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Fitch: U.S. Money Funds Grow Triparty Repos; Sharpens Focus on Collateral and Contingency Plans

NEW YORK--(BUSINESS WIRE)-- The proportion of secured exposure in the form of repurchase agreements (repos) for U.S. prime money market funds (MMFs) increased sharply post-financial crisis, creating a potential, although unlikely, risk for MMFs in the case of repo dealer insolvency, according to a Fitch Ratings report.

The triparty repo market stands at approximately $1.8 trillion, with MMFs providing 35% of trading volume. Prime MMFs invested approximately 18% of their assets ($260 billion) in repos. Government MMFs allocated 38% of their assets ($330 billion) to this market.

Fitch attributes the increase to a number of factors, including risk aversion, which has led to further demand for secured assets and broadening collateral practices. Importantly, amendments to Rule 2a-7 contributed to demand for repos by requiring taxable MMFs to hold at least 10% of their assets in daily liquid instruments, such as overnight repos.

MMFs are focused on counterparty credit quality as the primary source of repayment. Regulatory requirements to maintain high-quality, short duration portfolios can make it problematic for MMFs to take a possession of most repo collateral in the event of dealer insolvency. Fitch notes that MMFs are expected to have appropriate contingency plans and systems in place in the unlikely event of repo dealer insolvency.

The repo counterparties of Fitch-rated MMFs are rated 'F1+' or 'F1', consistent with Fitch's MMF rating criteria.

Fitch believes that MMFs will be able to liquidate U.S. government and agency collateral without material loss of value. Generally, this type of collateral will benefit from a flight to quality following a counterparty default. However, Fitch notes that other types of collateral may become illiquid, leading to mark-to-market losses upon disposal.

Triparty market reform has improved infrastructure and risk management practices. However, any potential further restrictions on collateral types and haircuts would most likely have negative effects on MMF yields by reducing the volume of collateral financed in the triparty market. This may prompt MMFs to consider bilateral trades if they are willing to forgo efficiency for access to more collateral and better yielding alternatives, but could introduce new risks.

The full report 'Triparty Repo Primer for U.S. MMFs' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: Triparty Repo Primer for U.S. MMFs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=690496

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Fitch Ratings
Viktoria Baklanova, Ph.D, CFA
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Source: Fitch Ratings