Money Market News
While awaiting the publication of the full final SEC Money Market Fund Reform rules last week, we overlooked a Wall Street Journal editorial, that was highly critical of the SEC and evidently supportive of a floating rate NAV, followed by the Investment Company Institute's pointed response. We summarize the exchange below.
The February 3 Wall Street Journal editorial, "The SEC v. Investors", said, "The SEC voted last week to keep recognizing a select group of private credit-ratings agencies to determine if money-fund assets are safe.... Speaking of blocking reform, Ms. Schapiro also stiff-armed the proposal by fellow Commissioner Kathleen Casey to encourage money funds to transition to floating net asset values.... Ms. Casey has correctly argued that a floating net asset value would give investors more accurate information, and it would ensure that breaking the buck is not a cataclysmic event threatening the financial system. The fund industry is delighted if investors think that all of America's thousands of money funds are too big to fail and eligible for federal rescue, as they were when the government guaranteed them in the autumn of 2008."
ICI President & CEO Paul Schott Stevens responded in a letter entitled, "Wall Street Journal v. The Facts on Money Market Funds, "Your editorial, 'The SEC v. Investors' (Feb. 3), got it wrong. Wrong on the facts, wrong on the analysis, wrong on the strength of the SEC's rules, and wrong on the mutual fund industry's commitment to its investors."
He explained, "First, you seriously misstate the law as well as the mutual fund industry's position on credit ratings. Money market mutual funds are forbidden to outsource their credit judgments to rating agencies. Instead, fund advisers, under board oversight, are required to ensure that every security their funds buy is subjected to an independent assessment of credit quality, in addition to any rating assigned by a credit rating agency. This belt-and-suspenders system effectively limits risk and enhances investor protection by providing an important floor on credit quality, below which funds cannot invest."
Stevens continued, "Second, you totally ignore the serious disruption and damage that investors, markets, and the economy would suffer under the misguided notion of forcing money market funds to give up their commitment to a stable $1.00 net asset value. Fund investors and borrowers in the money market have been almost unanimous in rejecting the notion of floating these funds' NAV. The $3.3 trillion invested in money market funds provides vital funding to the U.S. economy.... Fundamentally changing the structure of these funds would disrupt this significant flow of financing, as investors have clearly stated that they will exit money market funds to keep the tax and accounting efficiencies that stable-NAV alternatives provide. Those alternatives exist -- but they lack the tight limits that bind money market funds and protect their investors."
He added, "Throughout the 30-year history of money market funds, the fund industry has placed the highest priority on investor protection and stability. After the Reserve Primary Fund broke a dollar, the Investment Company Institute proposed new, tighter standards for credit quality, maturity, and liquidity, which our members voluntarily pledged to implement. The Securities and Exchange Commission has now gone well beyond those proposals, with rule changes that will impose significant costs on money market funds and their advisers, and a pledge from Chairman Mary Schapiro that the Commission will pursue still more reforms."
Finally, ICI's Stevens said, "Money market funds have an outstanding record of strength, and we are committed to making them more resilient, even in the face of extreme market conditions. We will continue to work to develop regulations and structures that will build investor confidence and provide liquidity in a crisis -- without fundamentally undermining the vital role that money market funds play for investors and the economy."
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.
It continues, "Normally you'd expect money funds to earn 2 percent to 4 percent a year, but now the average yield is down to around 0.03 percent -- a few hundredths of a penny for each dollar put in. That's a record low since money funds emerged as alternatives to bank accounts for keeping money safe and quickly accessible. Typically, you get a slightly higher yield from a money fund than from an interest-bearing bank account offering comparable check-writing privileges.
AP writes, "Bank or money fund, yields are just plain low now because interest rates are near zero. But with money funds, there could be even more shrinkage soon. Last week the Securities and Exchange Commission approved new rules to make money funds safer. With investing, more safety means lower returns, and money funds are no exception. Don't expect any big drop -- yields don't have much lower to go. And most managers have been running their funds more conservatively for months now in anticipation of the new rules."
They add, "Still, if yields may become even slightly smaller, why stick with money funds? Why not join the crowd that has pulled some $700 billion out of money funds since their assets peaked at $3.9 trillion a year ago? Well, look before you leap, even if money funds stink now. Once interest rates rise from their current near-zero levels, they could come out looking pretty good. Keep in mind, it's only a matter of when rates will rise."
