A statement entitled, "Fitch: Potentially Negative Euro Yields Won't Impact MMF Ratings," says, "Fitch Ratings says euro money market funds' (MMFs) yields have stabilised at marginally positive levels two months after the ECB cut its deposit facility rate to zero. MMFs could nevertheless post negative yields if short-term euro market rates move further into negative territory. This would not be a negative rating factor per se for Fitch-rated MMFs. It would, however, lead fund managers to review their investment objectives and fund structural features."
The release continues, "Negative MMF yields stemming from the short-term market rate environment would not be a negative rating factor per se for Fitch-rated MMFs, including for those rated at 'AAAmmf'. Fitch recognises that MMFs yields are to be consistent with prevailing safety and liquidity costs, commensurate with alternative high-quality short-term instruments, such as 'AAA'-rated euro treasury bills. The agency also highlights that Fitch MMF ratings must remain a ranking of funds on the basis of their liquidity, market and credit risk profile."
Fitch adds, "At end-August 2012 constant net asset value (CNAV) MMFs denominated in euro were generating net yields of 8bp on average, down by 11bp from their early July level, before the ECB rate cut. While fund managers are still able to find short-dated euro assets delivering small positive yields, further potential actions by the ECB to reduce its reference rates would likely push market rates well into negative territory, and euro MMF yields ultimately as well.... So far, MMF managers have taken a series of measures to maintain their funds' yields above zero. These include partial fee waivers, which have already been implemented on about half of the euro CNAV funds, and/or selective investment strategy adjustments, after an initial wave of closing funds to new investments."
Finally, they say, "Fund managers have now started to prepare for the possibility of negative yields on euro MMFs, reviewing fund structural features accordingly. This notably entails an adjustment of funds' investment objectives to introduce explicitly the notion of relativity to prevailing short-term market rates. For CNAV funds, the stable NAV and related yield distribution mechanism is being reviewed with a view to limiting operational challenges as well as minimising accounting and fiscal implications for investors, without changing the investment pay-off for investors. Euro CNAV MMF represented total assets of EUR106bn at end-August 2012, of which EUR8bn were in government-only MMFs. Overall, investors in euro CNAV funds have remained relatively stable throughout the summer, although government-only MMFs experienced large investor asset outflows since early July (-26%)."
In other news, Bloomberg wrote late yesterday a story entitled, "SEC Majority Said to Back Money-Market Study Schapiro Opposed." It says, "A majority of U.S. Securities and Exchange Commission members are seeking a study of money-market regulations after Chairman Mary Schapiro's bid to advance new rules failed last month, a person familiar with the matter said. SEC Republican commissioners Daniel Gallagher and Troy Paredes, together with Democrat Luis Aguilar, sent a letter yesterday to Schapiro and SEC Chief Economist Craig Lewis reiterating a call for an analysis of whether certain rules could disrupt money-market funds and short-term credit markets, said the person, who asked not to be identified because the matter isn't public."
Bloomberg explains, "The request for the study comes about three weeks after Schapiro canceled a vote on staff proposals for new money-market rules, saying that the SEC "will not act" because three of the five commissioners did not support them. The statement, in which Schapiro dismissed the need for additional study, marked the start of an unusually public spat among the commissioners. Schapiro, backed by the Federal Reserve, has worked to make money funds more stable in the wake of the collapse of the $62.5 billion Reserve Primary Fund in September 2008. Its closing triggered a wider run on money funds, helping to freeze global credit markets."
The piece adds, "Schapiro's Aug. 22 announcement marked a victory for the mutual-fund industry, which lobbied against new rules. The plan called for funds to abandon their traditional $1 share price or adopt capital buffers and redemption restrictions, changes executives said would destroy products that manage $2.6 trillion for U.S. companies and households.... In an Aug. 28 response to Schapiro's statement, Gallagher and Paredes said they supported an alternative proposal that would allow firms running money funds to prohibit withdrawals to stop investor flight in the event of a run. They also supported Aguilar's call for further study before proposing rules that could cause investors to move money from money-market funds to other unregulated investment vehicles."
