J.P. Morgan Securities published its latest "Update on prime money fund holdings for October 2011" last night, saying, "Prime money market funds saw assets under management (AUM) shrink again in October, but continued to cut global bank exposures at a quicker pace. Prime MMF AUM dropped $21bn to $1,428bn at the end of October and is down $178bn YTD. Prime fund exposures to all forms of bank credit (CP, CD, ABCP, repo, time deposits, and other notes) dropped approximately $41bn during October, and are down $260bn YTD. The fact that bank exposures continue to contract faster than AUM is a sign that fund managers remain very conservative and concerned about global bank exposures to the Eurozone. Total global bank credit exposures as a percentage of prime MMF AUM fell by 2% in October and 10% since the end of April but global bank CP and CD exposures as a percentage of prime MMF AUM has remained steady over the last two months after falling 9% from its peak at the end of April."
Authors Alex Roever, Teresa Ho and Chong Sin tell us, "Prime funds cut exposures to Eurozone banks by $24bn during October, but the rate at which managers trimmed exposure was slower than in recent months. Eurozone bank exposures in prime funds fell $72bn and $50bn, respectively, in September and August, and are down $261bn since May. The slowing pace of Eurozone liquidations supports our view that most prime fund managers are allowing existing Eurozone exposures to run off while a few remain actively engaged with the Eurozone banks, mostly in very short tenors."
They add, "Exposure to all foreign bank commercial paper and certificates of deposit (CP and CD) dropped only $9bn in October, and is down $202bn YTD. The $9bn monthly drop masks a decline in Eurozone CP and CD holdings of $23bn during October, which was partly offset by increases in other jurisdictions. We estimate prime MMF holdings of Eurozone bank CP and CD declined from a $373bn at the end of April to $117bn at the end of October. Over the same time frame, Federal Reserve data suggests that the amount of all USD foreign financial CP and CD outstandings fell by about $344bn. This implies prime funds accounted for about 74% of the aggregate pullback in CP and CD holdings of all USD money market investors."
Finally, JPMorgan's note says, "French banks again experienced the greatest contraction in the Eurozone, although it too was small relative to reductions in prior months. French bank exposures across all credit products fell by $10bn, while CP and CD exposures fell by $11bn, which was about 50% less than what we expected would run off based on September's month-end data. October data reveal that some prime fund managers rolled over maturing French paper into very short tenors. 87% of French bank paper across all forms of bank credit are set to mature within the next month. Based on recent experience, a significant fraction of this is likely to be rolled rather than run off."
In other news, Fitch Ratings published a comment entitled, "SEC Money Market Fund Reform Broadly Positive for Credit". It says, "Fitch views the potential U.S. money market fund (MMF) regulations expected to be put forth by the Securities and Exchange Commission (SEC) as positive from a ratings perspective. Still, the changes could have secondary effects on the industry, which require further consideration. SEC Chairman Mary Schapiro said Monday that the agency plans to propose new requirements for the MMF industry within the next few months. They include the addition of capital buffers and a change from constant net asset value (CNAV) to variable net asset value (VNAV) funds.
The piece adds, "Fitch thinks that while capital buffers would clearly provide additional credit and liquidity support, they could also potentially introduce increased costs and new conflicts between traditional MMF investors and those providing the capital buffers. Increased costs may create pressure on fund managers to reach for additional yield in order to maintain the overall economics of the product. Conflicts of interest could challenge a fund manager to maintain liquidity and capital preservation for shareholders while maximizing returns for capital investors. Fitch would also need to consider how a capital buffer could alter a fund sponsor's willingness to provide support to a MMF."