The article, written by Mark Jewell, quotes Peter Crane of "fund industry researcher Crane Data, publisher of the newsletter Money Fund Intelligence," "The risk of rising rates is that it tends to blow up bonds."
Finally, the piece says, "What if you face an unexpected medical bill, or find that house you've been looking to buy, and need a down payment, pronto?" It quotes Crane, "Liquidity isn't important, until you need it."
In other news, see the release, "SEC Charges State Street for Misleading Investors About Subprime Mortgage Investments," which involves losses in an ultra-short bond portfolio. (See our Crane Data News Aug. 29, 2007, "State Street Limited Duration Bond Incorrectly Called Enhanced Cash".) Robert Khuzami, Director of the SEC's Division of Enforcement, says, "State Street led investors to believe that their investments were more diversified than a typical money market portfolio, when instead they were invested almost entirely in subprime investments that ultimately caused hundreds of millions of dollars in losses."
The February 2010 issue of Crane Data's flagship Money Fund Intelligence newsletter, which goes out to subscribers this morning, features the stories: "SEC Passes New Money Market Fund Reforms," which discusses the recently-passed Amendments to Rule 2a-7; "Navigating New Rules: Q&A w/Stephen Keen," an interview with the veteran money fund attorney and Partner of Reed Smith LLP; and "Will Rising Rates Bring Outflows to Inst MMFs?," a look at how institutional assets have fared in past periods of Fed funds rate hikes. We excerpt several quotes below. Note that we're expecting the SEC's Final Money Market Reform rules to be posted next week, or even later today, so stay tuned!
Our lead story says, "Last week, the U.S. Securities & Exchange Commission approved the outline of the first changes to money market mutual fund regulations since 1997, tightening Rule 2a-7's quality, maturity and liquidity standards, and adding a new liquidity mandate. The Commission's summary release, entitled, "SEC Approves Money Market Fund Reforms to Better Protect Investors," says, "The Securities and Exchange Commission today adopted new rules designed to significantly strengthen the regulatory requirements governing money market funds and better protect investors."
Stephen Keen says on money fund regulations in MFI, "The rule is almost always -- you have to do what you decide is appropriate for a stable value fund. The rule isn't that can run your securities at an adequate maturity of 90 days. It is that you run them at a adequate maturity consistent with the stable net asset value, not to exceed 90 days.... Now you need to operate with adequate liquidity to meet your expected redemptions."
Finally, our study of asset flows during periods of falling, flat and rising rates says, "We decided to look back at the last 5, 10 and 20 years to see just how much institutional assets appear to be impacted by rate moves. The answer appears to be that rate cuts have helped money funds tremendously, but flat rates, and rate hikes, have merely slowed or stalled asset increases."
Money Fund Intelligence features news, info, and performance on over 1,300 money market mutual funds. Statistics include: assets, WAM, expense ratio, 7-day yield, 30-day yield, 1-month return, 3-mo, YTD, 1-year, 3-yr, 5-yr, 10-yr, and since inception returns, and gross yields. MFI also contains tables of the top-yielding and largest money funds and our benchmark `Crane Money Fund Indexes. To request a sample of the latest issue, e-mail info@cranedata.us.
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.
Chairman Shapiro said, "I believe one of the key lessons of the financial crisis is the need for strong liquidity buffers in money market funds. Today's rules for the first time, will establish liquidity standards for money market funds. These new liquidity standards will require money market funds to have enhanced reserves of cash, and securities that can be readily converted to cash, so that they can meet heightened investor demand for redemptions, as occurred in September 2008. Under the new liquidity standards, money market funds would have to meet both daily liquidity requirements of 10 percent of assets in cash and cash equivalents, and weekly liquidity requirements of 30 percent. The rules also will impose a requirement to have 'know your customer' procedures in order to identify the potential for large redemptions and have sufficiently liquid securities in place to meet them."
Commissioner Walter commented, "Money market funds have become a very important part of our financial markets. Investors use these funds primarily to pursue a conservative investment strategy or temporarily invest excess cash.... [I]nvestors currently have over $3 trillion invested in money market funds. By way of reference, that is more than the gross domestic product of France. For more than three decades, our laws governing money market funds have provided a regulatory foundation that has helped make such funds a popular investment vehicle for investors. However, the market turmoil that began in 2008 has shown us areas where we can improve.... The amendments I hope we adopt today will help to ensure that the laws governing money market funds will continue to serve investors, and our markets, for decades to come."
