OREANDA-NEWS. Changes in the U.S. regulatory environment will reduce the ability of money market funds (MMFs) to provide funding to banks, according to Fitch Ratings. However, we believe this should have minimal impact on U.S. banks that have been relying less on this form of funding due in large part to regulatory pressures of their own.

MMF regulatory reforms adopted by the Security and Exchange Commission (SEC) including the introduction of floating net asset valuation (NAV) for institutional prime MMFs and fees and gates for retail and institutional prime funds are likely to weaken the attractiveness of money funds as a cash management tool and result in asset shifts away from prime money funds. Floating NAV introduces potential fluctuations in the value of investors' cash as well as administrative, accounting, and tax issues while fees and gates may also raise investor concerns about access to liquidity.

Estimates of the scale of anticipated outflows range from 10% to 60% of the approximately \$1 trillion of institutional prime money fund assets over the course of the two-year implementation period that ends October 2016.

In response to the SEC rule changes, a number of fund complexes, including Fidelity, Federated, and BlackRock have made changes to their money market fund lineups. Changes impact both institutional and retail accounts and include converting prime funds to government funds and revising the investment strategy of certain prime funds to limit portfolio maturities in an effort to reduce fund volatility. Money fund managers are also developing alternative liquidity products such as private money funds, short-term bond funds, and separately managed accounts.

Outflows and fund conversions limit the ability of money funds to act as a source of wholesale funding to banks; however, regulatory changes in the banking sector should serve to lessen any impact on bank funding. Regulators have pressured banks to reduce their reliance on wholesale funding, deeming it inherently unstable in times of crisis. In 2007 and 2008, investors exited the wholesale funding market, in some cases causing borrowers to cover loans by selling assets at impaired prices. Fitch research based on FDIC data indicates that total wholesale funding has dropped from 26% of bank liabilities in 2007 to 18% of bank liabilities as of June 30, 2014.