Moody's Investors Service published the paper, "Most recent intervention could mark a turning point for institutional prime funds." It tells us, "The US institutional prime money market fund's viability has come under pressure again, but now the skepticism is coming from within the industry. For the second time in 12 years, the US government has had to provide liquidity to the sector following extreme market volatility and a surge in investor withdrawal requests in March. The 2020 rescue came despite 2016 reforms designed to strengthen the funds. In the past, sponsors were willing to ride out market instability, because prime funds were a larger portion of AUM, generating significantly more revenue than government funds. However, investor attrition and low interest rates and credit spreads have diminished the funds' revenue advantage. Large sponsors are now exiting the product rather than risking having to support prime funds, and at least two large sponsors have announced closures of their institutional prime funds." Moody's explains, "The assets of prime funds are higher-yielding than those of government money market funds, and prime funds have historically been a more profitable product for fund sponsors based on larger assets under management and higher gross portfolio yields. However, prime fund revenue as a percentage of overall money market fund revenue has diminished over time, making the decision to exit the prime fund product now less impactful on a sponsor's total revenue than in the past. Since 2014 when prime funds accounted for around 74% of total money market fund revenue, their contribution has steadily decreased to an estimated 21% as of June 2020. Secondly, the absolute yield of prime funds as well as the yield advantage of prime funds over government funds has been smaller in the last decade than was historically the case, given persistent low rates and narrow credit spreads. The lower yields have made the funds less attractive to investors, reducing the demand for prime funds and their associated revenue for fund sponsors." The piece adds, "Product revenue from prime funds is down not only because asset levels have fallen but also as a result of persistent low interest rates and narrow credit spreads in recent years. Given that these conditions are likely to remain in place and that the overall share of prime fund revenue within a sponsor's total revenue is likely to stay low, the prime fund product's revenue contribution may be less attractive to fund sponsors, especially after adjusting for the potential costs of having to support the funds' net asset value and its associated reputational risk in times of market stress. Fund sponsors that exit the prime fund business will have more robust operations knowing that they are not likely to have to deal with the question of whether to support or not to support a prime fund with their remaining liquidity product lineup during the next crisis. As sponsors review their liquidity fund offerings and consider the costs of potential sponsor support, institutional prime funds are likely to be less attractive to retain than retail prime funds and municipal funds."

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