Posts tagged 'Money Market Funds'

Procrastination as a strategy in the global reach for yield

New US money-market fund regulations go into effect on Friday, in case you happened to miss Libor’s climb and the reams of press coverage in the two years since the rules were introduced.

Because the topic has been widely covered, we thought there would be a pretty smooth transition into October. Why would someone put off making that kind of change until right before a big deadline? Read more

MMF flows and restricted money-ness

About $700bn has shifted from prime to government money-market funds this year. Here’s what that says about regulations and the illusion of safety in certain assets. Read more

More on Libor and that Japan connection

October 17 is going to be a big day for global USD money markets. It’s the deadline by which prime money market reforms must adjust to floating NAV models, leaving only those funds investing in government securities able to offer par value protection. The likes of Zoltan Pozsar at Credit Suisse are expecting banks to lose a significant whack of unsecured bank funding as a result. Read more

~$250bn less unsecured financing for financials, says Credit Suisse

The Fed rate-hike may have been priced in by the market, but what are the chances the market really priced in the effects of the rate-hike on the plumbing of the financial system, in particular with respect to the initiation of the unlimited RRP facility?

A report from Credit Suisse’ Global Rates Strategy team provides food for thought on Thursday.

For example, while we’ve already discussed the prospect of safe-asset starved MMF funds deploying en masse to the RRP facility, there’s an important nuance to be noted with respect to the winner funds and the loser funds in this new money-market paradigm.

From CS (our emphasis):

We expect that government-only money market funds are likely to see an inflow of $600bn-$1tn, while institutional prime funds could lose between $300-$500bn over the course of the year.

 Read more

Hungry, hungry, hungry money market funds… about to get Fed

Credit Suisse’s Zoltan Pozsar, shadow banking and all-round financial plumbing expert, has crunched the ways the Wednesday’s Fed rate hike is likely to impact the underbelly of the financial system and notes the biggest outcome is probably the entry of some very hungry money market funds into the Fed’s $2tn RRP facility:

Money funds are getting ready to bid away hundreds of billions in non-operating deposits from banks and invest those funds in reverse repos at the Fed. The more generous these funds are in passing on the first hike, the more deposits they will lure away from banks and the greater the usage of the RRP facility. Banks on the other side of these flows are about to learn the validity of their assumptions regarding deposit betas (how deposits will respond to higher rates) and the liquidity profile of the high-quality liquid asset (HQLA) portfolios built based on these assumptions.

 Read more

Dreams and growth; risky, also interesting

Via Chinese research shop Red Pulse on Tuesday:

Ant Financial announced the beta version of an online private equity trading platform, Antsdaq, on November 23. Antsdaq supports four different types of products, aiming at fundraising between RMB2m and RMB10m. Trial fundraising will start on November 30, through to the end of December. However, investors need to prove net assets above RMB1m in order to be qualified; this can be illustrated by balances on Yu E Bao and other investment tools from Ant Financial, or tied to a credit card with an RMB50,000 limit.

For those who don’t know, Ant Financial is Alibaba’s financial services affiliate which (among other things) manages Alipay’s Yu E Bao money market product offerings. Alipay is Alibaba’s answer to PayPal, albeit a much more shadow banking-esque incarnation of the latter. Read more

Will redemption gates cause runs? Redux

And by redemption gates we mean rules that give a financial intermediary the right to impose redemption restrictions (keep your money) when things get tense and liquidity is scarce. Rules like the SEC approved in July allowing money market funds sold to both retail and institutional investors “to impose temporary suspensions on redemptions, or gates, if a fund’s level of weekly liquid assets fell below 30 per cent of its total assets. The fund could also impose a liquidity fee of up to 2 per cent on all redemptions in those circumstances.”

We’ve asked before if imposing such gates might precipitate the problems they are meant to alleviate — if they might cause runs which otherwise would have been avoided — and at least one SEC commissioner, Kara Stein, thought so when voting against the new MMF rules above:

“As the chance that a gate will be imposed increases, investors will have a strong incentive to rush to redeem ahead of others to avoid the uncertainty of losing access to their capital… “More importantly, a run in one fund could incite a system-wide run.”

