Fitch Ratings published a flurry of documents yesterday, including a press release entitled, "NY Fed Reverse Repos Offset Declines in U.S. Money Fund Exposure to European Banks," which reviews the company's latest (December) portfolio holdings data analysis report, "U.S. Money Fund Exposure and European Banks: Decline as Fed Tests "Reverse Repo";" its "U.S. Money Market Funds Dashboard 4Q13" with the headline "Constrained Supply at Year-End Pushes U.S. Money Funds to Alternatives;" and, its "European Money Market Funds 4Q13 Update: Diverging Asset Mix Changes." Fitch's Fed Reverse Repo release says, "U.S. prime money market funds (MMFs) reduced their exposure to European banks in December 2013, with the declines mainly offset by repo exposure to the Federal Reserve Bank of New York (FRBNY), according to Fitch Ratings."

It continues, "The FRBNY has been periodically conducting overnight reverse repurchase agreement (RRP) exercises with market participants, including MMFs, to test how these operations might function as a policy tool for managing short-term interest rates. This test accounted for 3.7% of all MMF assets within Fitch's sample at end-December. By comparison, the MMF's allocation to European banks declined by 3.9% (i.e. expressed as a percentage of MMF assets) during December."

The release adds, "Fitch notes that it is unclear whether the FRBNY exercise might have crowded out some of the MMF allocations to European banks or whether the European reduction reflects a new equilibrium taking hold. Primarily as a result of the RRP exercise, MMF allocations to U.S. Treasurys and agencies, including both security holdings and through repos backed by government securities, increased to 27.1% of MMF assets from 22.9% of assets. Eurozone allocations accounted for 16.8% of MMF assets as of end-December, a decline from 19.1% of assets at end-November, 2013."

Fitch's 4Q13 Dashboard explains, "A significantly reduced supply of traditional money market fund (MMF)-eligible securities at year-end has pushed funds to allocate cash to alternative sources. As is typical at quarter- and year-ends, banks seek to reduce reliance on short-term funding and decrease issuance of money market securities. In response, some MMFs chose to leave portions of their assets un-invested with their custodian banks, with few other alternatives. The dearth of investment options has also led to surging usage of the Federal Reserve's (Fed) reverse repo program (RRP). On the last day of 2013, 102 eligible counterparties lent the Fed $197.8 billion at a rate of 3 basis points. According to data from Crane Data, MMFs accounted for $139.2 billion of this amount, representing 7.1% of government MMF assets, 6.8% of Treasury funds, and 4.7% of prime funds. This presents a stark contrast to the low average daily usage of the facility in November and October, of $4.6 billion and $6.0 billion, respectively."

It also says, "In recent months MMF sponsors have launched new cash management and liquidity products to prepare for possible market changes after proposed reforms are finalized later this year. The Securities and Exchange Commission (SEC) in June 2013 released proposals to reform MMF regulations, with a wide range of potential outcomes. Anticipating that investors' needs may change, a number of asset managers have recently launched "enhanced cash" and other short-term bond funds. Compared to MMFs, which currently maintain stable net asset value (NAV) pricing, short-term bond funds have fluctuating NAVs. Their average maturity profiles are typically longer than those of MMFs', and credit quality investment guidelines can be less restrictive, but they may offer slightly higher yields than MMFs. For now, institutional MMF assets have remained largely stable as investors wait for the final SEC proposal before changing cash investment guidelines."

Finally, Fitch's European update tells us, "US dollar- and sterling-denominated funds, in their search for yield, have increased their unsecured financial exposures. The move was at the expense of repurchase agreements and sovereigns or quasi-sovereigns issuers. In contrast, euro funds have favoured some re-allocation towards sovereigns, supranationals and agencies, and non-financial corporates. Diversification towards Canadian banks and Singapore's Oversea-Chinese Banking Corp increased markedly during 4Q13."

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