Daily Links Archives: May, 2021

The Federal Reserve Bank of New York updated its list of "Reverse Repo Counterparties." The statement says, "The following have been added to the list of reverse repo counterparties, effective May 27, 2021. T. Rowe Price Treasury Reserve Fund and Vanguard Admiral Funds – Vanguard Treasury Money Market Fund." The NY Fed's current list of "Money Market Funds" now includes: AllianceBernstein: AB Fixed-Income Shares, Inc., AB Government Money Market Portfolio; BlackRock Liquidity Funds: FedFund, T-Fund, TempCash, TempFund, Money Market Master Portfolio and Treasury Money Market Master Portfolio; BNY Mellon Investment Adviser: Dreyfus Cash Management, Dreyfus Government Cash Management, Dreyfus Institutional Preferred Government Money Market Fund, Dreyfus Treasury and Agency Liquidity Money Market Fund, Dreyfus Treasury Obligations Cash Management; Capital Research and Management Company: American Funds U.S. Government Money Market Fund and Capital Group Central Fund Series, Capital Group Central Cash Fund; Charles Schwab Investment Management: Schwab Government Money Fund, Schwab Treasury Obligations Money Fund and Schwab Value Advantage Money Fund; Columbia Management Investment Advisers: Columbia Short-Term Cash Fund, a series of Columbia Funds Series Trust II; Deutsche Investment Management Americas: Government Cash Management Portfolio; Dimensional Fund Advisors LP: The DFA Short Term Investment Fund of The DFA Investment Trust Company; Federated Investment Management: Edward Jones Money Market Fund, Federated Hermes Government Obligations Fund, Federated Hermes Government Obligations Tax-Managed Fund, Federated Hermes Government Reserves Fund, Federated Hermes Inst Prime Obligations Fund, Federated Hermes Inst Prime Value Obligations Fund, Federated Hermes Prime Cash Obligations Fund, Federated Hermes Treasury Obligations Fund and Federated Hermes U.S. Treasury Cash Reserves; Fidelity Management & Research Company: Fidelity Colchester Street Trust: Government Portfolio, Fidelity Colchester Street Trust: Money Market Portfolio, Fidelity Colchester Street Trust: Treasury Portfolio, Fidelity Hereford Street Trust: Fidelity Government Money Market Fund, Fidelity Hereford Street Trust: Fidelity Money Market Fund, Fidelity Newbury Street Trust: Fidelity Treasury Money Market Fund, Fidelity Phillips Street Trust: Fidelity Government Cash Reserves, Fidelity Revere Street Trust: Fidelity Cash Central Fund, Fidelity Revere Street Trust: Fidelity Securities Lending Cash Central Fund, Fidelity Salem Street Trust: Fidelity Series Government Money Market Fund and VIP Government Money Market Portfolio; Franklin Advisers: The Money Market Portfolio; Goldman Sachs Asset Management: Goldman Sachs Financial Square Government Fund, Goldman Sachs Financial Square Money Market Fund, Goldman Sachs Financial Square Prime Obligations Fund, Goldman Sachs Financial Square Treasury Obligations Fund and Goldman Sachs Financial Square Treasury Solutions Fund; HSBC Global Asset Management (USA): HSBC U.S. Government Money Market Fund; Invesco Advisers: STIT Government and Agency Portfolio and STIT Treasury Portfolio; J.P. Morgan Investment Management: JPMorgan Liquid Assets Money Market Fund, JPMorgan Prime Money Market Fund, JPMorgan Tax Free Money Market Fund, JPMorgan U.S. Government Money Market Fund and JPMorgan U.S. Treasury Plus Money Market Fund; Legg Mason Partners Fund Advisor: Western Asset/Government Portfolio, Western Asset/Liquid Reserves Portfolio and Western Asset/U.S. Treasury Reserves Portfolio; Morgan Stanley Investment Management: Morgan Stanley Institutional Liquidity Funds Government Portfolio, Morgan Stanley Institutional Liquidity Funds Government Securities Portfolio, Morgan Stanley Institutional Liquidity Funds Prime Portfolio, Morgan Stanley Institutional Liquidity Funds Treasury Portfolio and Morgan Stanley Institutional Liquidity Funds Treasury Securities Portfolio; Northern Trust Investments: NTAM Treasury Assets Fund, Northern Funds - U.S. Government Money Market Fund, Northern, Institutional Funds - Government Portfolio, Northern Institutional Funds - Government Select Portfolio and Northern Institutional Funds - Treasury Portfolio; RBC Global Asset Management (U.S.): RBC Funds Trust, U.S. Government Money Market Fund; SSgA Funds Management: Institutional Liquid Reserve Portfolio, Institutional US Gov. Money Market Fund, a series of the State Street Master Funds, State Street Navigator Securities Lending Government Money Market Portfolio and State Street Treasury Plus Money Market Portfolio; T. Rowe Price Associates: T. Rowe Price Government Money Fund, Inc., T. Rowe Price Government Reserve Fund, T. Rowe Price Treasury Reserve Fund and T. Rowe Price U.S. Treasury Money Fund; UBS Asset Management (Americas): Government Master Fund, Limited Purpose Cash Investment Fund, Prime Master Fund and Treasury Master Fund; U.S. Bancorp Asset Management: First American Government Obligations Fund and First American Treasury Obligations Fund; The Vanguard Group: Vanguard Treasury Money Market Fund, Vanguard Market Liquidity Fund and Vanguard Cash Reserves Federal Money Market Fund; Wells Fargo Funds Management: Wells Fargo Government Money Market Fund, Wells Fargo Heritage Money Market Fund, Wells Fargo Money Market Fund and Wells Fargo Treasury Plus Money Market Fund and Wilmington Funds Management: Wilmington U.S. Government Money Market Fund. The NY Fed describes the "Eligibility criteria of the program, "In order to be eligible to become a reverse repo counterparty, a firm must be either: A state or federally chartered bank or savings association (or a state or federally licensed branch or agency of a foreign bank) with total assets equal to or greater than $30 billion, or reserve balances equal to or greater than $10 billion on the last quarter for which relevant reports are available; or A government-sponsored enterprise; or An SEC-registered 2a-7 fund that has, measured at each month-end for the most recent six consecutive months, either net assets of no less than $2 billion or an average outstanding amount of RRP transactions of no less than $500 million. Firms must already have arrangements in place to operate in the triparty repo market, in transactions collateralized by U.S. government debt, agency debt and agency mortgage-backed securities. Firms must be able to execute RRPs with securities margined at 100% (i.e. the value of the securities provided by the New York Fed will equal the funds provided by the counterparty)." (See here for the NY Fed's latest "Repo and Reverse Repo Operations".)

