Daily Links Archives: October, 2020

Federated Hermes reported earnings Thursday evening, and will host a conference call Friday at 9am Eastern. (Watch for coverage on this in Monday's News.) Their press release, explains, "Federated Hermes, Inc. (NYSE: FHI), a global leader in active, responsible investing, today reported earnings per diluted share (EPS) of $0.85 for Q3 2020, compared to $0.72 for the same quarter last year, on net income of $85.8 million for Q3 2020, compared to $73.0 million for Q3 2019.... Federated Hermes' total managed assets were $614.8 billion at Sept. 30, 2020, up $87.6 billion or 17% from $527.2 billion at Sept. 30, 2019 and down $14.0 billion or 2% from $628.8 billion at June 30, 2020.... Money market assets were $433.0 billion at Sept. 30, 2020, up $73.7 billion or 21% from $359.3 billion at Sept. 30, 2019 and down $24.6 billion or 5% from $457.6 billion at June 30, 2020. Money market fund assets were $325.9 billion at Sept. 30, 2020, up $64.7 billion or 25% from $261.2 billion at Sept. 30, 2019 and down $18.9 billion or 5% from $344.8 billion at June 30, 2020." It tells us, "Revenue increased $24.1 million or 7% percent primarily due to higher average money market and fixed-income assets and as a result of revenue of a previously nonconsolidated entity being recorded in operating revenue beginning March 2020. These increases in revenue were partially offset by voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields (voluntary yield-related fee waivers).... During Q3 2020, Federated Hermes derived 60 percent of its revenue from long-term assets (38 percent from equity assets, 14 percent from fixed-income assets and 8 percent from alternative/private markets and multi-asset), 39 percent from money market assets, and 1 percent from sources other than managed assets. Operating expenses were flat, with increases in compensation being offset by decreased distribution expenses primarily resulting from voluntary yield-related fee waivers on certain money market fund assets." Federated writes, "During the three and nine months ended Sept. 30, 2020, voluntary yield-related fee waivers totaled $36.8 million and $56.9 million, respectively. These fee waivers were largely offset by related reductions in distribution expenses of $33.0 million and $51.0 million, respectively, such that the net negative pre-tax impact to Federated Hermes was $3.8 million and $5.9 million for the three and nine months ended Sept. 30, 2020, respectively. Federated Hermes' level of business activity and financial results are dependent upon many factors, including market conditions, investment performance and investor behavior. These factors and others, including asset levels and mix, product sales and redemptions, market appreciation or depreciation, revenues, fee waivers, expenses and regulatory changes, can significantly impact Federated Hermes' business activity levels and financial results. Risk factors and uncertainties that can influence Federated Hermes' financial results are discussed in the company's annual and quarterly reports as filed with the Securities and Exchange Commission (SEC). Federated Hermes will host an earnings conference call at 9 a.m. Eastern on Oct. 30, 2020. Investors are invited to listen to the earnings teleconference by calling 877-407-0782."

A CNBC.com piece entitled, "This start-up promised higher interest rates on savings. Now some customers are struggling to get their money back," tells us, "The ads popped up on social media. Earn as much as 7% interest on your savings by opening an account with a new start-up. In this historically low interest rate environment -- when the average savings account pays just 0.09% annual percentage yield -- the offer might have sounded too good to be true. Many of the company's customers are now wondering if indeed it was. A joint investigation by CNBC TV and CNBC.com has found that Beam Financial is having trouble processing customer withdrawals. Some users CNBC spoke with say their withdrawal transactions have been pending for months and that repeated attempts to get answers and updates from Beam have either gone unanswered or were not useful. Many of these email and text updates from Beam put the blame on the company's bank partners or vendors." The piece explains, "San Francisco-based Beam launched in September 2019 and promoted itself as the 'first mobile high-interest bank account designed for the 99%.' ... `Now, multiple Beam customers who spoke with CNBC said they are also facing long delays after trying to get their money out. It is unknown how many customers are affected or how much total money is at stake.... Beam's goal was to be the first high interest bank account for millennials, the company's CEO Aaron Du, 37, said in an August 2019 interview with CNBC.com. Today, the company touts more than 186,000 subscribers on its website. It has $2.4 million in total deposits, according to R&T, a vendor working with Beam. However, a source close to the company said the number of actual accounts may be less than 30,000." The CNBC article explains, "Notably, Beam is not a bank. The funds deposited with the company are insured by the FDIC through a network of U.S. banks, the company said. Typically, FDIC insurance covers up to $250,000 per depositor per bank. Beam also promised its customers 24/7 access to their funds and no monthly withdrawal limits. Beam's business model involved the use of what is known as a sweep account. The arrangement, which is common and perfectly legal, 'sweeps' Beam's deposits into a network of FDIC-insured banks each day. Beam can collect interest or fees on those deposits, and pass those on to its customers. However, multiple Beam account owners who spoke with CNBC said they have requested to withdraw their funds and have yet to receive their money." It adds, "Also cutting ties with Beam, as of Oct. 31, is the company handling Beam's sweep account, New York-based R&T, according to a letter obtained by CNBC. Beam's strategy relies on sweep accounts, whereby its deposits are swept into FDIC insured accounts each day. R&T said it 'stands ready to work with Beam and its service providers,' and that the funds are being 'held in a demand deposit account at one, well-capitalized FDIC member bank.' The firm added that it doesn't have the authority or the information necessary to immediately return these funds to the custodian bank, but plans to do so 'as soon as R&T receives the appropriate instructions, but no later than Oct. 31, 2020.' R&T said that it believes the delays for Beam customers receiving their funds may be an operational or technical issue on Beam's end."

