Moody's Investors Service published the brief, "Money market funds face more rule changes after coronavirus turmoil." It begins, "US and EU regulators plan to adjust money market fund (MMF) rules after coronavirus-related market turmoil caused an extreme flight to quality in March 2020, putting prime MMF liquidity under pressure, and triggering a drop in fund valuations. The MMF sector's dash for liquidity exacerbated short-term market pressures, raising concerns about the systemic risks posed by the sector. Regulators have put all options on the table, including several proposals that would drastically change the structure of prime MMFs. The proposals follow transformative reforms of the sector implemented in 2016 in the US, and 2018 in the EU. Regulators are unlikely to implement new reforms before 2022. The Financial Stability Board (FSB) is conducting a separate review of the MMF sector that will look broadly at the factors that affect liquidity in short term debt markets."
The piece summarizes, "Pre-emptive redemptions exacerbated March 2020 turmoil," writing, "Research by US Federal Reserve Board economists shows that in March 2020, some investors in prime MMFs exited long before any breach of liquidity thresholds that might have triggered redemption restrictions. There is also evidence that MMFs sold less liquid assets to meet redemption requests so as to protect their weekly liquidity thresholds, aggravating market-wide liquidity shortages."
Moody's continues, "In February, the Securities and Exchange Commission published ten reform proposals for public comment. One of these is to remove the link between breaches of liquidity thresholds and the imposition of withdrawal restrictions. This would help reduce the risk of pre-emptive redemptions, and make it easier for prime and tax-exempt MMFs to deploy their liquid assets in periods of market stress, a credit positive. However, we believe the SEC's other proposals would have a more far-reaching impact on the sector, with some potentially making prime MMFs less attractive to investors, a credit negative for the prime industry."
They add, "EU regulators will consider similar changes to liquidity rules as their US peers, and will look again at the Low Volatility Net Asset Value (LVNAV) fund model, after LVNAV funds' mark-to-market NAVs came close to exceeding the maximum 'collar' relative to their amortized NAVs in March 2020.... The FSB's review, due in July 2021, will consider the factors that amplified stress in short-term credit markets last year. It will look at how the non-bank sector's growing role in financial intermediation, banks' retreat from security dealing, and margin calls on leveraged investors, may limit liquidity. The European Commission will likely draw on the FSB's conclusions in its own review, due in July 2022."
S&P Global Ratings says that, "The New Bloomberg Short-Term Bank Yield Index Is Consistent With Our Fund Ratings Criteria." They write, "As the transition away from LIBOR continues, another potential successor has been introduced -- the Bloomberg Short-Term Bank Yield Index (BSBY). BSBY seeks to measure the average yields at which large global banks access U.S. dollar senior unsecured marginal wholesale funding. S&P Global Ratings has determined that BSBY is consistent with our principal stability fund ratings (PSFR) methodology as an 'anchor' money market reference rate. As a result, we would not classify exposures to floating-rate securities referencing BSBY as 'higher-risk investments,' subject to our assessment of their credit quality, diversification, and maturity metrics."
S&P states, "We've received information that demonstrated how BSBY would have moved in the past five years. Our review found that BSBY is highly correlated to LIBOR, which we view as an anchor money market reference rate for various tenors such as overnight and one, three, six, and 12 months. In addition, we previously reviewed the Secured Overnight Financing Rate (SOFR) and the Euro Short-Term Rate (ESTR) as alternative anchor money market rates and determined that instruments pricing off these indices also will not constitute 'higher-risk investments,' as described in our PSFR criteria."
Fitch Ratings also weighed in on the topic with, "MMFs Likely to Invest in Securities Referencing LIBOR and SOFR Alternatives." They write, "Fitch Ratings expects global money market funds (MMFs) to gradually adopt newly-developed reference rate alternatives to the London Interbank Offered Rate (LIBOR). Alternative benchmarks, such as the Bloomberg Short-Term Bank Yield Index (BSBY) and the ICE Benchmark Administration's Bank Yield Index (BYI) are being established due to demand from market participants for a forward-looking, credit-sensitive index as a replacement for LIBOR, which is being phased out."
Their commentary continues, "Fitch received a number of requests from market participants to opine on the treatment of securities referencing BSBY in our MMF criteria. Bloomberg's methodology for BSBY seeks to address the issues noted above while eliminating the subjectivity associated with LIBOR. Bloomberg updates BSBY daily, offering overnight, one-, three-, six- and 12-month tenor options. BSBY is based on a blend of transaction data and executable quotes for commercial paper, certificates of deposits, bank deposits, and bank bonds, sourced from TRACE and Bloomberg Execution Solutions. Combined, these quotes accounted for $165 billion-$200 billion of average daily volume over the past three years, according to Bloomberg."
It adds, "Fitch believes that securities that reference BSBY meet the relevant definitions in Fitch's rating criteria for MMFs. The criteria states that floating-rate securities held within MMFs are expected to reference an index whose movement is highly correlated with changes in prevailing short-term interest rates. Based on BSBY's rate-setting methodology and a review of Bloomberg's historical back-testing data, Fitch believes that BSBY meets this criteria definition. Fitch will assess any additional new benchmarks in line with this definition."
Fitch also released its April "U.S. Money Market Funds" dashboard, writing, "Total taxable money market fund (MMF) assets increased by $131 billion to $4.3 trillion from Feb. 26, 2021 to March 31, 2021, according to iMoneyNet data. Government MMFs gained $144 billion in assets during this period, offset by a $14 billion decrease in prime MMF assets."
It adds, "MMFs have increased exposure to Treasury securities by $143 billion in the month of March, according to Crane Data. Government MMFs accounted for the entirety of the increase, $152 billion, while prime MMFs decreased exposure by $9 billion. MMF yields have plateaued at near-zero levels since initially decreasing when the U.S. Federal Reserve cut rates in response to market volatility in March 2020.... As of March 31, 2021, institutional government and prime MMF yields are the same at 0.03%, per iMoneyNet data."
J.P. Morgan's "Short-Term Fixed Income" comments on the BSBY, stating, "Away from rates, Bloomberg's Short-Term Bank Yield Index (BSBY) seems to be gaining traction as a credible alternative credit benchmark for the money markets. Of note, S&P released guidance this week stating that BSBY is consistent with its principal stability fund ratings methodology as an 'anchor' money market reference rate. As a result, S&P would not classify BSBY FRNs as 'higher-risk investments,' subject to other metrics. This matters as nearly 25% of the prime MMF universe or about $220bn are rated by S&P.... Provided Moody's and Fitch come to a similar determination (which we believe they have/will), this effectively opens the door of the entire prime MMF universe (roughly $900bn) to BSBY FRNs. As a consequence, we wouldn't be surprised to see the emergence of BSBY FRNs in the very near-term." (See too the oddly-contrarian Wall Street Journal article, "Libor-Replacement Competitor Gains Strength From New Offerings," which writes on the underdog Ameribor index.)