Barron's posted, "Money-Market Funds Are Turning to the Fed to Fend Off Losses [sic], which tells us, "Some short-term Treasury yields have declined below zero for the first time since last year. That has investors sending their cash to the Federal Reserve to avoid losing money." The piece continues, "Several bills maturing in coming weeks and months are trading with yields that are lower than zero, according to Bloomberg data, as investors look for safe corners of markets where they can stash cash piles short-term. Bills maturing through July 1 are trading with yields below zero, though only slightly so, with most remaining higher than -0.1%. Some yields have also fallen below zero in markets for repurchase agreements, where investors lend cash overnight in exchange for Treasuries." Barron's explains, "As a result, money-market funds are sending cash to the Fed overnight instead. The U.S. central bank has an overnight facility where money-market funds, banks and government-sponsored mortgage underwriters can pledge cash overnight at an interest rate of 0%, and that facility saw nearly $433 billion of cash sent its way on Tuesday, the highest usage of that facility since late 2016, according to Bespoke Research. It was the most ever outside of the end of a quarter, a time when institutions often use the facility for regulatory reasons." The piece tells us, "There are a few reasons for the pickup in usage of that way to park cash, called the overnight reverse repurchase facility. First, the Treasury is shrinking the amount of bills outstanding ahead of the reinstatement of the debt ceiling on Aug. 1.... A second and more persistent reason is the Fed's bond-buying program.... And finally, the Treasury has started to release some of the aid it is directing to state and local governments, according to Barclays. Those municipalities may have to keep it invested in money-market funds, Treasury bills, or held as bank deposits until they find uses for it. That additional influx of cash into the system has further boosted the use of the Fed's overnight reverse repo facility." The article adds, "The Fed has already taken steps to make it easier for institutions to use its overnight reverse repo facility, however. At its March meeting, it raised the limit on the amount of cash any individual counterparty could pledge overnight to $80 billion from $30 billion. And New York Fed staffers have discussed widening the reach of the facility to smaller firms and funds, to bring a more 'diverse set of firms.'" Finally, Barron's tells us, "Barclays strategists ... expect the central bank to slightly increase the rate on its overnight reverse repo facility and the interest it pays banks on excess reserves at its June meeting. If the rate looks like it might fall to or below 0.05%, the central bank might move sooner, the strategists wrote. That means the Fed's policy rate likely won't fall below zero. But it is a reason for investors to be wary in short-term markets: They may offer safety and protection from losses when Treasury yields rise, but they aren't offering any yield."

Citywire published an article entitled, "Where the $1tn that moved into money-market funds could go," which tells us, "More than $1tn flew into money-market funds as investors sought safety during the worst of the 2020 pandemic, but those looking to deploy capital should not fire themselves headlong into risky bets to get the maximum bang for their buck. That is according to Jerome Schneider, head of short-term portfolio management at Pimco. Speaking on an internal commentary video, Schneider said 2020 was similar to the post-global financial crisis period when investors wanted comfort and liquidity above all else." He comments, "What we're saying to clients is that we need to be aware of two facets here. One, recognise that there's a very-low-rate environment, one that's dominated by an overwhelming amount of money-market assets near zero interest rates.... Whether that's T-bills, money-market funds or overnight repurchase agreements, and then combine that with the fact that investors are looking for opportunities to take steps out of those money market fund segments, perhaps for a little bit more income, perhaps for a little bit more yield, and in doing so, they need to be prudent." Citywire's piece adds, "Looking at what happened following the global financial crisis, Schneider said it is important to strike a balance between liquidity management, capital preservation and total return. In addition, he said a number of money-market funds may not be as robust as first thought, so redeploying capital would make sense." Schneider adds, "This is why we sort of think about our tiered liquidity structure in this regard. Using some government money market funds as that firm foundation for overnight liquidity, and then at the same time, keeping it very minimal, but judiciously moving some additional assets into what we call our tier two or tier three type of solutions, which seek to compromise and find opportunities into the premiums for the next few months, or even, perhaps, the next few years." (See the PIMCO "Viewpoint", "Stepping Out From Cash: Short-Term Strategies for Today’s Markets," for more.)

