Fitch will count holdings in EU’s new MMFs as cash

Regulatory changes will not affect Fitch’s treatment of company holdings in money market funds, it has assured corporates

Reforms to the regulations around European money market funds (MMFs) will not affect the way that Fitch views rated firms’ cash assets, the organisation has announced.

In a 17 November statement, the ratings agency outlined its thoughts on corporate holdings in Europe’s forthcoming wave of new-style MMFs, which will arise from the reforms.

Fitch assured its corporate stakeholders that it will still typically class such holdings as equivalent to cash in its analyses of companies’ net-debt metrics and immediate liquidity resources.

It pointed out: “MMFs are typically treated as cash under our corporate-rating criteria when they are located in developed jurisdictions, and used by a corporate with broadly conservative financial policies.

“This reflects our view that they allow timely, unconditional availability of cash to the rated entity – and offer reasonable certainty that the attributable value at par will be available.”

It noted: “European MMF reforms being introduced could appear to challenge this view, because they require some funds to either impose a fee or temporarily suspend redemptions if the fund’s liquidity is too low.

“However, analysis of our rated European MMF portfolio suggests the likelihood of this happening will be very low.”

A Fitch study of weekly liquidity data across its entire portfolio of rated, European MMFs over the past five years did not identify a single case of fund liquidity falling below 10%.

While the study covered a relatively benign period for credit conditions, Fitch said, it nonetheless provides strong grounds for counting MMF holdings as cash equivalent.

Another basis for that view, it explained, is that parts of the reforms require fund managers to adopt a far more conservative approach than they would have under the old regulations.

For example, the reforms introduce minimum liquidity requirements. Low volatility net asset value (LVNAV) funds will need to maintain at least 30% weekly liquidity. Meanwhile, short-term variable net asset value (VNAV) funds will need to maintain liquidity of at least 15%.

In addition, diversification requirements have been strengthened, while the weighted average maturity (WAM) limit for short-term funds (including LVNAVs and short-term VNAVs) remains unchanged at 60 days.

The ratings agency added: “The attractiveness of money funds to cash investors could be significantly reduced if there were a stricter application of the cash-equivalent definition driven by management/auditor judgement or industry practice.

“But the reclassification of MMFs to the ‘investment’ category from ‘cash equivalent’ in a company’s financials generally would not affect Fitch’s classification of MMFs as cash in its corporate analysis.”

The regulatory shifts will go into effect in July 2018 for new funds, and January 2019 for existing funds.

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