Aguilar's comments, entitled, "Fortifying the Money Market Framework Upon Which Investors and Issuers Rely," included, "The amendments being adopted today decrease the likelihood that money market funds will go through a similar crisis. Even as we adopt the additional safeguards being considered today, however, investors in money market funds need to realize that, as with almost any investment, these investments have risk. Nonetheless, it seems clear that our actions today will make the funds safer and will serve to better align the funds' ability to maintain a net asset value, typically at $1.00 per share, with the expectation of investors that one (1) dollar in means one (1) dollar out. This may be the most important expectation that investors have when they invest in money market funds. It needs to be protected."
Finally, while four Commissioners strongly supported the proposals (and money funds), Casey strongly opposed the measure. She said, "While I appreciate many of the reform proposals set forth in today's adopting release, such as the enhancements to liquidity and maturity, they simply do not go far enough. Some are good; others go in the wrong direction; and collectively, they do not address fundamental issues at the heart of rule 2a-7. Absent more fundamental changes to the rule and their structure, money market funds will remain susceptible to runs and we would be furthering the view that these funds are implicitly guaranteed or insured by the U.S. government.... If we are to address these concerns, one of two logical paths lies ahead: either money market funds will require recourse to dedicated liquidity facilities ... or they should move to a floating NAV."
The American Securitization Forum's ASF 2010 conference concludes today in Washington DC. The asset-backed security organization's annual event attracts thousands, and this year's agenda included two sessions focused on asset-backed commercial paper. Crane Data attended the ABCP Market Developments and Outlook and ABCP Investor and Issuer Roundtable panels on Monday, along with a surprisingly sizeable and upbeat contingent of money fund managers, securities issuers, and ABCP servicers.
ABCP Investors on the panel included Wells Fargo's Matthew Grimes and Federated Investors Debbie Cunningham, and issuers included PNC Capital Markets' Reginald Imamura and HSBC's Richard Burke. The Market Developments panel featured Credit Suisse's Maureen Coen and Orrick's James Croke, among others.
Grimes and others bemoaned the lack of supply. He said, "We've seen our primary investment base shrink. Right now, more than ever, we need issuers who are going to be consistent short-term issuers on the short end of the curve. We have money that needs to go to work every day." He also noted that, "The money fund balances for prime have held up very well.... They are in there [funds] because it's a stable investment."
Cunningham explained, "Prime money market funds have invested about one-half of their assets historically in commercial paper. It's now down to about one-third." Funds have been investing in government agencies and bank CDs to make up for the decline, she explained. (ABCP now totals about $440 billion and makes up about 40% of the CP market.) Cunningham added, "Historically, MMFs have loved the diversification of ABCP."
The two noted that the recent SEC rule changes for money funds don't have much impact on the ABCP market. The SEC "removed rating requirements for ABCP paper" but that's about it noted Cunningham.
Participants expressed concerns about pending regulatory changes, and the money fund liquidity mandates being at odds with the FAS (166 and 167) and bank's potential new lliquidity buffer and coverage rules. JP Morgan Securities' said, "The industry is hopefully not done discussing these roles with regulators."
Look for more coverage on this and regulatory issues in the upcoming February issue of Money Fund Intelligence, and watch for the SEC's Final Money Market Fund Reform rules to be released very soon.
Today'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."
Reporter Daisy Maxey continues, "Federated Investors, which manages $313.3 billion in money-market assets, welcomed the enacted changes 'not so much for what was done, but for what wasn't done.' It was pleased that the SEC opted to retain $1 net-asset-value pricing, rather than establishing a regime where $1 invested could fall below that value, said Debbie Cunningham, chief investment officer at Federated, in a statement on the firm's Web site."
The Journal piece summarizes the rules, then says, "While some in the industry aren't happy with some of the restrictions, in general 'money funds aren't all that upset one way or another,' said Peter Crane, president of Crane Data LLC."
They continue, "Federated doesn't believe that requiring money funds to regularly disclose the underlying value of their assets per share on a delayed basis will undermine the way funds currently operate using net asset value, Ms. Cunningham said.... Overall, the changes may lower money fund yields 'a couple of basis points,' or hundredths of a percentage point, she said. Much of the industry, including Federated, has already been trending toward such changes, so much of the change is already reflected in funds' yields, she said."
