Effectively Managing Money Market Fund Assets

Transcription

1 Effectively Managing Money Market Fund Assets Not FDIC-Insured. Not Bank-Guaranteed. May Lose Value.

2 DREYFUS MONEY MARKET INVESTMENT PHILOSOPHY Dreyfus approach to managing money market funds is to seek high current yields consistent with the preservation of principal and the maintenance of liquidity. Dreyfus money market portfolios are actively managed and continuously monitored by a tenured team of investment professionals who have the investment expertise and the necessary resources to extensively evaluate credits in an evolving global marketplace. EXECUTIVE SUMMARY Rule 2a-7 under the Investment Company Act of 1940 (the Rule ) permits a fund to utilize the amortized cost method of valuation to calculate a fund s Net Asset Value (NAV), which provides the means for daily pricing at $1.00 per share. The Rule also provides that, to hold itself out as a money market fund, the fund must meet specific credit quality, diversification, maturity and liquidity requirements (among other conditions). This brochure is designed to summarize the regulatory requirements of Rule 2a-7 and discuss the investment/risk management infrastructure that Dreyfus employs to ensure fiduciary and statutory compliance in managing assets in this highly regulated and valued asset class. Rule 2a-7 requirements are grouped into the following topics: Credit Quality Portfolio Diversification Portfolio Maturity Portfolio Liquidity Transparency of Money Market Fund Holdings Operational Requirements DEFINITION OF TERMS Amortized Cost Method: A valuation method where securities are valued at acquisition cost, and adjusted for amortization of premium or accretion of discount, rather than based on market value factors. 1

3 SUMMARY OF RULE 2a-7 REQUIREMENTS CREDIT QUALITY A money market fund must limit its portfolio investments to those that present minimal credit risks, which include factors pertaining to credit quality and which, at the time of purchase, are Eligible Securities as defined by the Rule. Rule 2a-7 defines Eligible Securities as securities that are rated in one of the two highest short-term rating categories by two NRSROs, or by one NRSRO if only one has provided the security with a short-term rating, or, if not so rated, then deemed to be of comparable quality by the money market fund s adviser. NRSRO ratings of money market instruments reflect the perceived ability of issuers to meet their payment obligations. The Rule further defines First Tier and Second Tier securities and provides that a money market fund may not: invest (at the time of investment) more than 3% of its assets in Second Tier securities in the aggregate. invest the greater of one-half of 1% of its assets in Second Tier securities of any one issuer. Funds are also not permitted to purchase Second-Tier securities with remaining maturities longer than 45 days. DEFINITION OF TERMS First Tier Security: An eligible security that receives a rating in the highest rating category from any two Nationally Recognized Statistical Rating Organizations (NRSROs); or if only one NRSRO has rated the security, it receives the highest short-term rating from such NRSRO; or an unrated security deemed of comparable quality by the adviser. It also includes U.S. government securities and shares of money market mutual funds. Second Tier Security: An eligible security that is not a First Tier Security and receives the second-highest short-term rating from any two NRSROs; or if only one NRSRO has rated the security, it receives the second-highest short-term rating category from such NRSRO; or an unrated security deemed of comparable quality by the adviser. Unrated Security: A money market security or issuer that has not been given a short-term rating by an NRSRO but that is independently determined to be of a certain comparable investment quality by the adviser. The following provides information of a general nature with respect to Rule 2a-7. It is not a comprehensive recitation of Rule 2a-7, and is qualified in all respects by the terms of the Rule itself. 2

4 PORTFOLIO DIVERSIFICATION A money market fund must meet issuer diversification requirements, including the following; A taxable fund may not invest more than 5% of its total assets in securities of any one issuer (government securities* are excluded from issuer diversification requirements). A national tax-exempt money market fund may not invest more than 5% of its total assets in the securities of any one issuer (subject to certain limited exceptions). A state tax-exempt money market fund may not invest more than 5% of its total assets in the securities of any one issuer with respect to 75% of its total assets (the other 25% of a state-specific fund s assets are not subject to issuer diversification requirements). With regard to repurchase agreements, the Rule permits a money fund to look through to the collateral for diversification purposes if the repurchase agreement is collateralized fully, meaning that the underlying collateral consists of cash and/or U.S. government securities. PORTFOLIO MATURITY Money market funds must: maintain a weighted average portfolio maturity ( WAM ) of 60 days or less. maintain a weighted average portfolio life to maturity ( WAL ) of 120 days or less. invest in securities that have a remaining maturity of 397 days or less. DEFINITION OF TERMS WAM: A measure of the average maturity of all of the underlying money market instruments in the fund, weighted to reflect the relative percentage ownership of each instrument, and taking into account applicable maturity shortening provisions provided by the Rule. Generally, for money market funds, WAM can be used primarily as a measure of relative sensitivity to interest rate changes. WAL: WAL is the WAM of the money market fund calculated without reference to the maturity shortening provisions of Rule 2a-7 permitted for purposes of calculating WAM. Because WAL does not reflect the rule s maturity shortening provisions, WAL will generally be higher than WAM. Repo Collateral: Refers generally to securities (or cash) that the fund would receive if the underlying counterparty defaults on a repurchase agreement transaction. In tri-party repos, collateral is maintained by a third party custodian. * Government security means any security issued or guaranteed as to principal and interest by the United States, or by any person controlled or supervised by and acting on behalf of the government of the United States pursuant to the authority granted by the Congress of the United States. Diversification cannot ensure a profit or protect against loss. 3

