Stories on New Money Fund Regulations

You can see the most recent news and commentaries on the SEC’s new Money Market Fund Reforms at http://www.cranedata.com, but I thought I’d excerpt from a few recent stories below.

This weekend, the Associated Press wrote “​Don’​t count out money market mutual funds” (​here in the Boston Globe). The article says, “​It’​s hard to market any investment when its annual yield starts with a zero. Take money-​market mutual funds. Yields for the safest of safe-​harbor investments have been creeping close to zero for more than a year.

While we’​re still waiting for the final release of the full text of the SEC’​s recently passed Money Market Fund Reforms, we wanted to spend a little time dissecting the various SEC Commissioners’ speeches and comments from last week’​s Open Meeting. The reforms, which passed with a vote of 4-​1, were supported by Commissioners Elisse Walter, Luis Aguilar, Troy Paredes, and Chairman Mary Schapiro. Commissioner Kathleen Casey voted against the new money market fund rules.

Last week’s Wall Street Journal Fund Track column writes “​Money Funds Exhale After SEC Rules; Should They?. The article says, “​Some big players in the $​3.​3 trillion money-​market fund industry are breathing sighs of relief after regulators amended the rules governing the funds. There’​s a chance that relief may prove premature: The Securities and Exchange Commission, in making the changes last week, said it is still assessing the need for more fundamental reforms.”

The Wall Street Journal writes “​SEC: More Changes for Money-​Market Funds”. It says, “Money-​market funds could be forced to pay out less interest under new federal rules designed to make them sturdier. With memories still raw from the 2008 meltdown of Reserve Primary Fund, the Securities and Exchange Commission released rules on Wednesday that require funds to hold more liquid and higher-​quality assets and disclose the value of their assets per share more frequently. The trade-​off: These safeguards also will put pressure on yields that are already near zero. The changes likely will reduce yields by about 0.​10 percentage point, said Pete Crane, president of research firm Crane Data LLC.

I’d love to hear your thoughts!

Fed Inches Toward Rate Hike In Statement; House Bill Impacting MMFs?

(This is reprinted from Crane Data’s Dec. 17 News. See http://www.cranedata.com/archives/all-articles/2628/.)

While most market observers continue to believe that the Federal Reserve remains on hold as far as the eye can see, our admittedly rose-​colored outlook detects several baby steps towards a rate hike by mid-​2010. Yesterday’​s FOMC Statement says, “Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months…. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.”

The Fed continues, “​With substantial resource slack likely to continue to dampen cost pressures and with longer-​term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/​4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Finally, they say, “In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’​s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’​s announcement of June 25, 2009. These facilities include the Asset-​Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility…. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.”

In other news, the Investment Company Institute recently issued the statement, “ICI Statement on House Passage of Regulatory Reform Bill,” which says, “​ICI President and CEO Paul Schott Stevens made the following comment on the House of Representatives’ approval of H.​R. 4173, a bill designed to reform the nation’​s financial regulatory system: ICI supports modernization of the U.​S. financial services regulatory framework…. However, a number of provisions included in the House-​passed bill must be addressed as the legislative process continues. Among other things, the bill, in its current form, could subject mutual funds to wholly inappropriate forms of bank-​like regulation were regulators, however improbably, to deem mutual funds to be a source of ‘​systemic risk.’ In addition, the bill could unfairly require mutual funds and their shareholders to contribute to a dissolution fund for failing financial institutions. Mutual funds do not and cannot ‘​fail’ in a manner that would require payments to funds or their shareholders out of any such dissolution fund. We look forward to continuing to work with Congress to resolve these issues.”

But The Wall Street Journal says in “​Fund Industry Bristles at Bill,” “​Not everyone is persuaded by ICI’​s arguments. The fund group’​s refusal to acknowledge that money-​market funds could fairly fall under the new rules undermines its broader arguments, said Mercer Bullard, associate professor at the University of Mississippi School of Law and president of Fund Democracy, an advocacy group for mutual-​fund shareholders.”

