The Use of Money Market Funds as Collateral

Topics: Financial markets, Credit risk, Derivatives market Pages: 76 (21513 words) Published: April 30, 2013
Table of Contents

List of Figuresiii

List of Tablesiv

List of Abbreviationv



2The Money Market3

2.1General Description of the Money Market and its Instruments3

2.2Participants and their Main Activities4

2.3Trading, Clearing and Settlement6

2.4Risks and Risk Mitigation7

3Collateral Management9

3.1General Description of the Collateral Management Function9

3.2Quality and Risks of Collateral10

3.3Transaction, Execution and Legal Issues11

3.4Valuation of Collateral13

3.5Users and Trends14

4The Role of Collateral in OTC Derivative Transactions16

4.1General Description of OTC Derivatives16

4.1.1Structure and Participants17

4.2Market Overview18

4.3Risks and Risk Management21

4.3.1Problems with Cash Reinvestment22

4.4Legal Foundation and Regulation23

5Money Market Funds as Financial Collateral25

5.1General Description of Money Market Funds25



5.2Market Overview30

5.3Share Valuation and Risks32

5.4Regulatory Framework34

5.5MMF Characteristics34

6Criteria to use MMFs as Collateral37

6.1Regulatory Requirements for Collateral Receiver37

6.1.1Impact of Future Regulation42

6.2Operational Requirements44

6.3Preliminary Findings45

7Practical Example47

7.1Operating Model47

7.2Performance, Liquidation and Risks50





List of Figures

Figure 1: European Benchmark Rates (Percent per Annum)5
Figure 2: The Function of Collateral Management for Market Participants10 Figure 3: Overview Bilateral, Tri-party, and CCP Execution12 Figure 4: Collateral Put Forward in the Eurosystem Credit Operations versus Outstanding Credit in Monetary Policy Operations14 Figure 5: Global OTC Derivative Market18

Figure 6: Growth of Value of Collateral vs. Gross Credit Exposure in Billions of Dollars (estimated)19 Figure 7: Collateral Analysis in OTC Derivative Transactions20 Figure 8: Collateral Levels by Counterparty Type21

Figure 9: Breakdown of UCITS Assets by Category Q1 201125
Figure 10: Worldwide Money Market Funds Net Assets27
Figure 11: Euro Area Investors in MMFs28
Figure 12: Average IMMFA Fund Investment by Client Type29
Figure 13: UCITS Fund Assets Compared to IMMFA Funds in Billion Euros30 Figure 14: Portfolio Composition IMMFA Funds June 201031
Figure 15: Tri-Party Collateral Management without CCP Clearing48 Figure 16: Tri-Party Collateral Management including CCP-Clearing49 Figure 17: European Prime Money Market Funds versus LIBID51

List of Tables

Table 1: Standard Money Market Securities3
Table 2: General Product Types in the OTC Derivative Market16 Table 3: Worldwide Money Market Fund Rankings32
Table 4: Overview of applicable regulatory framework37
Table 5: Overview General Collateral Requirements Required by Regulation42 Table 6: Eligibility Results by Collateral Receiver and Regulatory Framework45

List of Abbreviation

ABCPAsset-backed commercial paper

AMAsset manager

AuMAssets under Management

BABankers' Acceptance

BISBank for International Settlements

CCPCentral Counterparty

CDCertificates of deposits

CDSCredit default swap

CESRCommittee of European Securities Regulators

CGCollateral giver

CPCommercial paper

CRCollateral receiver

CSDCentral Security Depository


DVPDelivery versus Payment

ECBEuropean Central Bank

EFAMAEuropean Fund and Asset Management Association

EMIREuropean Market Infrastructure Regulation

EODEnd of Day

EONIAEuro Overnight Index Average

ESCBEuropean System of Central Banks

EUEuropean Union

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