BREAKOUT SESSION: BUY-SIDE TRACK MONEY MARKET REFORM MODERATOR TIMOTHY W. CAMERON RANDY BARNES Senior Product Manager and Engagement Manager Thomson Reuters Wealth Management PETER G. CRANE President and Publisher Crane Data, LLC Managing Director, Asset Management Group SIFMA PANELISTS JOAN OHLBAUM SWIRSKY Of Counsel Stradley, Rohan, Stevens & Young LLP ANDREW LINTON Executive Director and Head of Product Development, JPMorgan Global Liquidity Group JPMorgan Chase & Co. NANCY D. PRIOR President, Money Market Group Fidelity Investments
Money Fund Update: Trends, Regulations & Hot Topics April 29, 2013 SIFMA AMA Roundtable & Operations Conference Boca Raton, Fla. Peter Crane President & Publisher Crane Data LLC
Money Fund Trends & Hot Topics Current State of Money Funds Asset Trends, Yields, Expenses Consolidation & Market Share MMF Reforms & Regulatory Outlook Transparency, Europe, Global, Cash Plus In the News; Q&A 1
Current State of Money Funds MMF Assets $2.6 Trillion (Record was $3.9T) Bank Savings Over $6.7 Trillion Approx. 25 Million Shareholders $4.5 Billion in Annual Revenue? (down from $9B) Approx. 1/4 Share of Cash Markets Shifting Regulatory & Competitive Landscape Zero Yields, Attrition & Consolidation Record Levels of Cash? 2
History of Money Fund Assets Money Funds Are Down $1.2 Trillion Over 4 Years (-32%), But Still at mid- 07 Levels. 3
Assets by Type: Bottoming & Rebound 4
Banks Take Trillion+ From Money Funds Money Funds Are Down $.568T (-18.7%) Over 3 Yrs.; MMDAs Are Up $1.86T (+38.4%) 5
Rock Bottom: Ultra-Low Rate Environment 6
Fund Expenses & Fee Waivers Money Fund Revenue Estimates: $2.5 Trillion x 0.17% = $4.3 Billion (3/13); $3.1 Trillion x 0.35% = $8.4 Bil. (12/09) 7
Money Fund Market Share (3/31/13)
Types & Number of Money Funds Consolidation Shrinking Prime Still King Share classes vs. portfolios Categorization issues 9
Regulatory Update: MMF Reforms 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) FSOC Comments End (2/13) SEC or FSOC Proposal? (4-6/13) Possible Options Floating NAV (which funds) Capital Buffer (1% or 3%), MBR Redemption Gates/Charge, 2a-7 Tweaks 10
Other Developments: Daily MNAV (Mark-to to-mkt Mkt) Goldman, JPM Launch Daily NAVs 8 of 10 Largest Posting Not all Funds Monthly, Daily Shadow NAVs Haven t Generated Interest 11
Taxable MMF Portfolio Composition 12
Securities, Supply & Transparency 13
Money Fund European Exposure 14
Online Money Fund Trading Portals Approx. $365 Billion in Assets 22% of Institutional MMFs $1.68T AFP 12 Liquidity Survey 29% of Corps. Use Portals 73% of Trades Via Portal (older data) Enhancements Adding MM Securities, Tools Transparency: Weekly, SMAs New Entrants, Exits
Worldwide & Intl MF Markets ($4.8T) 16
Ultra-Short, Enhanced Cash & SMAs Bond Funds & Ultra-Short Bonds Bonds $3.5T But Ultras < $50B ETFs ($20B) PIMCO MINT, Guggenheim, SHY Enhanced Cash (<$50B) Banned from using stable NAV Separately Managed Accounts ($100B) Bankerage or FDIC Amalgamators $200B 17
Money Fund News; Q&A 18
Contact Info 19
Money Market Funds: The Shifting Regulatory Landscape Operations Conference and AMA Round Table Joan Ohlbaum Swirsky, Esq. jswirsky@stradley.com Stradley Ronon Stevens & Young, LLP 2600 One Commerce Square 2005 Market Street Philadelphia, PA 19103-7098 www.stradley.com April 29, 2013
Agenda What is unique about a money market fund? Regulatory context for money market funds Proposed reforms recommended by FSOC Floating NAV Capital buffer Minimum balance Possibly liquidity fee and redemption gate - 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. 1
What is Unique about a Money Market Fund Designed so shareholder should receive $1.00 for each $1.00 invested Strict requirements: maturity, diversification, quality and liquidity To value shares,, instead of market values, may use amortized cost and penny rounding: acquisition cost, adjusted for amortization of premium and accretion of discount; round to nearest penny on $1.00 Daily dividends of income and amortized discount Round to the nearest penny on a $1.00 share Fund must shadow price Compare amortized cost to market value periodically If market value deviates from amortized cost by more than 0.5%, fund breaks the dollar 2
