The Federal Reserve Bank of New York released its "2012 Annual Report this week, and the 132-page document spend 2 pages on money funds and tri-party repo. It says, "In 2012, the Bank contributed to multiple workstreams focused on improving financial stability through better market infrastructure. Key efforts included supporting reforms in the tri-party repo system, money market funds, over-the-counter (OTC) derivatives, and foreign exchange settlement. Significant work was also carried out to support the stability of financial market infrastructures."
It says of the "Tri-party repo <b:>`_, "The tri-party repo market is a large and important market where securities dealers fund a substantial portion of firm and client assets. The crisis revealed significant fragility in the tri-party repo system. To help support financial stability in this market in 2012, a cross-bank team including contributors from FISG and the Markets, Risk, and Research groups continued their work with market participants to effect changes in settlement infrastructure. The aim is to help reduce the extension of intraday credit within the tri-party repo market and to improve dealers' liquidity risk-management practices. To this end, the Bank intensified its direct oversight of market participants to make the infrastructure changes necessary to reduce reliance on intraday credit and worked with broker-dealers affiliated with bank holding companies and foreign banking organizations to improve risk-management practices."
The NY Fed's report comments on "Money market funds," "In 2012, the Bank continued to support reform in the money market fund business. The crisis made clear that the monies provided to the money market mutual funds by their own investors are inherently unstable and susceptible to runs in times of panic. Investors in money market funds with a fixed net asset value can take money out on a daily basis at par value, with no redemption penalty. This can occur even if the money market fund does not have sufficient cash or liquid assets to meet all potential redemptions. This creates an incentive for investors to be the first to get out whenever there is any uncertainty about the underlying value of the assets in the fund. The size of the money market fund sector and its interconnectedness with the rest of the financial system make reform of these vulnerabilities crucial."
It adds, "While the primary responsibility for implementing money market fund reform lies with the U.S. Securities and Exchange Commission, the Bank provided substantial analysis to policymakers on reform alternatives, with leadership from staff in the Research Group and the Office of Financial Stability and Regulatory Policy. In early 2013, I personally joined with the presidents of the other eleven Reserve Banks to offer our public support for reform in this market."
In other news, a release from the ratings agency Moody's Investors Service, entitled, "Moody's: US Money Market Funds Boost Euro Area Exposure by $21.2 Billion" explains, "US-domiciled money market funds (MMFs) have increased their total exposure to European financial institutions to $189.8 billion (28% of their assets) from $168.6 billion (25% of their assets) in the first two months of Q2 2013, said Moody's Investors Service. Most of this increase is due to higher exposures to UK banks, which rose by 47% to $30.5 billion from $20.4 billion in the same time period. Within euro- and sterling-denominated MMFs, exposure to European financial institutions remained stable at EUR28 billion (40% of their assets) and GBP58 billion (49% of their assets), respectively. However, there have been significant country shifts."
It continues, "Moody's analysis is based on the portfolios of all Moody's-rated MMFs in the first two months of Q2 2013. For the USD funds, the data covers 41 US Prime MMFs and 29 European and offshore USD-denominated MMFs. For both the euro-denominated MMFs and sterling-denominated MMFs, the data covers 22 funds domiciled in Europe for each (44 total). The credit profiles of U.S. prime, Euro-denominated and Sterling prime money market funds (MMFs) continued to experience a modest deterioration during the second quarter of 2013, whereas portfolios' duration and diversification improved."
Moody's writes, "In the first two months of Q2 2013, both US Prime MMFs and offshore USD MMFs have shown increased exposures to European financial institutions, increasing by 11% to $189.8 billion (28% of their assets) and 9% to $91.7 billion (57% of their assets), respectively. For offshore USD-denominated MMFs, most of this increase is due to their exposures to Swedish banks that went to $22.2 billion from $19.6 billion, and to UK banks that went to $11 billion from $8.8 billion. There was modest credit deterioration in the same time period, as 5.9% of investments in US-domiciled funds and 3.9% of offshore-domiciled funds moved from Aaa- and Aa-rated securities to A-rated securities. Approximately 18% of investments in all Moody's-rated MMFs were rated Aaa, down from 23% in March in US-domiciled funds and 20% in offshore-domiciled funds. Overnight liquidity remains high, at around 32% in US-domiciled fund assets and 36% in offshore-domiciled funds on average."
They add, "Prime euro-denominated MMFs experienced a stabilisation in their credit, liquidity and market risk profiles, while they reduced their maturity profile and decreased their portfolio concentration. While funds' aggregate exposure to European financial institutions remained stable at EUR28 billion, there have been significant shifts in country allocation. In the first two months of Q2 2013, investments in French financial institutions decreased significantly by 20% to EUR8.5 billion from EUR10.6 billion. However, exposure to Swedish banks increased by 16% to EUR6.6 billion from EUR5.7 billion, and investments in German financial institutions also increased by 24% to EUR2.9billion from EUR2.3 billion. The low interest-rate environment and low yields across the sector prompted a further AUM decrease by 7% in euro MMFs to EUR69.9 billion."
Finally, Moody's release writes, "Prime sterling-denominated MMFs experienced a stabilisation in their risk profiles, with a modest credit deterioration of their portfolio, but a shorter duration and higher diversification. Funds' investment in Aaa- and Aa-rated securities decreased by 4%, increasing exposures to A-rated instruments. While exposure to European financial institutions remained stable at GBP58 billion (49% of their assets), there have been significant country shifts in the first two months of Q2 2013. Exposures to UK and Swedish financial institutions continued to increase by 11% and 19%, to reach GBP15.2 billion and GBP10.5 billion, respectively, while reducing exposures to German financial institutions by 31% down to GBP4.4 billion.... Portfolios have become less concentrated and exposure to the largest three obligors decreased to 18.4% of AUM from 20% on average. Combined AUM increased by 3.2% to GBP118.5 billion during the quarter, despite the low yields across the sector."
