May 2018 Prime Funds

May 2018 Prime Funds HOW PRIME FUNDS ARE OUTPERFORMING OTHER MONEY MARKET INVESTMENTS

,, Since the October 2016 reforms, prime funds have consistently outperformed other money market investments by up to 30 basis points. Jonathan Spirgel, Head of Global Liquidity Services, BNY Mellon Markets

Prime Funds: An Emerging Opportunity Prime funds can sometimes be overlooked by investors in favor of government and treasury funds. A new piece of analysis based on data from BNY Mellon s Liquidity DIRECT reveals that not only are prime funds delivering investors superior yields over other money funds, the funds are doing so with remarkable stability and consistency. October 2016 witnessed the enactment of major reforms to US money market funds, as the Securities and Exchange Commission (SEC) introduced sweeping changes in the rules governing treasury, government and prime funds. Like treasury and government structures, prime funds invest in US Treasuries and US government debt, but prime funds are distinguished by the fact that these vehicles also invest in corporate credit instruments. These corporate instruments can provide investors higher yields relative to other money market fund structures. The intent of the 2016 reforms was to strengthen the resiliency of money market funds and, in any future market turbulence, to limit the kind of large-scale redemptions witnessed in 2008 after the Reserve Primary Fund broke the buck. In order to gauge the impact of these reforms, BNY Mellon has analyzed data going back to October 2016 but has focused in particular on the six-month period between September 2017 and February 2018. In this paper BNY Mellon presents some of the findings from its analysis and outlines observations supporting its primary conclusion: investors should reexamine the allocation of prime funds in their portfolio, given the superior returns achievable relative to other money market vehicles and the comparable high degree of NAV stability. The observations discussed in this paper include: 1. Recovering Prime Fund Volumes 2. Funds Exceeding Liquidity Thresholds 3. Stable Net Asset Values 4. Higher Returns 5. Prime Funds: Superior Yields & Consistent Stability 6. Conclusion

1 Recovering Prime Fund Volumes BNY Mellon's analysis began by focusing on investment volumes and how investors have allocated their assets into various money market instruments in the past 18 months. According to SEC analysis 1 of data filed by 379 money market funds in February 2018, US prime funds investors withdrew over $1 trillion in assets ahead of money market fund reform in October 2016, as fund assets plunged from $1.58 trillion in February of that year to just $550 billion by December 2016. These investor withdrawals appear to have been simply reallocated from prime funds into alternative money market funds. The SEC found an almost comparable $986 billion flowed into treasury funds and government funds, which collectively saw invested balances leap from $1.28 trillion in February to $2.27 trillion by December 2016. A steady recovery in volumes for prime funds took hold in 2017 and into 2018, but the growth has been somewhat gradual. BNY Mellon analyzed changes in portfolio size for 17 US prime funds accessible through its Liquidity DIRECT portal. Consistent with the withdrawals observable in the SEC data, the analysis found that at the low point in December 2016, the average prime fund portfolio size in the sample fell to $5.4 billion. Average invested volumes had climbed back up to $8.2 billion by January 31, 2018, however, and as of February 28, 2018, the average prime fund size among the 17 funds analyzed was $7.9 billion. Nonetheless, the four largest funds of the 17 surveyed held investor balances markedly higher than this average. In descending order, the largest fund sizes were $38.6 billion, $19.1 billion, $13.6 billion and 11.4 billion. This recovery in average fund balances is observable in the SEC data, which found that aggregate prime fund assets have grown from their December 2016 low of $550 billion to $666 billion as of February 2018.,, Barring a huge loss to the fund that dramatically drags down its NAV, a prime fund will in most circumstances outperform either government or treasury funds by a very wide margin. 1 Securities and Exchange Commission: Money Market Fund Statistics, February 28, 2018 4 Prime Funds: How Prime Funds are Outperforming Other Money Market Investments

Average Prime Fund Portfolio Size: Sept. 2017 - Feb. 2018 8.2 8 Avg. Prime Portfolio Size (Billions) 7.8 7.7 7.6 7.4 7.2 7 6.8 6.6 09-01 09-08 09-15 09-22 09-29 10-06 10-13 10-20 10-27 11-03 11-10 11-17 11-24 12-01 12-08 12-15 12-22 12-29 01-05 01-12 01-19 01-26 02-02 02-09 02-16 02-23 2017 2018 Source: Liquidity DIRECT

2 Funds Exceeding Liquidity Thresholds A major element of the SEC s 2016 reforms was to institute minimum liquidity thresholds that all money market funds are required to meet or exceed. These requirements are set at a minimum 10% daily liquidity threshold and a minimum 30% weekly liquidity threshold. Prime funds are comfortably exceeding the minimum requirements set by the SEC, according to BNY Mellon analysis, reflecting the robust liquidity position of most funds. On average, prime funds on Liquidity DIRECT boasted daily and weekly liquidity percentages over the past six months of 34.5% and 48.3% respectively. During that period, the lowest average daily liquidity across these funds was 30.8%, and the lowest average weekly liquidity was 46.1%.,, The prime funds sector enjoys strong stability, relatively little price volatility and ample liquidity. 6 Prime Funds: How Prime Funds are Outperforming Other Money Market Investments

