government and agencies such as Fannie Mae and Freddie Mac. Firms including Fidelity Investments, Franklin Templeton and others already have made the change, affecting billions of dollars. Shareholders barely noticed. This isn't like changing an asset allocation to buy a government bond fund; instead, it's deciding between safe and safer." The piece adds, "The difference -- the cost to you as an investor -- is "about 0.1 [percentage points] max," said Peter Crane of Crane Data, publisher of Money Fund Intelligence, "which isn't much in real terms, though it is a lot when it comes off a yield of about 0.2 max." Investors who don't want to lose that extra yield can stick with prime money funds."

Prime assets fell hard again, heading towards $825 billion, while Government money fund assets jumped again. Govt MMFs are now more than twice the size of Prime assets for the first time ever. ICI's "Money Market Fund Assets" report shows MMFs overall decreasing $10.5 billion in the latest week. Prime funds fell $54.1 billion -- their 15th decline out of the past 16 weeks (-$354.1B). Government funds gained $48.2 billion in the past week. Since Oct. 29, 2015, Prime assets have fallen by a massive $631.8 billion, or 43.3%. Govt MMFs have increased by $732.2 billion during this same time (up 72.2%) while Tax Exempt MMFs have fallen by $93.3 billion (-38.1%). YTD in 2016, Prime MMFs are down by $457.2 billion, or 35.6% while Govt MMFs are up by $524.9 billion, or 43.0%. Over the past 5 weeks, Prime MMFs have fallen by 163.4 billion and they've fallen by 337.5 billion over the past 14 weeks. (Govt MMFs have risen 204.5 billion over 5 weeks and 386.5 billion over 14 weeks.) The shift was initially fueled by the conversion of over $300 billion of Prime funds into Govt funds, but since June appears to be driven by investors and investor segments. ICI's latest weekly says, "Total money market fund assets decreased by $10.50 billion to $2.72 trillion for the week ended Wednesday, August 31, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $48.20 billion and prime funds decreased by $54.05 billion. Tax-exempt money market funds decreased by $4.66 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $1.746 trillion, while Prime assets, which dipped below the $1.0 trillion level for the first time in 17 years 4 weeks ago, are at $826.6 billion. The release explains, "Assets of retail money market funds decreased by $2.35 billion to $931.19 billion. Among retail funds, government money market fund assets increased by $6.00 billion to $496.51 billion, prime money market fund assets decreased by $6.17 billion to $315.90 billion, and tax-exempt fund assets decreased by $2.18 billion to $118.77 billion…. Assets of institutional money market funds decreased by $8.15 billion to $1.79 trillion. Among institutional funds, government money market fund assets increased by $42.21 billion to $1.25 trillion, prime money market fund assets decreased by $47.88 billion to $510.66 billion, and tax-exempt fund assets decreased by $2.48 billion to $32.93 billion."

Western Asset Management recently filed a Prospectus Supplement concerning changes in Western Asset Institutional Cash Reserves' master-feeder structure. (Note: Western is one of the few companies that have both "onshore" and "offshore" feeder funds into one "onshore" portfolio, and we believe this move was to split the constant NAV Cayman Islands feeder from the now-floating NAV domestic U.S. feeder.) The document states, "The Fund is a feeder fund that invests securities through an underlying mutual fund…that has the same investment objectives and strategies as the Fund, in what is called a master-feeder structure. The Board of Trustees of Prime Cash Reserves Portfolio has authorized the termination of Prime Cash Reserves Portfolio, which is expected to occur on or prior to August 31, 2016. In light of the upcoming termination of Prime Cash Reserves Portfolio, the Board of Trustees of the Fund believes that it is in the best interests of the Fund's shareholders to withdraw the Fund's investment from Prime Cash Reserves Portfolio and instead invest as a feeder fund in a different underlying mutual fund, Liquid Reserves Portfolio, on or about August 26, 2016." The document explains, "There will be no changes to the Fund's investment objectives and strategies as a result of the Fund becoming a feeder fund of Liquid Reserves Portfolio. The Fund will continue to operate as a money market fund investing in accordance with Rule 2a-7 under the Investment Company Act of 1940." Western adds, "As a feeder fund of Liquid Reserves Portfolio, the Fund's management fee will not increase, and the Fund's operating expenses are not expected to increase. Effective as of the Implementation Date, all references to Prime Cash Reserves Portfolio in the summary prospectus, statutory prospectus and statement of additional information are replaced with Liquid Reserves Portfolio." (Watch for more on Western Asset in a "profile" in the upcoming September issue of Money Fund Intelligence.) The New York Fed also wrote on its "Reverse Repo Counterparties List," "Western Asset/Institutional Cash Reserves Portfolio is no longer a reserve repo counterparty, effective August 30."

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