The outlook also reflects the status quo with respect to MMF regulations globally, as Fitch believes that any regulatory reform will take time to implement. Regulations proposed for MMFs, if enacted, would have far-reaching implications, affecting funds' terms and investment strategies, both in the US and Europe. Most managers have been proactively reviewing their offerings and exploring alternative liquidity products, as the appetite for convenient and diversified investment solutions will persist. Nevertheless, regulatory changes could pressure certain funds in terms of unexpected redemption activity.
Regulatory and political changes are also causing the supply of eligible investments for MMFs to decrease. For example, evolving assumptions on sovereign support for banks may further reduce the number of Tier 1 rated banks. In response, managers are venturing into newer markets and approving new issuers. Managers are also increasingly investing in innovative money market products, such as callable commercial paper (CP), collateralised CP and repo backed by non-government collateral.
The low interest rate environment is expected to persist in 2014, and will continue to present MMF managers with operational and profitability challenges. Given the importance of scale in this market, we expect additional industry consolidation, particularly in Europe.
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