OREANDA-NEWS. Fitch Ratings has downgraded and simultaneously withdrawn the rating of a Swiss-franc-denominated (CHF) money market fund managed by Lombard Odier Investment Managers (Lombard Odier IM), and affirmed two others as follows:

LO Funds (CH) - Money Market (CHF) (LOIMCHF) downgraded to 'AAmmf' from 'AAAmmf'; rating withdrawn
LO Funds (CH) - Money Market (USD) (LOIMUSD) affirmed at 'AAAmmf'
LO Funds (CH) - Money Market (EUR) (LOIMEUR) affirmed at 'AAAmmf'

The downgrade of the Swiss franc fund, LOIMCHF reflects the fund's increased counterparty exposure to its custodian bank, Banque Lombard Odier & Cie SA (AA-/Stable/F1+) in excess of Fitch's criteria. Fitch is withdrawing the rating of LOIMCHF as Lombard Odier IM has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the rating. Accordingly, Fitch will no longer provide ratings (or analytical coverage) on LOIMCHF, but will continue to maintain ratings on LOIMEUR and LOIMUSD.

The main drivers for the affirmations of LOIMEUR and LOIMUSD are:
-- The portfolios' overall credit quality and diversification and maturity profile
-- Low exposure to interest rate and spread risks
-- Lombard Odier IM's adequate capabilities and resources as investment manager

KEY RATING DRIVERS

Credit Quality/Diversification
Consistent with Fitch's money market fund rating criteria, all three funds seek to maintain a high credit quality. In line with Fitch's criteria, LOIMEUR and LOIMUSD invest exclusively in short-term securities rated at least 'F1' by Fitch or of a comparable credit quality by other global rating agencies, and limit their exposures to individual issuers and counterparties.

Following successive interest rate cuts by the Swiss National Bank (SNB) and the Swiss franc unpegging from the euro in January 2015, the supply of CHF assets has largely dried up. As a result, LOIMCHF has had difficulties finding suitable investments, even at strongly negative rates. This is forcing the fund to hold increased non-invested cash balances at its custodian bank, Banque Lombard Odier & Cie SA, with most of this cash subsequently left with the Swiss National Bank (SNB).

The issue of excess exposures to custodian banks is an emerging issue in markets struggling with negative rates. A key consideration for Fitch is the legal/regulatory framework of the custodian bank's country of domicile and whether the assets are 'ring-fenced' and operationally accessible. While most of LOIMCHF's cash is subsequently moved to the SNB, the Swiss legal/regulatory framework does not provide clear ring-fencing of custodian cash, creating a level of counterparty concentration risk inconsistent with Fitch's criteria. This level of concentration risk to an 'AA-' counterparty is likely to persist under current market conditions and, in Fitch's view, is consistent with a 'AAmmf' fund rating.

Maturity Profile
The funds seek to limit interest rate and spread risk consistent with Fitch's rating criteria. Each fund limits its weighted average maturity (WAM) and life (WAL) to 60 days and 120 days, respectively. It also limits the maturity date of any single investment to 397 days or less (730 days for highly-rated government FRNs).

Liquidity Profile
The funds seek to manage investor redemption risk through investment restrictions with the aim of maintaining sufficient daily and weekly liquidity. In line with Fitch's rating criteria, the funds seek to maintain at least 10% of their assets in securities maturing overnight or other qualifying liquid assets such as government securities and at least 25% in securities maturing within seven days or other qualified liquid assets. LOIMEUR has had less than 25% in seven-day liquid assets in several instances. This appears to have been temporary and, in our opinion, is mitigated by the fund's stable investor base mainly consisting of clients of Lombard Odier's private banking activities.

Group Exposure
The funds may be exposed to Banque Lombard Odier & Cie SA (AA-/Stable/F1+), a sister company, typically through overnight cash positions deposited at the bank.

Investment Advisor
Lombard Odier IM, the funds' investment advisor, is the asset management business of the Lombard Odier Group. At end-December 2014, Lombard Odier IM had EUR35.4bn of assets under management, of which about 11% were in money market funds. Fitch views Banque Lombard Odier & Cie SA and Lombard Odier IM's investment advisory capabilities, financial and resource commitments, operational controls, corporate governance, and compliance procedures as consistent with the respective funds' 'AAAmmf' and 'AAmmf' ratings. Net asset value calculation and controls on valuation (ie comparison between amortisation cost and marked-to market) are fully compliant with Swiss regulation and aligned with best-market practices.

At end-March 2015, the rated money market funds had CHF769m, USD1,359m and EUR521m of total assets, respectively.

RATING SENSITIVITIES AND SURVEILLANCE

The ratings may be sensitive to material changes in the credit quality, market risk and/or liquidity profiles of the funds. For additional information about Fitch's money market fund ratings, see the criteria referenced below.

To maintain the Money Market Fund ratings, Fitch seeks weekly fund and portfolio holdings information from the funds' administrator - UBS Fund Management (Switzerland) AG - and conducts surveillance checks against its rating criteria.