Giant mutual fund shops are reacting to the threat of more money market mutual fund reform, which
was renewed this week by U.S. Treasury Secretary Tim Geithner
and his FSOC
Stability Oversight Council).
On Tuesday the FSCO sent
the SEC three ideas for reforming money funds, including
ideas already dropped by the SEC this summer after insufficient support from the regulatory agency's
commissioners. The ICI and the Chamber of Commerce quickly denounced
the FSOC's recommendations. How are fundsters
, head of money funds at Boston-based Fidelity
], told Bloomberg
that she's "disappointed with both the FSOC process as well as the
outcome of the meeting," accusing the FSOC of not striking "the proper balance" between minimization
of risk and preservation of the benefits of money funds.
New York City-based BlackRock
] president Robert Kapito reportedly said
that he "wasn't enamored" with the FSOC's recommendations. Yet Reuters quotes
Kapito as also calling the FSOC's work a "good
starting place" for the "tough process" of reforming the business.
New York City-based BNY Mellon
] Curtis Arledge
, chief executive of investment
management, also took a somewhat positive tone, describing
the FSOC's proposals as having "some
"I'm not saying I would do it exactly the way it was in the (FSOC) proposal, although I think there
is some merit to it," Arledge said, according to Reuters
. "We do actually hold economic capital against our money
funds ... We're a winner in the scenario where risk is actually factored in to making money funds
Pittsburgh-based Federated Investors
47 percent of its third quarter
revenue from money funds. Yesterday Federated's shares fell
percent to $18.48, according to the Associated Press
How are money fund investors themselves reacting? The Wall Street Journal reports
that, according to money market fundsters, money
fund investors "shrugging" the FSOC's recommendations for now. A 60-day comment period for the
FSOC's recommendations would be followed by a 90-day period for the SEC to adopt the recommendations
or explain why not. And if the SEC did act, they'd have their own public comment and study period to
go through, too.
"This suggests that final SEC regulations would come roughly in late Q2," RBC Capital Markets
New York City-based Reich & Tang
] chief investment officer Tom Nelson
said that "it's
way too early" and investors aren't reacting yet.
"Investors won't move money till they know what the rules are," said Alex Roever
, head of
short-term rates strategy at New York City-based J.P. Morgan
"Any change will come only a year from now," agreed Joseph D'Angelo
, head of money funds for
Newark, New Jersey-based Prudential
On the PM side, ratings agency Fitch Ratings
yesterday released study results (see below)
suggesting that U.S. prime money market funds have moved "to significantly increase their portfolio
liquidity," possibly in expectation of more money fund reform.
Company Press Release
November 14, 2012 07:24 AM Eastern Time
Fitch: Regulations and Risk Aversion Drive Post-Crisis U.S. Money Fund Liquidity
NEW YORK--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 ratings group.
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
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Money Fund Liquidity: Regulation Versus Risk Aversion
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF
USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED
RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT
POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Neil Anderson, Managing Editor
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