Moody's: Fidelity Move Credit Positive
Moody's released a report Monday, "Fidelity Moves to Protect Money Fund Investors from Liquidity Risk," which says, "In a move that caught the money market fund industry off-guard, this month Fidelity announced that it would convert three of its prime money market funds (MMFs), totaling $127bn in assets, into government MMFs. The move, which affects Fidelity Cash Reserves fund, the industry's largest retail prime fund, is a proactive step to eliminate liquidity risk which is a new component of SEC money fund reforms. Fidelity's move to remove the risk of illiquidity from retail funds affected by the industry reforms will benefit the firm's reputation, and underscores the firm's commitment to its clients and its responsibility as a fiduciary." Mooody's continues, "Because retail prime funds were exempted from the switch to VNAV, many market participants did not expect fund managers to convert these funds to government funds. But the SEC reforms also allowed MMF boards to impose redemption fees and gates of up to 10 days in the event of a run on a retail prime fund should the percentage of a fund's weekly liquid assets fall below 30% of the fund's total assets. Rather than let investors bear the risk of having a cash-substitute investment suddenly gated for up to 10 days, Fidelity opted to convert some of its prime funds to government funds, in which investors will not be subject to redemption restrictions. The firm's decision to convert the prime retail fund will lead to improved client retention, a credit positive for Fidelity. Fidelity’s Cash Reserves fund is commonly used as the core "sweep" vehicle in Fidelity brokerage accounts. In these core sweep accounts, cash balances are transferred to a Fidelity money fund -- historically, a higher-yielding investment alternative than cash –- at the close of each business day. Redemption gates do not work well with this type of structure since an individual investor or a broker using a sweep account could experience a disruption in their ability to receive or deliver cash. This would leave Fidelity's brokerage clients exposed to the credit and liquidity risk of the fund for the duration of the gate, and would also leave the investor unable to use the cash for investment or other purposes. In removing this risk of illiquidity, Fidelity is helping to preserve its core brokerage franchise. Other MMF managers with substantial retail AUM may convert retail prime MMFs into retail government MMFs. This is particularly likely if those accounts are being used for daily cash functions such as sweep features in brokerage accounts. We estimate there is an additional $100-200 billion of retail AUM that could move from prime to government, in addition to Fidelity's $112 billion." Also, the New York Fed released a "Statement Regarding Term Reverse Repurchase Agreements," which announced that the next Term RRP operation is Feb 26. The amount offered is $50 billion, and the ON RRP offering rate on Feb 26 is +5 basis points.
