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Windy City Summit

Windy City Summit. Roger Merritt, Managing Director June 2012. Agenda. Global Money Market Funds – Trends and Developments Regulatory Reform and Future Initiatives Transparency – Understanding the Key Risk Drivers. Agenda. Global Money Market Funds – Trends and Developments

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Windy City Summit

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  1. Windy City Summit Roger Merritt, Managing Director June 2012

  2. Agenda • Global Money Market Funds – Trends and Developments • Regulatory Reform and Future Initiatives • Transparency – Understanding the Key Risk Drivers

  3. Agenda • Global Money Market Funds – Trends and Developments • Regulatory Reform and Future Initiatives • Transparency – Understanding the Key Risk Drivers

  4. Global Money Market Funds • Globally, money market funds come in many shapes and sizes • Accounting conventions and regulation vary • U.S. mostly heavily regulated to date • SEC Rule 2a-7 with constant NAV (amortized cost) accounting • ESMA regulates European money market funds • European conventions vary • Constant NAV under IMMFA (AAA-rated self-regulatory body) • Hybrid model for France (fonds monetaire) with accumulating share classes • Multiple base currencies • Other markets – Canada, China, India, Japan, Taiwan

  5. Global Trends in MMF Assets • U.S. MMF AUM peaked early 2009, with ‘flight to safety’ causing net positive inflows to government MMFs partially offset by outflows from prime MMFs.. Source: ICI, EFAMA, IFIA, Fitch

  6. Agenda • Global Money Market Funds – Trends and Developments • – U.S. Prime Money Market Funds • – European Money Market Funds • Regulatory Reform and Future Initiatives • Transparency – Understanding the Key Risk Drivers

  7. FRN CP-Unsecured ABCP CD Agency TD Repo Treasury 100% 80% 60% (% of total assets) 40% 20% 0% Jan-12 Jul-11 Jun-11 Sep-11 Dec-11 Feb-12 Aug-11 Oct-11 Nov-11 Apr-11 Apr-12 Mar-12 May-11 U.S. Prime Institutional MMFs – Portfolio Composition • Increase in repos and Treasury/agency to support higher liquidity and lower credit risk. Decrease in MMFs’ appetite for FRNs and ABCP. Source: iMoneyNet

  8. U.S. prime institutional MMFs maintain low exposure to market risk through limiting portfolio weighted average maturity (WAM) and weighted average life (WAL) 120 100 WAL < 120 days 80 Days 60 40 20 WAM < 60 days Jul-11 Jun-11 Jan-12 Sep-11 Feb-12 Aug-11 Oct-11 Dec-11 Apr-11 Apr-12 Nov-11 Mar-11 May-11 Mar-12 U.S. Prime Institutional MMFs – Low Market Risk 0 Source: iMoneyNet

  9. 60% 50% 40% Fitch rating criteria (25%) 30% % of total assets Fitch rating criteria 20% and Rule 2a-7 requirement (10%) 10% 0% Jul-11 Sep-11 Jan-12 Feb-12 Jun-11 Dec-11 Oct-11 Mar-12 Apr-11 Apr-12 Aug-11 Nov-11 May-11 Daily Weekly U.S. Prime Institutional MMFs – Daily and Weekly Liquidity • Investments in daily and weekly assets by U.S. prime institutional MMFs, on average, are well in excess Fitch rating criteria and regulatory requirements • Daily liquid assets include repos and time deposits Source: iMoneyNet

  10. Others* U.S. 13.2% Germany 24.3% 7.4% Netherlands, 7.6% 12.9% 7.7% U.K. Sweden 8.3% 9.8% 8.9% Australia Japan Canada Fitch-rated U.S. Prime MMFs – Current Allocations by Countries * Others include Switzerland, France, Norway, Denmark, Belgium, Singapore, Austria and supranational issuers Source: Fund reports, Fitch Ratings

  11. U.S. U.K. Japan Canada Australia France Fitch-rated U.S. Prime MMFs – Selected Trends in Country Allocations 30% 25% Larger allocations to the U.S. in response to credit 20% concerns regarding France 15% % of total assets 10% 5% 0% Jul-11 Jan-12 Sep-11 Feb-12 Jun-11 Oct-11 Dec-11 Aug-11 Nov-11 May-11 Source: Fund reports, Fitch Ratings

  12. Fitch-rated U.S. Prime MMFs – Selected Trends in Country Allocations (cont’d) • Since Feb. 2011 MMFs have reduced exposure to France by 14% and increased allocations to Japan, Sweden, the U.S. and Canada France Germany Denmark Belgium Italy Australia Canada U.S. Sweden Japan -15% -10% -5% 0% 5% % of total assets Source: Fund reports, Fitch Ratings

