Schwab Is Forcing Cash Out Of Money Market Funds And Into Treasuries

While perhaps not quite as dramatic (or confusing) as last week's announcement by Scottrade that the discount online broker would no longer allow Canadian citizens to hold accounts, in a new surprising development, another online broker, Charles Schwab has started informing some of its clients that "between June and October 2016, Schwab will update the cash feature on your account(s) from the current retail prime or municipal money market fund sweep to the Schwab Government Money Fund" or the SWGXX, which "will invest at least 99.5% of its total assets in cash, U.S. government securities and/or repurchase agreements that are collateralized fully by cash and/or U.S. government securities; under normal circumstances, at least 80% of the fund's net assets will be invested solely in U.S. government securities including repurchase agreements. "

In other words Schwab is telegraphing that brokerages have begun permanently unwinding hundreds of billions if not trillions in money market-funds, and rotating it almost entirely into government securities.

The stated reason for this quiet unwind is the following:

"the U.S. Securities and Exchange Commission (SEC) has made changes to the regulations that govern money market funds. These new rules are intended to increase fund liquidity and to protect investors. The changes include new restrictions related to who will be permitted to invest in “retail” money market funds, which are non-government money market funds that are allowed to maintain a constant net asset value (CNAV). As a result, beginning later this year Schwab Prime Money Market Funds and Municipal Money Market Funds will be required to limit shareholders to natural persons (i.e., individuals, as opposed to businesses, defined benefit plans, or endowments)."


According to our records, the account(s) noted at the end of this letter is invested in a retail money market fund as defined by the SEC and the beneficial owner(s) of the account(s) is not a natural person(s). Therefore, you will not be able to maintain the position(s) in the account(s).

The unstated, if real reason may be different.

Recall that according to the punditry, one of the biggest hindrances to NIRP in the US is the trillions of dollars held in money market accounts. Well, one way of overcoming this "problem" is to preemptive begin a mandatory sweep pushing all money market-parked cash into government-linked securities. In other words, instead of roughly $2 trillion of inert cash held at money market funds (as per the latest H.6 statement), not only will a substantial portion of that cash "rotate" into Treasury holdings in the coming months (resulting in yet another key driver of demand for Treasury paper) but will also eliminate the money market overhang risk if and when the Fed decided to join the global negative interest rate scramble, and unleash NIRP.

Schwab automatically assumes that all clients affected by this change will accept: "if you are in agreement with this change in your cash feature, no response is required from you. Schwab will consider a non-response to this notice as your authorization and instruction to change your cash feature." Those who disagree have the "option" of either sweeping their cash into th corporate bank (thus being exposed to Schwab corporate counterparty risk), or, as Schwab conveniently adds, "you also have the right to close your brokerage account(s) without penalty at any time."

Here is the notification letter Schwab has been sending out.