Article 1.1 Money funds at risk ofbig drop in assets
By Christopher Thompson and Stephen Foley
Financial Times November 21, 2013
Global money market funds are projected to lose around a third of their assets under management next year as the combined forces of record low interest rates and new regulations batter the multi-trillion dollar industry.
Incoming rules from regulators in the US and Europe could trigger outflows of at least 30%, according to Moody’s, the credit rating agency. Under US and European regulators’ proposals money market funds are potentially moving from a stable $1 or ˆ1 net asset value to one that will fluctuate according to the market value of the underlying investments.
‘If the regulation comes in as proposed we expect a 30% or higher decline of AUM because of the likely switch to “variable net asset values” by most managers,' said Yaron Ernst, a managing director of global managed investments at Moody's.
Money market funds, which act as reservoirs of easy-to-access cash, are a crucial source of short-term financing for banks and companies worldwide. They are used by corporates and others to diversify short-term cash holdings and are widely perceived as low risk.
‘We are overwhelmingly invested in senior bank debt of less than three months' maturity... the default risk on those assets is almost non-existent according to long-term studies,' said Martin Curran, a senior portfolio manager at Royal Bank of Scotland. ‘With variable net asset values a corporate cash manager puts £1 into a MMF to pay his bills, but it might not repay £1 the day after - he can't afford to be in that position, and particularly if he's managing millions of them.'
In the US, the Securities and Exchange Commission has proposed limiting investors' ability to withdraw their cash from money market funds during times of market stress, and is currently weighing whether this idea is better than a floating NAV, or whether it can combine the two. The changes would only affect part of the industry.
The SEC plans to exempt funds that invest only in super-safe government securities, and those targeted at retail investors, who are seen as less likely to start a run on a fund.The gloomy Moody's prognosis comes as low interest rates, which squeeze funds' already wafer-thin margins, have led to declines in assets under management for many funds.
‘Fees have already been waived for more than a year by most MMF managers, which reflects the stress on the industry's business model,' said Mr Ernst.
Euro-denominated money market funds shed ˆ127bn of assets between June 201113 according to Moody's figures. HSBC estimates that the US industry has seen assets decline from $4tn in 2009 to about $2.7tn.
Regulators say they want to bolster money market funds and avoid a run on the market in the event of a financial crisis, which would lead to global finance freezing up.
FT
Source: Thompson, C. and Foley, S. (2013) Money funds at risk of big drop in assets, Financial Times, 21 November.