  13. AUM ($ mil) AUM Chg % Chg Market as of 2/29/12 since 2/28/11 since 2/28/11 Share Rank Family 1 Fidelity 415,087 (10,806) -2.5% 16.7% 2 JPMorgan 256,776 (11,931) -4.4% 10.3% 3 Federated 244,422 8,354 3.5% 9.8% 4 Vanguard 161,583 (2,158) -1.3% 6.5% 5 Dreyfus 159,630 (11,035) -6.5% 6.4% 6 Schwab 153,916 1,878 1.2% 6.2% 7 BlackRock 144,925 (20,642) -12.5% 5.8% 8 Goldman Sachs 134,151 2,067 1.6% 5.4% 9 Wells Fargo 115,745 (25,190) -17.9% 4.7% 10 Northern 69,155 5,082 7.9% 2.8% 11 SSgA 67,564 2,867 4.4% 2.7% 12 Morgan Stanley 67,368 16,929 33.6% 2.7% 13 UBS 60,614 (1,748) -2.8% 2.4% 14 Invesco 58,527 3,389 6.1% 2.4% U.S. MMF Families Ranking Source: CraneData

  14. Agenda • Global Money Market Funds – Trends and Developments • – U.S. Prime Money Market Funds • – European Money Market Funds • Regulatory Reform and Future Initiatives • Transparency – Understanding the Key Risk Drivers

  15. A Detailed View on European MMF EUR1tn Assets European MMFs Major Sub-Universes European MMFs by Country of Domicile Source: EFAMA, iMoneyNet, AMF Source: EFAMA, IFIA, AMF, iMoneyNet, Fitch Ratings

  16. European MMFs Domiciliation: Concentration in Few Countries • Significant concentration of assets in MMFs domiciled in France, Luxembourg and Ireland • Ireland- and Luxembourg-domiciled funds • Distributed cross borders in Europe and globally • More than 80% of assets sourced outside of fund’s country of domiciliation • French-domiciled MMFs • Mostly distributed to French institutional and corporate investors European MMFs by Country of Domicile Source: EFAMA

  17. Most Liquid Instruments Increasingly Favored Asset Mix Evolution AAA-Rated Offshore Funds Source: iMoneyNet

  18. No exposure to issuers rated below F1 (or equivalent) per Fitch’s rating criteria F1: Highest short-term credit quality Indicates the strongest intrinsic capacity for timely payment of financial commitments May have an added "+" to denote any exceptionally strong credit feature Average F1+/F1 mix moved from around 80/20 to about 60/40 in 2012 so far, following Fitch’s bank rating downgrades in Q411 AAAmmf Funds: Highest Credit Quality Issuers Trend in Average Rating Mix % of Portfolio Fitch-rated European MMFs Source: Fitch Ratings

  19. Country Allocation(AAAmmf European Funds) Average Country Allocation – As at end-March 2012 Source: Fitch Ratings

  20. Trends in Country Allocation(AAAmmf European Funds) Largest Changes in Country Mix Feb-11 to Feb-12; % of Portfolio Evolution 10 Largest Country Allocations Source: Fitch Ratings

  21. AAAmmf Funds: Short Average Maturities WAM – Sensitivity to Interest Rate Risk AAAmmf European Funds WAL– Sensitivity to Spread Risk AAAmmf European Funds Source: Fitch Ratings

  22. Natural Liquidity Maintained Structurally High • Investments maturing overnight maintained above 20% on average over the past 12 months • 50% to 60% of investments mature within one month • Well above Fitch’s baseline portfolio liquidity which also includes eligible liquid assets: • Daily liquidity: 10% • Weekly liquidity: 25% Average Maturity Profile AAAmmf European Funds Source: Fitch Ratings

  23. Top European CNAV MMFs PlayersAt end-March 2012 Source: iMoneyNet

  24. Agenda • Global Money Market Funds – Trends and Developments • Regulatory Reform and Future Initiatives • Transparency – Understanding the Key Risk Drivers

  25. U.S. MMF Regulation: Rule 2a-7 • SEC’s Rule 2a-7 substantially revised in May 2010 • Lower WAM (60 vs. 90 days) and new WAL (120 days) • Added overnight and one-week minimum liquidity • Tightened F2 credit exposures (amount and durations) • Reduced illiquid assets to 5% (from 10%) • Introduced stress testing and increased disclosure

  26. European MMF Regulation • IMMFA MMFs self-regulated to achieve AAAmmf ratings • Continental Europe operates under auspices of ESMA • Two ESMA definitions of MMFs – • a) Short-term MMFs, and • b) MMFs • Short-term MMFs similar in risk profile to U.S.-style MMFs • European ‘money market funds’ more akin to ‘cash plus’ or short-term bond funds

  27. Fitch MMF Rating Criteria and MMF Definitions * UCITS diversification rules apply: 10% max per issuer; 20% max in deposits with the same body; issuer’s exposures above 5% must not exceed 40% Source: Fitch Ratings, ESMA

  28. U.S. MMFs – New Reforms on the Horizon? • Range of proposals possible from SEC • Floating NAV, Liquidity back-up, and/or capital buffers • Regulators focused on systemic risk • MMF sponsors focused on economic costs and product viability • Strong Investor preference for status quo CNAV • Timing?