We've excerpted from most of the relevant "Comment[s] on Potential Money Market Fund Reform Measures in President's Working Group Report" sent in to the SEC, but we still have a few to go. Today, we quote from another one, which says, "The Center for Capital Markets Competitiveness ('CCMC') is pleased to provide comments on the Request for Comment issued by the Securities and Exchange Commission, on 'Potential Money Market Fund Reform Measurers in President's Working Group Report.'" It continues, "Money market funds (MMFs) exist for the ease of short-term cash management and investment and provide economic benefits to issuers and investors, including individuals, governmental entities, and businesses. As of September 30, 2020, total industry MMF net assets were $4.9 trillion, demonstrating the importance of these investment vehicles for the operation of short-term markets. For many businesses, including those that make up the membership of the U.S. Chamber of Commerce (the 'Chamber'), MMFs are the preferred way to manage fluctuations in cash and to ensure adequate cash flow when needed. Businesses across the country benefit from MMFs in two ways -- as an investment tool for working capital and as a market for the instruments they issue to finance short-term funding needs. Cash inflows and outflows don't always line up, and MMFs act as a financial intermediary in helping businesses offset these discrepancies." The Chamber writes, "The market volatility experienced in March 2020 was the first significant test of these rules' effectiveness. Despite the reforms, the Federal Reserve Board, with the support of the U.S. Treasury Department, intervened in short-term markets via liquidity facilities authorized under Section 13(3) of the Federal Reserve Act including the Money Market Mutual Fund Liquidity Facility (MMLF). The Chamber does not believe inadequate regulation of MMFs was central to the liquidity crisis experienced in short-term funding markets; however, we do believe modest reforms to financial regulation could improve investor confidence in financial markets." They add, "The Chamber appreciates the Commission soliciting feedback from the public before rushing to implement changes to Rule 2a-7. We believe a measured approach, that holistically considers all aspects of short-term funding markets and that preserves the unique benefits provided by MMFs to investors and issuers, is warranted. While reforms to Rule 2a-7 may be appropriate for funds that experienced significant outflows in March 2020, financial regulators should also consider if there are opportunities to improve upon regulation that would limit disincentives for banks to intermediate in short-term funding markets. If the Commission determines Rule 2a-7 are necessary, we would encourage a close review of market behavior by investors confronted by the tie between gates and fees."

We wrote back in our March Money Fund Intelligence, that "Liquidations, Changes Slowly Reshape Manager Landscape." Over the past two months, the fund lineup tweaks have continued, though no major exits have surfaced. Recently, we've removed a number of funds from our Money Fund Intelligence XLS and MFI Daily collections, including (minor) funds from T. Rowe Price, Dreyfus and Wells Fargo. The SEC (497) filing for T. Rowe Price Institutional Cash Reserves Fund announcing its liquidation says, "At a Board meeting held on March 9, 2021, the fund's Board of Directors approved the liquidation and dissolution of the fund. The liquidation is expected to occur on May 14, 2021. Prior to the Liquidation Date, the assets of the fund will be liquidated at the discretion of the fund's portfolio management and the fund will cease to pursue its investment objective. In anticipation of the liquidation, effective May 7, 2021, the fund will be closed to new investors or existing shareholders to purchase Fund shares. At any time prior to the termination, we welcome you to exchange your shares of the fund for the same class of shares of another T. Rowe Price fund. After the fund is liquidated, the fund will no longer be offered to shareholders for purchase." A Prospectus Supplement for Wells Fargo 100% Treasury Money Market Fund explains, "At a meeting held on May 26 and 28, 2020, the Board of Trustees of the Fund approved the elimination of the Sweep Class of the Fund upon the redemption in full of all assets in the class." Finally, Dreyfus, which had announced a series of liquidations and mergers (see our Feb. 11 News, "BNY Mellon Streamlines Asset Management," and their release, "Dreyfus Cash Investment Strategies Optimizes Money Market Fund Range"), finally did the deeds. Announcements include: the liquidation of Dreyfus AMT-Free Municipal Cash Management Plus, Dreyfus AMT-Free New York Municipal Cash Management, General Government Securities Money Market Fund, Dreyfus Institutional Preferred Money Market Fund, Dreyfus Liquid Assets and General Treasury Securities Money Market Fund. (We covered this streamlining at Dreyfus as well as a number of fund lineup shifts in, For more on recent liquidations, see: "SunAmerica Liquidating AIG Govt MMF" (2/18/21), "BlackRock Liquidates Ready Assets" (2/11/21), "Delaware Liquidates Govt Cash Mgmt" (1/11/21), "DWS Liquidating Govt CR (BIRXX)" (11/25/20) and "BMO Liquidating Inst Prime MMF" (11/17/20).

Fund technology firm Calastone posted a Q&A with DWS's Reyer Kooy, who sees, "environment, social and governance (ESG) themes becoming a strategic focus for corporate treasuries." Kooy explains, "Covid-19 has led companies to think about their role in society and their goals in a very different way. They are thinking much more broadly about stakeholders and how their businesses handle ESG issues. Regulations are part of this trend too. The CFO (chief financial officer) and corporate treasurer naturally want to maximise their contribution to ESG priorities by investing responsibly. Hence the interest in the ESG footprint of money market funds (MMFs). Treasurers want to understand the ESG profile of the assets that make up such funds -- how they look through an ESG lens. This means that investment management firms like ours are deploying sophisticated ESG engines to score the underlying securities we are buying on behalf of our mutual funds and investors. We are able to provide transparency on that on a line-by-line basis, showing the ESG score on individual securities, but also at the headline level, showing the overall ESG score of their MMF." He tells Calastone's Ed Lopez, "There are not that many [ESG] MMFs out there. But increasing numbers of treasurers find ESG to be important to their investment criteria. What we've found within MMFs is that there is a small compromise in performance for full ESG MMF strategies. It's important to note that in MMFs the predominant driver of investments is capital preservation, then liquidity, then yield -- in that order. At the moment we do not see a preference for ESG investments over performance. The evidence so far is that while yield is still the least important, if ESG takes yield down by a fraction then investors continue to prefer that yield over ESG criteria.... That's not to say that people don't care and are not interested -- they are -- but given that trade-off the majority still appear to be going for yield, evidenced by the fact that there are very few ESG MMFs out there. But we see movement and there is definitely a groundswell of interest in ESG. Eventually we will reach a tipping point." Kooy adds, "But in the meantime, we understand that there is this tension between desiring -- and in many cases passionately desiring -- an ESG lens on an investment policy, and on the other hand maximizing the yield of the portfolio. So, our own determination has been that we are not ready to fully repurpose our funds to ESG and implement this into our MMFs and give them the ESG badge -- because we have this concern about whether all of our investors will necessarily follow us."

