FT: South African MMFs Break the Buck

Aug 26 14

The Financial Times published a story, "South African Money Funds Break the Buck." Author Steve Johnson writes, "At least 10 South African money market funds have "broken the buck" in the wake of a central bank-led bailout of African Bank Investments, the country's biggest provider of unsecured loans. Before last week, just two US money market funds had broken the buck -- meaning their share prices fell below $1 -- since the industry's creation in 1971. They were the Reserve Primary fund, which was exposed to $785m of Lehman Brothers debt in 2008, and the Community Bankers Money fund, which lost money on derivatives in 1994. "This is very unusual. [It] will make investors look [at money market funds] more closely. I think it caught the market by surprise," said Alastair Sewell, a senior director at Fitch Ratings. The writedowns come as regulators in Europe and the US are clamping down on money market funds -- ultra low-risk funds that provide short-term funding to companies and governments -- in an attempt to reduce the risk posed by investors trying to withdraw money at the same time. In the US, the Securities and Exchange Commission is forcing prime institutional money market mutual funds to scrap their traditional stable $1-per-share structures and adopt floating prices. In Europe, the European Commission has proposed that "constant net asset value" money market funds should be forced to hold a cash buffer of 3 per cent, which opponents say would kill off the industry. The South African losses stem from a bailout of African Bank Investments (Abil) by the South African Reserve Bank, which imposed a 10 per cent "haircut" on Abil's senior debt. According to the Financial Services Board, the industry regulator, this debt accounted for 1.3 per cent of the R270bn (L15bn) of assets held by South Africa's 43 money market funds. Jurgen Boyd, deputy executive officer for collective investment schemes at the FSB, said the "majority" of the 15 funds with exposure to Abil had broken the buck, meaning the losses were sufficiently large that the unit price of the funds fell. The fund managers involved included Absa Bank, which had an exposure of 3 per cent to Abil, Stanlib (1.7 per cent and 0.7 per cent in two separate funds), and Nedgroup." The article continues, "During the 2007-2009 financial crisis, 62 money market funds (36 in the US and 26 in Europe) were bailed out by their sponsor or parent at a cost of at least $12.1bn, according to Moody's."

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