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Benefits and Pensions Monitor

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Money Markets No Safe Haven? What's Going On?

Accessing Their Funds

Investors who hold commercial paper that has not been rolled over have experienced difficulty in accessing their funds. It is important to clarify that the failure of ABCP issuers to roll over their paper has been limited to third-party issuers. In August, the leaders of Canada’s large banks released a joint statement re-affirming their commitment to their own ABCP programs. An important distinction should be made here, the banks are the liquidity providers for their own ABCP programs. Third-party ABCP issuers generally rely on other institutions to be liquidity providers, typically large European banks. The Canadian banks’ ability to provide liquidity for their ABCP programs removes a source of uncertainty versus third-party providers. Most market participants believe that bank-issued ABCP is less risky than third-party paper.

Various affected parties have taken action. A consortium led by a large public pension plan in Quebec proposed a plan to convert illiquid paper to term debt in line with the underlying assets. The parent organizations of some money market funds have purchased thirdparty ABCP from their funds at full value plus accrued interest in order to provide support and liquidity.

Investment Manager Exposure

In light of recent developments in the ABCP market, Aon conducted a survey of 28 large firms that manage assets for Canadian institutional clients to determine their level of exposure to ABCP and, particularly, what portion was third-party sponsored. The survey found that:

• All but four of the respondents reported having no exposure to third-party ABCP. Many claimed to have internal rules prohibiting third-party paper, or that it had not passed their credit research reviews. Two of the four respondents reported greater than 10 per cent exposure in their money market funds.
• Eleven respondents reported holding bank-sponsored ABCP within their money market funds (the largest exposure reported was 43 per cent and most were quite lower).
• A small subset of respondents voluntarily disclosed limited exposure to Canadian sub-prime mortgages through mortgage backed securities (MBS). It is generally accepted that the problems being experienced in the U.S. sub-prime mortgage market are not as severe in Canada.

As a result of these findings, we have taken comfort regarding the liquidity of institutional managers’ cash investments as they relate to current news in the Canadian ABCP market. Almost all managers report only holding Canadian-bank sponsored ABCP and the Canadian banks have publicly committed to supporting the liquidity of their ABCP programs.

Brian White is vice-president and regional co-head and Tony Corona is a senior analyst with Aon’s investment consulting practice.

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