Fitch warns of more redemptions, disruptions to money market funds

Fitch has warned Europe’s cash funds, already struggling against record-low rates to generate profits, that they could face adverse investor reaction and “significant disruption or outflows” if they are required to switch to variable net asset valuation.

The €500bn industry is already fighting to satisfy its clients, after the European Central Bank cut rates sharply, in a bid to avert sharp recession and reduce borrowing costs for the eurozone’s banks. This has hit rates funds can earn on their holdings.

Recently Berenberg Bank cut the fees on their European strategy, while others such as and JP Morgan Chase, Investec, Goldman Sachs, BlackRock, JP Morgan and HSBC are among groups simply to have stopped taking new money into theirs. By mid-October Moody’s estimated about €10bn was in the capped funds.

Fitch said it expects current regulatory reviews of the industry in Europe were most likely to result in “a move to partial variable net asset value funds, where assets with a residual maturity of less than three months continue to be priced on an amortised cost basis”.

Europe’s MM industry is roughly evenly split between variable NAV and constant NAV funds.

The ratings agency says one danger is that some corporate and institutional investors not accept VNAV funds “if they conflict with their investment guidelines or raise significant tax or accounting hurdles.

“If so, this could drive significant outflows from the European MMF market,” Fitch said.

The agency will survey investors over coming weeks to identify the major implications of any regulatory changes, and publish the results in the next two months.

The industry is not just facing pressure to change its practices in Europe.
The global body for securities regulators, the Financial Stability Board and indeed also leaders of the world’s richest countries (G20) are making a concerted push for “common standards for the regulation and management of money market funds across jurisdictions”.

The global $4.7trn MM fund industry is seen to be part of the shadow banking system, as its assets represent about one fifth of all fund assets worldwide.

“Although money market funds, which provide a significant source of credit and liquidity, did not cause the crisis, their performance during the 2007-2008 financial turmoil highlighted their potential to spread or even amplify a crisis,” IOSCO said.

The IOSCO board has approved the organisation’s most recent report on the industry, though notably the majority of commissioners from the US Securities and Exchange Commission did not support its publication, IOSCO said.

Money market funds in the US are facing their own troubles, meanwhile.

The inventor of the concept of money market funds, Bruce Bent, who ran the Reserve Primary fund in the 2008 crisis is in court this month in New York in the civil case SEC versus Reserve Management Co et al.

The fund was caught in about $780m of investments in Lehman Brothers when the investment bank collapsed in mid-September 2008, leading the fund’s NAV to be worth less than its investment’s par value – something investors did not think was possible for such safe investments.

Although this only represented about 1% of total fund assets, the fund was hamstrung, and its NAV ‘broke the buck’, falling below $1 per share.

The SEC has sued the company in 2009 for breaking securities laws, and this month claimed that Bruce Bent, and his son, told investors and trustees untruths in attempts to stop a client run on the fund during that crisis week.

The Bents’ lawyer has argued the Bents were “people trying their best under absolutely unprecedented circumstances”.

The case in New York – and market-trials of the industry more generally – continue.


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