Context of the regulatory environment 2007-2008 Credit concerns Market liquidity concerns Rapid redemptions Today s added troubles Low yields Regulatory uncertainty Headlines 3
Timeline of Market and Regulatory Events 2007 SIV Crisis September 2008: Economic crisis March 2009: ICI issues reports on Money Market Reform May 2010: Rule 2a-7 amendments take effect February 2010: SEC adopts Rule 2a-7 Amendments October 2010: President s Working Group on Financial Markets releases study on possible reforms; directs FSOC to consider July 2010: Obama signs Dodd Frank Act 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 4
January 2011: Comment letters on President s Working Group study filed with SEC 1Q 2008 March 2011: SEC proposes rules to eliminate certain references 2Q 3Q 4Q 1Q to credit 2008 ratings 2008 2009in forms and disclosures 2008 Timeline of Market and Regulatory Events (continued) 2Q 2009 May 2011: SEC holds Money Market Funds and Systemic Risk public roundtable 3Q 2009 November 2011: Schapiro addresses 4Q 1Q 2Q 3Q Money Market Fund 2009 2010 2010 2010 Reform January 2012: Press reports of fundamental reform (float or buffer plus holdback). 4Q 2010 1Q 2011 2Q 2011 August 2012: SEC fails to propose 3Q 4Q MMF 1Q 2011 2011 2012 reforms November 2012: FSOC proposes recommendations 2Q 2012 3Q 4Q 2012 2012 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 5
Proposed Recommendations from FSOC (11/13/12) (1) Floating NAV (2) Capital Buffer up to 1% Coupled with Minimum Balance at Risk ( MBR ) Requirement (a 3% holdback) (3) Capital Buffer up to 3% Possibly coupled with stricter diversification, liquidity or know your customer measures and/or new disclosure (4) Also considered: Liquidity fees or temporary gates on redemptions 6
Where s the business end of this thing? 7 7
www.stradley.com Philadelphia, PA Washington, DC Malvern, PA Harrisburg, PA Cherry Hill, NJ Wilmington, DE 8
SIFMA Operations Conference April 29, 2013 Nancy Prior President, Money Markets
Four Types of Money Market Mutual Funds Fund Type Treasury Government Municipal/Tax-Exempt Prime/General Purpose Typical Instruments Held U.S. Treasury securities and repurchase agreements collateralized by U.S. Treasury securities U.S. Treasury securities, other government securities and repurchase agreements collateralized by U.S. Treasury or other government securities Tax-exempt securities issued by state and local governments and non-profit entities Any eligible money market instruments as defined by SEC Rule 2a-7, including all types listed above, as well as commercial paper, certificates of deposit, corporate notes and other private instruments 2
Money Market Mutual Funds are Significant Buyers of Short-Term Securities 70 60 Money Market Mutual Funds Share of Short-Term Securities 1 67 Percenta rcentage of Total 50 40 30 20 37 35 15 19 10 0 Agency Securities* Commercial Paper Treasuries Repurchase Agreements** Tax-Exempt VRDNs/ TOBs 1 Short-term securities include money market instruments as well as longer-term securities with a remaining maturity of 1-year or less. Data as of 8/31/2012 except VRDNs/TOBs as of 6/30/12 and Repurchase Agreements as of 5/31/12 Sources: Bloomberg, Investment Company Institute, Federal Reserve Board, U.S. Treasury Department, SIFMA *Agency securities include debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks **Repurchase agreements include tri-party and bilateral transactions
Potential Impact of Money Market Fund Regulatory Changes on U.S. Municipalities Financing Costs ($Billions) 500 400 300 200 100 0 16 Money Fund Holdings in U.S. Municipal Market Other Outstandings Money Fund Holdings Notes Commercial Paper Variable Rate Demand Total Notes Cost of Decrease in Demand for U.S. Municipal Debt ($Billions) 12 8 4 Incremental Funding Cost Current Cost 0 Notes Commerical Paper Variable Rate Demand 2 Notes 1 1 Total 4 Notes: 1 Assume securities go from 1-year rate to 2-year equivalent. 2 Assume securities go from floating rate to fixed rate in 20-years. Sources: Fidelity, Muniview, imoneynet Inc.
