Fitch Ratings said in a press release issued Tuesday, "Proposals announced last week by the Department of the Treasury regarding money market fund credit and liquidity risk are consistent with risks highlighted by Fitch Ratings in its January exposure draft on money market fund criteria. Fitch is considering whether 'AAA/V1+' ratings for 'prime' money market funds will be achievable over the longer-term, absent fundamental changes. Importantly, money market funds currently benefit from various forms of governmental intervention that have cushioned the impact of the current financial crisis. Removal of this support could negatively impact ratings if the credit and liquidity issues are not addressed at the same time."
The release continues, "The money market fund industry and its various regulators are considering changes to address credit and liquidity risk in 'prime' money market funds to improve their safety and soundness, while lowering their potential systemic risk. The timing and magnitude of these changes will determine whether ratings will be maintained at their current levels or if negative ratings actions will be necessary. Fitch will be monitoring the discussions between the SEC, the President's Working Group on Financial Markets and other industry-led groups that could result in fundamental changes that provide for greater protections against and credit liquidity risk."
The ratings agency says, "Fitch's Jan. 26 exposure draft proposed significant changes to the rating criteria for global money market funds in response to the adverse market events in 2008, which placed significant credit and liquidity pressures on money market funds.... Fitch's exposure draft proposed a series of changes that were deemed necessary to continue rating money market funds 'AAA/V1+'. These changes included: An evaluation of the fund's institutional sponsor ...; Updated guidelines on shareholder concentrations and redemption risk; Updated diversification guidelines ...; and, The introduction of new weighted average days to final (WAMF) metric that captures the risk from credit spread widening."
Fitch adds, "While money market funds have enjoyed a long and successful track record of stability up until last year, a critical element behind their stability has been sponsor support during times of stress.... Without fundamental structural changes, money market funds will continue to rely on sponsor support, which may not always be forthcoming. The financial crisis revealed structural shortcomings that, given their size and importance to the credit markets, have highlighted the systemic risks posed by money market funds.... These investment vehicles also have proven to be confidence-sensitive and exposed to contagion risk by offering same-day liquidity to shareholders which can lead to 'runs' as a result of industry or sponsor concerns. Fitch believes that more can be done to better match the liquidity profile of fund assets to shareholder redemptions."
