MEMORANDUM To: Money Market Reform Proposal File From: Sarah G. ten Siethoff Senior Special Counsel, Division of Investment Management Date: August 16, 2013 Re: Meeting with Representatives from Fidelity On August 16, 2013, Craig Lewis, Director, Division of Economic and Risk Analysis (DERA), Woodrow Johnson of DERA, Dan Hiltgen of DERA, and Sarah ten Siethoff, Senior Special Counsel, Division of Investment Management met with Nancy Prior (President, Money Markets), Kevin Meagher (SVP, Deputy General Counsel), Sean Verbout (Managing Director of Quantitative Research) and James Febeo (SVP, Head of Regulatory Affairs), representatives of Fidelity. The representatives discussed the Commission’s proposal on money market fund reform and the attached slides.

Money Market Mutual Fund Reform

August 16, 2013

Municipal MMFs Have Significant Liquidity

77% 80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

State Funds National Funds

2

Source: Crane Data as of 06/30/13

(%) o

f Tot

al

INDUSTRY MUNICIPAL MMF PERCENT OF HOLDINGS IN 7-DAYS OR LESS

INDUSTRY MUNICIPAL MMF PORTFOLIO DOLLAR WEIGHTED AVERAGE MATURITIES

0

5

10

15

20

25

30

35

40

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Municipal MMFs Have Low Interest Rate Risk

3

Note: Represents the nominal average of all Tax-Free MMFs as of the first business day of the month. Source: iMoneyNet as of 07/01/13

Day

s

$1,319 54.3%

$428 17.6%

$427 17.6%

$256 10.5%

Size of Municipal MMFs is Not Systemic

4

Source: Crane Data as of 06/30/13

Municipal

Prime

Treasury

Government

MUNICIPAL MMF AS A PERCENT OF TOTAL MMF INDUSTRY Total Assets $2,430 Billion

1.0009 1.0009 1.0010 1.0010 1.0011 1.0011 1.0012 1.0012 1.0013 1.0013 1.0014

850

890

930

970

1,010

1,050

Detroit Events Did Not Destabilize Municipal MMFs

5

Fund

Net

Ass

ets

($M

illion

s)

Fund Market N

AV

Rat

e

0

0.1

0.2

0.3

0.4

0.5

0.6

3/1/

13

3/8/

13

3/15

/13

3/22

/13

3/29

/13

4/5/

13

4/12

/13

4/19

/13

4/26

/13

5/3/

13

5/10

/13

5/17

/13

5/24

/13

5/31

/13

6/7/

13

6/14

/13

6/21

/13

6/28

/13

7/5/

13

7/12

/13

7/19

/13

7/26

/13

2-Year MMD

7-Day SIFMA 6-Month MMD

1-Year MMD

Fund Market NAV

Fund Net Assets

03/14/13 Kevyn Orr appointed

as Detroit’s Emergency Financial

Manager.

06/14/13 Detroit announces debt restructuring

plan.

07/18/13 Detroit files for

chapter 9 bankruptcy protection.

Sources: Top chart, FMR as of 07/26/13; Bottom chart, Thompson Municipal Market Data as of 07/26/13; Fund data shows Fidelity Michigan Municipal Money Market Fund

MONEY MARKET MUTUAL FUNDS ASSET FLOWS

Source: iMoneyNet as of 07/29/13

Municipal MMFs Did Not See Significant Redemptions During 2008 Financial Crisis

6

($Bi

llions

)

Institutional Government Institutional Treasury

Institutional Prime

Retail Tax-Free

Institutional Tax-Free Retail Prime

Retail Treasury Retail Government

-500

-400

-300

-200

-100

0

100

200

300

400

09/1

2/08

09/1

9/08

09/2

6/08

10/0

3/08

10/1

0/08

10/1

7/08

10/2

4/08

10/3

1/08

11/0

7/08

11/1

4/08

11/2

1/08

11/2

8/08

12/0

5/08

12/1

2/08

12/1

9/08

12/2

6/08

MONEY MARKET MUTUAL FUNDS ASSET FLOWS

Source: iMoneyNet as of 07/29/13

Municipal MMFs Did Not See Significant Redemptions During 2011 Market Uncertainty

7

($Bi

llions

)

Institutional Government

Institutional Treasury

Institutional Prime

Retail Tax-Free Institutional Tax-Free

Retail Prime

Retail Treasury Retail Government

-250

-200

-150

-100

-50

0

50

100

150

05/0

2/11

05/1

6/11

05/3

0/11

06/1

3/11

06/2

7/11

07/1

1/11

07/2

5/11

08/0

8/11

08/2

2/11

09/0

5/11

09/1

9/11

10/0

3/11

10/1

7/11

10/3

1/11

11/1

4/11

11/2

8/11

Municipal MMFs Provide Low-Cost Financing for States, Cities and Non-Profits

Sources: Suspension Orthopaedic, Healthcare Facilities Today, Chicago Tribune, Construction Week Online

8

MONEY MARKET MUTUAL FUNDS’ SHARE OF SHORT-TERM SECURITIES1

Notes: 1 Short-term securities include money market instruments as well as longer-term securities with a remaining maturity of 1-year or less. *Agency securities include debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Sources: Bloomberg, New York Federal Reserve, U. S. Treasury Department, SIFMA, iMoneyNet, Crane Data as of 06/30/13 except VRDNs/TOBs as of 12/31/12

(%) o

f Tot

al

$12.5

$2.0 $2.5

$13.5

Money Market Mutual Funds Are Significant Buyers of Short-Term Securities

9

39

46

28 30

65

0

10

20

30

40

50

60

70

Agency Securities* Commercial Paper Treasuries Repurchase Agreements

Tax-Exempt VRDNs/ TOBs

Source: FMRCo as of 7/30/13 Note: Data represents state and local governmental note issuance that was offered to FMRCo for purchase.

0

10

20

30

40

50

60

70

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

$ Bi

llion

s

Cash Flow Borrowing Short Term Capital

10

State and Local Governments Issue Significant Notes: Ten Year Total = $520 Billion State and local governments rely on short term money market borrowing to

pay government employees and fund other operating expenses for cash flow management, and to finance capital projects during construction periods prior to issuing long term bonds.

Notes: Annual financing cost assumes average interest rates of 0.18% on notes and commercial paper and 0.06% on floating-rate securities Sources: FMR as of 06/24/13; Crane Data, iMoneyNet and SIFMA as of 12/31/12

Potential Impact of MMF Reform on Municipal Issuers

11

0

2

4

6

8

10

12

14

0 10 20 30 40 50 60 70 80 90 100

Incr

emen

tal C

ost (

$ Bi

llion

)

Portion of MMF Funding Replaced with Longer-Term Debt

400 bp

200 bp

100 bp

50 bp

Assumed refinancing spreads:Total MMF holdings of municipal debt: $323 billion

Current annual financing cost: $275 million

Security Sales During Week Following Lehman Bankruptcy (September 15, 2008 – September 19, 2008)

12

-0.70

-0.60

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

Tran

sact

ion

Pric

e M

inus

Bas

e Pr

ice

(% F

ace

Valu

e)

Base Price = Amortized Cost

Base Price = Last Marked Price

Daily Liquid Weekly Liquid Other Gov't Other ≤ 90 d Other > 90 d

1-Year Treasury Bills

18-Month FHLB Floaters

Total: $10.0 B

6-Month FNMA Discount Notes

$0.5 B $0.7 B $2.8 B $2.4 B $3.5 B Face Value: