In listening to regulators money market funds are part of a vast shadow banking system that can upend the global financial system at any moment. “What do money market funds and the Harry Potter novels have in common?” wondered Morningstar Advisor Magazine recently. “Both are well-executed fictions that have become beloved cultural institutions.” A Wall Street Journal similarly called them a “fiction.”
So very well aware of the criticisms, barbs and digs – not to mention the continued rumblings of disgruntled regulators (think Elmer Fudd: “I’ll get you wabbit!”) – MMFs have been playing it safe. According to a recent Fitch Ratings report, despite consistent outflows throughout the summer of 2012, mainly related to the eurozone crisis, “Fitch-rated MMFs have been able to handle such outflows with available liquidity without reliance on secondary market liquidity.”
One reason for the success is that prime institutional MMFs have stayed focused on high quality assets and relatively short duration – as per some of the new rules implemented in 2010 that were inspired by the crash of 2008. This included rule 2a-7, which required funds to maintain a portion of their portfolios in instruments that could be readily converted to cash, and to reduce the maximum weighted average maturity of portfolio holdings. “As of July 2012, MMFs invested conservatively in daily and weekly liquid assets at the levels of 20% and 46% of their assets, respectively,” Fitch said in its report. “On average, MMFs’ weighted average maturity (WAM) and weighted average life (WAL) equaled 44 and 67 days, respectively, well within Fitch’s criteria for ‘AAAmmf’ rated funds and regulatory requirements.”
Europe will continue to be a challenge, as will the headwinds facing the US, Fitch noted. But MMFs have been nimble in this regard, as perhaps reflected in recent commercial paper data from the Federal Reserve, which showed decreased demand in the latest week, possibly due to intensifying eurozone pressures. The seasonally adjusted amount of US commercial paper fell $9.9bn to $1.022tn outstanding in the week ended September 5. However that may reverse in the coming weeks after European Central Bank President Mario Draghi Thursday revealed plans for unlimited bond purchases in order to regain control of interest rates in the euro area and fight speculation of a currency breakup (see related story here).