The WSJ also says, "Vanguard Group, which manages about $180 billion in money-market fund assets, believes the SEC struck a balance between investor protection and the efficient management of money-market funds, a spokesman said.... The rule change won't fundamentally affect Vanguard's approach, the spokesman said."
But, the Journal continues, "In announcing approval of the amendments, SEC Chairman Mary Schapiro said they're only a first step. The SEC will continue to pursue more fundamental changes, including a floating NAV; real-time disclosure of shadow NAV; and a private liquidity facility to provide liquidity to money-market funds in times of stress among other options, she said."
They conclude, "That's worrisome for some in the industry." They quote Crane, "It's like, 'You mean we're not done?' ... Still, he expects that a floating-rate NAV, capital requirements or a liquidity exchange bank for money funds are unlikely to be required." Crane tells the Journal, "The benefits of a floating-rate NAV have not been shown."
On Friday, during the company's quarterly earnings conference call, Federated Investors President & CEO Chris Donahue commented, "Now, the SEC's adoption of new money market rules was a welcome development. We believe that the changes announced will strengthen the regulatory framework that money funds operate within, and do what all of the regulators and governmental officials have said is their goal, enhance the resiliency of money funds. It was clear to us that the SEC carefully considered the comments made by Federated and others in arriving at these changes."
He added, "We anticipate that these changes will not materially alter the way we manage our funds or even the yields of our products as we have generally applied these standards already. We are encouraged by the process, and expect that any future changes follow the path of preserving the key characteristics of money funds that enable those products to play a vital role in our capital markets."
Asked to handicap the likelihood of 'transformational reform' with Paul Volcker 'back on the scene,' Donahue responded, "Considering sin is not the same as committing sin.... Mary Shapiro has made it clear that they are going to continue to look at an array of issues. We don't place much likelihood at all on changing the NAV to a fluctuating NAV. No matter how often someone talks about doing it, you have to face the reality of the importance of these funds in the capital markets in terms of the securities that are owned a $3.3 trillion dollar industry."
He continued, "[A]bout $325 trillion dollars has gone through money fund since the SEC's successful initiation of Rule 2a-7.... You also have to note that there's been over the last 24 years about $450 billion paid to investors more than they would have gotten in the MMDAs. So, yes you can consider all of these things, and that's fine. But we don't place much weight on the idea that they are going to change the NAVs. What we have seen is a regulator, especially the SEC and especially on 2a-7, that over decades has consistently gotten it right because of aggressive study, back and forth, and considered judgment in the end. And that is what will look forward here in to the future."
When queried on capital requirements, Donahue said, "Yes, we do have a lot of confidence that that will not happen [capital requirements for money markets] despite protestations and commentaries by others in the marketplace.... [Y]ou have to ask yourself, 'Is this business supportable by a 10%, or a real bank capital, [requirement] on it?' Go ask JPMorgan ... with $400 billion in money market funds as to how that business would function if they put real bank capital requirements on them. The need for it is a little odd when you consider that the money funds don't do the leverage thing, and they surely don't fail the way banks fail."
He added, "Even in The Reserve situation, they got 99 cents at the end. Now it wasn't a pleasant result because of the delay, but don't forget that in the Putnam situation it was all able to be resolved within the context of other money funds and some cooperation from various regulators. So when Mary Shapiro is summarizing the various things that she's looking at, capital wasn't one of the ones that she listed during her call earlier this week."
Finally, Donahue said, "So, it's again one of those things that gets mentioned out in the marketplace a lot.... But we don't think that it is going to come about. A footnote: Mary Shapiro did mention of course the private liquidity facility to provide liquidity to money market funds in times of stress.... So there may be some modest capital requirements in however that ends up being structured. But that is all that I can say about that so-called liquidity bank."
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing: December 2009 and its latest weekly "ICI Reports Money Market Mutual Fund Assets" last night. Both series continue to show significant money fund asset declines. The December numbers show money fund assets declined by $512.7 billion, or 13.4%, in 2009, falling to $3.3196 trillion as of Dec. 31. Money funds percentage of all mutual fund assets fell from 39.9% of the $9.6011 trillion in assets on Dec. 31, 2008, to 29.8% of the $11.1264 trillion as of 12/31/09.
