Fitch Says MMFs Unaffected by Revised UCITS Repo Maturity Limits

The recent European Securities and Markets Authority (ESMA) guidelines on repurchase agreement (repo) maturity limits will not have a material effect on money market funds (MMFs) as they predominantly enter into overnight repo contracts as a liquidity management tool, according to Fitch Ratings.

ESMA guidelines issued on 4 December restrict Undertaking for Collective Investment in Transferable Securities (UCITS) funds to repos with a fixed term of seven days or less. All Fitch-rated MMFs are UCITS funds or funds that adhere to UCITS rules.

The credit ratings agency (CRA) said that it expects the impact on MMFs to be limited. Almost all repos in Fitch rated MMFs were overnight or had a term of less than seven days as of end-October 2012. Longer-term repos will likely be kept to maturity and not renewed or made callable to comply with the revised guidelines. Fitch does not expect this repositioning to have a material effect on any of its rated MMFs since term repo exposures are limited.

In its global MMF criteria, Fitch analyses rated MMF investments in assets that are judged to be non-marketable or characterised by reduced secondary market liquidity. Non-callable term repos and long term time deposits generally fall under this category. Exposure to such securities is considered in the context of overall portfolio composition and liquidity profile vis-a-vis the fund’s shareholder base, but is generally expected to be small.

MMFs primarily use repo as a liquidity tool. Under a repo contract the MMF is typically the repo buyer, and economically is providing a collateralised loan. The MMF buys repo collateral (typically highly rated sovereign governments, supranationals, or government agencies in rated MMF) from a repo seller (usually a large trading bank) with cash and the repo seller agrees to repurchase the collateral from the MMF at a fixed price on a predetermined future date.

The repo seller posts additional collateral (typically 2%, re-evaluated daily) to the buyer as a buffer against potential price volatility. The relationship is governed by a Global Master Repurchase Agreement (GMRA). On average, exposures to repo transactions represented 12.8% of Fitch-rated MMF as of end October 2012.

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