A press release entitled, "Promontory Interfinancial Network has changed its name to IntraFi Network" tells us, "Promontory Interfinancial Network is changing its name to IntraFi Network effective today. As part of this rebranding effort, IntraFi Network is adopting new logos and names to better describe its suite of financial services -- popular products that until now have included CDARS, Insured Cash Sweep, Insured Network Deposits, and Insured Overnight Funding. Going forward, the company's deposit products will be consolidated into IntraFi Network Deposits and its funding products will become IntraFi Funding." CEO and Cofounder Mark Jacobsen comments, "Our new name recognizes how our company has evolved over the past 18 years -- from a small fintech providing a single service for less than 100 banks to a company offering an array of all-weather solutions to thousands of institutions. It's a new name, but still the same great people and customer service. Another thing that won't change is our commitment to always serve our network banks, never compete with them." The release tells us, "IntraFi Network has built the nation's largest deposit network, chosen by more than 3,000 financial institutions. The company was founded in 2002, invented reciprocal deposits, and is widely used by big and small banks alike -- 95% of banks in IntraFi's network are community banks, while 83% of banks with more than $1 billion of assets use its products and services. The new name is shorter, easier to pronounce, and emphasizes the firm's most differentiating characteristic -- the network and all that can be accomplished within it." President Jane Gladstone explains, "IntraFi Network is designed to convey clearly and concisely who we are and what we do. It's about streamlining the communication of our different offerings to our network members and their customers. If banks want funding, they don't have to navigate through five different names. It's the same for balance sheet and liquidity needs -- we've got financial institutions covered." Finally, Luanne Cundiff, President and CEO of First State Bank of St. Charles, adds, "It signifies the approach that it has really been taking for many years and that is digging deep into the strategy of each and every financial institution that it works with and partnering with them at every level."

Money market fund yields continue to bottom out just above zero -- our flagship Crane 100 was flat in the latest week at 0.03%. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March. It is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Nearly three-quarters of all money funds and half of MMF assets have landed on the zero yield floor, though some continue to show some yield. According to our Money Fund Intelligence Daily, as of Friday, 10/23, 618 funds (out of 849 total) yield 0.00% or 0.01% with assets of $2.376 trillion, or 50.5% of the total. There are 192 funds yielding between 0.02% and 0.10%, totaling $1.805 trillion, or 38.3% of assets; 38 funds yielded between 0.11% and 0.25% with $502.2 billion, or 10.7% of assets; only 1 fund yielded between 0.26% and 0.50% with $25.9 billion in assets. No funds yield over funds yield over 0.26%. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 670), shows a 7-day yield of 0.02%, unchanged in the week through Friday, 10/23. The Crane Money Fund Average is down 45 bps from 0.47% at the beginning of April. Prime Inst MFs were flat at 0.05% in the latest week and Government Inst MFs were flat at 0.02%. Treasury Inst MFs were unchanged at 0.01%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.01% (unchanged in the last week), and Prime Retail MFs yield 0.03% (unchanged), Tax-exempt MF 7-day yields were also unchanged at 0.02%. (Let us know if you'd like to see our latest MFI Daily.) Our Crane Brokerage Sweep Index, which hit the zero floor six and a half months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of October 23, showed no changes in the last week. All major brokerages, with the exception of RW Baird, offer rates of 0.01% for balances of $100K. No brokerage sweep rates or money fund yields have gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last 27 weeks at 0.01% (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too). RW Baird offers a rate of 0.02% for its balances of $100K.

The U.K.-based Sunday Times writes, "Negative rates are here already for some investors, discussing the potential of sub-zero yields on English money markets. They say, "Investors holding a total of £9.5 billion are suffering negative returns just so they can keep their savings in cash funds. The threat of negative interest rates is growing as Bank of England economists warn that they may be necessary to help boost the economy. This has raised the prospect of banks charging savers for keeping their money safe, instead of paying a return. Yet money market funds, which are supposed to provide a low-risk investment that holds savers' nest eggs steady while earning a small rate of interest from cash and cash-equivalent investments, are already in effect charging investors to be in cash. This comes at a time when the best easy-access rates on cash accounts are about 1 per cent."

Dreyfus Cash Investment Strategies published, "LIBOR to SOFR: The Impact on Money Market Funds," which tells us, "The London Interbank Offered Rate (LIBOR) -- the most commonly used reference interest rate in the financial world -- is scheduled to be replaced by the Secured Overnight Financing Rate (SOFR) at the end of 2021. Some floating rate money market securities have interest rates that are linked to LIBOR, and investors have been concerned about the potential impact of this change on money market funds." They explain, "The challenges of replacing LIBOR in the money market are less daunting than in other credit markets. Short-term, LIBOR-based securities purchased by money market funds will have largely matured, or reached their final reset, by the yearend 2021 deadline, eliminating many of the difficulties inherent in the transition. Short-term, SOFR-based securities have already been issued by government agencies and are increasingly being issued by banks, supranational organizations, and insurance companies." Dreyfus explains, "Two challenges have yet to be fully resolved. First, while LIBOR rates include a term structure of seven maturities, ranging from overnight to one year, SOFR is strictly an overnight rate. So, a SOFR term structure will need to be implemented. Second, because LIBOR is based on unsecured transactions, it reflects the credit risk of the borrower. In contrast, SOFR is secured by US Treasuries, so this rate does not incorporate a credit risk component." They add, "These two issues are being addressed by industry groups, and a number of solutions are being considered. The term structure challenge could be resolved by the development of a SOFR futures market. SOFR futures have been traded on the Chicago Mercantile Exchange since 2018, so this may offer a realistic solution. As for the credit-risk component, the New York Federal Reserve has created the Credit Sensitivity Group to examine this issue. Currently, market participants build in a credit element themselves, adjusting the spread at which they choose to purchase SOFR-based securities. Using another index as an alternative to LIBOR could also resolve these two challenges. Two possible alternatives are Ameribor and the ICE Bank Yield Index. Unlike LIBOR, they are entirely transaction-based. However, similar to LIBOR, they include a term structure. In addition, because they are based on unsecured transactions, they also reflect credit risk." Finally, the brief adds, "The year-end 2021 deadline may have to be extended if the financial industry fails to fully prepare for the SOFR transition, but BNY Mellon is assuming the current deadline will stand. We will continue to monitor progress on the remaining challenges and to advocate for suitable solutions. In this paper, we will outline the issues, summarize what has been done to address them, and discuss solutions that are still being considered."

