Moody's Investors Service published a 14-page report entitled, "Money Market Funds: 2010 Outlook" yesterday, which reviews recent credit conditions, current and potential future regulatory changes and industry trends and consolidation. It says, "The operating environment for money market funds has been challenging, but conditions have improved and are expected to recover further this year despite continuing headwinds due mostly to credit, interest rate and regulatory risks. We expect money market fund ratings in the U.S. and overseas to remain stable as their risk profile has been ratcheted down."
Author Henry Shilling writes, "In the near-term, money fund management firms and their fund offerings will continue to operate in a still-tentative market and regulatory environment that are punctuated by the following factors: (1) stabilizing but still uncertain credit conditions, (2) tight eligible securities supplies and resultant portfolio concentrations, (3) improved liquidity, (4) low short-term interest rates, higher yields but further declines in assets once rates begin to ratchet up, (5) the transition to meet the recently adopted Rule 2a-7 amendments and the specter of additional regulations that may be promulgated later this year, some of which have the potential to change the profile of the money market funds industry in the U.S., and (6) money fund sponsor consolidation and rising exposure to concentration risk."
He continues, "In the intermediate to longer-term, however, a number of industry trends and developments will likely contribute to further industry consolidation and, in turn, sponsor concentration. These include portfolio constraints in the light of credit conditions and new regulations, financial charges, in some cases significant after tax charges incurred by firms in the U.S. and Europe in support of the net asset values of their money fund offerings, higher operating expenses, lower asset levels and increasing regulatory constraints.... Taken as a whole, these industry developments could, in the longer term, serve to exacerbate systemic risks due to credit and liquidity events rather than reduce them."
Moody's 2010 Outlook examines the "outlook for money market funds in the following key areas": Credit Conditions, Supply of Eligible Securities, Liquidity, Interest Rates and Cash Flows, Regulations, and Impact on money market fund industry and money fund asset managers. It says, "The SEC has now issued its Rule 2a-7 amendments that in the near-term will further serve to reduce the risk profile of money funds.... [W]e believe that we may see the expansion of money market fund offerings in the U.S. to include variable net asset value (VNAV) funds."
Finally, the report says, "Sponsor consolidation will continue to be fuelled due to incremental risks, rising operating costs, beyond fee waivers due to low interest rates, in addition to regulatory uncertainties. This development potentially elevates the money market funds industry's longer-term exposure to concentration risk."
