Fitch: Brexit will be a challenge for MMF managers
30 June 2016 London
Image: Shutterstock
The UK’s vote to leave the European Union could create challenges for managers of sterling-denominated money market funds (MMFs), specifically around regulation and passporting, according to Fitch Ratings.
Although in the immediate aftermath of the referendum result money funds have remained relatively stable, with no material outflows as of yet, Fitch said adverse funding conditions could have a significant impact on supply in the future.
If the UK’s swap rates become less attractive, non-UK investors may reduce their sterling funds, and a reduction in this market presence would potentially prevent funds from creating highly-rated and diverse portfolios.
This in turn could mean already-low yields would be under additional pressure, as exposure to sovereign debt would increase.
Fitch suggested that this could be mitigated if banks start funding UK operations directly through the sterling market, as opposed to through a global programme, however, if UK banks start moving operations to within the EU, demand for sterling could fall altogether.
MMFs could also face difficulties if UK banks’ ratings fall any further. Multiple ratings agencies threatened to downgrade the UK’s rating after the result, and S&P was the first to cut it down by two places, from its AAA rating to AA.
This was shortly followed by Fitch itself, which took the UK to AA from AA+.
There is also uncertainty around the presence and role of offshore funds in the UK, and whether funds domiciled in Ireland and Luxembourg will be able to continue passporting into the UK.
Finally, Fitch suggested that liquidity could pose a problem for MMFs in the short-term, however it added that it hasn’t seen any unusual outflows since the Brexit result, adding that government supply of liquidity will be an important factor in mitigating supply.
Although in the immediate aftermath of the referendum result money funds have remained relatively stable, with no material outflows as of yet, Fitch said adverse funding conditions could have a significant impact on supply in the future.
If the UK’s swap rates become less attractive, non-UK investors may reduce their sterling funds, and a reduction in this market presence would potentially prevent funds from creating highly-rated and diverse portfolios.
This in turn could mean already-low yields would be under additional pressure, as exposure to sovereign debt would increase.
Fitch suggested that this could be mitigated if banks start funding UK operations directly through the sterling market, as opposed to through a global programme, however, if UK banks start moving operations to within the EU, demand for sterling could fall altogether.
MMFs could also face difficulties if UK banks’ ratings fall any further. Multiple ratings agencies threatened to downgrade the UK’s rating after the result, and S&P was the first to cut it down by two places, from its AAA rating to AA.
This was shortly followed by Fitch itself, which took the UK to AA from AA+.
There is also uncertainty around the presence and role of offshore funds in the UK, and whether funds domiciled in Ireland and Luxembourg will be able to continue passporting into the UK.
Finally, Fitch suggested that liquidity could pose a problem for MMFs in the short-term, however it added that it hasn’t seen any unusual outflows since the Brexit result, adding that government supply of liquidity will be an important factor in mitigating supply.
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