windy city summit

Windy City Summit

Roger Merritt, Managing Director

June 2012

Agenda

Global Money Market Funds – Trends and Developments

Regulatory Reform and Future Initiatives

Transparency – Understanding the Key Risk Drivers

4

www.fitchratings.com 5/4/12

Global Money Market Funds

• Globally, money market funds come in many shapes and sizes

• Accounting conventions and regulation vary

• U.S. mostly heavily regulated to date

• SEC Rule 2a-7 with constant NAV (amortized cost) accounting

• ESMA regulates European money market funds

• European conventions vary

• Constant NAV under IMMFA (AAA-rated self-regulatory body)

• Hybrid model for France (fonds monetaire) with accumulating share classes

• Multiple base currencies

• Other markets – Canada, China, India, Japan, Taiwan

5


Global Trends in MMF Assets

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

US Europe Asia-Pac Other(EURtn)

Source: ICI, EFAMA, IFIA, Fitch

• U.S. MMF AUM peaked early 2009, with ‘flight to safety’ causing net positive inflows to

government MMFs partially offset by outflows from prime MMFs..

Agenda

Global Money Market Funds – Trends and Developments– U.S. Prime Money Market Funds

– European Money Market Funds



7


U.S. Prime Institutional MMFs – Portfolio Composition

Source: iMoneyNet

0%

20%

40%

60%

80%

100%

FRN CP-Unsecured ABCP CD Agency TD Repo Treasury

Apr-1

1M

ay-1

1

Jun-

11

Jul-1

1Aug

-11

Sep-1

1O

ct-1

1Nov

-11

Dec-1

1

Jan-

12

Feb-1

2M

ar-1

2

Apr-1

2

0%

20%

40%

60%

80%

100%

(% o

f to

tal a

sset

s)• Increase in repos and Treasury/agency to support higher liquidity and lower credit risk.

Decrease in MMFs’ appetite for FRNs and ABCP.

8


U.S. Prime Institutional MMFs – Low Market Risk

• U.S. prime institutional MMFs maintain low exposure to market risk through limiting

portfolio weighted average maturity (WAM) and weighted average life (WAL)

Source: iMoneyNet

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-1

1

Sep-1

1

Oct-11

Nov-1

1

Dec-1

1

Jan-

12

Feb-1

2

Mar

-12

Apr-1

2

20

40

60

80

100

120

Day

s

WAM < 60 days

WAL < 120 days

0

9


U.S. Prime Institutional MMFs – Daily and Weekly Liquidity

Source: iMoneyNet

• Investments in daily and weekly assets by U.S. prime institutional MMFs, on average,

are well in excess Fitch rating criteria and regulatory requirements

• Daily liquid assets include repos and time deposits

10%

20%

30%

40%

50%

60%

% o

f to

tal a

sset

s

Daily Weekly

Fitch rating criteria (25%)

Fitch rating criteria and Rule 2a-7 requirement (10%)

0%

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-1

1

Sep-1

1

Oct-11

Nov-1

1

Dec-1

1

Jan-

12

Feb-1

2

Mar

-12

Apr-1

2

10


Fitch-rated U.S. Prime MMFs – Current Allocations by Countries

* Others include Switzerland, France, Norway, Denmark, Belgium, Singapore, Austria and supranational issuersSource: Fund reports, Fitch Ratings

U.S.

U.K.

Japan

Canada

Australia

Sweden

Netherlands,

Germany

Others*

24.3%

12.9%

9.8%8.9%8.3%

7.7%

7.6%

7.4%

13.2%

11


Fitch-rated U.S. Prime MMFs – Selected Trends in Country Allocations

Source: Fund reports, Fitch Ratings

0%

5%

10%

15%

20%

25%

30%

May

-11

Jun-

11

Jul-1

1

Aug-1

1

Sep-1

1

Oct-11

Nov-1

1

Dec-1

1

Jan-

12

Feb-1

2

% o

f to

tal a

sset

s

U.S. U.K. Japan Canada Australia France

Larger allocations to the U.S. in response to credit concerns regarding France

12


Fitch-rated U.S. Prime MMFs – Selected Trends in Country Allocations (cont’d)

Source: Fund reports, Fitch Ratings

• Since Feb. 2011 MMFs have reduced exposure to France by 14% and increased

allocations to Japan, Sweden, the U.S. and Canada

-15% -10% -5% 0% 5%

Japan

Sweden

U.S.

