Nov 14 - Since the U.S. credit crisis, both SEC changes implemented in 2010 and ongoing
investor risk aversion have driven U.S. prime money market funds (MMFs) to significantly
increase their portfolio liquidity, as discussed in a new Fitch Ratings study.
As of end-September 2012, liquid assets represented approximately 45% of MMF
assets, compared to approximately 20% of total assets at end-2006. Fitch's study
identifies three distinct phases when MMFs increased liquidity: (1) during the
U.S. financial crisis, particularly after the August 2007 stresses affecting
structured investment vehicles and the asset-backed commercial paper market; (2)
after the announcement and implementation of the 2010 Rule 2a-7 amendments; and
(3) during mid-2011 as Eurozone market volatility started to escalate.
'U.S. financial regulators, including the FSOC, remain focused on the ability of
money funds to weather market distress, and strong liquidity is important to
meeting redemption requests and providing confidence during volatile periods,'
said Roger Merritt, Managing Director and Head of Fitch's Fund and Asset Manager
While the 2010 SEC rule changes essentially place a floor on fund liquidity
levels, it is unlikely that currently high MMF allocations to liquid assets will
persist, particularly if Eurozone stresses were to ease and the supply of high
quality assets were to decline further.
'Since maintaining high liquidity dampens returns, an easing in market
volatility could motivate funds to reduce these buffers by shifting to
relatively higher-yielding, longer-duration investment opportunities,' said
Martin Hansen, Senior Director, Fitch Macro Credit Research.
Fitch's sample set is based on public filings from the 10 largest U.S. prime
institutional and retail MMFs. For this study, Fitch defines liquid assets as
MMF direct holdings of U.S Treasury and agency securities (regardless of
maturity), and other bank and corporate exposures (including repos) with a
residual maturity of one week or less.
The full report 'Money Fund Liquidity: Regulation Versus Risk Aversion' is
available at 'www.fitchratings.com.'