Fitch on Market Illiquidity, ABCP
Fitch Ratings sent out a release entitled, "US Money Funds May Benefit from Market Illiquidity," which says, "US money funds may benefit from inflows as investors increase their structural cash allocations in response to lower market liquidity.... Between Sept. 15 and Oct. 15, the VIX index, an indicator of market volatility, nearly doubled, while US money fund assets grew by $37.9 billion (1.5%), driven by flows into institutional government money funds. While these flows in money fund assets may be explained by other factors, larger cash positions may represent a structural change in how portfolio managers react to changing liquidity, in addition to temporary defensive positioning in the face of the recent volatility.... While money funds face their own regulatory changes, they continue to be an efficient cash vehicle for investors, and may benefit from a shift to liquidity. Recent reforms introduced by the SEC mandate that institutional prime money funds float their net asset value (NAV) starting in October 2016, while institutional government money funds will maintain a stable NAV. Some investors, particularly corporate treasurers, have indicated that these changes will likely cause them to shift some assets out of institutional prime money funds and into alternative liquidity products, including government money funds." Fitch also reports, "U.S. Money Fund Reform Will Have an Uneven Impact on ABCP," which states, "Money fund reform's impact on asset-backed commercial paper (ABCP) programs will vary, depending on each program's investor base composition.... Investments in ABCP by institutional prime money funds are expected to decrease following the Securities and Exchange Commission's (SEC) recent amendments to Rule 2a-7. The SEC's changes will likely cause some outflows from institutional prime money funds, which have traditionally been large investors in ABCP. However, we expect outflows from money funds will take place gradually over the implementation period (which will end in October 2016) and will likely be offset by inflows into new products that invest in ABCP. Fitch believes that the ABCP market will weather the reforms as other investors step in to replace money funds.... Estimates for potential outflows vary greatly, with the high end of the range at about 50% of institutional prime money fund assets, or approximately $476 billion. Based on these funds' investments in ABCP, this could amount to about 13% of total ABCP outstandings as of July 2015, or $32 billion.... At the same time, some of the money leaving institutional prime money funds is expected to migrate to products with similar investment mandates, reducing the likely impact of the outflows from money funds."