Canada

Australia

Italy

Belgium

Denmark

Germany

France

% of total assets

13


U.S. MMF Families Ranking

Source: CraneData

Rank Family

AUM ($ mil)

as of 2/29/12

AUM Chg

since 2/28/11

% Chg

since 2/28/11

Market

Share

1 Fidelity 415,087 (10,806) -2.5% 16.7%

2 JPMorgan 256,776 (11,931) -4.4% 10.3%

3 Federated 244,422 8,354 3.5% 9.8%

4 Vanguard 161,583 (2,158) -1.3% 6.5%

5 Dreyfus 159,630 (11,035) -6.5% 6.4%

6 Schwab 153,916 1,878 1.2% 6.2%

7 BlackRock 144,925 (20,642) -12.5% 5.8%

8 Goldman Sachs 134,151 2,067 1.6% 5.4%

9 Wells Fargo 115,745 (25,190) -17.9% 4.7%

10 Northern 69,155 5,082 7.9% 2.8%

11 SSgA 67,564 2,867 4.4% 2.7%

12 Morgan Stanley 67,368 16,929 33.6% 2.7%

13 UBS 60,614 (1,748) -2.8% 2.4%

14 Invesco 58,527 3,389 6.1% 2.4%

Agenda

Global Money Market Funds – Trends and Developments– U.S. Prime Money Market Funds

– European Money Market Funds



15


A Detailed View on European MMF EUR1tn Assets

-40

-30

-20

-10

0

10

20

30

40

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

Ma

r-11

Ma

y-11

Jul-

11

Se

p-1

1

No

v-11

Jan

-12

Ma

r-1

2

French MMFs Monthly Growth Rate (LHS)

European CNAV Monthly Growth Rate (LHS)

European MMF Monthly Net Sales (EURbn RHS)

European MMFs by Country of Domicile

Source: EFAMA, iMoneyNet, AMF

0.0

0.5

1.0

1.5

Ma

r 0

7

Ma

r 0

8

Ma

r 0

9

Ma

r 1

0

Ma

r 11

Ma

r 1

2

CNAV (IMMFA) MMFs

French MMFs

Other European MMFs(EURtn)

European MMFs Major Sub-Universes

Source: EFAMA, IFIA, AMF, iMoneyNet, Fitch Ratings

16


European MMFs Domiciliation: Concentration in Few Countries

France33%

Luxem-bourg28%

Ireland27%

Italy2%

Nordic countries

4%

Other6%

European MMFs by Country of Domicile

Source: EFAMA

• Significant concentration of assets in

MMFs domiciled in France, Luxembourg

and Ireland

• Ireland- and Luxembourg-domiciled funds

• Distributed cross borders in Europe and

globally

• More than 80% of assets sourced outside

of fund’s country of domiciliation

• French-domiciled MMFs

• Mostly distributed to French institutional

and corporate investors

17


Most Liquid Instruments Increasingly Favored

0 20 40 60 80 100

Mar 11

May 11

Jul 11

Sep 11

Nov 11

Jan 12

Mar 12

Govt Repo TD CD CP ABCP FRN Other

(%)

Asset Mix EvolutionAAA-Rated Offshore Funds

Source: iMoneyNet

18


AAAmmf Funds: Highest Credit Quality Issuers

Source: Fitch Ratings

0

20

40

60

80

100

Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12

(%) F1+ F1

Trend in Average Rating Mix% of Portfolio Fitch-rated European MMFs

• No exposure to issuers rated below F1 (or equivalent) per Fitch’s rating criteria

• F1: Highest short-term credit quality• Indicates the strongest intrinsic

capacity for timely payment of financial commitments

• May have an added "+" to denote any exceptionally strong credit feature

• Average F1+/F1 mix moved from around 80/20 to about 60/40 in 2012 so far, following Fitch’s bank rating downgrades in Q411

19


Country Allocation(AAAmmf European Funds)


Average Country Allocation – As at end-March 2012

27

17

10

17

23

14

12

14

11

8

6

22

11

10

8

8

6

6

2

5

7

3

4

6

4

4

4

1

2

5

8

8

8

0 20 40 60 80 100

EUR MMFs

GBP MMFs

USD MMFs

France UK Germany US Netherlands Sweden

Australia Switzerland Japan Canada Others

(%)

20


Trends in Country Allocation(AAAmmf European Funds)


Largest Changes in Country MixFeb-11 to Feb-12; % of Portfolio

-5 -3 -1 1 3 5

GermanySwitz.