A press release entitled, "Academy Securities Announces New Money Market Funds," tells us, "Academy Securities, a registered broker-dealer, certified Disabled Veteran Business Enterprise (DVBE), and Minority Business Enterprise (MBE), ... announced the launch of the Academy Share Class of the JP Morgan U.S. Treasury Securities Money Market Fund (JACXX) and JP Morgan U.S. Treasury Plus Money Market Fund (JPCXX). Like the JPAXX and JGAXX share classes launched in May 2019, the product offerings deliver the experience, expertise, and performance of the JP Morgan Asset Management team, while serving as a solution to cash management investors who share in the support of Academy Securities' social mission to mentor, train, and hire transitioning veterans. The partnership between JPM and Academy exemplifies the intersection between capabilities and authentic diversity. The JP Morgan 100% U.S. Treasury Securities Money Market Fund (JACXX) seeks maximum current income consistent with maximum safety of principal and maintenance of liquidity by investing in obligations of the U.S. treasury, which includes treasury bills, bonds, and notes. The JP Morgan U.S. Treasury Plus Money Market Fund (JPCXX) seeks current income with liquidity and stability of principal by investing in U.S. treasury bills, notes, bonds, and other obligations issued or guaranteed by the U.S. treasury and repurchase agreements collateralized by such obligations. The Academy Share Class of the JP Morgan Money Market Funds are managed by JP Morgan Asset Management." Academy Chairman & CEO Chance Mims comments, "We are very excited to launch the treasury money market fund share classes, as many of our clients have a need for a treasury only investment strategy. The opportunity to meet the needs of our growing list of customers is paramount to us at Academy." President Phil McConkey adds, "By investing in these new funds, our clients will be able to positively impact returning veteran heroes by giving them a chance at a career in financial services. We are grateful that JP Morgan has partnered with us to help fulfill this mission."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of October 16) includes Holdings information from 66 money funds (down 13 from two weeks ago), which represent $1.831 trillion (down from $2.307 trillion) of the $4.772 trillion (38.4%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our October 13 News, "October MF Portfolio Holdings: CP, CDs, TDs Fall; Treasury, Repo Flat.") Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $949.9 billion (down from $1.247 trillion two weeks ago), or 51.9%, Repurchase Agreements (Repo) totaling $443.8 billion (down from $524.2 billion two weeks ago), or 24.2% and Government Agency securities totaling $263.2 billion (down from $316.1 billion), or 14.4%. Commercial Paper (CP) totaled $60.7 billion (down from $71.5 billion), or 3.3%, and Certificates of Deposit (CDs) totaled $58.1 billion (down from $75.5 billion), or 3.2%. The Other category accounted for $30.4 billion or 1.7%, while VRDNs accounted for $25.0 billion, or 1.4%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $949.9 billion (51.9% of total holdings), Federal Home Loan Bank with $134.9B (7.4%), BNP Paribas with $61.7B (3.4%), Federal Farm Credit Bank with $51.1B (2.8%), Fixed Income Clearing Corp with $48.7B (2.7%), Federal National Mortgage Association with $45.9B (2.5%), RBC with $40.8B (2.2%), Federal Home Loan Mortgage Corp with $29.2B (1.6%), JP Morgan with $28.3B (1.5%) and Mitsubishi UFJ Financial Group Inc with $27.6B (1.5%). The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($178.4 billion), JP Morgan US Govt MM ($175.4B), Wells Fargo Govt MM ($163.8B), Fidelity Inv MM: Govt Port ($154.7B), JP Morgan 100% US Treas MM ($100.5B), Morgan Stanley Inst Liq Govt ($93.4B), Dreyfus Govt Cash Mgmt ($83.6B), JP Morgan Prime MM ($82.1B), First American Govt Oblg ($77.4B) and Fidelity Inv MM: MM Port ($60.9B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

