OREANDA-NEWS. Fitch Ratings says that volatile fund flows were seen in US-dollar denominated European money market funds (MMFs), but not sterling-denominated MMFs, following the UK's vote to leave the EU. In its latest quarterly report on European MMFs, Fitch also highlights that MMFs are cautiously positioned since mid-June with portfolio liquidity at 12-months high and shortened portfolio maturities ahead of potential material outflows and market volatility.

Flows in sterling-denominated funds were muted in the week running up to the vote. We have not detected any unusual outflows since; the largest weekly fund outflow was 11% over that period, well below historical highs. On the contrary we have seen more inflows and we expect this to continue in the near-term as uncertainties remain. In contrast, US-dollar denominated experienced more asset flow volatility during the weeks around the UK referendum, mostly driven by asset allocators seizing attractive investment entry points in high-risk assets as they move out of cash.

Overall, European MMFs have benefited from sustained demand. European constant net asset value (CNAV) assets in euro, US dollar and even sterling, increased in 2Q16 as investors sought safe havens around the date of the UK's vote to leave the EU. Total assets reached EUR562bn at end-June, close to their end-2015 highs.

MMFs in the three main currencies were cautiously positioned ahead of the referendum, in preparation for potentially large, sudden, outflows and to contain the impact of market volatility. MMFs had overnight and one-week liquidity of respectively 31% and 42% on average at end-June. These levels were also the highest over the past 12 months and large relative to our 'AAAmmf' criteria. Average portfolio maturities have been shortened across all three currencies and fund managers reviewed both their investments in and limits on those issuers most sensitive to a UK-leave vote.

The supply of high-quality short-term sterling debt could significantly be affected by adverse funding conditions for non-UK issuers (85% of sterling MMFs at end-June) in the medium term. We believe that UK government supply will continue to be an important factor in mitigating any supply constraints.

The UK's vote to leave the EU poses considerable uncertainty for the presence of offshore UCITS in the UK, while the vast majority of MMFs used by UK investors are domiciled in Ireland and Luxembourg. In addition, it remains to be seen how it will affect the European MMF regulatory debate, which recently entered its final stage. A significant step towards European MMF regulation has been achieved with the Council of the European Union's agreement on a revised proposed MMF framework, almost three years after the European Commission's initial proposed text. We believe that the Council's proposed rules would make MMFs safer, through portfolio diversification and liquidity rules. As proposed, low volatility NAV (LVNAV) MMFs would be a viable alternative to existing CNAV funds, although liquidity requirements could be an obstacle.