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Fitch: New York Fed Reverse Repos Offset Declines in U.S. Money Fund Exposure to European Banks

February 15, 2014

U.S. prime money market funds reduced their exposure to European banks in December 2013, with the declines mainly offset by repo exposure to the Federal Reserve Bank of New York, according to Fitch Ratings.

The FRBNY has been periodically conducting overnight reverse repurchase agreement exercises with market participants, including MMFs, to test how these operations might function as a policy tool for managing short-term interest rates. This test accounted for 3.7 percent of all MMF assets within Fitch's sample at end-December. By comparison, the MMF's allocation to European banks declined by 3.9 percent (i.e. expressed as a percentage of MMF assets) during December.

Fitch notes that it is unclear whether the FRBNY exercise might have crowded out some of the MMF allocations to European banks or whether the European reduction reflects a new equilibrium taking hold. Primarily as a result of the RRP exercise, MMF allocations to U.S. Treasurys and agencies, including both security holdings and through repos backed by government securities, increased to 27.1 percent of MMF assets from 22.9 percent of assets.

Eurozone allocations accounted for 16.8 percent of MMF assets as of end-December, a decline from 19.1 percent of assets at end- November, 2013.

For further analysis and the full MMF allocations, the report 'U.S. Money Fund Exposure and European Banks: Decline as Fed Tests Reverse Repo,' is available at 'fitchratings.com.'

Additional information is available at 'fitchratings.com'.

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