All money market funds are created equal, says Moody's

Flexibly priced money market funds are just as prone to runs in times of crisis as fixed price ones, analysis from Moody's suggests. This potentially undermines the rationale of a push by industry regulators to clamp down on fixed-price vehicles.

Regulators on both sides of the Atlantic fear the money market fund industry's preferred constant net asset value structure - whereby funds are priced at a flat $1 or €1 a share unless in extremis - creates a potential systemic risk as investors have an incentive to rush to sell during a crisis in order to be repaid at par.

The US has already decreed that much of its $2.6tn money market sector will have to switch to variable NAV status - where unit prices immediately move to reflect market prices - from 2016. The EU is working on similar proposals.

But analysis by Moody's, the rating agency, suggests this upheaval will achieve little.

"We believe that at times of crisis, redemptions will occur regardless of a fund's structure," said Vanessa Robert, a senior credit officer at Moody's.

Moody's found that when the subprime crisis erupted in 2007, French money market funds, which are all VNAV, suffered three months of outflows, averaging 4.8 per cent. There were no months in which CNAV US mutual funds experienced net redemptions, even though regulators view them as more prone to destabilising runs.

Moody's did concede that the US funds were less exposed to the structured assets that suffered liquidity and pricing issues during the 2007 crisis.

Moreover, US CNAV funds did suffer redemptions of 5.2 per cent in September 2008, following the collapse of Lehman Brothers. This was twice the level of outflows from their French counterparts.

But Moody's said there was evidence that many of the French funds were propped up by "sponsor support" from the companies managing them, which took some illiquid assets on to their own balance sheets. This support, which probably helped limit outflows, may be outlawed under forthcoming EU legislation, potentially increasing the likelihood of runs from these vehicles.

"The assumption that VNAV funds are less prone to run risk is somewhat contradicted by the experience of French money funds, which saw a considerable drop in assets in 2007 and 2008," said Ms Robert.

"It is really a confidence business. If investors lose confidence for whatever reason they will pull out their cash first and ask questions later, irrespective of whether a fund is CNAV or VNAV."

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