The center of regulatory controversy this week, US money market funds, are weathering the current market volatility reasonably well, according to a new report from Fitch Ratings.
The rating agency says that U.S. prime institutional money market funds (MMFs) have continued to manage market volatility effectively in 2012, “focusing in particular on strong asset quality and improved liquidity.” Fitch reports that despite significant outflows in the second half of 2011, its latest analysis indicates that MMFs have maintained stable shadow net asset values, without relying on secondary liquidity sources.
“Conservative investment practices related to the management of interest rate and spread risks continue to put MMFs in a good position to handle potential withdrawals that could pick up if the European debt crisis or concerns over the U.S. fiscal cliff boost risk aversion among fund investors,” it says.
The report comes in the wake of controversy at the U.S. Securities and Exchange Commission (SEC), which said earlier this week that it would not put forward a set of proposed reforms for money market industry that are intended to improve their resilience in the face of market turmoil. SEC chairman, Mary Schapiro, didn’t put the proposals to a vote after determining that a majority of the commissioners were not going to support the proposals.
On Thrusday, SEC commissioner Luis Aguilar, who is said to be the swing vote on the MMF reform proposals, said that he favours issuing a concept release examining the cash management industry as a whole, not just money market funds, “to diagnose its frailties and assess where reforms are required.”
However, Schapiro has dismissed the idea of issuing a concept release, saying that the market needs definitive proposals to consider.
“I remain concerned that the chairman’s proposal will be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the dark, opaque, unregulated market,” Aguilar said, noting that MMFs are subject to prescriptive conditions and are highly transparent to investors and regulators.
“I am also concerned that, given the current volatility of the capital markets and the fragile state of the economy, the timing of this proposal and its collateral consequences could be needlessly harmful,” he added.
Fitch’s latest research finds that NAV declines did not exceed 10 basis points, even as funds saw $135 billion (about 8.2% of their assets at the time) withdrawn as a result of concerns about exposure to European banks in July and August last year.
And, it reports that liquidity measures were also strong as of July 31, with daily and weekly liquid assets standing at 20% and 46% of total assets, respectively. Interest rate and spread risks also remain well managed, it adds.