This presentation is a summary only, and is qualified in its entirety by the applicable rules and regulations. Where this presentation includes

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1 SIFMA Operations Conference: Money Market Fund Reform Peter Crane President & Publisher Crane Data Michelle Lens Senior Vice President The Dreyfus Corporation, a BNY Mellon Company Tim Schiltz Senior Director, Product Management Ameriprise Financial Inc. Joan Ohlbaum Swirsky Stradley Ronon Stevens & Young, LLP This presentation is a summary only, and is qualified in its entirety by the applicable rules and regulations. Where this presentation includes interpretations, there is no assurance that, if asked, the applicable regulators or their staff would agree with these interpretations. These materials are provided for educational and informational purposes for the use of those who may be interested in the subject matter.

2 Money Fund Reform: Update & Implications Current Stats: Assets, Yields, Expenses Recent & Longer-Term Trends Regulatory Issues: SEC s MMF Reforms Timetable and Key Issues Portfolio Holdings Trends & Data Latest Data & Pending Disclosures Global Money Funds, Enhanced, Misc. News, Questions & Discussion 1

3 Current State of Money Fund Industry MMF Assets $2.7 Trillion (Record was $3.9T) Bank Savings Over $7.3 Trillion Approx. 24 Million Shareholders $3.5 Billion in Annual Revenue (down from $9B) Approx. 1/4 Share of Cash Markets (Banks 50%) Shifting Regulatory & Competitive Landscape Zero Yields, Attrition & Consolidation Record Levels of Cash? (Broke $10 Tril.) 2

4 Historical & Recent MMF Asset Flows Flat Flows (Stable Base) A New Hope (Bank & Bond Inflows) Cash Is Still King! Money Funds Are Down $1.2T Since Peak, But Flat Over 3 Years; Still at Mid-2007 Levels.

5 MMF Assets by Type: Prime Still King Prime Inst 34% or 20%? Treas & Govt Inst Much Bigger Than Retail Historical Spreads (+10 bps & +20 bps) 4

6 Banks Take Trillions From MMFs Crisis, Basel III, Regs. $4 Trillion in Uninsured Deposits Spreads, $1 Trillion Flow to MMFs? Money Funds Are Down $1.0T (-30.0%) Over 5 Yrs.; MMDAs Are Up $2.9T (+64.6%) 5

7 Rock Bottom Yields (Crane MFA 7-Day) Yields Inch Up (Dead Cat Bounce) Fed Hikes & Projections? Fee Waiver Unwinding 6

8 Fund Expenses & Fee Waivers Record Low Expenses/Waivers Revenue Savaged but Shared Higher Rates Will Explode Revs. Recapture? Money Fund Revenue Estimates: $2.6 Trillion x 0.14% = $3.6 Billion (12/14); $3.1 Trillion x 0.35% = $8.4 Bil. (12/09) Source: Crane Data. 7

9 Money Fund Family Market Share

10 Regulatory: Final SEC MMF Reforms New Rules Floating NAV (Prime Inst) & Liquidity Fees & Gates (Prime) 2a-7 Tweaks, No Buffer Disclosures, Ratings, Etc. Timeline of Events Rule 2a-7 Amendments (2/10) President s Working Grp (10/10) SEC Cancels Vote (8/12) FSOC Issues Draft (11/12) SEC Reform Proposal (6/13) Comment Letters Due (9/13) Final MMF Reforms (7/14) Fund Cos Prep for Regs (2/15) New Disclosures Start (4/16) Floating NAV/Gates-Fees (10/16) 9

11 Fundamental Money Market Fund Reforms Floating NAV for institutional MMFs, including tax-free MMFs Retail MMFs are exempt from the floating NAV, but are subject to fees/gates U.S. Government MMFs are exempt from the floating NAV U.S. Government MMF is defined as MMF that invests at least 99.5% of assets in cash, U.S. government securities or fully collateralized repurchase agreements 10