Reserve Primary Fund Debacle Nears Resolution as Court OKs SEC Plan

(This article was originally posted on http://www.cranedata.com on Nov. 25.) Investors in the ill-​fated Reserve Primary Fund, which “​broke the buck” in September 2008, should soon see their total recovery increase to 99 cents on the dollar after a court okayed the distribution of most of the fund’​s remaining assets. The SEC released a “Statement of Securities and Exchange Commission Chairman Mary L. Schapiro on the Court’​s Order Adopting the SEC’​s Proposed Distribution Plan in the Reserve Primary Fund Case” late Wednesday, which says, “We are pleased with the court’​s order adopting the SEC’​s distribution plan in the Reserve Primary Fund case.” (​See also our “Link of the Day”.)

It continues, “​From the start, our goal was to return money to investors as quickly and fairly as possible and to avoid the extended quagmire of litigation that would have only served to deplete the finite pool of money used to pay investors. With this goal in mind, the SEC took the lead in proposing a just and equitable resolution and forging a consensus among the vast majority of investors who recognized the benefits of resolving this matter amicably…. The proposal by the SEC advocated a pro-​rata distribution plan that provides an equal payout to all shareholders who have not had their redemption requests fulfilled, regardless of when they submitted those redemption requests. It is estimated by the Reserve Fund that the amount to be returned would be 99 cents on the dollar, or more.”

Shapiro continues, “Without this distribution plan, shareholders would have been racing to obtain judgments against the finite pool of funds, possibly leading to conflicting judgments by different courts and tapping into a $​3.​5 billion pot that had been set aside by the Fund to cover litigation costs. In fact, approximately 30 lawsuits already had been filed across the country at the time we proposed our plan. The SEC plan approved by the court eliminates these claims on the remaining assets, freeing up money to be returned to investors. Today’​s ruling affirms our approach and should enable all investors to get back their money quickly.”

The SEC says on background, “​On September 15, 2008, the Reserve Primary Fund, which held $​785 million in Lehman-​issued securities, became illiquid when the fund was unable to meet investor requests for redemptions. The following day, the Reserve Fund declared it had ‘​broken the buck’ because its net asset value had fallen below $​1 per share. On May 5, 2009, the SEC filed fraud charges against several entities and individuals who operate the Reserve Fund for failing to provide key material facts to, and affirmatively misleading, investors and trustees about the fund’​s vulnerability as Lehman Brothers Holdings, Inc. sought bankruptcy protection. More significantly, in bringing the enforcement action, the SEC sought to expedite the distribution of the fund’​s remaining assets to investors by proposing a plan of liquidation.”

It adds, “In its complaint, the agency asked the court to enter an order compelling a pro rata distribution of remaining fund assets, which would release money that is currently being withheld from investors pending the outcome of approximately 30 lawsuits against the Reserve Fund, the trustees and other officers and directors of the Reserve entities.”

Money Markets Hiring?

While most continue to talk about the bleak economic and employment picture, we couldn’t help but notice that the last 4 entries in a row on Crane Data’s “People” news section (http://www.cranedata.com/news/people/) were in effect “help wanted” posts. Of course, it’d be a stretch to consider the segment booming, but it’s nice to see any “green shoots”. We’d love to hear your thoughts on the state of the job market in the money markets. We excerpt several of them below.

Dwight Asset Management is seeking an East Coast sales representative for its new cash management unit. E-​mail jdonohue@​dwight.​com for more info.

We were just told about a “​help wanted” notice for a Principal Investment Officer in the Office of the State Treasurer State of Connecticut. The description says the applicant would be, “Responsible for the investment policy, direct investment, portfolio oversight, and administration of the Short-​Term Investment Fund (​STIF), a $​4-​5 billion AAAm rated government investment pool, and all short-​term investment-​related activity of the Treasurer’​s Office.”

Russell Investments is seeking a Senior Fixed Income Portfolio Manager, Short Term Investments for its Investment Division in Tacoma, WA. The description posted on Russell.​com says, “The Portfolio Manager will develop and implement investment strategy to attain fund objectives and to adhere with portfolio guidelines as well as contribute to group strategy formulation, idea generation and assume responsibility for trade execution. They will provide input to credit decisions and to identification of new security types.”