Potential Impact of Money Market Fund Regulatory Changes on Federal Government Financing Costs Money Market Mutual Fund Holdings in Short Term Government Markets ¹ ² ³ 4 30 25 Cost of Decrease in Demand for Short Term Government Securities 5 Total ($Billions) 20 15 10 5 Repo Treasury Bills Agencies 0 10 20 30 40 50 Basis Points 5 Note: 5 Cost determined using 10 basis points of assumed added cost of financing for entire market. Sources: 1 imoneynet as of 10/25/11, 2 Monthly Statement of Public Debt as of 9/30/11, 3 FNM, FRE, FHLB as of 9/30/11. 4 NY Federal Reserve Primary Dealer Repo Financing as of 10/19/11.
Money Market Fund Flows Sept 2008 to Dec 2008 6 Source: imoneynet
Responses to FSOC Proposed Recommendations: Exclude Treasury, Government, Municipal and Retail Prime Funds 7 Source: Fidelity Investments, Regulations.gov (FSOC-2012-003)
FOR PROFESSIONAL INVESTOR USE ONLY -- NOT FOR RETAIL DISTRIBUTION Headwinds and Highlights, The State of the MMF industry March 2013 Andrew Linton, Executive Director, Head of Global Liquidity Product Development 614.901.1434, Andrew.Linton@jpmorgan.com
FOR PROFESSIONAL INVESTOR USE ONLY -- NOT FOR RETAIL DISTRIBUTION Central bank action Central banks have taken decisive action 8.00 Rate (%) 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Australia RBA Cash Rate Target Bank of Japan Target Rate of Unsecured Overnight Call Rate Expected China Household Savings Deposits 1 Year Rate ECB Main Refinancing Rate Federal Funds Target Rate US UK Bank of England Official Bank Rate Combined recent interventions by the ECB, Fed, BoE, BoJ and PBoC have acted to sharply reduce the downside risks to the global economy and markets Central banks now appear to have done what they can; the onus for generating an economic recovery has shifted to fiscal policy It is clear that inflation targeting has given way to growth generation over the intermediate horizon While the downside risks have been mitigated, the upside to the economy has not materially improved The amount of deleveraging yet to occur is a massive inhibitor of growth Although the ECB has provided a sufficient liquidity backdrop to stabilize sovereign funding, agreements on integration and reform have yet to be reached The slowdown in China looms as an ominous headwind for Pacific Rim countries Focus in US must be immediate bipartisan agreement to reduce the fiscal cliff Source: Bloomberg: As at 31 Jan 2013 1
Adapting Products in Changing Market Environments Market Conditions Client Considerations ECB lowered the Eurozone deposit facility rate to zero in July, 2012 Potential for market rates in Europe and elsewhere to fall to zero or become negative Potential for yields to become negative Current fund structures across the MMF industry did not support negative yields Portion of clients indicated they could tolerate negative yielding MMFs. Prefer a negative dist structure to VNAV Prioritize diversification, professional management, high quality instruments, AAA rating, etc Enjoy operational benefits of MMFs (t+0 settlement, CNAV, accessible portals, reporting) Flex Dist Share Class Operates exactly like a traditional Dist share class under normal market conditions (positive yield environment) In a negative yield environment, the NAV resets to 1/$1/ 1 daily through the client paying a dispersal amount in shares equal to the negative yield + fees. All operational and professional benefits of the MMF instrument are maintained 2
FOR PROFESSIONAL INVESTOR USE ONLY -- NOT FOR RETAIL DISTRIBUTION 2010 reforms resulted in a sharp decline in shadow NAV volatility Rule 2a-7 amendments implemented in 2010 are reflected in substantial shadow NAV improvement in Fitchrated U.S. prime MMFs Market volatility associated with the European sovereign crisis did not materially affect shadow NAV Max Min Median 1.00200 1.00100 European crisis 1.00000 0.99900 0.99800 0.99700 0.99600 0.99500 Subprime / SIVs crisis Lehman Brothers default and its aftermath Rule 2a-7 amendments and monthly NAV disclosure Source: Fitch Ratings, Crane Money Fund Symposium, 2012 3