5 PORTFOLIO LIQUIDITY Rule 2a-7 requires that the fund must be managed to provide sufficient liquidity to meet reasonably foreseeable client needs. The Rule also provides for more specific liquidity requirements: Taxable money market funds must maintain at least 10% of Total Net Assets in Daily Liquid Assets. (Daily Liquid Assets = cash, U.S. Treasuries, or securities that can readily convert into cash within one business day.) Taxable and tax-exempt money market funds must maintain at least 30% of Total Net Assets in Weekly Liquid Assets. (Weekly Liquid Assets = cash, U.S. Treasuries, government securities issued at a discount and with a remaining maturity of 60 days or less, or securities that can readily convert into cash within five business days.) There is a 5% investment limit in illiquid securities. If a fund falls below the daily or weekly liquid asset percentages, the fund can only invest in the respective Liquid Assets until the fund meets its daily/ weekly liquidity requirements (see above). TRANSPARENCY OF MONEY MARKET FUND HOLDINGS The Rule requires money market funds to post their portfolio holdings each month on their website and retain this information for at least six months. Money market funds also are required to file detailed portfolio information with the U.S. Securities and Exchange Commission ( SEC ) on Form N-MFP (the Form ) after the end of each month so that the SEC and the public have greater transparency to money market fund activities. The Form details fund and holdings information, including the mark to market value of the fund s holdings ( Shadow NAV ), as of the last day of the month. The Form is made publicly available by the SEC 60 days after the respective month-end and is accessible via a link on the respective Dreyfus money market fund monthly holdings report on Dreyfus.com. OTHER RULES AND REQUIREMENTS Rule 22e-3 of the Investment Company Act of 1940 provides authority to a money market fund s board of directors to suspend redemptions if the extent of the deviation from $1.00 would materially dilute shareholder interests, provided also that the Board irrevocably elects to liquidate the fund. Shadow Pricing involves comparing a fund s market-based share value with its amortized cost share value a calculation method which uses the value of a security at its acquisition cost, adjusted for premiums paid or discounts received at the time of purchase. Rule 2a-7 also requires that a money market fund must have the capacity to process purchase and sale transactions at other than a $1.00 NAV, to facilitate fair and timely redemptions for all affected shareholders. ROLES AND RESPONSIBILITIES OF DREYFUS INVESTMENT AND SUPPORT GROUPS While Rule 2a-7 provides a strong, rules-based regulatory framework to protect money market fund shareholders, Dreyfus has developed its own best practice standards and risk management procedures to further enhance and monitor liquidity and credit risks within our money market funds. The responsibility of managing Dreyfus money market funds, with compliance oversight and legal advice and guidance, resides within our experienced team of portfolio managers, credit research analysts, investment accounting, risk management, legal, CCO, and the fund s board of directors. 4

6 PORTFOLIO MANAGERS/TRADERS Review and determine investment strategy/duration for the portfolios based on market conditions, future interest rate movements and economic outlook; Invest assets using the Dreyfus 2a-7 approved issuer list in accordance with the investment guidelines of the fund; Monitor liquidity, diversification and credit profile of the fund to ensure compliance to the Rule. CREDIT RESEARCH Conduct initial and ongoing credit risk analysis of all issuers deemed eligible ( minimal credit risk ) for inclusion on the Dreyfus 2a-7 approved issuers list; Maintain thorough documentation of each credit incorporating issuerspecific, as well as industry, sector and peer analysis using publicly available statements, discussions with management and third party research; and Construct and maintain the Dreyfus 2a-7 approved issuers list, which is the control document utilized by portfolio management for investment activity. OPERATIONS AND INVESTMENT ACCOUNTING Responsible for the fund s periodic financial reporting requirements. Provide daily reconciliation of all trades and calculate the fund s net asset value (NAV) and, Monitor holdings and communicate issues with portfolio management for continuous compliance to Rule 2a-7. Prepare periodic stress testing reports for fund portfolios. DREYFUS RISK MANAGEMENT Review and oversee periodic stress test process, which measures a fund s ability to maintain a stable net asset value per share taking into consideration interest rate changes, redemption activity and credit quality changes within the portfolio. Provide risk oversight and reporting of operations to management using a series of qualitative and quantitative evaluation assessments. THE ROLE OF THE BOARD OF DIRECTORS While a fund s board of directors is permitted to delegate certain responsibilities to the adviser, certain duties cannot be delegated, including the following: The determination that a fund can maintain a stable $1.00 NAV per share using the amortized cost method; Whether a downgraded security continues to present minimal credit risks ; Whether the disposal of a defaulted security is in the best interest of the fund; and Exercising oversight of its delegate. Dreyfus fund boards meet regularly, at which time they receive updates from Portfolio Management on investment activities, the current market environment, stress testing and other Rule 2a-7 compliance matters. 5