Last week, at the Investment Company Institute's 2021 Virtual General Membership Meeting, ICI President Eric Pan sat down with former SEC Chair Jay Clayton and former CFTC Chair J. Christopher Giancarlo to discuss regulatory issues. Speaking about March 2020, Clayton comments, "If we're going to count on [banks] to provide liquidity, we need to make sure that they have the appropriate amount of freedom to provide that liquidity in times like that." Pan explains, "[With] international bodies like the FSB [Financial Stability Board] ... there's this thinking that March 2020 shows problems in the nonbank financial intermediation area, sort of outside of the banking system. Would you say that that's a fair critique of March 2020? That it really shows there are these unanswered vulnerabilities? ... Or, there actually may be things both in the banking and nonbanking sectors that need to be reviewed?" Giancarlo answers, "What I understand about what happened in the Treasury market -- it was not that the nonbanks didn't show up; it was that the regulated large banks didn't show up and the Treasury had to step in. Now, by constraining big bank balance sheets you in a sense, as Jay just said, push trading liquidity, the responsibility for it, onto nonbank financial institutions that have a different trading approach. They're not dealers.... They can just turn off the lights if the market gets too choppy for them.... Banks play a different role. There's a difference between being a dealer and being a market maker. But I'm not sure you can blame what happened in March on the nonbanks, because the liquidity provision that was expected was because some banks had to move in a different direction and not deploy capital." Clayton adds, "I agree with Chris. Oftentimes when you have periods of stress and you need intervention. People look at things that have bothered them and point to that stress as proof that those things remain risks. An area of focus now is money markets. But what we need to look at there is: money market funds backed by Treasuries are different from money market funds backed by commercial paper, and are different from money market funds backed by municipal securities. I think we now understand that, and we need to take a much more nuanced review, of just for example, money market funds.... [A]nd I think the FSB is looking at it that way if you look at the papers they've put out." Clayton also comments, "[A] more macro point, which is again, if you've pushed more capital formation outside of the banking system, it has to go somewhere or you're going to have no economic growth. And, we shouldn't be surprised that the nonbank financial system is larger today than it was in 2008, and is more important to the continued ... growth of modern economies than it was in 2008." Finally, Giancarlo adds, "I think everything we've seen, to me, proves one thing. That is the reforms to the global economic system cannot be left just in the hands of prudential regulators; there needs to be much better dialogue. All of these markets are connected, and there needs to be much better dialogue, as Jay and I started at the Federal level, and at the international level between market regulators and prudential regulators. You can't view that in a vacuum. I think one of the criticisms that I made of FSB is it's not sufficiently staffed with market regulators. It's overstaffed with prudential and central bankers, and I think as a result some of its choices reflect ... bank finance and not enough about market finance."

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 May 14, 2021) includes Holdings information from 63 money funds (up 14 funds from two weeks ago), which represent $1.976 trillion (up from $1.624 trillion) of the $4.917 trillion (40.2%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $977.3 billion (up from $833.0 billion two weeks ago), or 49.5%, Repurchase Agreements (Repo) totaling $577.8 billion (down from $720.4 billion two weeks ago), or 29.2% and Government Agency securities totaling $232.2 billion (up from $198.0 billion), or 11.7%. Commercial Paper (CP) totaled $64.7 billion (down from $66.4 billion), or 3.3%. Certificates of Deposit (CDs) totaled $48.5 billion (up from $45.7 billion), or 2.5%. The Other category accounted for $56.5 billion or 2.9%, while VRDNs accounted for $19.2 billion, or 1.0%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $977.3 trillion (49.5% of total holdings), Federal Home Loan Bank with $124.1B (6.3%), Federal Reserve Bank of New York with $119.3B (6.0%), BNP Paribas with $58.5B (3.0%), RBC with $48.6B (2.5%), Federal Farm Credit Bank with $43.0B (2.2%), Federal National Mortgage Association with $40.1B (2.0%), Fixed Income Clearing Corp with $36.9B (1.9%), JP Morgan with $30.0B (1.5%) and Mitsubishi UFJ Financial Group Inc with $28.0B (1.4%). The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($220.4 billion), Goldman Sachs FS Govt ($193.8B), Wells Fargo Govt MM ($154.1B), Fidelity Inv MM: Govt Port ($129.6B), Morgan Stanley Inst Liq Govt ($123.1B), Dreyfus Govt Cash Mgmt ($121.4B), JP Morgan 100% US Treas MMkt ($103.9B), First American Govt Oblg ($100.5B), State Street Inst US Govt ($81.6B) and JPMorgan Prime MM ($74.9B). (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.)