Now, here’s the New York Fed’s Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi arguing just that  Read more

Redemption is, a mutual fund story

Summary of stuff you probably know up top, newer stuff on whether big mutual funds are in fact systemically important nearer the bottom.

Last week the SEC finally got around to publishing new rules for money market funds which forces certain, arguably riskier, funds to switch to a floating share price instead of the current fixed $1-a-share cost. They have two years to comply.

Now, as Matt Levine says, you can largely ignore the changes if you’re a (coddled) human rather than a corporation as funds targeted at retail investors will be exempt from the floating share price, but still, from the FTRead more

The peer problem for peer-to-peer lenders [update]

A friend of FT Alphaville who works in the real world, far from finance, asked us what we think about putting money with peer-to-peer lenders.

We advised him to buy gold-bitcoins instead, but it made us want to take a look. It turns out we’re not alone. The chancellor is expected on Thursday to launch a consultation on blessing peer-to-peer lending with inclusion in the UK’s popular ISA scheme for tax free savings accounts.*

But where we think we might be alone, for now, is worrying about something that has afflicted lenders from time immemorial: run risk. Read more

Matched-book repo and the continued shadow crunch

We’ve been paying attention to the various ways in which oncoming regulations are likely to crunch parts of the shadow banking system.

After the Fed released its notice of proposed rulemaking for its implementation of the Liquidity Coverage Ratio last week, the Citi rates team noted that the matched-book repo market would be unaffected by the LCR but nonetheless should expect future regulations of a different kind. Read more

Breaking the full faith and credit, vs breaking the buck

Just for the record, FT Alphaville thinks of ‘technical’ default as one of those weasel words.

Still, some interesting comment from Fitch on Wednesday, on whether defaulted US Treasuries could still call the $2.694trn money market fund industry a home: Read more

Fed Presidents are not going to let Money Market Funds off the hook

A letter lands from the 12 Presidents of the Federal Reserve, led by consistent money market fund critic Eric Rosengren. Reform has been a marathon and they are going to run along behind the SEC waving a big stick until it is finished: Read more

More on GC rates and MMFs

GC repo rates and term (3-month and 6-month) GC futures have fallen in recent weeks. The only mystery is why it took so long.

A decline was largely expected as a result of TAG expiring and the end of Operation Twist. The former had given large risk-averse investors a safe place to stash their money, and the latter had allowed flooded dealer inventories with safe collateral against which slightly less risk-averse investors and MMFs could reverse repo and get a tad extra yield. Read more

Les Miser-NAV-ables

Well, it’s a revolution! Apparently.

This is Goldman’s first report on its money market funds to disclose daily net asset values (h/t Tracy): Read more

MMFs: Float your NAVs or be regulated like banks

A proposal by the Securities and Exchange Commission chairman Mary Schapiro to more closely regulate money market funds was abandoned back in September when three of the five commissioners opposed it. A week or so later it became clear that the Financial Stability Oversight Committee would keep advancing the cause of the MMF reforms. Read more

Money market charts du matin

It might look a little underwhelming but that’s US prime money market funds increasing their exposure to eurozone banks for the third month in a row. At the end of September they were 16 per cent more expoosed on a dollar basis compared to the month before, according to Fitch. Read more

FSOC pushes ahead on MMF reform

UPDATE: A Treasury official got in touch with us after reading this post to explain a little more clearly what happens next.

First a bit of background. Dodd-Frank section 120 authorises the FSOC “to provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards… if the Council determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of such activity or practice could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, financial markets of the United States.” Read more

European repo is on the rise

US money market funds are still cautious about building up exposure to European banks.

However, according to Fitch’s latest Macro Credit Research report on Friday, they seem much more confident about building up exposure on secured terms. As a result, repos as a percentage of exposure to European banks is on the rise to new post-crisis levels: Read more

MMFs still fleeing eastwards

The rivals rely on each other in potentially unstable ways. The US Treasury estimates that 105 money market funds with total assets of $1tn could fail in the same way as Reserve Primary if any of their top 20 counterparties defaulted. The latter include many European banks – 30 per cent of the assets of money market prime funds are European bank debt.