New York Times on Auction-Rate Securities … Again

The New York Times recently complained about a recent lawsuit involving auction-rate securities failing in a blog, “When Law Obscures the Facts” (http://dealbook.blogs.nytimes.com/2009/10/09/when-law-obscures-the-facts/#comment-323241). The article says, “The collapse of the auction-rate securities market is a largely forgotten part of the financial crisis, a disaster that was soon overwhelmed by bigger ones — except for the investors who were caught up in it, The New York Times’s Floyd Norris writes in his latest High & Low Finance column.” (To read the original, see: http://www.nytimes.com/2009/10/09/business/09norris.html?dbk.)

It continues, “The investors thought they were buying safe short-term securities — sort of like a money market fund but with an expectation of a slightly higher return. The securities were supposed to be easy to sell for face value. Now, Mr. Norris says, many of the investors are stuck with securities that pay ridiculously low yields. In some cases, the securities will never mature, so the investors will never get their money back unless they sell them for a fraction of what they paid. Those who thought they were being safe and cautious in fact were taking huge risks.”

As we wrote in a comment, calling the auction-rate securities market “forgotten” is a laugher. The New York Times has written about this tiny sector of the investment marketplace more times than I can count. Investors, all clearly qualified, sophisticated institutions, enjoyed outsized returns for years. Meanwhile, The Times never uttered a peep. Why didn’t they question why the sector was able to pay higher rates than money market mutual funds? Investors accpeted the returns, so were clearly were aware of the risks. Any additional attempts to extort more money from financial institutions only rewards a handful of lawyers and punishes the vast majority of investors who had enough sense to avoid higher-yielding “free lunches” like auction-rate securities in the first place.

Crane Data Surveys Subscribers on Money Fund Reg Changes

The following is taken from the August issue of Crane Data’s (http://www.cranedata.com) Money Fund Intelligence newsletter, and gives our subscribers opinions on the SEC’s proposals for Money Market Mutual Fund Reform.

Crane Data recently surveyed MFI subscribers and readers of our website at www.cranedata.com about the SEC’s recent Money Market Fund Reform Proposals and issues facing money funds. The responses indicate that ultra-low interest rates have surpassed regulatory changes as the most important issue facing money funds, and that the proposals overall are rated relatively favorably.

MFI e-mailed the brief survey questions to its 800+ readers and received 26 responses. Respondents included primarily money fund managers and sales professionals, but also a number of money fund investors and money market securities issuers. We first asked readers to rate the SEC’s proposals on a scale of 1 to 10, with 10 being the highest. The average score was 6.3. The SEC proposals overall got ‘8’ scores (the highest) from 7 respondents and ‘1’ scores from two. (See page 2 for a summary of the full survey results.)

 Like Liquidity Mandates, Hate 30%

 We then asked, “Which of the SEC’s proposed MMF Reform amendments do you think would do the most good?” The most popular option, “Adding liquidity mandates,” was chosen by 48.3% of respondents. This was followed by “Other” (20.7%), where the majority of write-in options cited the 120-day maximum “spread WAM” as likely the most effective mandate.

 The next question asked, “Which of the SEC’s Proposed MMF Reform Amendments do you think would do the most harm?” Responses were widely distributed with “Moving WAM from 90 to 60 days” garnering the most votes (27.6%), followed again by “Other.” This time the write-ins included: “introduction of Floating NAV,” “differentiating between retail/institutional funds, as it relates to liquidity requirements (30% 7 day punitive!),” and “showing the shadow price to investors.”

 MFI then asked, “What are the most important issues facing money market mutual funds in the coming months?” Respondents were asked to rank the choices (see below left) in order of importance.

 “Ultra-low interest rates” ranked the most important issue (1.7), followed by “Regulatory changes” (2.2), “Competition from banks or new products” (3.6), and “Rising rates” (3.8). “Consolida- tion” trailed in importance (3.9) followed by “Other” (4.3), where a couple of write-in responses included the,  “threat of floating NAV.”

We then asked readers to “Rate the attractiveness of a floating NAV.” Though the overall average of 3.5 indicates this concept’s unpopularity among the money fund community, there were some surprising pockets of support for the idea.