ICI released its latest monthly "Money Market Fund Holdings" summary, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (For more, see our May 12 News, "May MF Portfolio Holdings: Repo, TDs Jump; Treasuries, Agencies Drop.") Their MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in April, prime money market funds held 29.9 percent of their portfolios in daily liquid assets and 45.5 percent in weekly liquid assets, while government money market funds held 79.2 percent of their portfolios in daily liquid assets and 88.8 percent in weekly liquid assets." Prime DLA was down from 30.8% in March, and Prime WLA decreased from 45.9%. Govt MMFs' DLA increased from 77.1% in March and Govt WLA increased from 87.2% from the previous month. ICI explains, "At the end of April, prime funds had a weighted average maturity (WAM) of 46 days and a weighted average life (WAL) of 61 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 42 days and a WAL of 90 days." Prime WAMs were up one day from the previous month, while WALs were down one day from the previous month. Govt WAMs were down two days while WALs were down three days from March. Regarding Holdings By Region of Issuer, the release tells us, "Prime money market funds' holdings attributable to the Americas declined from $193.85 billion in March to $173.00 billion in April. Government money market funds' holdings attributable to the Americas declined from $3,490.51 billion in March to $3,470.72 billion in April." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $173.0 billion, or 34.6%; Asia and Pacific at $91.7 billion, or 18.3%; Europe at $229.0 billion, or 45.8%; and, Other (including Supranational) at $5.9 billion, or 1.3%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.471 trillion, or 87.5%; Asia and Pacific at $141.5 billion, or 3.6%; Europe at $339.2 billion, 8.5%, and Other (Including Supranational) at $16.1 billion, or 0.4%."

The Federal Reserve published, "Financial Stability Report May 2021" last week, which covers a range of topics including money market funds, March volatility and funding risks. They explain (on p.45), "In 2020, the total amount of liabilities that are potentially vulnerable to runs, including those of nonbanks, is estimated to have increased 13.6 percent to $17.7 trillion ...; that amount was equivalent to about 85 percent of GDP.... Much of this net increase reflected growth in uninsured deposits and government MMF assets under management. This growth more than offset declines in the second half of the year in the size of prime and tax-exempt MMFs, which are particularly vulnerable to runs. Meanwhile, bond mutual funds continued to grow, on net, in 2020." The report tells us, "As noted in previous Financial Stability Reports, rapid redemptions from MMFs and fixed-income mutual funds contributed to market turmoil at the start of the pandemic, and Federal Reserve actions in the form of emergency lending facilities and regulatory relief provided support to prime and tax-exempt MMFs. Although flows and activities in associated markets have since returned to typical levels, structural vulnerabilities remain at NBFIs such as some types of MMFs as well as bond and bank loan mutual funds. Regulatory agencies are exploring options for reforms that will address these vulnerabilities." A section entitled, "Structural vulnerabilities remain at prime and tax-exempt money market funds," explains, "Assets under management at prime and tax-exempt MMFs have declined since the middle of last year, but vulnerabilities at these funds remain and call for structural fixes. In particular, assets under management at prime MMFs declined over the second half of last year, when some large prime funds closed or converted to government funds, and they have continued to decline modestly since then.... However, vulnerabilities associated with liquidity transformation at these funds remain prominent. A fund engages in liquidity transformation by offering daily redemptions to investors even when the fund's underlying assets may be difficult to sell quickly. The President's Working Group on Financial Markets released a report in December 2020 outlining potential reforms to address risks from the MMF sector. Subsequently, the SEC issued a request for comment on these potential reforms. If properly calibrated, some of these reforms -- such as swing pricing, a minimum balance at risk, and capital buffers -- could significantly reduce the run risk associated with MMFs. Meanwhile, the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility, which were deployed during the COVID-19 pandemic to backstop short-term funding markets, expired at the end of March with no material effect on these markets." It adds, "Other cash-management vehicles, such as dollar-denominated offshore funds and short-term investment funds, also invest in money market instruments and are vulnerable to runs, and some of these vehicles experienced heavy redemptions in March 2020. Currently, between $400 billion and $1 trillion of these vehicles' assets are in portfolios similar to those of U.S. prime funds, and a new wave of redemptions could destabilize short-term funding markets. The Financial Stability Board's (FSB) Holistic Review of the March Market Turmoil highlighted vulnerabilities from NBFIs, including from these cash management vehicles. The FSB, coordinating with other international organizations, will continue work that addresses risk factors that amplified stress and furthers an understanding of systemic risks in NBFIs and policies that could address these risks."

ICI's latest weekly "Money Market Fund Assets" report shows MMFs inched higher after falling last week. Money fund assets are up $219 billion, or 5.1%, year-to-date in 2021. Inst MMFs are up $294 billion (10.6%), while Retail MMFs are down $75 billion (-4.9%). Over the past 52 weeks, money fund assets have decreased by $272 billion, or -5.7%, with Retail MMFs falling by $117 billion (-7.5%) and Inst MMFs falling by $155 billion (-4.8%). ICI's "Assets" release says, "Total money market fund assets increased by $3.37 billion to $4.52 trillion for the week ended Wednesday, May 12, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $9.42 billion and prime funds decreased by $4.48 billion. Tax-exempt money market funds decreased by $1.57 billion." ICI's stats show Institutional MMFs increasing $13.8 billion and Retail MMFs decreasing $10.5 billion. Total Government MMF assets, including Treasury funds, were $3.926 trillion (86.9% of all money funds), while Total Prime MMFs were $495.5 billion (11.0%). Tax Exempt MMFs totaled $94.5 billion (2.1%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.) It explains, "Assets of retail money market funds decreased by $10.46 billion to $1.45 trillion. Among retail funds, government money market fund assets decreased by $6.07 billion to $1.13 trillion, prime money market fund assets decreased by $3.32 billion to $240.36 billion, and tax-exempt fund assets decreased by $1.07 billion to $84.47 billion." Retail assets account for just under a third of total assets, or 32.1%, and Government Retail assets make up 77.6% of all Retail MMFs. ICI adds, "Assets of institutional money market funds increased by $13.83 billion to $3.07 trillion. Among institutional funds, government money market fund assets increased by $15.48 billion to $2.80 trillion, prime money market fund assets decreased by $1.16 billion to $255.17 billion, and tax-exempt fund assets decreased by $494 million to $10.06 billion." Institutional assets accounted for 67.9% of all MMF assets, with Government Institutional assets making up 91.3% of all Institutional MMF totals.