Average Prime Fund Portfolio Daily and Weekly Liquidity: Sept. 2017 - Feb. 2018 100 90 Avg. Prime Portfolio Liquidity % 80 70 60 50 40 30 20 10 11-17 11-24 12-01 12-08 12-15 12-22 12-29 01-05 01-12 01-19 01-26 02-02 02-09 02-16 02-23 0 09-01 09-08 09-15 09-22 09-29 10-06 10-13 10-20 10-27 11-03 11-10 2017 2018 Avg. Daily Liquidity Avg. Weekly Liquidity Source: Liquidity DIRECT

3 Stable Net Asset Values Alongside the introduction of liquidity thresholds, perhaps the other most significant reform to money market funds has been the shift away from a fixed net asset value (NAV). Instead of maintaining an NAV of $1 per share, the SEC altered its rules to mandate that funds operate under a floating NAV. Analysis by BNY Mellon demonstrates that the prime funds segment of the market has proven to be remarkably stable, having digested the move to a floating NAV with equanimity. Since October 2016, prime funds have offered superior yield to government and treasury funds, yet have also delivered the returns with very little variation in their NAVs, despite their new floating nature. Changes in Prime Fund Net Asset Value: Sept. 2017 - Feb. 2018 1.0025 1 0.9975 0.995 09-01 09-25 10-16 11-06 11-28 12-19 01-11 02-02 02-26 2017 2018 Market NAV Source: Liquidity DIRECT BNY Mellon looked at a selection of 17 prime funds available on Liquidity DIRECT as a sample set from which to investigate overall trends for the entire US prime funds industry. One of the first parameters examined was one of the most basic: how many price changes have each of the 17 funds experienced in the past six months? The chart above shows the minute variance in a typical prime fund's NAV over six months. More broadly during this observation period, prime funds, on average, recorded 2.4 price changes per month. During that period, no price change was by more than 0.0001. 8 Prime Funds: How Prime Funds are Outperforming Other Money Market Investments

4 Higher Returns The analysis has so far presented a picture of a prime funds sector that enjoys strong stability, relatively little price volatility and ample liquidity. Data gathered over the past six months also demonstrates that this resiliency has been matched by yield outperformance relative to other money market funds. The below chart indicates that since September 2017, the prime to government yield spread has consistently remained between 24 and 30 basis points. The consistency of the spread between prime yields and government and treasury yields has shown little variation during the observation period, while also delivering a pronounced pickup in yield for prime investors over other money funds. Average Yields on Prime, Government and Treasury Funds: 1.6 1.5 1.4 1.3 1.2 1.1 1 0.8 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 09-01 09-09 09-17 09-25 10-03 10-11 10-19 10-27 11-04 11-12 11-20 11-28 12-06 12-14 12-22 12-30 01-07 01-15 01-23 01-31 02-08 02-16 02-24 2017 2018 Avg. Prime Yield Avg. Treasury Yield Avg. Govt. Yield Prime To Govt. Spread Source: Liquidity DIRECT

5 Prime Funds: Superior Yields & Consistent Stability With prime funds so consistently delivering enhanced yields relative to other money market instruments, how big a drop in average annual NAV would a prime fund have to experience in order for an investment in a government fund to be the better decision from a pure yield perspective? During February 2018, the average prime fund in our sample yielded, while the average government fund yielded just 1.23%. Annualizing those rates, if a fund manager was to invest $10 million in a prime fund and the same sum in a government fund, at the end of a year, the investor would have earned $151,000 in interest in the prime fund and $123,000 in the government fund. Based on February 2018 yields, in order for the government fund to prove the superior investment from a yield perspective, the NAV of the prime fund would have to fall an average of more than 28 basis points, from $1 to $0.9971. Since the largest drop observed among our sample group over the past six months was just three basis points, a prime fund would have to see its NAV plunge by several times this sum in order for government funds to emerge as the superior investment. Impact of Declining Prime Fund NAV on Yield vs. Yield Achievable on Government Fund with no NAV Decline Purchase Shares at $1 NAV Avg. NAV for 1 Year Annual Yield Earned Interest Share Value at Avg. NAV Total Value RDI 1.0000 $.00 $10,151,000.00 0.9999 $9,999,000.00 $10,150,000.00 1.50% 0.9998 $9,998,000.00 $10,149,000.00 1.49% 0.9997 $9,997,000.00 $10,148,000.00 1.48% 0.9996 $9,996,000.00 $10,147,000.00 1.47% 0.9995 $9,995,000.00 $10,146,000.00 1.46% Prime with 0.0027 Drop 0.9973 $9,973,000.00 $10,124,000.00 1.24% Govt. Fund 1.0000 1.23% $123,000.00 $.00 $10,123,000.00 1.23% Source: Liquidity DIRECT 10 Prime Funds: How Prime Funds are Outperforming Other Money Market Investments

