Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013 - (Page 27)

FORUM FORUM ONLIN E www VERSION When Stress is a Good Thing: Stress Testing and the Money Market Funds Industry Why is Stress Testing Important for Money Market Funds? One of the defining features of money market funds adhering to the IMMFA Code of Practice in Europe is their stable or constant net asset value (NAV) per share. This feature allows investors, whether corporations, governments, financial institutions or individuals, to receive the benefits To maintain their constant NAV , money market funds value portfolio securities at their acquisition cost adjusted for amortization of premium or accretion of discount. This is known as amortized cost accounting. Money market funds are permitted to use this valuation method due to the short-dated, diversified, high quality and liquid nature of their underlying investments. In addition, money market funds that use the amortized cost method are generally required to calculate a separate NAV—often called the “mark-to-market” (MTM) or “shadow” NAV—which is based on available market quotations for the funds’ portfolio securities plus undistributed realized gains and losses. There are typically very small daily market price movements experienced by the securities in a money market fund’s portfolio. How Testing Mitigates Key Risks Testing helps to monitor both the overall portfolio impact from changes at the macro or economy-wide level and the impact of specific market conditions or events on individual portfolio securities. It is typically conducted on a regular basis and modified as underlying market conditions change. The stress tests applied to money market funds typically monitor several key risks: — APR / MAY / JUNE N°81 At a broad level, mark-to-market NAV movements for money market funds are typically caused by changes in certain factors, including levels and direction of interest rates, prevailing economic conditions, credit conditions affecting individual issuers and investor purchase and redemption activity within the money market fund. Stress testing is critical for money market funds in that it models a fund’s ability to maintain a stable net asset value per share when faced with hypothetical changes in one or more of these factors. — that money market funds can provide (e.g., principal stability, liquidity, underlying security diversification, exposure to asset management expertise and resources and accounting simplicity) while investing in a vehicle which has a primary goal of NAV stability. LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE While stress testing has proved important and topical for the global banking industry, it has also increased in visibility and importance for the global money market funds industry. However, for many of the world’s leading asset managers stress testing is not a new concept and has been an established practice within the risk management framework supporting their money market funds for some time. In this article we discuss the importance of stress testing to the money market funds industry, highlight a number of the key risks that stress testing helps to mitigate and briefly describe a number of the reports and practices implemented by the BlackRock Cash Management business. 2013 Today, stress testing has become an integral component of globalbanking regulators’ assessment of the strength of the broad financial services industry. Interest rate risk: the risk to a money market fund’s NAV from interest l 27

Table des matières de la publication Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013

INTERVIEW - Patrick Siméon and Ibra Wane, Amundi
15 MINUTES WITH - Jörg Wiemer -Treasury Intelligence Solutions - TIS
The Financial Risk Observatory

Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013