That’s from John Gapper’s column on the failure of the Securities and Exchange Commission to tame the $2.6tn US money market fund industry. Cardiff also has a few words to say on the topicRead more

US money market fund reform goes down

Well, it looks like all the lobbying paid off for the money market fund industry and its backers.

Mary Schapiro, chairman of the Securities and Exchange Commission, has announced that her proposal to reform the industry would not go to a vote because three of the SEC’s five commissioners had already announced their opposition to it. (Two were already expected. Until today, the position of Luis Aguilar remained unknown.) Read more

A response to market monetarists on IOER

A big thanks to economist David Beckworth, one of FT Alphaville’s favourite bloggers, for his characteristically smart and polite post in response to our thoughts on why lowering or eliminating IOER is a problematic idea.

(In our post we had asked what the market monetarists thought of the issues we raised.) Read more

MMFs flee. Again.

Earlier this year, while LTROs-have-saved-Europe sentiment was still a (fleeting) thing, US money market funds began gently easing back into eurozone banks.

But as we noted then, it was fickle money, with exposures of much shorter duration than last year. Read more

QE3, the market functioning fear factor

I guess I would add to that, though, that, you know, each of these nonstandard programs does have various costs and risks associated with it with respect to market functioning, with respect to financial stability, with respect to the exit process, and so I don’t think they should be launched lightly. I think there should be some conviction that they’re needed, but if we do come to that conviction, then we’ll take those additional steps.

— Ben Bernanke on further unconventional Fed measures, at June’s FOMC presser. (Page 8 here, in response to Binyamin Appelbaum’s question.) Read more

What next for European MMFs?

Fee waivers and duration extension, according to Fitch’s Fund & Asset Manager rating group.

They’re talking, of course, about how European money market funds will react to the ECB’s decision to cut its deposit rate to zero, a fact which should soon push the Euro overnight index average (Eonia) to historical lows of between -15 and +15 bps, putting MMF yields at risk of negativity. Read more

The dollar-euro repo arb?… Not yet

Well, here’s one answer to a question we’d been wondering about since last week, when the ECB lowered the deposit rate from 0.25 per cent to zero.

We were curious to know whether some EUR-denominated investors would switch into USD short-term markets in a search for yield. Read more

The ‘natural experiment’ of negative deposits rates in Denmark

Maybe not truly natural, as this is a matter of currency intervention, but close.

After the ECB lowered its interest and deposit rates on Thursday, the Danish central bank, Nationalbanken, followed a few hours laterRead more

Negativity at the door, euro money market fund edition

The cut in the deposit facility rate to zero will almost certainly move cash bids in short-dated instruments into negative territory, and so we have taken the step to restrict subscriptions and switches in to the Funds in order to protect existing shareholders from yield dilution…

That’s JPMorgan, explaining why it’s closed five European liquidity-themed funds to new investors, following Thursday’s rate cuts by the ECB. “We wish to restrict growth in assets at this time,” etc. Read more

The right and wrong debates about money market funds

Amnesia, ignorance and disingenuousness are competing fiercely as a possible explanation for this comment:

“In my view, you’re portraying an industry that’s extremely vulnerable, that has all these risks of runs and I really find that extraordinary in light of the actual history,” Senator Patrick Toomey, a Pennsylvania Republican, told Schapiro. “We’ve had another round of real stress: an ongoing recession, European credit crisis, downgrade of the U.S. government, considerable redemption pressure and not a single problem in this industry.”

 Read more

Will rates stay low, QE or no?

It was inevitable that the abysmal payrolls report last Friday would make louder the calls for another round of quantitative easing from the FOMC, which meets later this month.

QE can take various shapes, but we wanted to mention something about the specific idea of the Fed buying up more US Treasuries: as a few analysts have pointed out recently, there’s a pretty good chance that rates will stay low no matter what the Fed does. Read more