ICI's weekly release says, "Total money market mutual fund assets decreased by $21.93 billion to $3.218 trillion for the week ended Wednesday, January 27.... Taxable government funds decreased by $6.14 billion, taxable non-government funds decreased by $12.58 billion, and tax-exempt funds decreased by $3.21 billion." Year-to-date in 2010, money fund assets have decline by about $75 billion, or 2.3%.
ICI's monthly stats show money fund assets rising slightly in December, up $3.5 billion. Taxable funds rose $10.7 billion to $2.9221 trillion while Tax-Free money funds fell $7.2 billion to $397.5 billion. ICI's "Trends" says, "Money market funds had an outflow of $161 million in December, compared with an outflow of $48.55 billion in November. Funds offered primarily to institutions had an inflow of $17.50 billion. Funds offered primarily to individuals had an outflow of $17.66 billion." Net new cash flow to money funds totalled negative $536.65 billion in 2009 vs. a positive net new cash flow of $637.11 billion in 2008. Liquid assets of stock mutual fund remain near record lows at 3.6%.
ICI also released its "Month-End Portfolio Holdings of Taxable Money Market Funds." It shows that CD holdings surged in December, rising $32.8 billion to $671.7 billion. CDs remain the largest holding in money funds at 23.0%. Second is U.S. Government Agency Securities at 19.1% ($557.6 billion), while Commercial Paper is third at 17.9% ($522.7 billion). Repos fell to fourth place with $490.7 billion, or 16.8% (down $92.6 billion in Dec.). Treasury securities account for 14.0% of holdings ($410.3 billion), Notes (Corp and Bank) account for 5.9% (173.2 billion), and Other securities account for 3.2%.
For more on asset flows during 2009, see Crane Data's latest Money Fund Intelligence Distribution Survey. Click here for the release on the SEC's Money Market Fund Reforms, or see our previous stories below. The full Final Rules should be posted here later today or early next week.
As we reported yesterday, the Securities & Exchange Commission approved its long-awaited Money Market Fund Reforms, the latest changes to Rule 2a-7, the regulations governing money market mutual funds. The SEC voted 4-1 in favor of the new rules, which tighten maturity and quality rules, and add new liquidity mandates. (See our story from yesterday for the full summary, "SEC Approves Money Market Fund Reform Proposals, Hosts Webcast," and click here for the full Open Meeting Webcast.) The new regulations will be "effective 60 days after their publication in the Federal Register." The SEC says, "Mandatory compliance with some of the rules will be phased in during the year." The final rules, including compliance dates, will be posted on the SEC Web site as soon as possible." (Watch the SEC's Final Rules page.)
In her prepared remarks (see them here), SEC Chairman Mary Shapiro said, "The Commission [adopted] significant revisions to our oversight of money market funds -- revisions that include increasing credit quality, improving liquidity, shortening maturity limits, and requiring the disclosure of a fund's actual 'mark-to-market' net asset value, known as a 'shadow NAV,' on a delayed basis. Today's action grows out of the financial crisis of 2008 and the weaknesses revealed by the 'breaking of the buck' of the Reserve Primary Fund in September 2008. Those events precipitated a full-scale review of the money market fund regulatory regime by the SEC. And the adoption of today's rules is an important step -- but just a first step -- in our efforts to strengthen that regime."
She says, "The rules will tighten the maturity and credit quality standards for money market funds, and impose new liquidity requirements.... [Our] new rules will impose a 60-day [WAM] standard, rather than the current 90-day standard.... [and] will impose a weighted average life restriction [of] 120 days. With respect to 'second tier' securities ... we are limiting such securities to 3 percent of a money market fund's total portfolio.... Under the new liquidity standards, money market funds would have to meet both daily liquidity requirements of 10 percent of assets in cash and cash equivalents, and weekly liquidity requirements of 30 percent.... [T]he rules will create a substantial new disclosure regime so that everyone from investors to the SEC itself can better monitor a money market fund's investments and risk characteristics."
