Fitch: Post-MMF Reform Cash Management Landscape Takes Shape; EU Bank Ratings Under Pressure

NEW YORK--()--The post-money fund reform cash management landscape in the U.S. is taking shape as fund managers unveil adaptation plans, according to Fitch Ratings. 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. 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, although 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. On the other hand, all managers also committed to maintaining existing large institutional prime funds (which will have floating NAV in 2016), and all also noted that they will opt out of the fees and gates feature that 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 are up 8% since reform was enacted in July 2014, but institutional prime funds are also up 2%. Seasonal factors affect money fund flows, so it is hard to tell if the data is indicative of reform-related flows towards government funds, which will likely intensify closer to the implementation date for floating NAV 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.

On a separate note pertaining to money fund investments, approximately 50 EU banks and banking groups will face long-term rating pressures as a result of Fitch's reduced sovereign-support assumptions, which may impact the banks' short-term ratings during 2Q15. Many prime money funds have exposures to these banks and may reassess their positioning ahead of rating actions. As explained in Fitch's special report EU Bank Short-Term Ratings the EU's new bank resolution framework involves bail in debt buffers which can be employed to recapitalize failed banks. This reduced government support negatively affects bondholders, partially balanced by banks' more resilient funding and liquidity structures.

European banks susceptible to downgrades currently represent an average of 5.5% of U.S. prime money fund assets, but exposures vary across funds and issuers as the charts on the right show. The exposure of individual funds to this group of banks ranges from 0% to 32% but is concentrated in very short-dated securities, primarily under 1 month, and in many cases overnight.

The full report, 'U.S. Money Market Funds Quarterly 1Q15', is available at 'www.fitchratings.com' or by clicking on the link above.

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Applicable Criteria and Related Research: U.S. Money Market Funds Quarterly 1Q15

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866024

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Contacts

Fitch Ratings
Greg Fayvilevich
Director
+1 212-908-9151
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Kamil Kopec
Associate Analyst
+1 212-908-9108
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Christian Giesen, +49 69 768076 232
christian.giesen@fitchratings.com

Contacts

Fitch Ratings
Greg Fayvilevich
Director
+1 212-908-9151
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Kamil Kopec
Associate Analyst
+1 212-908-9108
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
or
Christian Giesen, +49 69 768076 232
christian.giesen@fitchratings.com