Last week, Fitch Ratings published, "Money Market Fund Developments Constrain Short-Term Funding." They write, "The combination of more conservative money market fund (MMF) portfolio positioning, fund outflows and changes to MMF providers' product ranges have reduced the availability of short-term funding for financial institutions and corporate entities, Fitch Ratings says. Recent comments from US and European regulators highlighting the potential for further reforms to MMFs may also constrain funds' ability to provide short-term funding. Fitch does not expect these dynamics to have rating impacts for financial institutions or corporate entities, but it may incrementally impact their funding costs and/or necessitate modest changes to their funding strategies. The pandemic-driven market volatility earlier this year resulted in significant redemptions from prime MMFs, with institutional prime funds affected to a higher degree than retail funds, while government MMFs saw strong inflows. Investors' flight to quality in March caused US prime fund assets to fall by $158 billion, or 20%, to $646 billion between Feb. 20 and Mar. 31, according to iMoneyNet data. This was somewhat lower than the outflows of 2008, when US prime MMFs lost 25% of assets, or $515 billion, between Sept. 9 and Oct. 8, 2008. MMFs held about 21% of US commercial paper (CP) as of 1Q20, according to the Fed. Outflows from MMFs can affect the US CP market, which has declined by about $193 billion between Jan. and Sept. of this year, to $957 billion." Fitch continues, "Persistently low interest rates and falling yields have caused some prime MMFs to reduce or waive management fees, exacerbating the effect of the outflows on fund providers' revenues. In some cases, reputational and business considerations have led providers to close funds or convert them into government funds. These changes constitute an effective outflow from prime MMFs, reducing the aggregate short-term funding prime MMFs can provide. Prime MMFs are more conservatively positioned now than they were prior to the March stress. US prime institutional MMFs averaged 57% weekly liquidity as of Oct. 7 compared with 44% average weekly liquidity as of March 19, according to Crane Data. Therefore, we expect these MMFs to be better able to withstand the effects of a similar market shock should one occur in the future. However, this more conservative positioning means prime MMFs are holding a relatively higher share of government securities than normal as part of their weekly liquid asset bucket and that non-government exposures are shorter in maturity. Together, these factors result in less short-term funding provision for banks and corporates, while further depressing fund yields." They add, "The severity and speed of outflows in March caused the Fed to respond with the Money Market Mutual Fund Liquidity Facility (MMLF), which stabilized the short-term funding markets by facilitating asset sales by prime MMFs amid severe illiquidity. The exit fees and redemption gates features present in MMFs that are designed to stop runs on funds by temporarily barring investors from withdrawals have been criticized by some market participants for exacerbating outflows, with funds becoming forced sellers of assets in volatile and/or down markets. Preserving principal and providing timely liquidity are key credit considerations to our MMF ratings and Outlooks. Fitch's negative global sector outlook for MMFs is driven by the liquidity stress affecting funds in March, continued uncertainty with respect to potential further market shocks and downside pressure on portfolio credit quality. A second wave of the pandemic could lead to resumed financial market stress and further outflow pressure while many eligible issuers underlying prime MMFs are on Rating Outlook Negative, highlighting the challenging credit conditions rated funds continue to face." (See also, Fitch's "Chinese Money Market Fund Dashboard: October 2020," and "Fitch: Amundi Money Market Fund-Short-Term (GBP)'s 'AAAmmf' rating following the liquidation of the fund.")

Federal Reserve Vice Chair for Supervision Randy Quarles presented some "Remarks at the Hoover Institution," which briefly touched upon money funds and the March Covid Madness. He says, "While banks so far have been resilient to the shock from the COVID event, the same cannot be said for important parts of the system of nonbank financial intermediation (NFBI). Starting in March, Federal Reserve facilities were needed to contain pressures in some prime money market funds, as well as, to a lesser extent, in certain long-term mutual funds that invest in corporate debt. Other types of NBFI also struggled during that period, including nonbank mortgage servicers and real estate investment trusts, the latter of which received support from the Board's decision to, for the first time, purchase agency commercial mortgage–backed securities." Quarles continues, "The vulnerabilities of NBFI are also at the top of the mind of international regulators. The Financial Stability Board's (FSB) annual report on NBFI indicates that the NBFI sector is now almost 50 percent of total financial intermediation, and many NBFIs rely on the banking system for credit and backstop liquidity. Thus, late last year, I formed a high-level steering group of central bankers, market regulators, and international organizations to oversee the FSB work on nonbank finance and to help coordinate work across the range of global standard setting bodies that oversee the financial sector. The group is currently completing a holistic review of the COVID event to better understand the role that vulnerabilities stemming from the NBFI sector played in those events. In the wake of the COVID event, we have made good progress in arriving at a shared diagnosis of the market turmoil that happened during the onset of the event in March. Our discussions have surfaced a number of issues associated with particular types of market participants and mechanisms that may have caused liquidity imbalances and propagated stress. They include: vulnerabilities in money market funds (as I discussed earlier); dealers' capacity and willingness to intermediate; market structure in the core government bond markets and, potentially, the role of leveraged investors; and fragilities in US dollar cross-border funding." He adds, "We are looking at the role that each of these factors may have played, but we are not yet prepared to say 'J'accuse' to any one of them. This is because our work has also reinforced the point that one needs to examine the system as a whole and take into account the various linkages within nonbank financial intermediation and between nonbanks and banks. We will provide to the G20 Summit next month our holistic review of the turmoil and a concrete set of proposals for follow-up work on NBFI. This will provide a basis for a work plan for 2021, focused on better understanding this critical sector, vulnerabilities related to it, and how we might take a more macroprudential approach to supervising and regulating at least some parts of this sector."

Money market fund assets fell yet again in the latest week, their tenth decline in a row and 18th decline over the past 20 weeks. Assets have fallen $426 billion since May 20, when assets were at a record $4.789 trillion. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $19.06 billion to $4.36 trillion for the week ended Wednesday, October 14.... Among taxable money market funds, government funds decreased by $13.43 billion and prime funds decreased by $4.93 billion. Tax-exempt money market funds decreased by $697 million." ICI's stats show Institutional MMFs falling $19.8 billion and Retail MMFs increasing $743 million. Total Government MMF assets, including Treasury funds, were $3.651 trillion (83.7% of all money funds), while Total Prime MMFs were $598.6 billion (13.7%). Tax Exempt MMFs totaled $113.4 billion (2.6%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data.) ICI shows money fund assets up a still massive $731 billion, or 20.1%, year-to-date in 2020, with Inst MMFs up $573 billion (25.3%) and Retail MMFs up $159 billion (11.6%). Over the past 52 weeks, ICI's money fund asset series has increased by $895 billion, or 25.8%, with Retail MMFs rising by $197 billion (14.8%) and Inst MMFs rising by $698 billion (32.7%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $39.5 billion in October (as of 10/14) to $4.738 trillion.) They explain, "Assets of retail money market funds increased by $743 million to $1.53 trillion. Among retail funds, government money market fund assets increased by $2.67 billion to $1.12 trillion, prime money market fund assets decreased by $1.23 billion to $303.38 billion, and tax-exempt fund assets decreased by $692 million to $102.28 billion." Retail assets account for just over a third of total assets, or 35.0%, and Government Retail assets make up 73.5% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $19.80 billion to $2.83 trillion. Among institutional funds, government money market fund assets decreased by $16.10 billion to $2.53 trillion, prime money market fund assets decreased by $3.69 billion to $295.20 billion, and tax-exempt fund assets decreased by $5 million to $11.09 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 at the end of August, accounted for 65.0% of all MMF assets, with Government Institutional assets making up 89.2% of all Institutional MMF totals.