Ten of our 26 respondents rated the concept a ‘1’ (plus one who went off the scale with a zero), while 4 respondents gave the concept a ‘10’. One respondent commented, “potential changes to accounting treatment make it less desirable.”

We then asked, “If you could add or remove a change, what would it be?” Survey takers’ comments included: “Change liquidity mandates,” “I would nix removal of illiquid securities,” “Remove floating NAV from comment consideration,” “In addition to the punitive 30% 7 day liquidity bucket for institutional funds (should be lower) the ‘maturity limit for other portfolio security’ should not be reduced from 397 days,” “Removing second tier securities,” “2nd tier reinstated,” “Removing illiquid securities,” “Liquidity mandates,” “Limit FRNS longer then 12 months and limit the % of FRNs in the fund,” and “don’t change illiquid bucket.”

Finally, we asked, “Are there any other important issues you think Crane Data should address in a comment letter or in an article?” Readers said: “US government support in the form of liquidity backstop would help the industry. Not an FDIC insurance but a perpetual program to buy securities, or lend against them in the event of market  disruptions,” “The notion of having to distinguish between retail and institutional funds for determination of liquidity requirement,” “Definitely have concerns with publicly publishing actual security prices. Eliminating illiquid securities could potentially stifle innovation — why not have a low max of say 5%?”

Investors in particular responded unfavorably to a theoretical floating rate NAV. One wrote, “If the NAV were re-priced and allowed to float, [our bank] would likely be forced to remove 100% of the $50M we have invested in MMFs. We do not want to be forced out of the MMF market!”

MFI SUBSCRIBER SURVEY           

1. Overall, on a scale of 1 to 10 with 10 being the highest, how do you rate the SEC’s MMF Reform proposals?            Average           6.3

2. Which of the SEC’s Proposed MMF Reform Amendments do you think would do the most good?   

a. Moving WAM from 90 to 60 days.   10.3%

b. Removing Second Tier Securities      6.9%

c. Adding Liquidity Mandates   48.3%

d. Removing Illiquid Securities   6.9%

e. Disclosing monthly portfolio holdings 6.9%

f. Other ________       20.7%

3. Which of the SEC’s Proposed MMF Reform Amendments do you think would do the most harm?   

a. Moving WAM from 90 to 60 days.   27.6%

b. Removing Second Tier Securities      10.3%

c. Adding Liquidity Mandates   10.3%

d. Removing Illiquid Securities   20.7%

e. Disclosing monthly portfolio holdings 6.9%

f. Other            24.1%

4. What are the most important issues facing money market mutual funds in the coming months?            

 (rank highest to lowest with 1 being the highest, 2 being next, etc.)        

a. Regulatory Changes  2.2

b. Consolidation           3.9

c. Ultra-Low Interest Rates       1.7

d. Rising Rates  3.8

e. Competition from Banks or New Products    3.6

f. Other            4.3

5. On a scale of 1 to 10 with 10 being the highest, rate the attractiveness of a floating NAV.      

Average           3.5

Source: Crane Data.

Fund Associations in Europe Pushing for Money Fund Definition(​s)

This was originally published on http://www.cranedata.com…. The Brussels-​based European Fund and Asset Management Association and the London-​based Institutional Money Market Funds Association recently published a report entitled, “EFAMA and IMMFA Recommendation for a European Classification and Definition of Money Market Funds” (​link pending). The report says, “There is currently no common definition of money market funds across Europe.” This effort “defines clear-​cut rules to clarify what the ‘​money market fund’ label should include,” according to a press release issued jointly by the two organizations.

The full report says, “​At the end of 2008, European money market funds had EUR 1,​350 billion under management, compared to EUR 1,​186 billion at end 2007…. The main domiciles of money market funds at end 2008 were France (​EUR 488 billion), Luxembourg (​EUR 335 billion) and Ireland (​EUR 319 billion). These three domiciles represented 85% of the European money market funds market.” See http://www.cranedata.com’s News for the full article and links.