AustraliaNorway

SwedenJapan

CanadaSing.UAE

ChinaDenmark

ItalySpain

BelgiumUKUS

France

(%)

0

5

10

15

20

25

Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

France UK GermanyUS Neth. SwedenAustralia Switz. JapanCanada

(%)

Evolution 10 Largest Country Allocations

21


AAAmmf Funds: Short Average Maturities

0

20

40

60

80

100

120

Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12

Euro Sterling US Dollar

(Days)

WAM – Sensitivity to Interest Rate RiskAAAmmf European Funds


0

20

40

60

80

100

120


Euro Sterling US Dollar

(Days)

WAL – Sensitivity to Spread Risk AAAmmf European Funds

22


Natural Liquidity Maintained Structurally High

Average Maturity ProfileAAAmmf European Funds


0

20

40

60

80

100


O/N 2-7 Days 8-30 Days(%)

• Investments maturing overnight maintained above 20% on average over the past 12 months

• 50% to 60% of investments mature within one month

• Well above Fitch’s baseline portfolio liquidity which also includes eligible liquid assets:

• Daily liquidity: 10%

• Weekly liquidity: 25%

23


Top European CNAV MMFs PlayersAt end-March 2012

Asset ManagerEuropean CNAV

AUM (EURbn)Market Share

(%)EUR MMFs

(EURbn)GBP MMFs

(GBPbn)USD MMFs

(USDbn)

JPMorgan 128 25 28 12 115

BlackRock 71 14 18 33 19

Goldman Sachs 55 11 12 6 48

HSBC 31 6 8 6 21

BNY Mellon 29 6 2 3 30

Deutsche 28 6 13 7 9

SSgA 23 5 6 2 21

SWIP 21 4 1 17 -

Insight 19 4 1 15 0

BNP Paribas 18 4 14 2 3

Source: iMoneyNet

Agenda




25


U.S. MMF Regulation: Rule 2a-7

• SEC’s Rule 2a-7 substantially revised in May 2010

• Lower WAM (60 vs. 90 days) and new WAL (120 days)

• Added overnight and one-week minimum liquidity

• Tightened F2 credit exposures (amount and durations)

• Reduced illiquid assets to 5% (from 10%)

• Introduced stress testing and increased disclosure

26


European MMF Regulation

• IMMFA MMFs self-regulated to achieve AAAmmf ratings

• Continental Europe operates under auspices of ESMA

• Two ESMA definitions of MMFs –

• a) Short-term MMFs, and

• b) MMFs

• Short-term MMFs similar in risk profile to U.S.-style MMFs

• European ‘money market funds’ more akin to ‘cash plus’ or short-term

bond funds

27


Fitch MMF Rating Criteria and MMF Definitions

AAAmmf SEC 2a-7 IMMFA ESMA ST MMF ESMA MMF

Int. rate risk (WAMr/WAM) 60 days 60 days 60 days 60 days 6 months

Spread risk (WAMf/WAL) 120 days 120 days 120 days 120 days 12 months

Max maturity fixed-rate inst. 397 days 397 days 397 days 397 days 397 days

Max maturity FRN 2y AAA sov Longer for US

sov. FRN/VRN

397 days 397 days 2y

Min portfolio liquidity 10% O/N

25% 1w

10% O/N

30% 1w

5% O/N

20% 1w

n.a. n.a.

Min credit quality F1 or

equivalent

F2 or

equivalent

F1 or equivalent F2 or equivalent F2 or equivalent

Max F2 (or equivalent) 0% 3%; < 45 days 0% n.a. n.a.

Max PCF 1.50 n.a. n.a. n.a. n.a.

Max issuer concentration

(excl. govt/govt agencies)

F1+: 10%

F1: 5%

5% n.a.* n.a.* n.a.*

* UCITS diversification rules apply: 10% max per issuer; 20% max in deposits with the same body; issuer’s exposures above 5% must not exceed 40%Source: Fitch Ratings, ESMA

28


U.S. MMFs – New Reforms on the Horizon?

• Range of proposals possible from SEC

• Floating NAV, Liquidity back-up, and/or capital buffers

• Regulators focused on systemic risk

• MMF sponsors focused on economic costs and product viability

• Strong Investor preference for status quo CNAV

• Timing?

29


European MMF Reform: On a Parallel Path?