Following the SEC's publication of "U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock" (see our News yesterday), the Investment Company Institute published a report on "The Impact of COVID-19 on Economies and Financial Markets. (See their release, "Pandemic and Economic Shutdown Drove Financial Turmoil in March.") ICI says, "Financial markets' significant volatility in March reflected a combination of unprecedented factors, including the COVID-19 pandemic, global economic shutdown, and sudden demands for liquidity, ICI says in the first research paper in Report of the COVID-19 Market Impact Working Group, a new series examining the impact of the crisis. Based on empirical evidence and in-depth analysis, this first paper details the reaction of financial markets to the pandemic and the US government's response. Successive installments will describe the experiences of regulated funds -- and their investors -- including exchange-traded funds (ETFs), money market funds, and bond funds in the United States, and Undertakings for Collective Investment in Transferable Securities (UCITS) and ETFs in the European Union. ICI is serializing the report, releasing different papers throughout the fall, starting with "The Impact of COVID-19 on Economies and Financial Markets." ICI President and CEO Paul Schott Stevens comments, "A holistic appreciation of how financial markets reacted to the pandemic and worldwide economic shutdown is critical to understanding the experiences of funds and their investors during March. Dislocations began in the Treasury bond market several days before money market funds or bond funds came under redemption pressure. Though policymakers already are considering whether and how to bolster the financial sector's resilience, they must recognize that the COVID-19 crisis is different from the 2007–2009 global financial crisis. Policy solutions for the global financial crisis, which was a credit crisis, are not necessarily appropriate for the COVID-19 crisis, which was a liquidity crisis stemming from the global pandemic and steps taken by governments to curb the spread of the disease." ICI adds, "The COVID-19 crisis posed deep challenges around the globe for businesses, governments, households, investors, and financial institutions, including money market funds and bond mutual funds. As ICI's first paper discusses, these challenges arose as a direct result of COVID-19 and governments' decisions to shutter large parts of the global economy. Understanding this is a prerequisite to understanding money market and bond mutual funds' experiences in March 2020.... As ICI's paper discusses, strains in the Treasury and agency bond markets eventually spilled over into short- and long-term credit markets, including the markets for municipal debt securities, commercial paper, bank certificates of deposit, and corporate bonds. In light of uncertainty about the virus and the economy, investors became extremely risk averse and sought to preserve or bolster their cash positions. As a result, sellers of short- and long-term credit securities far outstripped the number of buyers.... By mid-March, liquidity in, and the flow of credit through, short- and long-term credit markets had virtually dried up, risking damage to households, businesses, governments, and financial institutions. With the demand for liquidity far outstripping the supply from the private sector, there was little choice but for central banks to fulfill their role as lenders of last resort." (Note: ICI's Paul Stevens is also scheduled to keynote our upcoming Money Fund Symposium Online, which is Oct. 27 from 1-4pm.)

Columnist Jason Zweig writes in Wall Street Journal, "Your Cash Earns Zip, Zilch, Nada. Don't Make It Worse." He explains, "A good yield is hard to find. With interest rates so close to zero across the board, many investors are undoubtedly wondering whether they can afford to keep a portion of their portfolio safe. In fact, you can't afford not to.... U.S. investors have amassed $4.79 trillion in money-market funds, says Crane Data, a firm in Westboro, Mass., that tracks cash accounts. Yet the average money fund yields a piddling 0.03% in interest income. In the third quarter, reckons Crane, investors pulled $238 billion out of these funds. Yield is so hard to come by that several asset managers have begun shutting down tax-free money funds." The piece explains, "Investing for income in this environment is like trying to squeeze water out of a fistful of sand at high noon in Death Valley. The standard advice from pundits and financial planners is to squeeze more desperately: If you take a lot more risk, you can wring out a little more income.... This year has subjected these assets to wholesale slaughter. In the first nine months of 2020, utilities lost 6%, real estate 7%, financials 20% and MLPs 49%, as measured by leading exchange-traded funds that invest in those sectors.... Meanwhile, in the bond market, the siren song of low risk may never have been louder, says Nancy Davis, founder of Quadratic Capital Management LLC." Zweig adds, "One of Wall Street's favorite adages is 'Don't fight the Fed.' ... If you want to keep some of your money safe, however, you need to defy that maxim. You should fight the Fed. I like to say that at least 90% of what makes investors successful isn't knowing what to do, but knowing what not to do.... So it's never been more tempting to take extra risk with the money you want to keep ultrasafe. But knowing what not to do is vital. Fooling yourself into thinking that you can find absolute safety in any asset yielding more than 1% is a terrible idea. We live in a 1%, if not a sub-1%, world right now. Nothing you do can change that.... When your future self looks back at the decisions you face now, which will you regret more: Earning less income than you could have but keeping your cash safe, or earning higher income that came at the cost of destroying your capital?" See also, the WSJ's "Stashing Cash In a Low-Interest World."