  29. European MMF Reform: On a Parallel Path? • Further reform proposals in latest IOSCO consultation paper (April 2012) • Money Market Fund Systemic Risk Analysis and Reform Options • A range of policy options put forth – • Variable NAV • NAV Capital Buffers • Private market insurance • Redemption/liquidity fees • Liquidity facilities • Seeking public comments by May 28, 2012

  30. Agenda • Global Money Market Funds – Trends and Developments • Regulatory Reform and Future Initiatives • Transparency – Understanding the Key Risk Drivers

  31. Key Portfolio Risk Factor in a MMF MMF Portfolio: Key Risk Parameters Interest Rate/ Credit Risk Liquidity Risk Market Risk Interest Rate Credit Quality Asset Liquidity Exposure Spread Risk Shareholders Diversification Exposure Redemptions

  32. MMFs Improve Transparency • Investors more attuned to risks post-crisis • Transparency has improved • U.S. MMFs must post portfolio holdings monthly • Monthly SEC filings – ‘shadow NAV’ made public with a 60-day lag • Fitch-rated MMFs provide weekly portfolio holdings and metrics

  33. Fund Surveillance – Rating Transparency and Surveillance

  34. 1/28/09 2/25/09 3/18/09 4/29/09 5/27/09 6/24/09 7/29/09 8/26/09 9/23/09 10/28/09 11/25/09 12/30/09 1/28/09 2/25/09 3/18/09 4/29/09 5/27/09 6/24/09 7/29/09 8/26/09 9/23/09 10/28/09 11/25/09 12/30/09 Fund Surveillance – Rating Transparency and Surveillance (cont’d) Fund Security Distribution Fund Asset Rating Distribution Fund Seven Day Yield Morgan Stanley Euro Liquidity Fund – 30 Dec 2009Security Distribution Morgan Stanley Euro Liquidity Fund – 30 Dec 2009Rating Distribution Morgan Stanley Euro Liquidity Fund 7 Day Net Yield* Corps 0% CD F1 10% 9% TD 15% 53% 22% 91% F1+ GovtB/N CP Data Source: Fund Sponsor/Fund Administrator/Fitch Data Source: Fund Sponsor/Fund Administrator/Fitch Fitch short-term ratings or equivalent * The annualized 7 day net yield for the institutional share class or the lowest fee share classData Source: Fund Sponsor/Fund Administrator/FitchAnnualized, net of expenses Fund Maturity Distribution Fund Total Assets Morgan Stanley Euro Liquidity Fund – 30 Dec 2009Maturity Distribution Morgan Stanley Euro Liquidity Fund Total Net Assets(Millions) 32% 26% 25% % of Portfolio 9% 8% 0% 0% Data Source: Fund Sponsor/Fund Administrator/Fitch Data Source: Fund Sponsor/Fund Administrator/Fitch

  35. MMF Snapshot – A Monthly Publication of Consistent Portfolio Analytics

  36. January December Monthly MMF Highlights – Over 1,500 Regular Readers

  37. U.S. Money Market Fund Quarterly European Money Market Fund Quarterly Special Series: MMFs’ European Exposures Assessing Chinese MMFs Repo Emerges from the Shadow U.S. MMF Shadow NAV Volatility Post-Crisis 2012 MMF Outlook U.S. MMFs: New Reforms on the Horizon MMFs: What a U.S. Default Would Mean Recent Fitch MMF Research – Promoting Transparency

  38. Fitch Expands Coverage of Money Market Funds Number of Fitch-Rated Prime MMFs Assets of Fitch-Rated Prime MMFs As a % of Total IMMFA Assets Source: iMoneyNet. IMMFA funds only. Number of U.S. rated money market funds up 30% since late 2009.

  39. Disclaimer • Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at thetime a rating was issued or affirmed. • The information in this presentation is provided “as is” without any representation or warranty.A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does notaddress the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. • Ratings may be changed or withdrawn at any time for any reason in the sole discretion ofFitch Ratings. The agency does not provide investment advice of any sort. Ratings are nota recommendation to buy, sell, or hold any security. • ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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