UBS Asset Management published an article titled, "Money market funds: Why their appeal is set to endure as rates fall." It states, "Money market funds offer a range of advantages for use as collateral in financial transactions. Their appeal may expand if proposed regulatory changes are implemented. Money market funds (MMFs) in general, and government and Treasury MMFs in particular, are high-quality, actively managed investments that typically hold low-risk securities such as Treasury bills and other government-issued bonds, and in some cases, repurchase agreements (repo) backed by these instruments. These funds are usually run in a way that ensures they have a stable or constant net asset value (CNAV) of US$1 per share, and they offer investors a high level of liquidity and safety of principal." The piece continues, "Treasury and government MMFs offer a range of advantages for use as collateral in financial transactions: 1. Lower haircuts (typically 2% of pledged value): When assets are used as collateral in financial transactions, they are normally subject to a haircut -- a percentage discount on their market value that reflects the risk inherent in the asset.... While securities with shorter maturity dates than noted above may have lower haircuts, they still require monitoring and rebalancing due to changes in market value, whereas MMF haircuts remain constant.... 2. Lower ongoing management and administrative burden: Managing a MMF position as collateral is also significantly easier than with other eligible assets.... As such, MMFs can be considered a viable solution for investors who are looking to reduce the administrative burden attached to collateral management." It adds, "3. Interest-rate exposure management across the cycle: The ability of MMF managers to adjust the duration -- the interest-rate sensitivity -- by adjusting the weighted average maturity (WAM) of the portfolio can deliver benefits when rates are rising as well as falling.... Being able to raise, maintain, or capture yields as rates change while also maintaining a stable NAV level is a key benefit of MMFs. 4. Greater trading flexibility: The use of repo in MMFs enables these vehicles to accommodate late-day purchases, including large purchases that Treasury-only funds are unable to facilitate. This results in later cutoff times for MMFs that use repo, something that offers significantly greater flexibility for investors looking to use such funds as margin collateral." Finally, it discusses, "Plans to relax rules on the use of MMFs as collateral," saying, "In mid-2023, the Commodities Futures Trading Commission (CFTC) announced plans to broaden the type of MMFs that could be used as initial margin collateral in derivatives trading. The regulator said it wanted to end the ban on MMFs that use repo and other forms of securities lending from being used as initial margin collateral in commodity futures transactions. These changes are set to increase the appeal of the asset class even further. As interest rates on both sides of the Atlantic have risen to their highest levels in 15 years, inflows into MMFs have increased: figures published at the start of 2024 showed that MMF assets in the US rose by US$1.1 trillion in 2023 to reach a total of US$6 trillion.... In addition, allowing MMFs to use repo would more closely align the CTFC with its global counterparts, most of which currently allow for funds using repo as eligible collateral for their markets. For firms with multinational domains, this development is likely to provide a broader and more simplified solution. Whatever the outcome of the CFCT's proposals, MMFs offer a wide range of advantages to market participants looking for collateral for initial margin trading and other forms of risk-management transactions. These benefits should see their popularity endure across the market cycle, even in a falling interest-rate environment."

Email This Article




Use a comma or a semicolon to separate

captcha image

Daily Link Archive

2024 2023 2022
July December December
June November November
May October October
April September September
March August August
February July July
January June June
May May
April April
March March
February February
January January
2021 2020 2019
December December December
November November November
October October October
September September September
August August August
July July July
June June June
May May May
April April April
March March March
February February February
January January January
2018 2017 2016
December December December
November November November
October October October
September September September
August August August
July July July
June June June
May May May
April April April
March March March
February February February
January January January
2015 2014 2013
December December December
November November November
October October October
September September September
August August August
July July July
June June June
May May May
April April April
March March March
February February February
January January January
2012 2011 2010
December December December
November November November
October October October
September September September
August August August
July July July
June June June
May May May
April April April
March March March
February February February
January January January
2009 2008 2007
December December December
November November November
October October October
September September September
August August August
July July July
June June June
May May May
April April April
March March March
February February February
January January January
2006
December
November
October
September