The New York Times writes, "Panic in the Parking Lot for Cash." The article explains, "Money-market mutual funds are sometimes called 'parking lots' because they have been safe places to store cash while earning a modest return. And most of the time they have been about as exciting as watching a flat piece of striped black asphalt. Until recently. With short-term interest rates driven to nearly zero during a global pandemic, some money-market funds are closing down, while others are changing strategies, waiving fees and flirting with the previously unthinkable -- negative yields, in which investors would be charged for the privilege of holding the funds. The upshot is that in terms of risk and return, many investors might be better off taking their cash back to the bank." The piece continues, "Institutional investors make up the bulk of investors in the funds, which held $5.2 trillion at the end of May but are now down to $4.8 trillion, according to Crane Data, which tracks money-market funds. Corporations use money-market funds because they offer slightly higher rates and fewer restrictions, such as limits on withdrawals, than insured bank money-market accounts, said Aquiles Larrea Jr., chief executive of Larrea Wealth Management.... Pressure on money-market funds intensified again in March when the coronavirus surged in the United States and the economy sank. Corporate customers started pulling cash out of so-called prime money-market funds, which hold corporate debt. Fund managers sold assets, which can lower returns, force managers to freeze redemptions or even push the net asset value below $1. Once again, though, the Fed stepped in with a temporary support program." The Times adds, "As money fund managers work to reconfigure their business, industry experts expect to see more efforts by the Fed to institute permanent reforms and safeguards. 'Money funds had seen a series of reforms after the financial crisis that went into effect over the last decade. This was the first test of those, and the jury's still out,' said Peter Crane, chief executive of Crane Data.... But Mr. Crane said that thanks to the history of Federal Reserve intervention, people who park their money in standard, uninsured money-market funds aren't likely to be in real danger if they stay put. 'When it comes to individual investors, you hate to say, 'Don't worry about it, the retail investor will always get bailed out,' but don't worry about it, the retail investor will always get bailed out,' Mr. Crane said."

BlackRock published a "Cash Management Market Update" for September 2020 recently, which says, "Assets of money market funds (MMFs) across the industry declined about $91 billion for the month as of September 30. Flows within the taxable MMF categories were affected by the conversion of a large prime MMF to a government MMF. Specifically, assets of government MMFs rose about $61 billion during September, while prime MMF assets declined around $147 billion. Assets of municipal MMFs fell approximately $6 billion for the month as of September 30, likely driven by the low yields in the category. Dealer inventory of variable rate demand notes (VRDNs) was largely manageable in September and the Securities Industry and Financial Markets Association (SIFMA) Index of 7-day VRDNs stood at 0.11% as of September 30, up only slightly from the beginning of the month." The brief continues, "Despite some week-over-week flow volatility in September, the BlackRock government MMFs grew assets in the month of September. Rates on government securities remained pressed against their lows. Net new T-bill issuance decreased for the third month in a row, with yields on T-bills maturing within one-year trading inside of 0.09% at month end.... Sourcing investable supply of agency securities remains a challenge, so our exposures decreased. Instead, we seized an opportunity to add fixed and floating rate Treasury notes as an alternative. Our allocations to repurchase agreements moved slightly lower month-over-month as we feel cash management bills provide us with a better investment opportunity for the liquidity component of our funds." BlackRock adds, "Over the course of September, assets in BlackRock's prime MMFs declined slightly. However, given the extended forecast for low-interest rates, we believe investors will continue to seek the incremental yield prime funds may provide relative to government funds. Our strategic allocations in September were broadly consistent with August. In setting strategy, we maintain a bias towards high-quality issuers of commercial paper and U.S. dollar-denominated certificates of deposit when adding investments in three- to six-month tenors. We are building elevated liquidity buffers in our funds to mitigate against potential volatility associated with an upcoming U.S. presidential election, among other events. In an effort to achieve this, we have increased our exposure to short-dated U.S. Treasuries, U.S. agencies and other securities that mature within one week. To help preserve the yield of the funds, we still seek selective opportunities further out the curve in fixed and floating rate securities that we believe represent convincing relative value."

A press release entitled, "ICD, American Honda, California ISO, MGM to Talk Treasury Investments at AFP" tells us that, "ICD, treasury's trusted independent portal provider of money market funds and other short-term investments, will moderate a panel of treasury investment leaders from American Honda, California ISO and MGM in a virtual session during this year's conference of the Association for Financial Professionals (AFP). #AFP2020 attendees can join the session, "Aligning Investment Strategy with Your Company's Operations," on Wednesday, October 21 at 3:00 pm ET.... Slotted under the AFP 2020's Capital Markets & Investments track, the session will emphasize how misalignment between investment strategies and operational strategies can cause treasury organizations to miss out on yield or risk working cash. Speakers ... include Kim Kelly-Lippert [of] American Honda; Ryan Seghesio [of] California ISO; and Tom Wolfe [of] MGM Resorts; along with moderator Sebastian Ramos [of] ICD." Ramos comments, "Regardless of how companies adjust to challenges, especially as the global pandemic continues to unfold, what we've heard from clients is that treasury needs to be at the ready with the cash and strategic recommendations to help pivot the business." The Association for Financial Professionals virtual event will be held October 19-29, with the money fund segments occurring on Oct. 20, 21, 22 and 28. Other sessions involving money markets and cash investing (that we spotted) include: Opportunities for Downside Protection in Corporate Cash Portfolios During Late Stages of the Economic Cycle with Peter Kaplan of Merganser Capital Management, Nicholas Zaiko of Bridgebay Financial and Ivan Troufanov of Celonis (Tues, Oct. 20 1:30pm-2:30pm); BBB or Not BBB, That is the Question...and Other Investment Policy Predicaments with Zeke Lorettoof of nVidia, Gregory Hamilton of Bechtel Corporation and Garret Sloan of Wells Fargo Securities (Wednesday, Oct. 21 1:30pm-2:30pm); Managing the Hidden Risks in Cash Portfolios with Raymond Facinelli of Capital Advisors Group, Kimberly Kelly-Lippert of American Honda Motor Company, Nicholas Ro of Toyota Financial Services and Leonard Brooks of Regeneron Pharmaceuticals (Thursday, Oct. 22 12:00pm-1:00pm); Treasury's Critical Role in Achieving Environmental, Social & Governance Commitments with Matthew Allen of Walmart Inc., Morgan Collins of Starbucks and Pratik Mohta of Bunge (Wednesday, Oct. 28 12:00pm-1:00pm); and, Building Confidence in Liquidity Management: Understanding the Fed Toolkit with Laurie Brignac of Invesco Global Liquidity and Alex Roever of J.P. Morgan (Wednesday, Oct. 28 1:30pm-2:30pm). (See also AFP's recent blog post on "Understanding the Fed's Crisis Toolkit.") Finally, register here for our next virtual event, Crane's Money Fund Symposium Online, which will be held on Tuesday, October 27 from 1-4pm ET, and for our "European Money Fund Symposium Online," which will be Nov. 19 from 10am-12pmET.