Financial advisor website RIABiz writes that, "Fidelity and Schwab oddly take opposite sides on issue critical to money market funds." The article says, "Fidelity Investments and Charles Schwab Corp. are clashing on a matter that may determine whether prime and municipal money market funds will still exist. At issue is whether to keep net asset values fixed at one dollar for certain types of retail money market funds and whether sub-categories contorted by unrelenting interest rate drops even warrant the name 'money market fund.' The ... brokerage giants are butting heads over the potential introduction of a floating net asset value (NAV) for all prime and municipal money market funds. The split surfaced in letters submitted in April to the Securities and Exchange Commission (SEC).... 'Schwab believes the time has come to consider whether the stable one dollar per share price of prime and municipal money market funds is based on an accounting convention whose time has passed,' writes Schwab['s] Rick Wurster, in a letter to the SEC. 'The commission will also need to resolve whether floating NAV funds should continue to be permitted to call themselves 'money market funds',' he adds. Yet floating NAVs demonstrably don't prevent redemption runs, and by unpegging prime funds from the dollar, the SEC could kill the prime market, Fidelity chief legal officer, Cynthia Lo Bessette asserts in a response." The piece continues, "Fidelity's view matters on floating NAVs. It is top dog in the retail prime market with $91.9 billion under its management (AUM), followed closely by Schwab with $86.7 billion. The pair have a massive lead over all other vendors; Federated Hermes ($27.5 billion) and JPMorgan ($11.1 billion) are their closest competitors, according to Westborough, Mass., money-market fund tracker Crane Data. Of 49 respondents to the SEC, just five companies or individuals and four trade groups joined Schwab in backing the introduction of floating NAVs.... Some 31 respondents rejected floating NAVs, including Fidelity, Federated Hermes, JP Morgan, BlackRock and BNY Mellon." RIABiz quotes our Peter Crane, "Schwab decided to break ranks and say 'we've got to give a significant concession or else [regulators] will hit us with something harder' [and] the floating NAV on prime money funds might be enough.... It's all about throwing the SEC a bone, and everyone wants to throw a bone that doesn't hurt their business."

Please join us for Crane Data's next webinar, "Handicapping Money Fund Reforms," which will take place May 20 (Thursday) at 2:00pm Eastern. (Register here for this free event. Sorry, we had the wrong link earlier!) This one-hour online session will recap the latest developments involving potential future money market fund regulations. Crane Data's Peter Crane and Dechert LLP's Steve Cohen will review reports from the PWG, IOSCO and ESMA and the host of comment letters to the SEC on possible reforms. They'll discuss the latest news, the next steps and when to expect a regulatory proposal from the SEC. Also, mark your calendars for another upcoming webinar, "Asian Money Fund Symposium," which is scheduled for June 17 (Thurs.) from 10:00am-12:00pm EDT. Crane Data is excited to host live events once again in the second half of the year. Our big show, Crane's Money Fund Symposium, is scheduled for Sept. 21-23, 2021, at The Loews Hotel, in Philadelphia, Pa. The latest agenda is available and registrations are now being taken. Registration is $750, and discounted hotel reservations are available. Visit the MF Symposium website for more details. We hope you'll join us in person in Philadelphia! Finally, we're also preparing for our next European Money Fund Symposium, which is scheduled for Oct. 21-22, 2021, in Paris, France. But this show may shift to a virtual event if travel in Europe is slow in recovering from the coronavirus. Let us know if you'd like more details on any of our events, and we hope to see you at an upcoming webinar, or live in Philadelphia or Paris later this year! (Attendees and Crane Data subscribers can access the Powerpoints, recordings and conference materials at the bottom of our "Content" page, and see the materials from our last webinar, ESG & Social Money Fund Update in our Money Fund Webinar 2021 Download Center.)

A new posting entitled, "ICI Roundtable Examines Liquidity Crisis of March 2020," tells us that, "Regulators in the United States and around the world have advocated for money market fund reform in recent months, expressing the view that money market funds were primary contributors to the extreme market stress in March 2020. At an ICI roundtable, "A Study of the Performance of Money Market Funds and the Short-Term Funding Markets During March 2020," on April 29, 2021, money market fund managers from eight ICI member firms detailed the events of March 2020, including the challenges they faced and the decisions they made. Any regulatory action in response to the COVID-19 liquidity crisis should take into account the true drivers of the March 2020 events and should be pursued with a well-informed, evidence-based approach." A brief "Summary of Proceedings and Key Points" explains, "The Investment Company Institute (ICI) organized a two-hour roundtable to investigate the activities of money market funds, their investors, and the short-term funding markets during the weeks before the Federal Reserve announced the Money Market Mutual Fund Liquidity Facility (MMLF) on March 18, 2020 and in the days following. The purpose of the roundtable was to study the experience of money market funds during the liquidity crisis through analyzing proprietary data and asking fund managers to detail the behavior of money market funds and money market fund investors in March 2020. Over 160 international regulators, policymakers, industry participants, and academics attended the roundtable. The moderator of the roundtable was Professor Erik Sirri, a professor of finance at Babson College and former Director of Trading and Markets and Chief Economist at the US Securities and Exchange Commission (SEC). Audience members had the opportunity to ask questions." It adds, "Part One of the roundtable consisted of ICI economists Sean Collins and Shelly Antoniewicz presenting their research about money market funds' portfolio activities during March 2020. Part Two of the roundtable consisted of fund managers from eight of the most significant money market fund providers describing their personal experiences managing money market funds during the March 2020 period, their interactions with investors, and the choices made regarding the portfolios."