6 Conclusion In conclusion, this analysis definitively found that in the months since the 2016 reforms, prime funds have presented investors with enhanced yield relative to other money market instruments while also maintaining stable NAVs, very similar to those achieved by government and treasury funds. Stating the findings another way, BNY Mellon s analysis concludes that barring a huge loss to the fund that dramatically drags down its NAV, a prime fund will in most circumstances outperform the yield available in either government or treasury funds by a very wide margin. Contact For more information on these issues and BNY Mellon's solutions, please contact: Stephen Gill +1 212 815 3278 stephen.gill@bnymellon.com Kevin Ronan +1 212 815 4480 kevin.ronan@bnymellon.com

bnymellon.com BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorized and regulated subsidiaries, affiliates and joint ventures of BNY Mellon, which may include any of the following: The Bank of New York Mellon, at 225 Liberty St., New York, NY USA, 10286, a banking corporation organized pursuant to the laws of the state of New York, and operating in England through its branch at One Canada Square, London E14 5AL, UK, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon, London Branch, is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, Belgium, authorized and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, and a subsidiary of The Bank of New York Mellon. The Bank of New York Mellon SA/NV operates in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, UK, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorized by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV operating in Ireland through its branch at 4th Floor Hanover Building, Windmill Lane, Dublin 2, Ireland, trading as The Bank of New York Mellon SA/NV, Dublin Branch, is authorized by the ECB and is registered with the Companies Registration Office in Ireland with No. 907126 and with VAT No. IE 9578054E. The Bank of New York Mellon, Singapore Branch, subject to regulation by the Monetary Authority of Singapore. The Bank of New York Mellon, Hong Kong Branch, subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. If this material is distributed in Japan, it is distributed by The Bank of New York Mellon Securities Company Japan Ltd, as intermediary for The Bank of New York Mellon. If this material is distributed in, or from, the Dubai International Financial Centre ( DIFC ), it is communicated by The Bank of New York Mellon, DIFC Branch, regulated by the DFSA and located at DIFC, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE, on behalf of The Bank of New York Mellon, which is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for professional clients only, and no other person should act upon it. Not all products and services are offered in all countries. The information contained in this material is intended for use by wholesale/professional clients or the equivalent only and is not intended for use by retail clients. If distributed in the UK, this material is a financial promotion. This material, which may be considered advertising, is for general information purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter. This material does not constitute a recommendation by BNY Mellon of any kind. Use of our products and services is subject to various regulations and regulatory oversight. You should discuss this material with appropriate advisors in the context of your circumstances before acting in any manner on this material or agreeing to use any of the referenced products or services and make your own independent assessment (based on such advice) as to whether the referenced products or services are appropriate or suitable for you. This material may not be comprehensive or up to date, and there is no undertaking as to the accuracy, timeliness, completeness or fitness for a particular purpose of the information given. BNY Mellon will not be responsible for updating any information contained within this material, and opinions and information contained herein are subject to change without notice. BNY Mellon assumes no direct or consequential liability for any errors in or reliance upon this material. This material may not be distributed or used for the purpose of providing any referenced products or services or making any offers or solicitations in any jurisdiction or in any circumstances in which such products, services, offers or solicitations are unlawful or not authorized or where there would be, by virtue of such distribution, new or additional registration requirements. Liquidity DIRECT : Money market fund shares are not a deposit or obligation of BNY Mellon. Investments in money market funds are not insured, guaranteed, recommended or otherwise endorsed in any way by BNY Mellon, the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, fund shares are subject to investment risk, and your investment may lose value. Money market fund yield performance represents past performance, which is no guarantee of future results, and investment returns will fluctuate. Before investing, investors should carefully consider the investment objectives, risks, charges, tax impacts and expenses of the fund that are explained in each fund s prospectus. The following factors, among many, could reduce any one fund s income level and/or share price: interest rates could rise sharply, causing the value of the fund s investments and its share price to drop; interest rates could drop, thereby reducing the fund s yield; any of the fund s holdings could have its credit rating downgraded or could default; and there are risks generally associated with concentrating investments in any one industry. Investments in instruments of non-us issuers are subject to the risks of certain domestic events such as political upheaval, financial troubles, nationalization (certain assets, entities or sectors) or natural disasters that may weaken a country s securities markets. Country risk may be especially high in emerging markets. Such investments may be affected by market risk on a global scale based on responses of certain foreign markets to markets of other countries or global market sectors. Foreign-currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. Investments in foreign instruments are subject to the risk that the value of a foreign investment, measured in US dollars, will decrease because of unfavorable changes in currency exchange rates. Securities instruments and services other than money market mutual funds and off-shore liquidity funds are offered by BNY Mellon Capital Markets, LLC. All references to dollars are in US dollars unless specified otherwise. This material may not be reproduced or disseminated in any form without the prior written permission of BNY Mellon. Trademarks, logos and other intellectual property marks belong to their respective owners. The Bank of New York Mellon, member FDIC. 2018 The Bank of New York Mellon Corporation. All rights reserved.