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of October 2) includes Holdings information from 79 money funds (up 9 from two weeks ago), which represent $2.307 trillion (up from $1.987 trillion) of the $4.867 trillion (47.4%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our September 11 News, "Sept. MF Portfolio Holdings: Repo Jumps; Agencies, CP, CDs Decline.") Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.247 trillion (up from $1.038 trillion two weeks ago), or 54.0%, Repurchase Agreements (Repo) totaling $524.2 billion (up from $460.1 billion two weeks ago), or 22.8% and Government Agency securities totaling $316.1 billion (up from $290.7 billion), or 13.7%. Certificates of Deposit (CDs) totaled $75.5 billion (up from $71.0 billion), or 3.3%, and Commercial Paper (CP) totaled $71.5 billion (up from $64.3 billion), or 3.1%. The Other category accounted for $40.9 billion or 1.8%, while VRDNs accounted for $30.9 billion, or 1.3%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.247 trillion (54.0% of total holdings), Federal Home Loan Bank with $165.7B (7.2%), BNP Paribas with $73.1B (3.2%), Fixed Income Clearing Corp with $67.9B (2.9%), Federal Farm Credit Bank with $59.9B (2.6%), Federal National Mortgage Association with $53.5B (2.3%), RBC with $42.8B (1.9%), JP Morgan with $36.1B (1.6%), Federal Home Loan Mortgage Corp with $34.9B (1.5%) and Mitsubishi UFJ Financial Group Inc with $29.4B (1.3%). The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($186.2 billion), JP Morgan US Govt MM ($176.3B), Wells Fargo Govt MM ($156.1B), Fidelity Inv MM: Govt Port ($154.6B), BlackRock Lq FedFund ($145.9B), JP Morgan 100% US Treas MMkt ($102.4B), BlackRock Lq T-Fund ($98.6B), Morgan Stanley Inst Liq Govt ($91.0B), JP Morgan Prime MM ($85.1B) and Goldman Sachs FS Treas Instruments ($84.0B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

A statement entitled, "ESMA, ESMA Announces Update to Reporting Under the Money Market Funds Regulation," tells us, "The European Securities and Markets Authority (ESMA), the EU's Securities Markets regulator, today announces an update of the validations of the technical instructions for reporting under the Money Market Funds Regulation (MMFR). The requirements of Article 37 of MMF regulation require MMF managers to submit data to National Competent Authorities (NCAs), who will then transmit this to ESMA. Following feedback received by market participants after the publication of the validation rules, ESMA has decided to implement amendments on the validations." They add, "The proposed changes are not related to the published XML schemas. The changes only add new warning type validations or provide clarifications on existing validation rules in order to fix inconsistencies or ease the understanding of the rules; As the abovementioned updates in the validation rules have no effect on the data processing the deadline for the reporting announced earlier remain unchanged. For the MMF Managers the time for submission of the first quarterly reports to the National Competent Authorities is still September 2020, when the MMF Managers will have to submit a report for both Q1 and Q2 reporting periods."

Morgan Stanley liquidated its NY Muni Money Market Trust (R and S shares, DWNXX and AANXX), the latest State Municipal money market fund to exit the business. The Prospectus Supplement tells us, "The Board of Trustees of Morgan Stanley New York Municipal Money Market Trust (the "Trust") approved a Plan of Liquidation with respect to liquidation of the Trust. Subject to shareholder approval and pursuant to the Plan of Liquidation, substantially all of the assets of the Trust will be liquidated, known liabilities of the Trust will be satisfied, the remaining proceeds will be distributed to the Trust's shareholders, all of the issued and outstanding shares of the Trust will be redeemed (the "Liquidation"). The Trust will suspend the offering of its shares to all investors at the close of business on or about June 30, 2020. Subject to shareholder approval, the Liquidation is expected to occur on or about September 17, 2020. Additional information regarding the proposed liquidation will be included in the proxy materials that are anticipated to be mailed to shareholders on or about July 22, 2020. This supplement is not a solicitation of a proxy. Prior to the liquidation date, the Trust will engage in business and activities for the purposes of winding down the Trust's business affairs and transitioning the Trust's holdings to cash and cash equivalents in preparation for the orderly liquidation and subsequent distribution of proceeds to remaining shareholders. During this transition period, the Trust may no longer be pursuing its investment objective or be managed consistent with its stated investment strategies. This is likely to impact the Trust's performance. Shareholders who remain invested in the Trust may bear increased brokerage and other transaction expenses relating to the sale of portfolio investments prior to the liquidation date." It adds, "Prior to the liquidation date, shareholders of the Trust may: exchange their shares of the Trust for shares of the appropriate class of any other Morgan Stanley fund that is open to investment, subject to the requirements and limitations in that Morgan Stanley fund's prospectus; remain invested in the Trust; or redeem their shares at any time in the manner described in the Prospectus. Unless shares of the Trust are held in a tax-qualified account, the liquidation of shares held by a shareholder will generally be considered a taxable event. A shareholder should consult their personal tax adviser concerning their particular tax situation. A shareholder who owns Trust shares in a tax-qualified account, such as an individual retirement account, 401(k) or 403(b) account, should consult a tax adviser regarding the tax consequences applicable to the reinvestment of the proceeds of the liquidating distribution." Dreyfus also liquidated its General NJ Muni Money Market Funds (DNJXX) last week. (See Crane Data's Links of the Day, "Federated to Liquidate State Muni MFs" (9/4/20) and "Dreyfus Liquidating General NJ MMF" (8/3/20), and our Sept. 28 News, "SEC's Blass on Push for More MMF Reforms; Vanguard Liquidating PA, NJ.")