12 Floating NAV Retail Fund Exemption Retail MMF is a MMF with policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons For MMF shares held in omnibus accounts if underlying beneficial owner is a natural person, shares may be considered retail 11

13 Fees and Gates Applicable to all money market funds other than U.S. Government MMFS: Board can impose up to 2% Liquidity Fee (redemption fee) and/or Redemption Gate (temporary block on redemptions) if weekly liquid assets (WLA) fall below 30% of total assets 1% fee must be imposed if WLA fall below 10% of total assets unless Board decides otherwise U.S. Government MMFs may opt into fees/gates No more than 10 days/ 90 day period 12

14 Fundamental Reforms - Overview Treasury and U.S. Government MMFS Municipal MMFs Prime MMFS Retail (SEC said most Municipal MMFs would fit here, but not all do) Stable NAV No fee nor gate Stable NAV Fee and gate Stable NAV Fee and gate Institutional (Includes some Municipal MMFs) Stable NAV No fee nor gate Floating NAV Fee and gate Floating NAV Fee and gate (SEC said Prime Institutional MMFs comprise 30% of MMF assets) 13

15 Additional Requirements Enhanced disclosure and reporting - VNAV, liquidity, flows - Form N-MFP (no more 60 day lag) Enhanced diversification testing of issuers and providers of credit support Stress testing 14

16 Compliance timeline July 14, 2015 Money market funds must begin to report negative events to SEC April 14, 2016 Money market funds must comply with changes other than floating NAV and fees/gates (e.g., disclosure, stress testing) October 14, 2016 Money market funds must comply with floating NAV/fees/gates 15

17 Fees and gates- Operational complications Can intermediaries impose fees/gates on the Board s demand? Can intermediaries change the fee level on the Board s demand? 16

18 Floating NAV What Does It Mean? Floating NAV MMF must compute its NAV in compliance with Rule 2a-4 (definition of current net asset value ), limiting its use of amortized cost as a fair value to securities with 60 days or less remaining to maturity Government and retail MMFs may use amortized cost, but must shadow price daily Will the NAV float? 60-Day max maturity funds. Funds will need to close early to provide same day settlement? Floating NAV MMFs must calculate their NAV per share rounded to the nearest basis point (e.g., $1.0000, $10.000, or $100.00) Government and retail MMFs may penny round 17

19 Tax Complications of Floating NAV Treasury & IRS issue final & proposed relief Shareholder recognizes small gains and losses on redemption; results in potential issues Issue: Must brokers do 1099 reporting for redemptions of floating NAV MMF shares Issue: Wash sales Shareholder purchases shares in fund within 30 days before or after a loss is recognized on redemption results in disallowance of loss Issue: Complexity of shareholder reporting of G/L IRS has proposed a solution to all three issues in regulations and also issued a final Rev. Proc. as alternative solution to wash sales issue 18

20 Tax Complications of Floating NAV Treasury & IRS Issue Proposed and Final Relief Brokers will not be required to do 1099-B reporting: Proposed regulations provide that existing exception to 1099-B for MMF shares includes shares in floating NAV MMFs Wash sale rules will not apply to shares of floating NAV MMFs Revenue Procedure provides that wash sale rules will not apply to floating NAV MMF shares Proposed NAV Method (where applied) also makes wash sale rules irrelevant. Relief applies to an institutional MMF even if the fund s holdings mature within 60 days (and therefore generally are valued at amortized cost) Proposed regulations include a simplified method of tax accounting for floating NAV MMF shares to attempt to address some of the tax compliance burdens for shareholders 19

21 Tax Complications of Floating NAV Proposed NAV Method Shareholder may adopt the NAV Method of accounting so that gains/losses are recognized based on change in aggregate value of shares over a period of time (that does not exceed one year and does not stretch across two tax years) selected by shareholder, rather than at each redemption G/L = value of MMF shares at the end of the period, minus value of MMF shares at the end of the prior period, minus the taxpayer s net investment in the MMF during the period Similar to mark-to-market tax accounting Net investment = aggregate cost of the shares purchased during the computation period minus the aggregate amount received upon taxable redemptions during such period All gains and losses are short-term capital gain/loss if the MMF shares are a capital asset ICI comment letter requests that shareholders be allowed to choose to use NAV method on an account-by-account basis 20

