Investor Analytics' MMF Stress Testing
BNY Mellon and Investor Analytics recently released a brochure entitled, "U.S. Money Market Funds: Portfolio Stress Testing, which highlights the two companies' enhanced portfolio stress testing capabilities. (The SEC's "Money Market Fund Reforms" contain a mandate on "enhanced stress testing" -- see page 552 for details.) The IA piece says, "BNY Mellon and Investor Analytics (IA) are pleased to offer an enhanced portfolio stress testing capability tailored to assist clients in meeting certain of the SEC's 2014 requirements, building on current portfolio stress testing capabilities. Investor Analytics (IA) offers a comprehensive stress testing service in support of the 2010 money market fund reforms, including: Floating NAV, Identification of entity concentration; Calculation of daily and weekly liquid assets; and Combined stress tests of interest rate increases, redemption increases and credit spread widenings." It continues, "In addition to the 2010 rules, Money Market Funds will now also need to test their ability to maintain weekly liquid asset level at 10%, and to minimize volatility in response to specified hypothetical events including: Increases in the level of short term interest rates; The downgrade or default of particular portfolio security positions, each representing various exposures in a fund's portfolio; and The widening of spreads in various sectors to which the fund's portfolio is exposed, each in combination with various increases in shareholder redemptions. The fund's adviser must report the results of the stress testing to the fund's board of directors." It explains Investor Analytics' approach. "Data Management: IA handles and stores all the security and pricing data for monthly and ad-hoc reporting needs. Liquidity and Principal Volatility: Calculation of daily and weekly liquid assets for each redemption stress by simulating the selling of securities to meet required redemptions. IA performs bottom-up security valuation based stresses: IA does not use duration/convexity approximations, which are inappropriate for large stresses. IA does not proxy with "Weighted Average Maturity (WAM) equivalent" proxy. IA updates its yield curve every day. Comprehensive Suite of Stress Tests: IA covers interest rate, credit spread, default and redemption stresses. IA covers credit stresses in two different ways: through spreads and through simulated defaults of groups of instruments. IA's stresses go through the point of "breaking the buck." Also, IA "Simulates how both the portfolio's liquidity profile and NAV are affected." Further, "Combined Stresses: The most likely scenario is not that only one of these stresses occurs, but that they all occur (to some degree), at the same time. IA shows exactly what combination of stresses will impact the portfolio to what degree. IA shows the portfolio's ability to minimize principal volatility and maintain liquidity. IA support groupings for enhanced stressing. Board-Quality Presentation of Results: IA's reports show summary and detail level. IA presents data in numeric and graphical formats. Color coded reports highlight areas of concern for quick identification of focus areas."
