The Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of Sept. 30, 2017) Monday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in September, prime money market funds held 30.0 percent of their portfolios in daily liquid assets and 45.0 percent in weekly liquid assets, while government money market funds held 57.6 percent of their portfolios in daily liquid assets and 75.4 percent in weekly liquid assets." Prime DLA increased from 27.3% last month and Prime WLA increased from 43.1% last month. We review ICI's latest Holdings update, and a new update from Fitch on European MMF reforms, below. (Note: Thanks to those who stopped by to visit us at AFP in San Diego! It was great to see all our money fund friends and was a great time in SD.... See you next year in Chicago!)
ICI explains, "At the end of September, prime funds had a weighted average maturity (WAM) of 30 days and a weighted average life (WAL) of 71 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 32 days and a WAL of 86 days." Prime WAMs were down three days from the prior month, and WALs were down two days. Govt WAMs increased by 1 day and Govt WALs decreased by 1 day from last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $170.19 billion in August to $177.68 billion in September. Government money market funds’ holdings attributable to the Americas rose from $1,687.99 billion in August to $1,781.12 billion in September.” (See too Crane Data's Oct. 11 News, "Oct. Money Fund Portfolio Holdings: Treasuries Rebound, FICC Grows.")
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $177.7 billion, or 40.4%; Asia and Pacific at $91.4 billion, or 20.8%; Europe at $164.4 billion, or 37.4%; and, Other (including Supranational) at $6.3 billion, or 1.4%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.781 trillion, or 82.9%; Asia and Pacific at $95.3 billion, or 4.4%; and Europe at $269.3 billion, or 12.5%.
In other news, Fitch Ratings recently published, "Reform Gate Risk Low for European Funds." It tells us, "Fitch considers the probability of a mandatory MMF reform-driven liquidity fee or redemption gate being imposed as low, barring any systemic shock or idiosyncratic credit event. There have been no incidents of weekly liquidity dropping below 10% in the Fitch-rated CNAV MMF universe over the last five years, reflecting funds' adherence to Fitch's minimum liquidity criteria standards and successful outflow management through prudent liquidity positioning."
Fitch explains, "The 10% one-week liquidity level is significant, as this is the point at which the reforms require a fund's board of directors to apply a redemption gate or liquidity fee. Importantly, even in this mandatory scenario, the board retains discretion over whether a fee or a gate serves investors' interests best. In the period reviewed, MMF managers were largely able to maintain regulatory and rating agency liquidity guidelines by maintaining liquidity buffers and anticipating large redemptions. Fitch recognises, however, that credit conditions were relatively benign in the period reviewed."
They write, "CNAV MMF with less than 2 billion (EUR, GBP or USD) in AUM had more than twice as many instances of dropping below the reform's weekly liquidity (discretionary) threshold for LVNAV fund types.... Smaller funds were more sensitive to redemptions, causing those rated 'AAAmmf' to hold 5%- 7% more weekly liquidity than their larger equivalently-rated counterparts to manage liquidity risk, according to the same study."
The paper tells us, "Some investors are sensitive to fees and gates according to a recent Fitch survey, where it was cited as the area of greatest concern. Therefore, LVNAV managers are likely to hold much higher levels of weekly liquidity to position the portfolio against large unanticipated redemptions. Some fund providers and investors may also focus on short-term VNAV funds as their preferred post-reform option, as these funds will not feature reform-driven gates and fees (but will be subject to the standard extraordinary liquidity management measures authorised under the UCITS regime)."
Fitch adds, "The July 2017 EU MMF reforms codified how and when redemption gates and liquidity fees should be applied for Public debt CNAV and LVNAV funds. If weekly liquidity falls below 30% and there is a simultaneous net outflow of over 10%, a fund's Board of Directors is required to consider applying a discretionary gate or fee; if weekly liquidity falls below 10%, the Board must apply a gate or fee. As a result, a lot of emphasis is put on the role of Fund Board of Directors and their independence, as they ultimately make the decision to take action or not -- in the best interest of investors."
Finally, they comment, "We do not expect to see a significant shift between fund types in Europe, as was witnessed in the US following its reforms.... In Europe, four important factors mitigate the likelihood of an equivalent shift: 1. The presence of reform-related fees and gates in both European government only and LVNAV funds.... 2. The introduction of the LVNAV fund category can be viewed as embodying characteristics seen within the equivalent US Government and Prime fund types; specifically, the flexibility to invest in non-government securities, but permitted to maintain a stable asset value. Early indications suggest investors view this fund type as their preferred option in Europe post-reform. 3. Liquidity fees, redemption gates and a host of other liquidity control measures already exist in European mutual fund regulations and fund prospectuses, including in MMFs.... 4. We estimate only a low probability of gates and fees being triggered based on historic data. Factoring in a likely change in fund behaviour post-reform to increase liquidity reduces that probability further."