FOR PROFESSIONAL INVESTOR USE ONLY -- NOT FOR RETAIL DISTRIBUTION How strong are money market funds today? Money market funds have shown great resiliency since significant reforms were enacted in 2010. Prime Money Market Funds accommodated large outflows during U.S. debt ceiling and Eurozone debt crises $2,200,000 Global Prime Assets Jan, 2011 -Jan 2013 $2,150,000 $2,100,000 Assets (Mils) $2,050,000 $2,000,000 $1,950,000 $1,900,000 Global Prime Assets $1,850,000 $1,800,000 $1,750,000 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 1/1/2013 Still, regulators are proposing additional regulations with varying impact on systemic risk. Source: imoneynet, data as of 1/31/2013 4
The money market fund industry has consolidated in recent years Market consolidation and AUM concentration Date range: December 2006 to December 2012 Onshore money market fund providers Offshore money market fund providers 160 76% 48 85% No. of MMF Providers 150 140 130 120 110 100 90 80 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 74% 72% 70% 68% 66% 64% 62% 60% % Assets in Top 10 Providers No. of MMF Providers 46 44 42 40 38 36 34 32 30 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 83% 81% 79% 77% 75% 73% 71% 69% 67% 65% % Assets in Top 10 Providers MMF Providers % Assets in Top Providers MMF Providers % Assets in Top Providers Source: imoneynet. Data as of December 31, 2012. Charts shown for illustrative and discussion purposes only. 5
FOR PROFESSIONAL INVESTOR USE ONLY -- NOT FOR RETAIL DISTRIBUTION Treasurers face increased challenges Weakening economies forcing lower rates Regulatory change constraining portfolios High levels of cash competing for a home Surveys show that corporate treasurers expect global cash levels to remain at the same elevated levels or climb higher Primary driver is operating performance, holding cash as a buffer against future liquidity constraints and in anticipation of improved opportunities for investment in the future Strategic challenges for corporate treasurers Traditional strategic concerns such as trapped cash, global visibility and cash flow forecasting have been surpassed by fresh concerns regarding the Eurozone crisis and regulatory reform Increased challenges for treasurers Implications Extending investment horizons from AAA-rated short term MMFs to MMFs that permit longer maturities With the ongoing need to balance counterparty risk, liquidity and yield appropriately, both short-term and longer-duration MMFs are likely to become increasingly important elements of corporate investors portfolios Increasing use of variable NAV MMFs and floating rate note securities Source: 2012 AFP Survey; 2012 SunGard Survey; 2012 Fidelity Survey; 2012 ICD; 2012 Treasury Strategies Cash Management 6
FOR PROFESSIONAL INVESTOR USE ONLY -- NOT FOR RETAIL DISTRIBUTION Disclosure This presentation is prepared specifically for the ACT Cash & Treasury Management Conference event in which attendance is strictly by invitation to selected few institutions and corporates in Hong Kong. Please note that this document is not for public distribution and the information contained herein must not be distributed to, or used by the public. It may not be reproduced or transmitted in whole or in part, to third parties except as agreed in writing by the issuer of this document. The contents in this presentation are provided for informational purposes only. It is not an offer to buy or sell units or shares of funds, or the solicitation of any offer to buy or sell units or shares of funds, which offer can only be made pursuant to the offering document(s) of the relevant funds. Any forecasts or opinions expressed are those of JPMorgan Asset Management at the date of this document and may be subject to change. Informational sources are considered reliable but you should conduct your own verification of information contained herein. Investment involves risk. Past performance is not necessarily a guide to future performance and investors may not get back the full or any part of the amount invested. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in emerging markets may be more volatile than other markets and the risk to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of investments made. J.P. Morgan Asset Management is the asset management division of JPMorgan Chase & Co. JF Asset Management Limited is the Asian investment arm of J.P. Morgan Asset Management. JPMorgan Funds (Asia) Limited operates the pooled funds division of J.P. Morgan Asset Management in Hong Kong and together with JPMorgan Asset Management (Singapore) Limited forms a key part of J.P. Morgan Asset Management. This document is Issued in Hong Kong by JPMorgan Funds (Asia) Limited, which is regulated by the Securities and Futures Commission; in Singapore by JPMorgan Asset Management (Singapore) Limited, which is regulated by the Monetary Authority of Singapore. 2012 JPMorgan Chase & Co. The information contained herein is for informational purposes only and represents our understanding of the market information. No products or services are being offered in this presentation 7
SIMFA AMA ROUNDTABLE SEC MMF REFORM APRIL 29, 2013
Brokerage Operations and Technology Challenges Floating NAV proposal Technology / Systems Tax Lot Accounting (Wash Sales) and Tax Reporting New logic to automate dollar sell orders Uniquely identify security as sweep eligible vs. other NSCC processed positions Statements, Confirms, Performance Reports, Advisor Tools, Managed Account Rebalances, Margins Initial requirements to convert existing $1.00 shares to new position Operational Tax Lot Accounting impacts Increased trade cost to firms Increased reconciliation (stock record, trade exceptions) Increased burden on Margins Could act as a Margin Multiplier CMA and Activity Settlement impacts Daily trading cutoffs and funding work flows are these still T+0 settlement? Outflow of assets towards stable NAV funds and bank deposit sweep vehicles CONFIDENTIAL 2
Brokerage Operations and Technology Challenges Minimum Balance at Risk proposal Technology / Systems ACATS how to identify locked up balance when transferring assets Impacts predictive redemptions to cover settling debits What is the best way to lock up reserved portion segregated dollars or shares Audit and control requirements to monitor the locked up portions, confirm they are aged properly, etc New system/process required to calculate and lock up appropriate portions. Must enforce restrictions if client tries to redeem part of restricted balance Need to display restricted balance to clients and FA s (Statements, FA tools, Back Office tools) Operational Audit and control of restricted balances Managing FA and client expectations if restricted balance is requested Increased disclosure requirements (Statements, New Accounts, Fund Prospectus) Possible CMA and Activity Settlement impacts Outflow of assets towards non-restricted funds and bank deposit sweep vehicles Will firms choose to honor redemption of MBR balance and float the money as a client service CONFIDENTIAL 3
Overall Client Impacts Confusion need for additional education Increased costs to funds and firms could drive MMF yields even lower Firms may reduce MMF products available Wash sale complexity Impact from MBR can t access all of their funds even to trade Possible increase in trading exceptions CONFIDENTIAL 4
BREAKOUT SESSION: BUY-SIDE TRACK MONEY MARKET REFORM MODERATOR TIMOTHY W. CAMERON RANDY BARNES Senior Product Manager and Engagement Manager Thomson Reuters Wealth Management PETER G. CRANE President and Publisher Crane Data, LLC Managing Director, Asset Management Group SIFMA PANELISTS JOAN OHLBAUM SWIRSKY Of Counsel Stradley, Rohan, Stevens & Young LLP ANDREW LINTON Executive Director and Head of Product Development, JPMorgan Global Liquidity Group JPMorgan Chase & Co. NANCY D. PRIOR President, Money Market Group Fidelity Investments