• Further reform proposals in latest IOSCO consultation paper

(April 2012)

• Money Market Fund Systemic Risk Analysis and Reform Options

• A range of policy options put forth –

• Variable NAV

• NAV Capital Buffers

• Private market insurance

• Redemption/liquidity fees

• Liquidity facilities

• Seeking public comments by May 28, 2012

Agenda




31


Key Portfolio Risk Factor in a MMF

MMF Portfolio: Key Risk

Parameters

Credit RiskInterest Rate/Market Risk

Liquidity Risk

Credit Quality Interest Rate

Exposure Asset Liquidity

DiversificationSpread Risk

ExposureShareholdersRedemptions

32


MMFs Improve Transparency

• Investors more attuned to risks post-crisis

• Transparency has improved

• U.S. MMFs must post portfolio holdings monthly

• Monthly SEC filings – ‘shadow NAV’ made public with a 60-day lag

• Fitch-rated MMFs provide weekly portfolio holdings and metrics

33


Fund Surveillance – Rating Transparency and Surveillance

34


Fund Surveillance – Rating Transparency and Surveillance (cont’d)

Fund Security Distribution

Fund Maturity Distribution

Morgan Stanley Euro Liquidity Fund – 30 Dec 2009Security Distribution

Morgan Stanley Euro Liquidity Fund – 30 Dec 2009Maturity Distribution

CPGovtB/N

TD

CDCorps0%

53%22%

15%10%

Data Source: Fund Sponsor/Fund Administrator/Fitch

0%10%20%30%40%

Ove

rnig

ht2

- 78

- 30

31 -

90

91 -

180

181

- 1 Y

r

Ove

r 1 Y

r


% o

f P

ort

foli

o

26%

8%

32%25%

9%

0% 0%

Fund Asset Rating Distribution

Fund Total Assets

Morgan Stanley Euro Liquidity Fund – 30 Dec 2009Rating Distribution

Morgan Stanley Euro Liquidity Fund Total Net Assets(Millions)

F1+

F1

91%

9%

Data Source: Fund Sponsor/Fund Administrator/Fitch Fitch short-term ratings or equivalent

0

1,000

2,000

3,000


0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

Fund Seven Day Yield

Morgan Stanley Euro Liquidity Fund 7 Day Net Yield*

* The annualized 7 day net yield for the institutional share class or the lowest fee share classData Source: Fund Sponsor/Fund Administrator/FitchAnnualized, net of expenses

1/28

/09

2/25

/09

3/18

/09

4/29

/09

5/27

/09

6/24

/09

7/29

/09

8/26

/09

9/23

/09

10/2

8/09

11/2

5/09

12/3

0/09

1/28

/09

2/25

/09

3/18

/09

4/29

/09

5/27

/09

6/24

/09

7/29

/09

8/26

/09

9/23

/09

10/2

8/09

11/2

5/09

12/3

0/09

35


MMF Snapshot – A Monthly Publication of Consistent Portfolio Analytics

36


Monthly MMF Highlights – Over 1,500 Regular Readers

January December

37


Recent Fitch MMF Research – Promoting Transparency

• U.S. Money Market Fund Quarterly

• European Money Market Fund Quarterly

• Special Series: MMFs’ European Exposures

• Assessing Chinese MMFs

• Repo Emerges from the Shadow

• U.S. MMF Shadow NAV Volatility Post-Crisis

• 2012 MMF Outlook

• U.S. MMFs: New Reforms on the Horizon

• MMFs: What a U.S. Default Would Mean

38


Fitch Expands Coverage of Money Market Funds

Source: iMoneyNet. IMMFA funds only. Number of U.S. rated money market funds up 30% since late 2009.

Number of Fitch-Rated Prime MMFs Assets of Fitch-Rated Prime MMFsAs a % of Total IMMFA Assets

0

10

20

30

40

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

(#)

0%

10%

20%

30%

40%

50%

60%

# Fitch rated USD (LHS)# Fitch rated GBP (LHS)# Fitch rated EUR (LHS)% IMMFA Funds rated by Fitch (RHS)

0%

10%20%

30%40%

50%

60%70%

80%

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

(%)EUR GBP USD

39


Disclaimer

Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.

Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings

are inherently forward-looking, embody assumptions and predictions that by their nature cannot be

verified as facts, and can be affected by future events or conditions that were not anticipated at the

time a rating was issued or affirmed.

The information in this presentation is provided “as is” without any representation or warranty.

A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not

address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.

A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its

agents in connection with a sale of securities.

Ratings may be changed or withdrawn at any time for any reason in the sole discretion of

Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not

a recommendation to buy, sell, or hold any security.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE

LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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windy city summit

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