ICI President and CEO Paul Schott Stevens commented, "The mutual fund industry supports the SEC's action today to make money market funds more resilient in the face of extraordinary market conditions, such as we saw in the fall of 2008.... ICI will remain in close dialogue with the SEC and other regulators while they consider further changes to money market fund regulation. We will urge them, however, not to take steps that would undermine money market funds' value to investors or the significant role that these funds play in the U.S. economy.... In particular, we will continue to oppose strongly any move that would directly or indirectly require money market funds to abandon the $1.00 fixed net asset value that has been a defining feature of these funds. Investors and issuers in the money market have filed extensive comments with the Commission, and they have been almost unanimous in pointing out the serious damage that floating these funds' NAV could inflict on investors, markets, and the economy."
Debbie Cunningham said in "Market Memo" entitled "Federated welcomes SEC money market changes", "We at Federated welcome the changes to money market fund industry oversight approved today by the Securities & Exchange Commission, not so much for what was done but for what wasn't done. Most significantly, we were pleased that the SEC opted to retain the stable $1 Net Asset Value (NAV) pricing for funds instead of replacing it with a floating rate as had been considered. As a more than $3.2 trillion business, the money market industry is a critical source of short-term funding for U.S. businesses and industry that is built around the concept of $1 NAV, which is easy to use for record-keeping, accounting and valuation purposes. The SEC will require money funds to regularly disclose the underlying value of their assets per share on a delayed basis -- so-called shadow pricing -- but we don't believe that will undermine the way funds currently operate using NAV."
Look for additional responses to be posted later today and tomorrow. Watch for more coverage as the full final rules are posted, and look for in-depth analysis in the February issue of Money Fund Intelligence. Finally, please let us know your thoughts and opinions!
This morning, the SEC voted to approve its Money Market Reform Proposals. (See the recorded webcast here.) A released summary statement says, "The Securities and Exchange Commission today will consider adopting new rules designed to significantly strengthen the regulatory requirements governing money market funds. The rules will, if adopted, increase the resilience of these funds to economic stresses and reduce the risks of runs on the funds." No word yet on the implementation timetable, but the full final rules should be released within days.
The SEC continues, "The rules would improve liquidity, increase credit quality and shorten maturity limits. They also would enhance disclosures by, among other things, requiring the posting on a delayed basis of a fund's 'shadow' net asset value or NAV, rather than the stable $1.00 NAV at which shareholder transactions occur. This information would enable the SEC and fund investors to better assess the risk profile of a money market fund and acclimate investors to the idea that money market funds may not always maintain a stable $1.00 share value."
The rules would "Further Restrict Risks by Money Market Funds via "Improved Liquidity: The rules would require that money market funds have a minimum percentage of their assets in highly liquid securities so that those assets can be readily converted to cash to pay redeeming shareholders (currently there are no minimum liquidity mandates): Daily Requirement: For all taxable money market funds, at least 10% of assets must be in cash, U.S. Treasury securities, or securities that convert into cash (e.g., mature) within one day. Weekly Requirement: For all money market funds, at least 30% of assets must be in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week."
It also says, "The rules would further restrict the ability of money market funds to purchase illiquid securities by: Restricting money market funds from purchasing illiquid securities if, after the purchase, more than 5% of the fund's portfolio will be illiquid securities (rather than the current limit of 10%). Redefining as 'illiquid' any security that cannot be sold or disposed of within 7 days at carrying value."
The new rules also address: "Higher Credit Quality: The rules would place new limits on a money market fund's ability to acquire lower quality ('Second Tier') securities. They would do this by: Restricting a fund from investing more than 3% of its assets in Second Tier securities (rather than the current limit of 5%). Restricting a fund from investing more than 1/2 of 1% of its assets in Second Tier securities issued by any single issuer (rather than the current limit of the greater of 1% or $1 million). Restricting a fund from buying Second Tier securities that mature in more than 45 days (rather than the current limit of 397 days)."
There will be: "Shorter Maturity Limits: The rules would shorten the average maturity limits for money market funds, which would help to limit the exposure of funds to certain risks such as sudden interest rate movements. They would do this by: Restricting the maximum 'weighted average life' maturity of a fund's portfolio to 120 days (currently there is no such limit). The effect of the restriction is to limit the ability of the fund to invest in long-term floating rate securities. Restricting the maximum weighted average maturity of a fund's portfolio to 60 days (currently the limit is 90 days)."
