OREANDA-NEWS. Fitch Ratings says sterling-denominated money funds are preparing for market volatility and potential pronounced investor flows ahead of the Brexit referendum. Likely liquidity support from the UK Debt Management Office (DMO) will provide a safety net for fund managers.

Minimising reinvestment risk at dates around the referendum has been a key focus for most sterling money fund managers. This is to avoid holding securities or counterparty exposures that would mature around those dates, when market volatility may be particularly high and most issuers inactive, with the exception of the UK DMO. This will add to the quarter-end effect, which typically sees tightened market supply, while investors' seasonal cash needs create flow volatility.

Fund managers expect the UK DMO's activity will mitigate this risk and support the market with liquidity through T-bill issuance around the referendum date, as it regularly does at quarter-end and now even month-end. This will help sterling money fund managers swiftly meet reinvestment needs and act as a source of liquidity in the event that funds need to sell such securities to meet redemption requests. Market volatility contagion risk to sterling MMFs should therefore be contained allowing funds to remain in line with their investment guidelines and Fitch's rating criteria.

Sterling money fund managers could face potentially large and rapid flow volatility as investors either seek "safe haven" cash holdings, using money funds as a cash holding vehicle or move out of sterling-denominated assets altogether, including sterling money funds. Money fund managers are well prepared to withstand such flows, in Fitch's view, given high levels of overnight and one-week portfolio liquidity (27% and 39% of portfolio assets, respectively, at end-May 2016).

Fitch is not recommending any particular position, vote or outcome regarding the referendum vote on 23 June 2016.