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Tough Times Ahead for Money Market Funds

<p class="p1"><em>Money market funds look set for a torrid time in 2012 as regulatory pressures hit at the same time investors are demanding performance and liquidity.</em></p>
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(February 21, 2012) — Increased regulation and stubbornly low interest rates will continue to pile pressure on money market funds in 2012 as investors need returns without ramping up their risk, ratings agency Standard & Poor’s has said.

Regulation announced by the United States’ Securities and Exchanges Commission this month could make generating good performance from a money marketing fund a tough call and force consolidation, Andrew Paranthoiene, Associate Director at S&P, said.

“SEC proposed new regulations for money market funds following a decision made in 2010 – the market has responded coldly to it. These proposals included capital buffers, holdback provisions and the dreaded variable net asset values (NAV). It will be interesting to see where the market takes these discussions and see what the regulator decides upon,” Paranthoiene said.

Money market funds were thrown into the spotlight as the financial crisis took hold due to many of them holding assets that were not as liquid as investors had initially thought.

As investors scrambled to liquidate assets when financial markets crumbled, many of these funds were found unable to immediately release investors’ holdings.

Paranthoeine said that as money market fund providers considered the new regulatory landscape they may decide to cut back their product range so consolidation was a distinct possibility. However, he added that there was still appetite for these products. In 2011 euro-denominated money market funds grew by 10%, while sterling-denominated funds grew 33%.

Investors in the US, where this strict regulation is to take hold, were less keen – assets only grew by 6% in 2011. Some $115 billion flowed out of global money market funds last year, according to Data Monitor EPFR, but this was only around a fifth of the half a trillion dollars that was liquidated a year before.

“Investors are very cautious about where they are putting their money and when portfolio managers allocate they are very much focused on liquidity and access to cash at a time of market stress, and unexpected redemptions access to your money is of paramount importance,” Paranthoeine said.