US money market funds (MMFs) reduced their exposure to European financial institutions by 18% in December, while Euro and Sterling MMFs reduced their exposures by 8% and 6% respectively, according to Moody's Investors Service.

Due to year-end redemptions, European funds' combined AuM dropped by 6.5% over Q4 and their maturity profiles shortened significantly, by seven days on average.

Despite the prolonged period of low interest rates and continuing uncertainty around regulation, US domiciled prime MMFs' AuM increased 2.9% to $677bn at the end of December, from $658bn at the end of September. In European and offshore US-Dollar funds, combined AuM declined 4.6% to $219bn.

In US domiciled funds, aggregate exposure to European financial institutions stood at approximately 25% of total investments or $168bn at the end of December, down from 30% of total assets or $205bn at the end of November.

Funds also reduced their maturity profiles and increased their liquidity levels in anticipation of year-end redemptions. Furthermore, the credit profiles of US prime MMFs improved in Q4 with investments rated Aa3 and higher increasing by 2.8%. Funds' resilience to market risk improved in Q4.

Euro MMFs experienced a sharp decrease in AuM (-6.5% or -€4.3bn) to reach their lowest level in 12 months, mostly due to year-end redemptions. In anticipation of such redemptions, funds' maturity profiles shortened significantly and overnight liquidity levels increased to nearly 32% of AuM.

Funds' aggregate exposure to European financial institutions fell by €4.1bn to €23.5bn (38% of AuM) during Q4, due to lack of suitably rated counterparties and banks' reluctance to borrow at year-end due to balance sheet considerations.

Credit profiles of prime Euro MMFs stabilised in Q4, with the bulk of the investments (46%) made in Aa-rated securities, followed by exposure to A-rated instruments (41%). Investments in Aaa-rated securities accounted for 13% of AuM.

Sterling MMFs continued to experience a decrease in AuMs in Q4, with funds loosing £2.8bn to reach their lowest level in 2013 (£97.1bn). Aggregate exposure to European financial institutions decreased by £5.4bn to £42.3bn to hit the lowest level of the year. Credit profiles of funds slightly improved, as investments in Aaa and Aa-rated securities increased to 62% of AuM from 60.4%.

Overnight liquidity slightly deteriorated, due to the scarcity of repurchase agreements at year-end. Time deposit counterparties either reduced down capacity significantly or refused to take any cash at year-end.