It also requires: "'Know Your Investor' Procedures: The rules would require funds to hold sufficiently liquid securities to meet foreseeable redemptions (currently there are no such requirements). In order to meet this requirement, funds would need to develop procedures to identify investors whose redemption requests may pose risks for funds. As part of these procedures, funds would need to anticipate the likelihood of large redemptions. Periodic Stress Tests: The rules would require fund managers to examine the fund's ability to maintain a stable net asset value per share in the event of shocks -- such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio (currently there are no stress test requirements).
Regarding, "Nationally Recognized Statistical Rating Organizations (NRSROs): The rules would continue to limit a money market fund's investment in rated securities to those securities rated in the top two rating categories (or unrated securities of comparable quality). At the same time, the rules also would continue to require money market funds to perform an independent credit analysis of every security purchased. As such, the credit rating serves as a screen on credit quality, but can never be the sole factor in determining whether a security is appropriate for a money market fund. In addition, the rules would improve the way that funds evaluate securities ratings provided by NRSROs. They would do this by: Requiring funds to designate each year at least four NRSROs whose ratings the fund's board considers to be reliable. This will permit a fund to disregard ratings by NRSROs that the fund has not designated, for purposes of satisfying the minimum rating requirements, while promoting competition among NRSROs. Eliminating the current requirement that funds invest only in those asset backed securities that have been rated by an NRSRO."
The SEC says on, "Repurchase Agreements: The rules would strengthen the requirements for allowing a money market fund to 'look through' the repurchase issuer to the underlying collateral securities for diversification purposes: Collateral must be cash items or government securities (as opposed to the current requirement of highly rated securities). The fund must evaluate the creditworthiness of the repurchase counterparty."
Under "Enhance Disclosure of Portfolio Securities," the new rule says, "Monthly Web Site Posting: The rules would require money market funds each month to post on their Web sites their portfolio holdings (currently there is no website posting requirement). Portfolio information must be maintained on the fund's website for no less than six months after posting. Monthly Reporting: The rules would also require money market funds each month to report to the Commission detailed portfolio schedules in a format that can be used to create an interactive database through which the Commission can better oversee the activities of money market funds (currently the Commission has no such database of money market fund information). Information reported to the Commission would be available to the public on a 60 day delay. This information would include a money market fund's 'shadow' NAV, or the mark-to-market value of the fund's net assets, rather than the stable $1.00 NAV at which shareholder transactions occur (currently a money market fund's 'shadow' NAV is reported twice a year, with a 60-day delay)."
Finally, the SEC says to "Improve Money Market Fund Operations," under, "Processing of Transactions: The rules would require that all money market funds and their administrators be able to process purchases and redemptions electronically at a price other than $1.00 per share (currently there is no such explicit requirement). This requirement would facilitate share redemptions if a fund were to 'break the buck.' A money market fund 'breaks the buck' when its net asset value falls below $1.00 per share, meaning investors in that fund will lose money. Suspension of Redemptions: The rules would permit a money market fund's board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this would allow for an orderly liquidation of the portfolio. The fund would be required to notify the Commission prior to relying on this rule. Purchases by Affiliates: The rules would expand the ability of affiliates of money market funds to purchase distressed assets from funds in order to protect a fund from losses. Currently, an affiliate cannot purchase securities from the fund before a ratings downgrade or a default of the securities -- unless it receives individual approval. The change would permit such purchases without the need for approval under conditions that protect the fund from transactions that disadvantage the fund. The fund would have to notify the Commission when it relies on this rule."
The Securities & Exchange Commission will discuss and likely adopt its final Money Market Fund Reform proposals Wednesday morning starting at 10:00 a.m. (To view the live webcast, click here.) The Open Meeting Agenda including "Money Market Fund Reform" features Division of Investment Management staff Robert E. Plaze, C. Hunter Jones, Penelope Saltzman, Sarah ten Siethoff, Thu B. Ta, Adam Glazer, and Daniele Marchesani.
The agenda says, "The Commission will consider a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds, to increase the protection of investors, improve fund operations, and enhance fund disclosures. Look for details from a press release and summary around 9:30 a.m. Wednesday, and watch for the full Final Money Market Fund Reform amendments to be posted over the next couple of days. (Check here to see where the final rules should appear around Friday.)
