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MMF exposure to European banks hits 12-month low

US money market funds (MMFs) reduced their exposure to European financial institutions by 18 per cent in December 2013, while Euro and Sterling MMFs reduced their exposures by eight per cent and six per cent respectively, according to Moody's Investors Service.

Due to year-end redemptions, European funds' combined AUM dropped by 6.5 per cent over Q4, and their maturity profiles shortened significantly, by seven days on average.
 
Despite the prolonged period of low interest rates and continuing uncertainty around regulation, US domiciled prime MMFs' AUM increased 2.9 per cent to USD677bn at the end of December from USD658bn at the end of September. In European and offshore US-Dollar funds, combined AUM declined 4.6 per cent to USD219bn.
 
"US money market funds' exposure to European banks dropped in December to the lowest level in 2013. This is most likely a reaction to the record low interest rate that the ECB announced in November", says Yaron Ernst, managing director of Moody's managed investments group.
 
In US domiciled funds, aggregate exposure to European financial institutions stood at approximately 25 per cent of total investments, or USD168bn at the end of December, down from 30 per cent of total assets or USD205bn at the end of November.
 
Funds also reduced their maturity profiles and increased their liquidity levels in anticipation for year-end redemptions. Furthermore, the credit profiles of US prime MMFs improved in Q4 with investments rated Aa3 and higher increasing by 2.8 per cent.
 
Funds' resilience to market risk improved in Q4, due to shortening WAMs combined with improvement in credit profiles.
 
Euro MMFs have experienced a sharp decrease in AUM (-6.5 per cent or -EUR4.3bn) to reach their lowest level in 12 months. This is mostly due to year-end redemptions.
 
In anticipation for such redemptions, funds' maturity profiles shortened significantly (average WAM of 31 days from 38 days) and overnight liquidity levels increased to nearly 32 per cent of AUM. Funds' sensitivity to market risk decreased as a result.
 
Funds' aggregate exposure to European financial institutions decreased EUR4.1bn to EUR23.5bn (38 per cent of AUM) during Q4, due to lack of suitably rated counterparties and banks' reluctance to borrow at year-end due to balance sheet considerations.
 
Credit profiles of prime Euro MMFs stabilised in Q4, with the bulk of the investments (46 per cent) made in Aa-rated securities, followed by exposure to A-rated instruments (41 per cent). Investments in Aaa-rated securities accounted for 13 per cent of the assets under management (AUM).
 
Sterling MMFs have continued to experience a decrease in AUMs in Q4. Funds lost GBP2.8bn to reach their lowest level in 2013 at GBP97.1bn.
 
Funds' aggregate exposure to European financial institutions decreased by GBP5.4bn to GBP42.3bn (43.6 per cent of AUM from 47.8 per cent) to hit the lowest level of the year.
 
Credit profiles of funds slightly improved, as investments in Aaa and Aa-rated securities increased to 62 per cent of their assets under management from 60.4 per cent.
 
Overnight liquidity slightly deteriorated to 30.4 per cent from 31.5 per cent, due to the scarcity of repurchase agreements at year-end. Time deposit counterparties either reduced down capacity significantly or refused to take any cash at year-end.
 
Moody's analysis is based on the portfolios of all Moody's-rated MMFs in Q4 2013. For the US dollar funds, the data covers 38 US Prime MMFs and 27 European and offshore US dollar-denominated MMFs. For the euro-denominated MMFs and sterling-denominated MMFs, the data covers 22 and 21 funds, respectively, domiciled in Europe.

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