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July 14, 2017  

Fidelity Crafting Vehicle to Purchase ABCP

Fidelity Investments is planning a fund that would buy asset-backed commercial paper, a potential bright spot for a market that has been hurt by a recent exodus of money-market managers.

While the effort still is in the early stages, sources said Fidelity executives intend to launch a mutual fund that would buy securities issued by commercial-paper conduits, as well as the short-dated “A-1” classes of term securitizations. The initiative is aimed at offering institutional investors an alternative to prime money-market funds, which have reduced their exposures to asset-backed commercial paper in the wake of a regulatory overhaul.

The fund, expected to launch in the fourth quarter or early next year, would be marketed as a short-duration or enhanced-cash vehicle whose portfolio would encompass asset-backed securities with lives of two months to two years. J.P. Morgan and Charles Schwab are crafting similar vehicles.

The developments are generating a buzz among commercial-paper conduit professionals, who view the planned funds as a potential source of new demand for a market that has shrunk dramatically since the 2007-2008 financial crisis.

“I think it’s a good idea because corporate cash managers can’t get that exposure and it’s a nice diversification tool,” one source said. “The size of the fund can be small and they don’t need a lot of scale to get it going.”

Money-market managers including Fidelity, BlackRock, BNY Mellon, Northern Trust and State Street pulled back from the asset-backed commercial paper market after the SEC implemented new rules last October requiring prime funds to maintain floating net asset values. That, in turn, requires fund managers to mark their assets to market on a daily basis — a task that’s more difficult for asset-backed securities than for Treasurys and other government issues.

Fidelity’s institutional prime money-market fund, the $1.3 billion Fidelity Investments Money Market Prime Reserves Portfolio, currently maintains less than 6% exposure to asset-backed commercial paper. As Fidelity and other money-market managers have retreated from the sector, the portfolios of prime funds have become increasingly similar. “It’s like selling vanilla ice cream,” one conduit executive said.

The pain also has been felt by issuers of term asset-backed securities — particularly in the auto-loan and equipment-receivables sectors, where deals usually included ultra-short-dated classes designed specifically for money-market funds. Many issuers have stopped selling A-1 tranches altogether, while others have been forced to offer higher yields to attract investors. Take a $1.3 billion auto-loan securitization Ford issued on June 20. The deal’s $293.4 million A-1 class priced to yield 1.30%, compared to 0.84% for similar paper Ford sold in January.