Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013 - (Page 27)
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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
Couverture
EDITORIAL
SOMMAIRE
FINANCIAL HIGHLIGHTS
INTERVIEW - Patrick Siméon and Ibra Wane, Amundi
FOCUS
FORUM OF ADVERTISERS
CORPORATE FINANCE
15 MINUTES WITH - Jörg Wiemer -Treasury Intelligence Solutions - TIS
NEWS
The Financial Risk Observatory
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