Fitch: MMFs well positioned to face uncertain regulatory outlook

Money market funds (MMFs) are adequately positioned to face challenging market conditions and ongoing regulatory uncertainty in 2013, according to Fitch Ratings, which expects MMFs to manage their portfolios conservatively with respect to credit, interest rate and liquidity risks.

Fitch said today the MMF sector would benefit from the resolution of both the US and Japanese fiscal cliff deadlines and the European sovereign debt crisis and that such resolution would lead to credit market stabilisation in the financial sector.

“The continued limited supply of high-quality short-term assets is one of the major challenges for the MMF sector in 2013 especially those portfolios denominated in euro and sterling. This has led MMFs to seek diversification from banking sectors within their traditional, core markets to other geographies, in particular Asia and Latin America,” Fitch said.

MMFs’ preference for collateralised exposures has mainly been evident through increased allocations to repurchase agreements. European MMFs exhibited a broader acceptance of asset-backed commercial paper in 2012 in light of increased issuance.
Fitch expects this trend to continue in 2013 as MMFs add investments in repo-backed commercial paper.

Meanwhile, to cope with the prolonged ultra-low interest rate environment, MMFs may selectively extend maturities in high-quality issuers such as sovereign and government agencies. This will allow MMFs to capture yield while continue to maintain a high degree of liquidity.

The MMF industry faces continued regulatory uncertainties in both the US and Europe, and reforms could accelerate in both regions during 2013, the agency added.

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