Financial advisor website ThinkAdvisor writes on "How Vanguard Overhauled a Prime Money Fund." They tell us, "A day after Vanguard announced the liquidation of two municipal money market funds, it has converted its Prime Money Market to a Cash Reserves Federal Money Market fund.... The changes being made by Vanguard are just the latest in a series of shifts affecting money market funds more broadly due to near-zero short-term rates in the U.S., which the Federal Reserve expects to maintain through the end of 2023." The piece explains, "[I]n August Fidelity Investments liquidated two institutional prime money market funds -- Fidelity Investments Money Market Prime Money Market Portfolio and Fidelity Investments Money Market Prime Reserves Portfolio -- and Northern Trust liquidated its Northern Institutional Prime Obligations Portfolio in July.... Vanguard cited the supply shortage of 'certain types of municipal securities in Pennsylvania and New Jersey' for its decision to liquidate the funds, but Peter Crane, president of Crane Data, which monitors the money market and mutual fund and banks savings market, says the decision may have more to do with the nature of the muni money market universe -- 'the smallest and most expensive money market funds to run with limited audience' and Vanguard's own structure." They quote Crane, "Vanguard doesn't have the flexibility that other for-profit companies have in cross-subsidizing its products.... It makes sense for Vanguard to get out of a less popular higher cost segment." ThinkAdvisor adds, "Other fund companies are also liquidating muni money market funds, including Federated Investors and Dreyfus, owned by BNY Mellon. The tax exemption for the interest earned from these funds is also worth far less in a near-zero rate market -- 'a worthless investment when there is no income,' says Crane.... Crane expects to see more consolidation in the money market space, especially in muni market and prime market space because 'rates are so low funds can only charge half what they normally do.'"

Calastone, a U.K.-based fund technology provider, published a white paper entitled, "Money Market Funds in Uncertain Times: Investors demand digitalisation and resilience." Managing Director Simon Keefe writes in the introduction, "Money market funds (MMFs), investing in high-quality, short-term debt instruments, play a key role in investors' portfolios, offering a balance of security, liquidity and yield. This survey reveals investors' views on the current MMF investment process -- their value drivers, the opportunities for improvement, and the future potential for the industry. We commissioned ... an independent online survey of 150 decision-makers from corporations and financial institutions (FIs) in major financial hubs -- the United States, the United Kingdom, Singapore and Hong Kong. The quantitative survey was supplemented by eight qualitative interviews to add depth and colour to the data." Among the report's Key Findings: "Seventy-one percent of investors say that their strategic priority for MMFs is to improve capital and liquidity management, as firms use MMFs when they need to achieve a balance of liquidity, security and returns. This is a challenging balance to achieve amidst today's low interest rate environment; Complexity and friction come from multiple areas in the investment process, which are compounded for firms that invest in multiple funds with different investment managers through different channels; and, 61% of firms use three or more fund providers, and 64% hold three or more funds from each provider. In addition to this, 48% of firms access and manage their investments through two or more channels, creating further complexity." The "most-often cited criteria" for selecting funds are: "yield (70%) and fees (57%) ... Safety, or risk profile (49%), reputation of the investment firm (47%) and Liquidity/redemption (45%)." The paper tells us, "With yields currently depressed, investors are under pressure to improve the efficiency and performance across the MMF investment process and reduce costs that drag down overall returns.... The inefficiency is most noted by larger corporates and FIs who hold significant investment volumes with multiple fund providers managed through a suite of systems and portals." Calastone explains, "Once firms have made the decision to invest in MMFs as part of their capital and liquidity management strategies, they turn to reviewing and selecting specific funds. At this point, when selecting specific funds to invest in, return becomes the most important consideration." They also comment, "The integration of systems and processes continues to be a recurring challenge. Aside from those with large trade volumes, there are also more potential points of friction for other investors who have to deal with multiple funds from multiple providers through a variety of systems. Almost two-thirds of firms (61%) use three or more fund providers. Compounding the complexity, almost two-thirds (64%) hold three or more funds from each provider." The survey states, "While the overwhelming majority of respondents use portals as the primary way they manage their funds ... findings show that they also use multiple systems in addition to portals, such as order management systems, treasury management systems, providers to source market rates and data, and the like." Finally, on "transparency," the paper adds, "Overall, investors note the challenges of accessing real time insights on fund composition (42%), fund performance (30%) and a consolidated view of all their MMF investments (33%). Fee transparency is also a top three issue, reinforcing the need for greater visibility throughout the process."

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