Last week, Fitch Ratings published "European Treasurer Survey 2013," which examines large investors' thoughts on the possibility of a move to a floating NAV regime, and "U.S. Money Fund Exposure and European Banks: Eurozone Climbs Again," which reviews the latest trends in the portfolio holdings of the largest money market funds." Fitch's first report, subtitled, "European Treasurers Split on Impact of Potential Regulatory Changes, explains, "Money market funds are subject to regulatory debate around the world. Many changes have been proposed, notably a potential move from the constant net asset value (CNAV) structure, which represents around half of total MMF assets in Europe, to a variable net asset value (VNAV) structure, which is predominant in French funds and represents the remaining MMF assets."
Fitch explains, "While calling for changes to MMF operating frameworks, regulators have also expressed concerns about the potential impact on short term investors who have adopted pooled solutions in recent years.... European treasurers surveyed by Fitch have increasingly turned to money market funds, which many view as an extension of traditional bank deposits. While deposits remain the preferred vehicles, half have also adopted MMFs and a fifth of those treasurers that invest in MMFs use both CNAV and VNAV."
The piece tells us, "MMF guidelines still mainly adopt an "AAAmmf or nothing" approach for CNAV, even though a quarter of respondents could accommodate MMFs rated "AAmmf" or "Ammf". This is an area where regulators are concerned with a "cliff risk", that is the risk of a "run on the fund" should it be downgraded below "AAAmmf".... Treasurers appear to hold mixed views on the respective merits and flaws of CNAV and VNAV funds. Treasurers highlight the clear profile of CNAV funds and the true valuation of VNAV. Conversely, perception of guarantee and lack of valuation transparency in CNAV represent concerns, while for VNAV, the worries centre around funds' volatility and potential hidden capital losses."
Fitch adds on "Differing Views on Regulatory Impact," "47% do not expect to be materially affected but 42% anticipate a significant or material impact, mostly in accounting and tax areas. Moreover, 42% do not have an opinion on whether funds converted to VNAV would be less clearly defined, which Fitch views as a real risk. This makes clear the need for a sound transition and more communication on the part of industry and regulators.... 80% of respondents consider the financial standing of the sponsor when selecting an MMF, and not just the portfolio and investment strategy. But treasurers take a holistic view, emphasising the financial as well as operational role of the fund sponsor."
The second study, the monthly "U.S. Money Fund Exposure and European Banks," comments, "After retreating slightly in December, U.S. prime money market fund (MMF) exposure to eurozone banks increased in January. As of end-January 2013, exposures to eurozone banks represented 14.5% of MMF assets under management within Fitch Ratings' sample, the highest level since end-October 2011 and a more than 90% increase (on a dollar) basis since the end-June 2012 trough. From the money funds' perspective, ECB actions and improved eurozone market conditions have helped to promote a more positive posture to banks in the region. For eurozone banks, continuing access to MMFs can enhance funding diversification and bolster liquidity."
They continue, "For the seventh consecutive month, MMFs increased their exposure to French banks, which at 6.8% of MMF assets reached their highest point since end-August 2011. For a second straight month, French banks represented the largest single country exposure within Europe. Since end-December 2012, MMFs have increased their bank allocations across the rest of Europe as well, with gains in exposure to the U.K. (31% increase), Netherlands (22% increase), Germany (19% increase), Switzerland (11% increase), and the Nordic region (9% increase)."
Finally, Fitch adds, "In addition to the continuing resumption of flows to eurozone banks, several other trends also indicate an easing in MMF risk aversion. The proportion of eurozone exposure in the form of repos remains below last summer's peaks, a decline which likely reflects a greater willingness by funds to take on unsecured exposure to the region. Additionally, in the case of France, MF exposure in the form of certificates of deposit (CD) have increased by about thirtyfold since end-June 2012 (albeit from a very low base), while over the same period, exposure in the form of time deposits (which typically mature overnight or within a few days) has decreased by roughly 70%. As of end-January 2013, French bank CDs had a weighted average residual maturity of more than 40 days. This shift away from short-duration time deposits towards longer-duration CDs is another indication of diminishing risk aversion."
