Money market funds (MMFs) are adequately positioned to face challenging market conditions and ongoing regulatory uncertainty in 2013, Fitch Ratings has predicted, as it expects MMFs to manage their portfolios conservatively with respect to credit, interest rate and liquidity risks.

According to Fitch Ratings, the MMF sector should benefit from the US and Japanese fiscal cliff deadlines as such resolution would lead to credit market stabilisation in the financial sector.

It also expects the trend for asset-backed commercial paper to continue in 2013, along with MMFs adding investments in repo-backed commercial paper.

However, the continued limited supply of high-quality short-term assets is one of the major challenges Fitch Ratings expects for the MMF sector in 2013, especially for those portfolios denominated in euro and sterling. This has led MMFs to seek diversification from banking sectors within their traditional, core markets to other geographies, in particular Asia and Latin America.

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