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.
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.
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
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
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 FT: Read more
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
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
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
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
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
In April we began discussing the possible end of the Transaction Account Guarantee at the end of this year, describing it as a kind of collateral-substitute and as a pseudo-bailout for certain investors (the most extremely risk-averse) in money market funds.
Well, the expiration of TAG increasingly appears inevitable, and today the Wall Street Journal reports: Read more
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
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
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
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
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 topic. Read more
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 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
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
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
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
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
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 later. Read more
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
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.”
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
We’ve written extensively about the problems facing US money market funds, the motives behind the Fed’s adding them to its list of reverse repo counterparties, and how sterilisation of further QE was an idea likely floated with MMFs in mind.
We won’t do a full recap here, but the idea is that with rates low and their margins incredibly thin, money market funds have been competing for a limited amount of collateral against which to lend in repo markets. Read more
Ben Bernanke gave a speech on Monday night about fostering financial stability, which featured a lot about the risks of shadow banking.
From the prepared speech notes, Bernanke lists the reforms around shadow banking that are under way — but “still at very early stages”. One of those is of course money market funds, to which he gives strong support: Read more
Deposit insurance on non-interest bearing accounts — it was in October 2008 that the FDIC started it, through the Transaction Account Guarantee, or TAG.
Until we looked a bit more closely, we hadn’t guessed that the issue could offer much insight into the complexities of shadow banking regulation. Read more