Stress Testing Money Market Fund Excel Model

Description
Aftermath of Financial meltdown saw a number of money market funds fail. As a result, SEC proposed Money Market Fund Reforms, an amendment to money fund regulations, or Rule 2a-7 of the Investment Company Act of 1940.

Amendments to rule 2a-7 require the board of directors of each money market fund to adopt procedures providing for periodic stress testing of the money market fund's portfolio. These include an increase in short-term interest rates, an increase in shareholder redemptions, a downgrade of or default on portfolio securities, and widening or narrowing of spreads between yields on an appropriate benchmark. Under the amended rule, a fund must adopt procedures that provide for the periodic testing of the fund's ability to maintain a stable net asset value per share based upon certain hypothetical events. Also because different tests may be appropriate for different market conditions and different money market funds, SEC mandated that the funds are better positioned to design and modify their stress testing systems.

Stress Testing Application uses a methodology that is robust in measuring fund value in terms of NAV at the overall fund level, Credit VAR at both fund level and at the individual security level, weighted average duration of the fund’s balance sheet and at the individual security level. It measures the metric for a shock in an isolated risk area, for example, interest rate risk scenario only or for a combination of shocks in different risk areas of credit, interest rate risk and others.

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