22 Floating NAV Retail Fund Exemption Retail MMF is a MMF with policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons Tough questions if one or a few institutions appear in the fund...? Board must decide at what point procedures are not reasonably designed Beneficial ownership typically means direct or indirect, sole or shared voting, and/or investment power Release also mentions Exchange Act Rule 16a-1(a)(2), which refers to beneficial ownership via pecuniary interest 21

23 Floating NAV Retail Fund Examples SEC says if underlying beneficial owner is a natural person (including shares held in omnibus accounts), shares may be considered retail Possible earmark of natural persons social security number or similar identifier unique to natural persons SEC gives examples of accounts beneficially owned by natural persons Managed investment accounts in which only natural persons have a pecuniary interest Tax-advantaged savings accounts such as certain retirement, college, or health plans Personal trusts established for the benefit of natural persons Estates 22

24 Floating NAV Retail Fund Exemption Examples Examples Not Retail SEC gives examples of accounts that are not beneficially owned by natural persons (for example, accounts not associated with social security numbers), such as those opened by businesses, including small businesses Corporations, partnerships, limited liability companies, business trusts, or other businesses requiring TINs defined benefit plans, or endowments would not qualify as retail MMFs Many questions remain 23

25 Floating NAV Retail Fund Exemption Procedures SEC mentions Possible Procedures Social Security Number provided directly on account opening Social Security Number provided indirectly to adviser that is record-keeper for a plan or for beneficiaries when account is opened for a trust Procedures may be required at intermediary level to limit shareholders to natural persons 24

26 Floating NAV Retail Fund Exemption Intermediaries Fund must reasonably conclude that beneficial shareholders who own through intermediaries are natural persons SEC gives examples of how to satisfy the definition with intermediaries: contractual arrangements periodic certifications representations or other verification methods 25

27 Complications of the Floating NAV Transition How to transition without triggering a pre-emptive run (e.g., if NAV is slightly below $1.00, shareholders may redeem prior to transition) SEC says: money market fund managers could take steps to ensure that the fund s market-based NAV is $1.00 or higher at the time of conversion and communicate to shareholders the steps that the fund plans

28 Floating NAV Government Money Market Fund Exemption 99.5% of a Government MMF s total assets must be: Government securities as defined by ICA 2(a)(16) Repurchase agreements collateralized fully under rule 2a- 7(a)(5) (only government securities and cash permitted as collateral) Cash Proposal would have required only 80% of total assets 27

29 Confirms for Floating NAV Money Market Funds SEC proposed an exemption from Rule 10b-10 that will allow floating NAV MMFs to provide periodic statements rather than transactional confirmations if: Notice is given of the right to request a con-firmation, and A broker provides confirmations upon a customer s request 28

30 Big Issues with Brokerage Sweep What is a natural person? Social Security, Codes Intraday Pricing Same-day settlement Costs, frequency Pricing to 4 decimal places Mini Y2K problem? Gates & Fees Timing Communications 29

31 Preparing for Reforms: Recent Moves Fidelity Prime to Govt Federated Short WAM JPMAM Retail vs. Inst Goldman Affirms Govt 30

32 Securities, Supply & Transparency 31

33 Largest Issuers & Largest Credit Issuers 32

34 Worldwide & Intl MF Markets ($4.8T) Source: ICI, Crane Data 33

35 Ultra-Short, Enhanced Cash & SMAs Bond Funds & Ultra-Shorts Bonds $3.5T But Ultras < $200B ETFs (<$100B) PIMCO MINT, Guggenheim, SHY Enhanced Cash (maybe $200B) Banned from using stable NAV? Separately Managed Accounts ($200B-$400B?) Bankerage/FDIC Amalgamators $300B 34

36 Recent Money Fund News; Q&A 35

37 Contact Info 36

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