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Transparency and Risk in Money Market Funds

by Mark Stockley, Managing Director and Head of International Cash Sales, BlackRock

The themes of transparency and risk have evolved in the US and international money market funds (MMF) industries over recent years as key stakeholders in the industry have sought to create new and improved standards for disclosure. In the aftermath of the financial crisis of 2006-2009 there is now an intensified environment for MMF reporting and analytics enabling investors to easily understand, manage and act on risks within their MMF portfolio holdings. We believe that this new landscape helps to contribute to a greater level of stability for the MMF industry and acts as a foundation for a deeper ongoing partnership and dialogue between investors and fund sponsors.

It’s hip to be clear – how we got here

Transparency has become a key theme in today’s financial markets. Regulators have taken steps to mandate increased disclosure to investors and customers across almost all sectors of the financial markets including the banking, insurance and asset management industries. A major theme of the financial crisis in 2006-2009 was a lack of transparency and consequently inadequate appreciation of the risks inherent in many financial instruments and the associated funding structures of leading issuers and participants in the capital markets.

As the crisis intensified over time contagion brought on by the sub-prime mortgage crisis rapidly moved from one leading financial institution to another with historic results. In the US, Bear Stearns was acquired by J.P. Morgan Chase, Lehman Brothers went into bankruptcy, AIG was bailed out by the US taxpayer and in the MMF industry, the Reserve Primary Fund ‘broke the buck’. In Europe, major banks were also affected by the collapse of the mortgage market as institutions such as the Royal Bank of Scotland and Dexia required state intervention to prevent their failure.

The overall effect for the MMF industry was to create a new paradigm: investors became highly curious and sensitised to the different approaches taken by fund sponsors. Today, the themes of transparency and risk are common for stakeholders within the MMF industry. Regulators, investors, fund sponsors and technology platform providers have all taken steps to build rules, processes and tools to enhance disclosure, analysis and calibration of risks.