Yesterday, two articles involving money market funds were featured in the mainstream investment press. Bloomberg BusinessWeek wrote, "S&P Rating Plan Faulted for Reducing Repo Cash, Funds' Choices", saying, "A Standard & Poor's plan to change the way it rates the credit risk of counterparties in repurchase agreements will boost costs for broker-dealers who draw cash through the arrangements and shrink the pool of liquid assets for money funds, according to industry participants. Today is the final day in a one-month public comment period on S&P's proposal to view unrated broker-dealers serving as counterparties in repos to rated money funds as having 'high credit risk.' S&P now assigns to an unrated counterparty that's at least half-owned by a rated entity the parent company's risk level."
The piece quoted Baclays Capital's Joseph Abate, "This would be disruptive not only to the dealer community, whose funding costs will go up, but also to the money funds who will need to find some replacement for that overnight liquidity. The changes are unnecessary because the overwhelming majority of repos held by money market funds are against government securities which are liquid and the transactions are typically overnight." (See Crane Data's Sept. 20 News "More Ratings Bad News: SnP RFC Requires Repo Counterparty Ratings".)
Also, this week's Investment News features "Federated plans to buck the tide on money funds", a Q&A with Federated Investors' CEO Chris Donahue. It says, "Some asset management executives would argue that now isn't a good time to be in the money market fund business. Yields on money market funds have been close to zero for months. Regulators have tightened rules around these offerings, and the industry is looking at further regulation."
The article continues, "Nevertheless, J. Christopher Donahue, president and chief executive of Federated Investors Inc., thinks that it's not only a good time to be in the money market business, it's time to expand. Mr. Donahue, whose firm had $336.8 billion in assets under management as of June 30, thinks that regulators' idea to impose capital requirements on money market funds could be detrimental to the industry and to investors. In a recent interview, he spoke about how he plans to build up Federated's $260.5 billion money market business and his plans for the firm as a whole."
One question says, "The Investment Company Institute has been working on developing a bank that would provide additional liquidity to prime money market funds and would be capitalized by the industry. What is the status of that project?" Donahue answers, "I think it's moving ahead. I am not in the position to tell you where the Federal Reserve and Treasury Department are on the issue, but we have people on some of the working groups within the ICI, and they have had very good meetings. We think it's a very good idea. There is a huge issue with liquidity."
