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Fitch: Chinese MMF Regulations Target Concentration Risks
September 18, 2017 / 11:03 AM / 3 months ago

Fitch: Chinese MMF Regulations Target Concentration Risks

(The following statement was released by the rating agency) BEIJING/LONDON/HONG KONG, September 18 (Fitch) China's latest round of money-market fund (MMF) regulations represent a significant tightening of regulatory risk limits and are likely to improve liquidity among unrated funds, while slowing the rate of expansion and reducing returns for investors, Fitch Ratings says. The regulatory approach differs from that of the US and EU, reflecting the particular risks Chinese MMFs face due to investor concentration and high exposures to individual commercial banks. We expect the impact of the new regulations on Fitch-rated money funds to be limited. Consistent with Fitch's MMF rating criteria in China, 'AAAmmf(chn)'-rated funds already operate with significantly higher credit quality, more liquidity and lower maturities than most unrated funds. The rules come into effect from October with a six-month delay for some provisions. Like US and EU regulations, they are intended to make the sector more resilient and reduce the risk of a run on MMFs. While the US and European rules restrict a fund's investment options based on whether it adopts a constant or variable net asset value model, the latest Chinese liquidity restrictions are closely linked to the concentration of its investor base. This reflects the rapid growth of institutional money funds over the past couple of years, including the emergence of tailored funds, managed largely for the benefit of a single investor. The rules require any new MMF where a single investor accounts for more than half of the fund to either apply a mark-to-market valuation model, or hold at least 80% of assets in instruments maturing within five days. The growth of institutional MMFs means it is also not uncommon for the top 10 investors in more broadly distributed Chinese MMFs to hold more than half of the fund and, therefore, the changes are likely to contribute to stronger liquidity across the sector. If the 10 largest investors hold more than half of the fund it will have to comply with lower limits on the weighted average maturity and weighted average life, and maintain a higher proportion of assets maturing within a week (see table). Chinese authorities said additional requirements may be placed on MMFs deemed systemically important. While no further details on this designation were announced, it is likely to include Yu'e Bao. The RMB1.4 trillion (USD214 billion) MMF is the world's largest and manages money held in the online payment accounts of customers of e-commerce giant Alibaba. <iframe src="https://e.infogram.com/cfdc422a-54ae-4afa-9e4b-f727b9c2b1e8?src=embed " title="Chinese MMF Rules" width="550" height="393" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> A further restriction that does not have an analogous requirement in the US or EU is a limit on the size of all funds using amortised cost accounting run by a single manager of 200 times the manager's risk provision. These requirements are likely to slow the rate of fund launches and limit the growth rate of funds, especially those run by smaller managers. A new 10% limit on the proportion of the fund that can be invested in illiquid assets is a material change from the current 30% limit and is broadly in line with Fitch's 'AAAmmf(chn)' rating criteria after reconciling differences in the definitions of illiquid assets. A final key requirement of the new rules is that an MMF's exposure to a single bank cannot exceed 10% of the bank's net assets. This should reduce the potential for a bank to fund excessively from a single MMF, as the bank would need to seek extra funding from other MMFs or through other wholesale channels. In addition, rules restricting banks with weaker credit profiles from being eligible to receive funding from MMFs will also affect MMF yields, as only higher-rated banks will be allowed to rely on MMFs for funding. Contact: Li Huang Associate Director Fund and Asset Managers +86 21 5097 3018 Fitch Ratings (Beijing) Limited 3401, 34/F, Shanghai Tower No.479, Lujiazuihuan Road 200120 Shanghai China Alastair Sewell Senior Director Fund and Asset Managers +44 20 3530 1147 Jack Yuan Associate Director Banks +86 21 5097 3038 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research China Banks: Funding and Liquidity here China MMFs' Asset Concentration Raises Liquidity Risk here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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