Moody's Investors Service recently released an update on how Euro money market funds are preparing for the possibility of negative yields. The "Special Comment," entitled, "Money Market Funds: Structural changes to combat negative yields are credit neutral," says, "The European Central Bank (ECB) decided to lower its deposit facility rate to zero in July 2012 and, as a result, a number of high-quality credits that are standard money market fund (MMF) holdings have traded at negative yields at times during the past six months. In response to these negative yields, a number of MMFs have implemented structural changes or amended terms of their prospectus to allow the MMF to implement changes in the event the fund experiences negative yields. We view these actions as credit neutral."

The report explains, "Asset management firms -- including Royal Bank of Scotland, Morgan Stanley Investment Management, Goldman Sachs, BlackRock, Inc. and HSBC Global Asset Management -- have made amendments to the terms or share structures of their respective funds (the "Funds") to enable them to continue operating as constant net asset value (CNAV) funds during periods of sustained ultra-low or negative interest rates. While there are some variations, the changes made typically incorporated a share-reduction mechanism into the Funds' structures to compensate for negative aggregate portfolio yields. In case of negative aggregate portfolio yields, maintaining a stable 1.00 NAV would be impossible absent these mechanisms or alternative structural changes. To date, there has not been a need to activate the share reduction mechanism in these Funds."

Moody's tells us, "In our view, the changes to the Funds' structures are credit neutral because (i) the Funds' promise to investors regarding principal preservation and provision of liquidity was not breached; In addition, we note that all the asset managers maintained sufficient liquidity to ensure that all redemption requests from investors could be settled timely at par. (ii) the Funds sought -- and obtained -- investors approval before implementing the structural changes: dissenting investors had the right to redeem their shares at par prior to the conclusion of any amendment or restructuring; and (iii) neither the Funds' investment strategy nor their portfolio composition changed as a result."

They add, "Despite the structural changes, the MMF investment managers aim to keep the gross yields of their Funds above zero, unless market events push yields below zero. Based on the current portfolio characteristics of the Funds, we continue to rate them Aaa-mf."

Moody's list of Dublin-domiciled funds that have amended their offering documents to allow automatic redemptions to pay expenses or negative yields include: Goldman Sachs Euro Liquid Reserves Fund, Goldman Sachs Euro Government Liquid Reserves Fund, Morgan Stanley Funds plc -- Euro Liquidity Fund, RBS Global Treasury Funds PLC -- Dollar, Euro, and Sterling, RBS GTF plc -- Euro Government Fund, HSBC Euro Liquidity Fund, HSBC Euro Government Liquidity Fund, HSBC Sterling Liquidity Fund, HSBC US Dollar Liquidity Fund, HSBC Canadian Dollar Liquidity Fund, BlackRock Institutional Euro Government Liquidity Fund, and BlackRock Institutional Euro Liquidity Fund.

For more news on this topic, see our latest issue of Money Fund Intelligence, which features the article, "HSBC's Jonathan Curry Talks Global Liquidity." See too our Nov. 21, 2012 story, "Moody's on JPM Euro Liquidity Funds' Launch of Flex Distributing Class," and our Oct. 19, 2012 story, "World Turned Upside Down: JPM Flex Class For Negative Euro Rates." Finally, see our latest Money Fund Intelligence International for fund asset sizes, yields, and performance information on Euro, Sterling and USD "offshore" money funds. MFII's Crane Euro MMF Index shows the average 7-day yield for the 65 Euro-denominated funds we track at 0.03% (net) as of March 13.

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