Fitch Recaps Reform Landscape
Fitch Ratings released "U.S. MMF Quarterly: Post-Money Fund Reform Cash Management Landscape Takes Shape," which says, "The post-money fund reform cash management landscape in the U.S. is taking shape as fund managers unveil adaptation plans. The moves hint at a sizable shift into government funds, a wound-down institutional prime space and growth in alternative products, such as separately managed accounts, private money funds and short-term bond funds. Managers responsible for over $1.4 trillion, or 59% of U.S. money market fund assets, have provided guidance thus far. As managers announce plans in response to reform, an overriding theme appears to be more options for investors. Two managers announced plans to convert over $100 billion of prime retail funds into government funds to maintain a stable NAV and avoid fees and gates. [Note: Crane Data believe this is just one manager, Fidelity.] Asset managers also said they will introduce new "short-maturity" institutional prime money funds, which will only buy securities maturing in less than 60 days to reduce the likelihood of, albeit not eliminate, NAV volatility. BlackRock went further, committing to establish a 7-day-maturity institutional prime fund, which could potentially avoid triggering the new fees and gates provision. However, all managers also committed to maintaining the existing large institutional prime funds (which will have floating NAVs in 2016) and noted that they will opt out of the fees and gates feature, which is optional for government funds. While the industry largely expects assets to shift from prime to government funds due to reform, so far, flows have been muted. Institutional government fund assets have increased 8% since reform was enacted in July 2014, but institutional prime funds have also risen, by 2%. Seasonal factors affect money fund flows, so it is hard to tell if the data indicate reform-related flows toward government funds, which will likely intensify closer to the implementation date for floating NAVs and fees and gates in October 2016. Anecdotally, Fitch is aware that a small number of institutional money fund clients have switched from prime to government funds in response to reform. The increased demand for government funds may bump against shortages in supply and, consequently, wider spreads between government and prime funds." It adds, At the end of March, Fitch-rated prime MMFs had on average 26% and 39% of their portfolios in daily and weekly liquid assets, respectively. This is down from 24% and 41% at the end of December but remains well above Fitch's criteria guidelines for 'AAAmmf' funds. The weighted average maturity (WAM) and weighted average life (WAL) of Fitch-rated prime MMFs were at 40 days and 72 days, respectively, at the end of March 2015, compared with December figures of 36 and 65 days.... Allocations to the U.S. remained high (28.3% of prime fund assets) as prime money funds took advantage of the availability of the Fed's reverse repo facility. Exposure to Japanese banks (12.9%) increased 1.6% over the quarter, while exposure to French issuers (10.8% of assets) decreased 1.9%."
