Standard & Poor's Ratings Services late last week issued a brief "Clarifications For Rated Money-Market Funds Involving Uninvested Cash And Weighted Average Maturity," which addressed several issues which have come up in the unprecedented near-zero yield environment. These include: "Uninvested Cash Held In Noninterest-Bearing Transaction Accounts," "Treatment Of Uninvested Cash In A Fund's Weighted Average Maturity (WAM) Calculation," and "Criteria Concerning WAM Limits For Principal Stability Funds".
Under "Uninvested Cash Held In Noninterest-Bearing Transaction Accounts", S&P says, "Rated funds are permitted to hold more than 5% of total fund assets in uninvested cash with its custodian if the following provision is met: The fund and custodial bank represent to Standard & Poor's that uninvested cash is being held in a non-interest-bearing transaction account with a custodial bank that has elected to participate in the FDIC Temporary Liquidity Guarantee Program (FDIC TLGP) and that those monies are covered without limit under the FDIC TLGP. If the above representation were not satisfied, highly rated funds can hold up to 5% of their assets in a highly rated custodial bank as per our issuer diversification guidelines and minimum credit quality criteria."
Regarding "Treatment Of Uninvested Cash In A Fund's Weighted Average Maturity (WAM) Calculation," the NRSRO says, "We understand general industry accounting practice excludes uninvested cash from a fund's weighted average maturity calculation. For example, if a fund is invested 50% in a 90-day T-bill and the other 50% is uninvested, the SEC-calculated WAM would be 90 days. For Standard & Poor's principal stability fund rating purposes, uninvested cash deposited with its custodial bank should be treated as an overnight investment for WAM calculation purposes. Therefore, in the example described above, the fund would have a WAM of 45.5 days."
Finally, S&P is not sympathetic to triple-A rated Treasury and Government funds wanting to extend WAMs to boost yields. Its "Criteria Concerning WAM Limits For Principal Stability Funds" section states, "Standard & Poor's is aware of the challenging environment facing managers because of various factors, including the limited supply in the short-term Treasury market, the continued easing of the Federal Funds Rate, and the general flight to quality. Despite these pressures, given potential risks from changing interest rates and heightened dilution concerns, we feel that any extension of our WAM criteria for 'AAAm' rated funds (a WAM limit of 60 days or less) would be inconsistent with a fund's 'AAAm' principal stability rating."
S&P adds, "A 'AAAm' fund is defined as having extremely strong capacity to maintain principal stability and limit exposure to principal losses because of credit, market, or liquidity risks. Although 'AAAm' criteria limit the WAM of a fund to 60 days or less, criteria for funds rated 'AAm' or 'Am' allow a maximum weighted average maturity beyond this 60-day limit. 'AAm' rated funds have a maximum allowable weighted average maturity of 75 days or less, while 'Am' funds have a maximum allowable weighted average maturity of 90 days." In other S&P news, see "Two Wisconsin Investment Series Cooperative Funds Rated 'AAAm'."
