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
Agenda
Global Money Market Funds – Trends and Developments
Regulatory Reform and Future Initiatives
Transparency – Understanding the Key Risk Drivers
4
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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
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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
Regulatory Reform and Future Initiatives
Transparency – Understanding the Key Risk Drivers
7
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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
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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
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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
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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
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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
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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
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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
Regulatory Reform and Future Initiatives
Transparency – Understanding the Key Risk Drivers
15
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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
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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
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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
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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
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Country Allocation(AAAmmf European Funds)
Source: Fitch Ratings
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
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Trends in Country Allocation(AAAmmf European Funds)
Source: Fitch Ratings
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
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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
Source: Fitch Ratings
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)
WAL – Sensitivity to Spread Risk AAAmmf European Funds
22
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Natural Liquidity Maintained Structurally High
Average Maturity ProfileAAAmmf European Funds
Source: Fitch Ratings
0
20
40
60
80
100
Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12
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
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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
Global Money Market Funds – Trends and Developments
Regulatory Reform and Future Initiatives
Transparency – Understanding the Key Risk Drivers
25
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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
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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
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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
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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
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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
Global Money Market Funds – Trends and Developments
Regulatory Reform and Future Initiatives
Transparency – Understanding the Key Risk Drivers
31
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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
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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
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Fund Surveillance – Rating Transparency and Surveillance
34
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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
Data Source: Fund Sponsor/Fund Administrator/Fitch
% 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
Data Source: Fund Sponsor/Fund Administrator/Fitch
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
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MMF Snapshot – A Monthly Publication of Consistent Portfolio Analytics
36
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Monthly MMF Highlights – Over 1,500 Regular Readers
January December
37
www.fitchratings.com 5/4/12
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
www.fitchratings.com 5/4/12
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
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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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