The While we appreciate any effort by Europe and others to restrict the use of the term “​money market fund” to only those vehicles adhering to strict regulatory oversight and abiding by strict quality, maturity, diversity, and soon liquidity, standards like those in the U.​S., we believe the splitting of categories will continue to only confuse the marketplace. We would urge Europe to restrict the term “​money market” to only the “​short-​term,” highest quality, and most liquid securities. However, we look forward to the discussion and appreciate the efforts of IMMFA and EFAMA. (​Note that IMMFA Chairman Travis Barker is scheduled to speak at Crane’​s Money Fund Symposium in Providence August 25.)

The Die Is Cast: Government Support of Money Funds

We’ve been discussing the fact that the Treasury Guarantee Program for money market mutual funds and the Federal Reserve’s extensive support of the money markets, including the AMLF, CPFF, MMIFF, etc., clearly indicates that money market mutual funds are too big to fail. But only recently have some others begun thinking about the implications of these explicit, and implicit, guarantees. We’ve said for weeks, whether these guarantees are extended or not, the die has been cast. The government will have no choice but to step in to support the money markets should the “1,000 year flood” we just experience return at some point.

In our Crane Data News from May 28 (“CCMR Report Supports ICI Recommendations, Government Guarantees” at http://www.cranedata.com/news/#item-2310), we quote, “The Committee on Capital Markets Regulation, an “independent and nonpartisan 501(​c)(​3) research organization dedicated to improving the regulation of U.​S. capital markets” that counts a number of mutual fund industry heavyweights among its members, recently released a report entitled, “The Global Financial Crisis: A Plan for Regulatory Reform. This report incudes a brief section that weighs in on the issue of changes in money market mutual fund regulations. The CCMR Report supports the ICI’​s recent recommendations, but also appears to come out in favor of continuing a system of government guarantees for money funds.”

The CCMR Report is the first mention (outside Crane Data conversations) to discuss the implied nature of the government’s support of money markets and money market mutual funds. While we believe that the Treasury’s Guarantee Program will terminate in September, we’re pretty confident that the Treasury cannot afford to allow another money fund to “break the buck” at any point in the near future.

We’d love to hear more on this topic and would be happy to discuss in more detail off-line.

Crane Seeks Money Fund Investor Feedback

I’m seeking individual investors and institutional investors to interview them on their thoughts regarding the future of money market funds. The Investment Company Institute, the trade group representing mutual funds, and various regulators and other parties have proposed a series of improvements and suggestions, but the investor has yet to be heard.

Is the $1.00 share price important? Would you sacrifice yield for safety? Are you familiar with the current set of money fund regulations, or could fund companies do a better job of educating their investors? Are you interested in monitoring portfolio holdings?

If you’re interested, contact me (Pete Crane, pete@cranedata.us). I would love to schedule an interview and hear your thoughts. Or please feel free to post on this blog!

Attempting to Standardize “Money Market Fund” Worldwide

There has been talk recently about changing the regulations governing U.S. money market mutual funds in the United States, the mother of all money market mutual fund marketplaces with 63% of the worldwide $5.4 trillion in money fund assets. What some fail to appreciate, however, is how much better U.S. money market funds fared than every single one of their “cash” counterparts, particularly when compared to Europe’s cash offerings.

Bank savings, reserve accounts, enhanced cash, ultra-short, auction rate … everything got savaged. Though U.S. money funds had a number of bailouts and one “breaking of the buck”, the total amount of damage was significantly less severe than practically every other locale and sector. The money fund regulations truly proved their mettle.

What became painfully clear during the Subprime Liquidity Crisis, however, is the threat of contagion. When Reserve Fund broke the buck, it brought into question every similar institutional money fund. Many forget that money market funds originally came under duress due to problems in “enhanced” funds in Europe, specifically BNP and AXA Libor Plus.

Additional concerns over “enhanced cash” funds, such as Columbia Strategic Cash, GE Enhanced Cash, Florida’s Local Government Investment Pool, etc., made it painfully clear that even in the U.S. the regulatory line dividing “money market funds” from other vehicles needed to be strengthened, not removed.

Europe in particular needs a Rule 2a-7, and it’s looking increasingly likely, primarily due to the fact that many who objected to the strict definition of “money market fund” are no longer around to protest.