Money market fund industry stable after recent reforms, Moody's claims

Money market fund industry stable after recent reforms, Moody's claims

  • Export:

The global money market fund industry appears to be on a more solid footing following recent regulatory reform.

That’s according to experts at Moody’s Investors Service, who have changed their 2017 outlook for the industry to stable after being negative in 2016.

"Our outlook reflects our renewed confidence in the industry, given its resilience during this period of transformational change," says Vanessa Robert, a vice president at Moody's.

"We consider that fund managers will conservatively manage portfolios in the new regulatory regime."

The conversion of institutional prime and tax-exempt funds from fixed to variable net asset values (NAVs) and the adoption of liquidity fees and gates on all non-government MMFs led to a shift in the mix of industry assets which far exceeded most estimates.

Prime money market funds have already lost more than $1trn of assets as a result of the new rules, which allow managers to gate redemptions and impose fees should there be a threat to liquidity.

However, most assets transferred into government money market funds and did not leave the sector altogether.

"While $1trn of assets have moved around within the industry, it has survived and can move forward in a more sound fashion," added David Wang, an assistant vice president at Moody's.

According to Henley Smith, senior vice president at Vanderbilt Avenue Asset Management, it makes sense for Moody’s to revise its outlook given the “smooth implementation” of reforms last month. 

However, he points out that many investors just followed their sponsors, by default, into an available US Government fund and have yet to fully comprehend the changes made.

“We still believe that the business model for money market funds is outdated and broken.  Furthermore, we would argue that given the magnitude of the asset migration, the possibility of any unintended consequences manifesting themselves in the coming months/quarters, has not abated.”

Smith adds that the industry fails to address that many sponsors in order to get their yields back to zero or average (0.03%) continue to subsidize their money funds daily, through fee waivers and covering increasing expenses. 

"We fully expect, even in a rising rate environment, that sponsors will “claw back” fees lost during the last 8 years, keeping US Gov’t MMF low rates low and the threat of redemptions high, as savers stretch for yield.

“Bottom-line, we believe that the risk/reward associated with the MMF structure as still very much askew.  That said, we now see tremendous opportunity to profit from this forced asset migration.”

The supply of highlyrated short-term investments is less of a concern, according to Moody’s.

In the US, the contraction of prime funds has sharply reduced their demand for short-term investments, and government funds also have no shortage of investable assets given higher Treasuries issuance and expanded repo availability.

In Europe, money market fund rules will be finalised in 2017, but are unlikely to be implemented before 2019.

Moody's added that industry assets will be stable, despite negative or low rates in Europe and possible rate hikes in the US.


  • Export:

Related Articles