Fitch Ratings published a number of pieces recently, including one entitled, "What Investors Want to Know: Global Money Market Fund Regulation." This paper explains, "New MMF rules have been proposed by the Securities and Exchange Commission (SEC) in the US, European Securities and Markets Authority (ESMA) in Europe and the China Securities Regulatory Commission (CSRC) since 2021. The proposed rules in the US and Europe focus on addressing threshold issues, enhancing MMF liquidity and imposing liquidity management tools, such as swing pricing. Meanwhile, China's regulators are targeting a reduction in the risks associated with large individual MMFs. This report compares the regulatory developments in the three large MMF markets and assesses the potential impact on funds and asset managers. Fitch Ratings expects the US proposals to incrementally widen rating headroom at MMFs, with the exception of swing pricing."
Fitch asks, "How Could the Proposals Affect EU MMFs?" They write, "Prohibiting the use of amortised cost valuations for LVNAV fund proceeds could diminish investor appetite for these products and lead to fund outflows, shrinking the size of LVNAV MMFs. In addition, ESMA's proposed pricing mechanism changes would alter LVNAV fund structures. Many investors view constant pricing as a key attribute of LVNAVs and most respondents to ESMA's initial consultation objected to the elimination of the LVNAV fund structure."
The ratings agency's update continues, "ESMA has not yet finalised its proposal to increase liquidity requirements. Recommendations from the European Systemic Risk Board include higher levels of daily and weekly maturing assets as well as public debt assets and aim to assist MMFs in meeting heightened redemption requests. ESMA also sees a need to differentiate additional liquidity requirements between variable net asset value (VNAV) funds and LVNAV funds. Nevertheless, the proposals do not include exact values for amendments, and ESMA has indicated that further assessment is needed before proposing specific suggestions. Funds may need to adjust the amount and composition of liquid assets, depending on the values included in the final form of the regulations."
It adds, "ESMA proposes to mandate the availability of at least one liquidity management tool for all MMFs. This allows some flexibility, in contrast to the proposed rules in the US that require institutional prime and institutional tax-exempt MMFs to adopt swing pricing. Possible tools in the EU include anti-dilution levies, liquidity fees or swing pricing, and ESMA proposed that the MMF manager can choose to activate such tools, rather than the option being dictated by authorities."
Fitch comments, "Current EU MMF regulations require LVNAV and public debt constant net asset value (CNAV)funds to make provisions for liquidity fees and redemption gates, whereas VNAV MMFs may adopt any eligible liquidity tools under the directives for Undertakings for the Collective Investment in Transferable Securities and the Alternative Investment Fund Managers Directive, although this is not specifically detailed in the regulations. These tools include suspending redemptions, gates and side pockets. The choice is subject to domestic implementation measures, as the use of such tools is not harmonised in EU law and is mostly subject to national law."
A press release, "Fitch Withdraws Amundi Money Market Fund - Short Term (EUR)'s Rating," states, "Fitch Ratings has withdrawn Amundi Money Market Fund - Short Term (EUR) 'AAAmmf' rating. The rating was withdrawn as the fund was liquidated on 12 July 2022. Fitch will no longer provide rating or analytical coverage of the fund."
Yet another posting, entitled, "European Short-Term Bond Fund Dashboard: June 2022," says, "Fitch Ratings estimates that over two-thirds of short-term bond funds (STBFs) had a weighted average rating factor equivalent to 'BBBf' or below in 1Q22, as measured by weighted assets under management (AUM), based on a sample representing 70% of industry AUM. This is an increase of almost 10% on the previous quarter. High inflation causing funds to seek higher yields by investing in riskier securities may be a contributing factor."
It continues, "Fitch defines STBFs as fixed-income funds with a target duration of between one and three years.... [A] substantial fall in real rates may have contributed to the reallocation to risker asset classes, and the consequent contraction of AUM that emerged in the first quarter. As of March 2022, Article 8 share of AUM among STBFs was 40%, while most STBFs assets are invested in Article 6 funds (45%)."
Finally, Fitch just published their, "U.S. ESG Money Market Funds: 2Q22," which states, "On May 25, 2022, the SEC proposed rule changes on both environmental, social, and governance (ESG) disclosures for investment advisers and investment companies and investment company names. The proposed amendments will require ESG funds to invest more of their assets in ESG investments and establish uniform disclosure requirements. These changes may affect the amount of funds that will brand themselves as ESG going forward and limit potential greenwashing."
They state, "As of June 30, 2022, total U.S. ESG MMF assets under management (AUM) were $9.1 billion. AUM decreased by $240 million in 2Q22, or -2.6%, while overall prime MMF AUM decreased by 4%.... Gross yields of ESG MMFs averaged 82 basis points (bps) in 2Q22, the same as non-ESG MMFs. ESG MMFs' net yields averaged 67 bps during the quarter, which is 6 bps higher than comparable non-ESG MMFs due to lower expense ratios at the ESG funds."
Fitch says, "The Fed continued tightening on May 4th and June 15th, raising rates by 50 and 75 bps, respectively. ESG MMFs' gross and net yields were up 118 bps and 116 bps, respectively, between March 31, 2022 and June 30, 2022, while non-ESG MMFs' gross and net yields rose 118 bps each over the same period. Following each rate hike, yield spreads decreased but quickly stabilized.... Yields will continue to increase as the Fed's benchmark federal-funds rate is expected to reach at least 300 bps by the end of this year."
