13 October 2016
New York
Reporter: Stephanie Palmer

MMFs un-phased by broker-dealers’ repo retreat

The drop in repo supply from primary broker-dealer counterparties will not have a significant effect on money market funds, according to a report from Moody’s Investor Services.

According to the report, Moody’s analysis suggests that counterparties and their parent entities are still typically receiving high investment grade ratings, and therefore pose limited counterparty risk.

The report suggested that, as of June 2016, 49 percent of Moody’s-rated money market funds use a primary broker-dealer, down from 87 percent in January 2011.

This has opened up the repo market for less traditional counterparties, and leading to increased interest from non-bank financial entities such as insurers, endowments, and real estate investment trusts.

The report noted that, as of June 2016, life insurer Prudential Financial accounted for approximately 1 percent of the total US repo security market, almost $4 billion.

According to David Wang, Moody’s analyst and author of the report, primary dealers’ reigning in of repo activity could be due to increased regulation or higher risk aversion, following the financial crisis.

He said, however: "We don't expect this to have negative credit or ratings implications for the market in the near to intermediate term, given the generally high ratings of the non-bank financial institutions that have replaced them."

Wang said: "As the counterparty mix shifts further away from primary dealers, we will continue to rely on our assessment of counterparties' creditworthiness when assessing money market funds."

He added: "Thus far, we have not observed a stark difference in the credit quality of the counterparties."

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