Barron's writes, "`Money-Market Funds Face New Rules After Covid Stumble. Here's What Could Happen." They comment, "During the race into cash that happened at the start of the pandemic, investors pulled cash from money-market funds that invest in short-term corporate and municipal debt. That has regulators worried about the stability of the sector again, and they’re considering more rule changes to help shore it up.... As the regulatory process marches forward, strategists at Bank of America are handicapping the likelihood of different changes. U.S. officials proposed a list of 10 potential reforms in their December report, and in a May 6 note, the bank's analysts group them into three main categories." Barron's explains, "The first group would loosen the threshold where funds would have the option of penalizing investor redemptions.... The second group of proposals are meant to encourage either fund-management companies or investors to pay to offset the risk of future runs. For example, officials are considering new rules that would govern exactly when and how a fund's parent company would be required to support their funds, for example, by providing liquidity to meet investor withdrawals. And third, regulators are considering a group of ideas that are meant to reduce the likelihood investors will run to withdraw their cash in the first place. One of the options in this category would be a new rule that would reduce the incentive for an investor to try to pull their money out of a fund first. In essence, the rule would create a delay before an investor could cash out a certain proportion of their shares. That means that if there was a run on a fund, an investor who withdrew early would still share in the losses." They add, "While most money-market fund managers didn't support that idea, Bank of America said, 'it has some potential,' though it 'could reduce the attractiveness' of investing in prime or tax-exempt money-market funds.... In short, 'prime and tax-exempt MMF changes are coming,' Bank of America wrote, 'which we think are likely to weaken investor interest in these funds.'"

ICI's latest weekly "Money Market Fund Assets" report shows MMFs decreasing, following two weeks of increases. Money fund assets are up $215 billion, or 5.0%, year-to-date in 2021. Inst MMFs are up $281 billion (10.1%), while Retail MMFs are down $66 billion (-4.3%). Over the past 52 weeks, money fund assets have decreased by $256 billion, or -6.8%, with Retail MMFs falling by $103 billion (-7.2%) and Inst MMFs falling by $153 billion (-6.5%). ICI's "Assets" release says, "Total money market fund assets decreased by $17.18 billion to $4.51 trillion for the week ended Wednesday, May 5.... Among taxable money market funds, government funds decreased by $11.93 billion and prime funds decreased by $4.75 billion. Tax-exempt money market funds decreased by $504 million." ICI's stats show Institutional MMFs decreasing $10.6 billion and Retail MMFs decreasing $6.6 billion. Total Government MMF assets, including Treasury funds, were $3.916 trillion (86.8% of all money funds), while Total Prime MMFs were $500.0 billion (11.1%). Tax Exempt MMFs totaled $96.1 billion (2.1%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.) It explains, "Assets of retail money market funds decreased by $6.63 billion to $1.46 trillion. Among retail funds, government money market fund assets decreased by $4.20 billion to $1.13 trillion, prime money market fund assets decreased by $2.10 billion to $243.00 billion, and tax-exempt fund assets decreased by $324 million to $85.54 billion." Retail assets account for just under a third of total assets, or 32.4%, and Government Retail assets make up 77.5% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $10.56 billion to $3.05 trillion. Among institutional funds, government money market fund assets decreased by $7.73 billion to $2.78 trillion, prime money market fund assets decreased by $2.64 billion to $257.01 billion, and tax-exempt fund assets decreased by $180 million to $10.55 billion." Institutional assets accounted for 67.6% of all MMF assets, with Government Institutional assets making up 91.2% of all Institutional MMF totals.

The ICI released its 2021 Investment Company Fact Book this morning, which contains a wealth of statistics on money market (and other) mutual funds, and which reviews major fund trends of 2020. The introductory letter, from ICI Chief Economist Sean Collins, states, "2020. What a year. I'm writing this letter sitting in my basement, which has served as my office this past year. It's March 15, 2021, almost one year to the day from March 13, 2020, when vast swathes of the US economy began shutting down because of the COVID-19 pandemic. How things have changed from that fateful Friday the 13th! ... Some things, of course, remain much the same. Throughout this challenging period, ICI's Research Department -- as with all ICI departments -- maintained its intense focus on supporting registered investment companies and the more than 105 million shareholders they serve. As the crisis unfolded, market participants rightly became deeply concerned -- and highly uncertain -- about the effects of the economywide shutdown on businesses, households, and governments. In this environment, all types of investors around the world scrambled to raise cash, a development that quickly morphed into a liquidity crisis. During this time, ICI Research worked tirelessly to provide critical perspective and data to policymakers to help them navigate and respond to the rapidly moving events." He explains, "As the financial markets began to settle, we turned to providing more in-depth analyses of funds' experiences during March 2020, in no small part to help ensure that emerging narratives were based on facts, not supposition. For example, in late May, I was invited to present a detailed analysis to the Securities and Exchange Commission's Asset Management Advisory Committee on funds' experiences in March. In addition, under the guidance and assistance of senior leaders from throughout the fund industry, ICI published the Report of the COVID-19 Market Impact Working Group -- a series of papers discussing developments in the spring of 2020 in the financial markets broadly, as well as in ETFs, money market funds, and UCITS. We also produced a series of blog posts discussing the experiences of bond mutual funds in March 2020. The preface in this year's Fact Book summarizes some of that work and provides a link to the full suite of COVID-19 papers and blog posts. The key theme of this work is that the March 2020 turmoil was driven not by the actions of individual market participants or market sectors, but by uncertainty about how the virus and the shuttering of world economies would play out. In light of the COVID-19 turmoil, regulators are now pondering reforms for many sectors of the financial markets, including ours. As they do so, they must keep the true drivers of the March 2020 turmoil at the forefront of their minds, and must remain cognizant of the benefits regulated funds provide to the world's economies. Funds are an important source of financing -- to businesses, consumers, and governments at all levels -- and a chief way that tens of millions of investors save for long-term goals." Finally, Collins adds, "All of this extraordinary work over the past year is built on the solid foundation ICI Research has built over decades, which is also reflected in the data and analysis we offer throughout the entire Fact Book. For example, Fact Book chapters 1 to 6 provide detail on the remarkable range of products our industry has created to help investors save for their goals, on how our industry is evolving (both in the United States and in other jurisdictions) to meet investors' changing demands, and on the substantial declines in fund fees Main Street investors incur to gain exposure to stocks and bonds through pooled, professionally managed funds. The many figures, tables, and analyses you will find here reflect the efforts of Shelly Antoniewicz and her staff." Watch for more excerpts from the new ICI Fact Book in coming days, and in the May issue of Money Fund Intelligence (which ships tomorrow). ICI also kicks off its 2021 Virtual General Membership Meeting at 1pm EDT today, so watch for coverage of this in coming days too.

