New York, October 11, 2016 — The sharp decline in repo supply from primary broker dealer counterparties will likely have only a minimal credit impact on money market funds, Moody’s Investors Service says in a new report. The rating agency’s analysis shows that counterparties or their parent entities still for the most part have high investment grade ratings, and therefore present limited counterparty risk.
Among Moody’s-rated money market funds, 49% used a primary broker-dealer as a counterparty as of June 2016, down from 87% in January 2011.
“Since the financial crisis, many primary dealers have reigned in their repo business due to increased regulation and their own higher risk aversion,” says Moody’s analyst, David Wang. “But 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.”
Primary broker dealer counterparties’ pull back from the repo market has opened the door for less traditional counterparties, with non-bank financial institutions including insurers, endowments and REITs increasingly entering the space, Wang says in “Wider Pool of Repo Counterparties Won’t Affect Credit Strength.” As of June 2016, among Moody’s-rated funds, life insurer Prudential Financial Inc. (Baa1, stable) comprised almost $4 billion, or 1%, of the total US repo security market.
“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,” Wang notes. “Thus far, we have not observed a stark difference in the credit quality of the counterparties, with our analysis revealing that in both January 2011 and July 2016, the average credit input for repurchase agreements in Moody’s money market fund credit matrix was Aa1.”
Moody’s research subscribers can access this report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1043223