Some of the final rules appear to have leaked already with some stories appearing Tuesday night. The Wall Street Journal says in "SEC To Vote Wed On Rules For Money-Market Funds", "The U.S. Securities and Exchange Commission on Wednesday will vote on rules requiring money-market mutual funds to disclose slight fluctuations around their $1-a-share price, but regulators will leave in place the current $1 standard, according to people familiar with the rule's content. The SEC is scheduled to vote on final rules designed to reduce the risk and volatility of money-market mutual funds. The rule, which is still being finalized, will require funds to disclose fluctuations around $1, called a 'shadow price,' on a monthly basis with a 60-day lag, these people said.... The final rule won't make any changes to the current net asset value framework. But regulators are likely to state that future rules could include a floating standard."
The Journal article continues, "The rule also will include uniform mandatory liquidity requirements for money-market funds at an institutional-investor level, requiring a minimum of 10% of assets to be in liquid securities on a daily basis and 30% on a weekly basis. The SEC had proposed a lower standard for retail investors, but regulators decided after receiving public comment that dual-liquidity standards were too complex to implement and monitor.... In a change to the proposed rule, the SEC decided that it wouldn't ban outright investments in so-called second-tier securities, or those that don't have the highest rating. Instead, the final rule will include limits on money-market funds' use of second-tier securities, limiting their exposure to 3% overall and 0.5%% of any individual second-tier security. The maturity window for second-tier securities also will be reduced from 397 days to 45 days."
Reuters says in "US SEC mull tough rules for money market funds", "The agency is considering requiring money market funds to hold a minimum of 10 percent of their assets in liquid securities and may shorten the average maturity of debt the funds can hold to 60 days from 90 days, the sources said. At a meeting Wednesday, the SEC will also consider requiring funds to publicly disclose the net asset value, or value of each share of a money fund, on a 60-day lag basis.... The agency may consider at a later date other changes that could include a fluctuating net asset value."
Finally, Bloomberg quotes Peter Crane in its "SEC Said to Drop Plan to Bar Money Funds From Lower-Rated Debt," "They are really fighting and clawing over inches.... The vast majority of the changes that the SEC proposed and likely will adopt, most of the industry has been adhering to already." Crane adds, "The SEC rules 'are seen as a necessary evil because you have to do something'.... People are more concerned about the President's Working Group and the re-emergence of Paul Volcker. There's still a slim chance of radical change."
Invesco Aim is the latest money market mutual fund complex to begin producing a regular quarterly communication for clients. The company writes in its most recent "Investment Perspective, Cash Management," an article entitled, "Regulatory reform and low yields face money markets in 2010". The piece says, "Invesco is managing their money market funds through a historically low interest rate environment and pending regulatory reform while continuing to focus on safety and liquidity into 2010."
The Perspective, written by a group led by Tony Wong, Head of Short-Term Investment Grade & Municipal Credit Research at Invesco Aim, describes the "Credit crisis impact on [the] money fund industry," and says, "As you may recall, subsequent to the bankruptcy of Lehman Brothers in September 2008, the Reserve Primary Fund, a U.S. registered 2a-7 money market fund 'broke the buck'.... On September 19, 2008, U.S. government authorities responded by providing support to the broader short term credit markets and to restore the confidence of money market investors. These government policy responses in our opinion were enormously effective and arguably have been the most successful policy actions taken during the crisis to stabilize the marketplace.
Describing the "Dawn of a new regulatory environment, they write, "Along with this unprecedented support, policymakers entered 2009 calling for material changes in the regulatory framework for money funds. However, some of these suggestions called for money funds to be organized and supervised like banks, including access to central bank lending windows and regulatory capital requirements. Other proposals called for money funds to abandon the use of stable NAVs and instead require funds to switch to floating NAVs. Neither of these were attractive for investment advisors who manage money funds or for issuers that rely on the short-term credit markets as a source of capital. But most importantly, some of these policymaker suggestions would be harmful to the millions of investors, both retail and institutional, that rely on money funds as an investment option for their liquidity needs."
Finally, they say, "While Invesco originally had anticipated that the SEC would announce its final rules by the end of 2009, the timetable of the expected release has been pushed into the first quarter of 2010. Additionally, we increasingly believe the Rule 2a-7 reform process will be a multi-step process and that a broader re-examination of the floating NAV concept will occur later in 2010. Alongside the Rule 2a-7 reform process in the U.S., a similar process is occuring in Europe.... Invesco is part of a small group of investment managers invited to engage with the U.S. Treasury, Federal Reserve, and other foreign central banks in developing private sector solutions to ensure the long-term safety and resiliency of money funds."
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