Federated Hermes' Deborah Cunningham writes, "Not so smooth. It's time for the Fed to raise overnight rates." She tells us, "With the recent surge in retail sales and jump in gross domestic product growth, you would think the commercial paper market would be robust. But issuance has been flat, which tells us that the spike in bonds many companies offered in 2020 for insurance as the economy tanked has left them flush with cash. As the recovery gains more steam and inflation creeps up, we anticipate more paper to be issued. Concerning inflation, it is curious how the market keeps trying to lead the Fed. While price pressures are increasing and many consumers are itching to spend stimulus checks, the Fed has been deflecting every suggestion of tightening. Investors don't seem to believe that the Fed wants the economy to be piping hot and that it considers the recent rise in activity as lukewarm. We think it could start to taper purchases this year, but no indication yet. These days, the Fed seems happy to make everyone wait." Cunningham adds, "One note on the new Bloomberg Short-Term Bank Yield Index (BSBY). The industry has been waiting for a firm to issue a security tied to it, and Bank of America did so in April. No money funds bought it, but it was taken up by a Local Government Investment Pool and some other lenders. As the index grows in usage, our expectation is that we and the industry will participate regularly. The International Organization of Securities Commissions blessed it last month, so it is chugging along on the track to becoming the index that prime funds will use to replace the London interbank offered rate (Libor). Industry-wide, government money markets grew slightly in April, while prime and tax-free funds faced modest outflows. We kept the weighted average maturities of our money funds in target ranges of 35-45 days for government and 40-50 days for prime and municipal."

A new SEC fund filing announces the pending launch of BNY Mellon Ultra Short ETF. It tells us, "The fund seeks high current income consistent with the maintenance of liquidity and low volatility of principal.... To pursue its goal, the fund normally invests in investment grade, U.S. dollar denominated fixed, variable, and floating rate debt or cash equivalents, including the following: Corporate securities; Asset-backed securities; Repurchase agreements; High quality money market instruments, such as commercial paper, certificates of deposit, time deposits and bankers' acceptances; U.S. Treasury securities; Securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, or government-sponsored enterprises (U.S. government securities); Obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions or agencies; Securities issued by foreign corporations or a U.S. affiliate of a foreign corporation; and Securities subject to purchase and sale restrictions that are offered pursuant to Rule 144A under the Securities Act of 1933, as amended." BNY Mellon writes, "The fund's portfolio, under normal market conditions, will have an average credit rating of A or equivalent. The fund's investments, at the time of purchase, will have a minimum short-term credit rating of P-2, A-2 or F2 or better by Moody's Investors Service Inc. (Moody's), Standard & Poor's Corporation (S&P), or Fitch Ratings (Fitch) ... or a minimum long-term credit rating of Baa3, BBB-, or BBB-." It adds, "`The fund's portfolio managers seek to achieve what they believe provides the optimal portfolio for the fund in terms of preservation of principal, liquidity and producing high current income." For more, see these CD News pieces: Vanguard Debuts Ultra-Short Bond ETF (4/8/21); BFS Short vs. Shorter: JPMAM's Martucci and PIMCO's Schneider Speak (4/6/21); Bond Fund Symposium Highlights: Davis, Driscoll, Rothweiler Comment (4/1/21); Federated Hermes Enters Conservative Ultra-Short BF Market; ICD; CAG; and Vanguard Launching Ultra-Short Bond ETF; Weekly MF Portfolio Holdings (1/21/21).

The Federal Reserve Bank of New York issued a "Statement Regarding Reverse Repurchase Transaction Counterparties," which says, "The New York Fed is making the following adjustments to the reverse repurchase (RRP) counterparty eligibility criteria: For SEC registered 2a-7 funds, the existing requirement to have, for the past six months, either net assets of at least $5 billion or an average outstanding amount of RRP transactions of at least $1 billion is reduced to $2 billion and $500 million, respectively. For government sponsored enterprises, the existing requirement to have either an average daily outstanding amount of RRP transactions of no less than $1 billion for the past three months, or an average daily amount outstanding of overnight money market transactions of no less than $100 million over the past three months, is removed. These changes are designed to make the ON RRP facility more accessible, in line with the New York Fed's efforts to ensure that its counterparty policies support effective policy implementation and promote a fair and competitive marketplace. The New York Fed will consider further adjustments of the 2a-7 fund eligibility requirements over time as appropriate. All other eligibility criteria and expectations remain the same."

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