Fitch Ratings put out a press release yesterday entitled, "Fitch: U.S. Money Market Funds Likely to Increase Repurchase Agreement Activity." It says, "U.S. money market funds (MMFs) have increased their investment in repurchase agreements (repos) in response to the credit crisis and regulatory changes, a trend that is unlikely to abate over the near-to-intermediate term.... As of Aug. 31, 2010, repo activities undertaken by U.S. prime MMFs totaled $281.5 billion, or 17% of total assets under management. Historically, U.S. prime MMFs have allocated, on average, 11% of their total assets to repos (42% for U.S. government MMFs). The sharp increase in repo allocations by prime MMFs began in 2H'07, coinciding with the onset of the credit crisis and a general risk aversion towards various forms of short-term structured credit securities."
The Fitch release continues, "Recent regulatory changes have imposed additional liquidity and maturity constraints on U.S. MMFs, making the use of overnight repos increasingly important. Furthermore, in an environment of declining availability of short-term investment options that are also of high credit quality, Fitch expects MMF investment in repos to increase. The repo market has become one of the biggest sectors in the global money markets reaching $2.8 trillion on its peak in early 2008. According to data compiled from Fitch, the value of securities financed by tri-party repos averaged $1.7 trillion in the first quarter of 2010. Fitch estimates that approximately 1/4 of this market is attributable to repo transactions conducted by U.S. taxable MMFs. At the end of the first quarter of 2010 U.S. prime MMFs' investments in repos totalled $170 billion, while U.S. government MMFs had $275.9 billion in such transactions."
The 7-page Fitch report, entitled "U.S. Money Market Funds: Repurchase Agreement Practices," says, "Repurchase agreements (repos) have become an increasingly important investment option for U.S. money market funds (MMFs) over the past three years, prompted by the credit crisis and subsequent regulatory changes to MMFs. This special report examines the effects of some of these market dynamics on U.S. MMFs and analyzes the main risk management considerations of repo activities." The paper includes a chart which shows the "spikes in repo allocations by U.S. prime MMFs."
Highlights of the Fitch report include: "At 17% of prime MMFs’ assets under management invested in repos, MMFs are increasingly active investors in this asset class, predominantly on an overnight basis.... Given current market conditions of ultra-low yields and constrained supply of MMF-eligible assets, some U.S. prime MMFs have increased their allocations to longer-dated repos and repos backed by nongovernment collateral.... The tri-party repo market is concentrated with respect to its participants. Top 10 repo counterparties of Fitch-rated taxable MMFs account for more than 82% of all repo exposures in Fitch-rated taxable MMF portfolios.... Repos undertaken by U.S. MMFs are almost exclusively done on a tri-party basis in order to minimize the risks associated with a counterparty default. Fitch Ratings notes that The Federal Reserve Bank of New York (FRBNY) recently published a White Paper on tri-party repo with the goal of further strengthening the market against counterparty risk, particularly intra-day risk from the dominant clearing banks."
Under "ReEvaluating Credit Risk: Counterparty Analysis," the report says, "It should be noted that MMFs often conduct repos with unrated wholly owned subsidiaries of rated banks and other financial institutions. Fitch normally views such exposure as an exposure to the subsidiary’s rated parent unless the credit profile of the subsidiary differs significantly from that of its rated parent." The piece includes a table of the top 10 repo counterparties of Fitch-rated taxable MMFs. These (all rated F1+) include: Barclays Bank (15.5%), Deutsche Bank (14.6%), BNP Paribas (12.9%), Bank of America (9.7%), Goldman Sachs (8.4%), Royal Bank of Scotland (5.4%), Credit Suisse (5.2%), Citigroup (3.6%), Societe Generale (3.6%), and Toronto-Dominion Bank (3.2%).
Finally, Fitch says, "The FRBNY published a White Paper in May 2010 titled 'Tri-Party Repo Infrastructure Reform,' which puts forth recommendations designed to strengthen the market for tri-party repo. Specifically, the paper highlights the need to reduce intra-day settlement/counterparty risk and risk management practices at the large, dominant tri-party clearing banks.... Repos continue to be an important asset class and a liquidity management tool for MMFs. Given the recent regulatory changes, which impose additional liquidity and maturity constraints on U.S. MMFs, the use of overnight repos has become increasingly important. In addition, in the environment of declining availability of high credit quality, short-term investment options, Fitch would expect MMFs’ investments in repos to increase."
