Yesterday, Moody's Investors Service released a brief entitled, "US Money Market Fund Proposals Are Credit Positive for Investors; Negative for Sponsors," which says, "According to remarks made last Thursday by Mary Schapiro, chairman of the US Securities and Exchange Commission (SEC) at a US House Oversight panel, an internal draft proposal designed to reduce money market funds' (MMFs) systemic risk has been circulated for review by SEC commissioners. The proposal requires MMFs to choose from two options, both of which have been debated for several years. The first option requires MMFs to set aside capital to protect against unexpected credit events and to limit investors' ability to redeem their entire investment at times of market distress. The second option requires MMFs to value their shares on the basis of a floating net asset value (NAV). Both regulatory proposals, which SEC commissioners must review within 30 days or so, are credit negative for MMF sponsors and credit positive for MMFs and their investors."
The company's "Weekly Credit Outlook" explains, "The negative effect on sponsors would have a greater effect on independent firms with limited capital and those whose assets under management are concentrated in money market funds, such as Federated (not rated), and, to a more limited extent, Vanguard (not rated). However, better capitalized sponsors and/or sponsors with large diversified product platforms, such as FMR LLC (A2 negative), JP Morgan Chase Bank, N.A. (Aa3 stable; C/a3 stable), and Blackrock, Inc. (A1 stable), which are among the largest sponsors of money funds, would be better positioned to manage the changes. MMFs' liquidity/run risk would diminish and exposure to credit and/or interest rate risks would be limited, all of which are credit positives for the funds. But the additional constraints on MMFs that reduce investors' risk will likely lower their returns. The options would have far reaching implications for MMF sponsors, investors and the funds themselves."
Finally, Moody's latest brief comment adds, "According to our research, at least 201 US MMFs received some form of sponsor support between 1980 and 2011. By accounting for gains and losses on a regular basis, as is the case with other mutual funds, investors may be less inclined to redeem their shares in a destabilizing fashion, a credit positive for MMF investors. However, the elimination of the stable NAV in favor of the floating NAV for MMFs may result in a less attractive liquidity product offering for investors because of tax and accounting complications for institutional investors who, in the aggregate, account for about 64% of industry assets. Consequently, we would also expect industry assets to decline from the current $2.5 trillion in the event either proposal was to be put in place."
In other news, Federated's Debbie Cunningham writes in the company's latest "Month in Cash: Forewarned is forearmed," "As expected, Moody's Investors Service last month completed its review of major global banks in the U.S., U.K., Germany, France and Switzerland, downgrading all of them from one to three notches on a long-term basis. The announcement, while clearly significant, did not meet with any real resistance or reaction from the marketplace, mainly because the moves had been priced into the markets long before. Moody's announced the review in February, and in the four months since, the markets had plenty of time to adjust to the implications of a potential downgrade. The downgrades haven't affected money markets much, either. The banks Moody's downgraded to second-tier issuers are still rated as first-tier institutions by Standard & Poor's and Fitch Ratings and, as a result, can still be used in money funds in accordance with SEC Rule 2a-7. That's not to say that the money markets haven't adjusted by reducing exposure to and shortening maturities within these institutions to account for the possibility that S&P or Fitch might review their ratings. For the time being, however, the impact of Moody's downgrade has been minimal."
She adds, "For the money market world, [The Fed's Operation] Twist's extension represented a rare case in which increased monetary policy stimulus didn't hurt and, on the margins, actually helped. The sale of shorter securities in effect has put a floor beneath repo and Treasury rates, helping keep repo rates elevated while making Treasuries relatively more attractive compared with government agencies. Agency securities are fine; it's just that with Treasuries having the benefit of this Twist-induced support, it makes sense to allocate more money in that direction than may have been the case otherwise. This is particularly welcome given that in the fourth quarter of 2011, money markets regularly faced overnight repo rates of one or two basis points and negative rates for Treasuries."