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Prime money fund assets stable following reforms

Assets of institutional prime money funds have remained stable following the Securities and Exchange Commission's (SEC) adoption of reforms for the industry on 23 July, according to Fitch Ratings.

Between 16 July, when the SEC announced it would hold a vote on money fund reform, and 6 August, shareholders withdrew USD6.8 billion from institutional prime money funds, or 0.7 per cent of the funds' assets, according to iMoneyNet data.
Institutional prime (and municipal) funds are most impacted by the reforms, and Fitch expects some investors to gradually redeem a portion of their assets out of these funds over the two-year implementation period.
However, investors so far have not made significant changes to money fund investments in reaction to the SEC's announcement of reforms. Since 16 July, of 94 institutional prime money funds tracked by iMoneyNet, 64 per cent had small fluctuations in assets of -5 per cent to +5 per cent, and an additional 18 per cent of the funds showed inflows of greater than five per cent. Six per cent of the funds had outflows of five per cent to 10 per cent, and 12 per cent of the funds had outflows greater than 10 per cent of assets over the roughly three-week period.
It appears that money fund investors have thus far taken a wait-and-see approach to the SEC's reform efforts, and many are still reviewing the final rules. Institutional investors will need to re-examine and update their investment policies to be able to use the new money fund structures or access alternative liquidity management solutions. Once this process is underway, prime money funds may experience more significant outflows, and will need to be prepared to handle them.
Separately, prime and government money funds allocated a record USD275 billion to the Fed's reverse repo facility (RRP) at the end of 2Q'14 to offset the seasonal reduction in banks' balance sheet capacity. Between May-end and June-end, money funds increased their allocations to the RRP facility by USD148 billion, according to Crane Data. At the same time, the funds reduced investments in government and treasury repos with banks by USD72 billion. Banks have historically sought to reduce the size of their balance sheets and leverage on quarter-end reporting dates, but this seems to have been exacerbated as a result of the new bank regulatory requirements. The reduction in exposures could also be caused by bank-specific market developments.

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