Money Market Funds
Operations and Technology
European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June
By Chris Plantier
July 18, 2014
As we discussed in March and April, European banks have generally become less willing to borrow from U.S. money market funds due to regulatory pressures, especially at the end of the quarter. Specifically, the new Basel III requirements seek to increase capital ratios of banks and explicitly limit how much banks fund their operations through short-term borrowing (which includes short-term securities banks issue that money market funds invest in). This quarter-end effect was particularly strong at the end of June as European bank regulators continued to monitor bank progress toward meeting the new Basel III requirements, which will be fully phased in over the next few years.
In our latest release on money market funds’ holdings, Table 3 shows that the share of European holdings in prime money market funds’ portfolios fell to 32.01 percent in June 2014 from 39.99 percent in May 2014. In addition, Table 2 shows that the share of European holdings in government money market funds’ portfolios fell to 9.60 percent in June 2014 from 14.83 percent in May 2014, primarily reflecting declines in repo (repurchase agreement) holdings with European counterparties. The June 2014 decline in the share allocated to European counterparties is larger than the declines seen in March 2014 and December 2013, suggesting that regulatory pressures on European banks are rising.
Large Drop Reflects Reduced Supply
The June drop in the share of prime money market fund portfolios allocated to European counterparties was the largest decline since Form N-MFP data have been collected, topping even the tumultuous summer of 2011. The large monthly decline indicates that European banks can shrink their balance sheets quickly and/or have the ability to find other sources of funding quickly. We suspect it is a fair amount of the former, since Federal Reserve H.8 data (banks’ weekly balance sheets) indicate that branches and agencies of foreign banks ran off $70 billion in their deposits at the Federal Reserve from June 18 to July 2 (H.8 data are weekly, ending each Wednesday). The largest monthly drops in money funds’ holdings of European banks have tended to occur in June and December when European regulators currently assess progress toward Basel III’s goals, but this pattern may evolve going forward.
Reverse-Repo Facility Picks Up Slack
Table 3 also shows that the share of U.S. holdings in prime money market funds’ portfolios rose to 34.96 percent in June 2014 from 28.33 percent in May. The increase in lending to U.S. counterparties is almost entirely due to the large increase in money market fund lending to the Federal Reserve via the Fed’s overnight reverse-repo facility. The Federal Reserve initiated the facility to help it soak up excess liquidity, which also has the effect of putting a floor under overnight repo interest rates.
The introduction and expansion of the Fed’s overnight reverse-repo facility over the past year has greatly increased the central bank’s role as a repo counterparty. On June 30, 2014, the Fed allotted $339.5 billion in reverse repos (the highest amount ever), of which at least $258 billion was allotted to money market funds, according to ICI’s analysis of Form N-MFP data. In June, 47.88 percent of repurchase agreements reported by government money market funds and 45.67 percent by prime money market funds were attributable to the Federal Reserve as a counterparty.
The Importance of the Fed’s Reverse-Repo Facility
Money market fund use of the Federal Reserve facility could increase further as major bank regulatory changes are implemented, and as the structural changes likely to be imposed on money market funds are phased in over the next few years. Under this facility, 93 money market funds have been designated by the Fed as eligible counterparties for its reverse-repo facility; each of these 93 funds can execute up to $10 billion in repo agreements. It is difficult to know exactly how large the Fed’s overnight reverse-repo facility will be going forward, but we know that money market funds collectively are currently using less than one-third of their maximum $930 billion allotment (93 funds x $10 billion each). This facility will improve the Federal Reserve’s ability to control short-term interest rates and will likely be an important safety value as Basel III and other regulatory changes are applied.
For more on money market funds, please visit ICI’s Money Market Fund Resource Center.
For more on Form N-MFP data, please visit the Taxable Money Market Fund Portfolio Data page.
Chris Plantier is an ICI senior economist.
GMM Policy Forum: BlackRock’s Larry Fink Speaks with ICI’s Paul Stevens
By Todd Bernhardt
May 21, 2014
The fund industry needs to stop focusing on the moment and start focusing on outcomes when advising investors on their resources, said Laurence D. Fink, chairman and CEO of BlackRock, at ICI’s Annual Policy Forum, part of the Institute’s 56th General Membership Meeting (GMM).
“Market Tantrums” and Mutual Funds: A Second Look
By Sean Collins and Chris Plantier
May 19, 2014
Over the past year, policymakers who are focused on financial stability have pursued a theory that mutual fund investors can destabilize financial markets by redeeming from funds when markets decline. According to this theory, redemptions by fund investors lead fund managers to sell securities; those sales drive asset prices down further and, in turn, spur more investor flight, redemptions, and price declines.
Seasonality, U.S. Money Market Funds, and the Borrower of Last Resort
By Chris Plantier
April 16, 2014
The March money market fund holdings data indicate a large drop in the share of fund assets allocated to European counterparties and a large increase in the share of fund assets allocated to U.S. counterparties. This shift is likely temporary and reflects reduced willingness of European banks to borrow from money market funds at the end of the quarter, rather than reduced demand from money market funds. Also, the increase in lending to U.S. counterparties is almost entirely due to the large increase in money market fund lending to the Federal Reserve via its overnight reverse-repo (repurchase agreement) facility.
U.S. Prime Money Market Funds and European Borrowing
By Chris Plantier
March 18, 2014
European holdings by U.S. prime money market funds have fluctuated significantly since early 2011.
ETFs Don’t Move the Market—Information Does
By Shelly Antoniewicz
March 11, 2014
There they go again.
Money Market Funds and Liquidity Ratios: Why So High and Stable?
By Chris Plantier
February 19, 2014
Second in a series of posts about ICI’s new data release, a monthly compilation and summary of portfolio data from taxable money market funds. To find out more, read the first post about the new data summary or this list of answers to frequently asked questions.
The SEC’s 2010 money market fund reforms require taxable funds to hold at least 30 percent of their assets in securities that are deemed to be liquid within five business days (known as weekly liquidity) and at least 10 percent of their assets in securities that are deemed to be liquid in one business day (known as daily liquidity). In practice, money market funds—especially government money market funds—hold liquidity well above these minimum standards, and these ratios change very little in any given month.
ICI’s New Data Release: Further Enhancing the Transparency of Money Market Funds
By Chris Plantier
January 21, 2014
The 2010 reforms to money market mutual funds greatly enhanced the transparency of these funds, giving regulators, analysts, and investors greater insight into important elements of funds’ holdings and operations.
The reforms required funds to disclose their entire portfolio holdings to the public on their company websites five business days after the end of each month. Money market funds also are required to file a more detailed disclosure—SEC Form N-MFP—with the Securities and Exchange Commission directly. The SEC releases this more detailed data to the public 60 days after it’s filed. The SEC does not, however, summarize the data, leaving the public with no non-commercial access to a broad look at holdings across the industry.
Money Market Funds and the Debt Ceiling: What Do We Know?
By Brian Reid
October 14, 2013
As the U.S. Treasury reaches the limits of its borrowing authority this week, markets and the media are focusing on the risk that the United States will default on its debt and fail to pay interest or principal on maturing Treasury securities, perhaps before the end of October.
Bond Fund Flows: A Little Perspective on the Big Bond Market
By Brian Reid
July 3, 2013
The sharp run-up in interest rates since late April has caused many bond funds to experience their first losses in several years.