7 SAFEKEEPING PRACTICES OF MONEY MARKET FUND ASSETS In addition to the various investment practices outlined in the previous sections, below describes additional safeguarding measures relating to money market funds. Money market funds are open-end registered investment companies that are separate, independent corporations or business trusts. They are not subsidiaries of their investment advisor or their parent company. Fund assets are separate and apart from those of any contractual service provider, and insulated from any failure by such party to fulfill its contractual obligations to the fund. A fund s board of directors maintains the general oversight responsibility and authority to take whatever action it deems advisable and in the best interests of fund shareholders in order to remedy a situation in which a service provider cannot fulfill its contractual obligations to a fund. A fund s custodian bank is responsible for the safekeeping of securities on behalf of the funds. Since the securities are registered in the name of each fund, they are not assets or liabilities of the custodian. SUMMARY OF SEC RULE 2a-7 Portfolio Limits Minimum Liquidity Standards Portfolio Maturity 1) Weighted Average Maturity (WAM) 2) Weighted Average Life to Maturity (WALM) 5% issuer limit for all securities. (25% of state-specific fund assets are not subject to issuer diversification requirements.) Government securities are excluded from issuer diversification requirements. Must have at least 10% of a taxable money fund s assets in Daily Liquid Assets, defined as cash, direct obligations of the U.S. government, or securities readily convertible to cash within one business day. 30% of a money fund s assets must be in Weekly Liquid Assets, defined as cash, direct obligations of the U.S. government, including government agency securities with remaining maturities of 60 days or less, or securities readily convertible to cash within five business days. A fund may not purchase illiquid securities if, after the purchase, more than 5% of the fund s portfolio would be in such illiquid securities. 60-day maximum 120-day maximum Portfolio Quality 1) 2nd Tier Maximum 1) 3% maximum investment (based on Total Assets ) in Second Tier Securities. 2) 2nd Tier Concentration 2) 0.5% maximum investment concentration (based on Total Assets ) in any single Second Tier issuer. 3) 2nd Tier Maturity 3) Final maturity for Second Tier securities of 45 days at the time of purchase. Stress Testing of Money Market Fund Portfolios Repurchase Agreements Money Market Funds must perform periodic stress tests of certain hypothetical events to test resilience of $1.00 NAV to such events. 1) In order to benefit from the look-through provisions of the 1940 Act (for purposes of the 1940 Act [for purposes of diversification under SEC Rule 2a-7]), repurchase agreement collateral can only be cash or U.S. government securities. 2) Fund boards are responsible for evaluating counterparty risk. Disclosure of Portfolio Information 1) Website Disclosure 1) Must post a fund s Schedule of Investments on its website on a monthly basis and must keep this information posted on the website for six months. 2) Regulatory Filing 2) Form N-MFP must be filed with the SEC on a monthly basis. The Form is made available on 60 days after the month to which the information pertains. 6

8 Dreyfus is recognized as one of the largest and most experienced money market managers in the industry. We offer money market funds in all major asset categories, including general purpose (prime), treasury, U.S. government, national and statespecific municipals, and AMT-free municipals. This breadth of product and strength of this business has positioned us to deliver customized and comprehensive investment solutions to meet the needs of the institutional marketplace. LEARN MORE Call your BNY Mellon Fixed Income Representative or visit our website at Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. Investors should contact their BNY Mellon Fixed Income Representative at to receive a prospectus, or a summary prospectus, if available, that contains this and other information about the fund, and should read it carefully before investing. Money market mutual funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although any money market mutual fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market mutual fund. Yield fluctuates. Past performance is no guarantee of future results. Short-term corporate, asset-backed and municipal securities holdings involve credit and liquidity risks and risk of principal loss. Income from national tax-exempt money market funds may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable MBSC Securities Corporation, Distributor CIS is a Division of Dreyfus Corporation. BNY Mellon Fixed Income is a division of MBSC Securities Corporation. IST-MMHO-0515