Standard & Poor's Ratings Services is preparing to propose changes to its money market mutual fund, or principal stability fund ratings (PSFRs) criteria. On Thursday, the company released a document entitled, "Advance Notice Of Proposed Criteria Change: Principal Stability Fund Ratings Criteria," which details the potential fund ratings changes. It says, "The review will likely result in changes to certain of our assumptions and methodologies, reflecting the heightened stress that the funds market has experienced during the past 18 months. During the next several weeks, we expect to publish a more detailed discussion of the proposed changes to our PSFR criteria in a request for comment."

S&P explains, "Revisions would apply to funds domiciled in the U.S., France, U.K., Bermuda, Cayman Islands, Channel Islands, Ireland, Isle of Man, Luxembourg, and possibly other countries. However, the effect of any such changes on the ratings on any particular existing funds will depend on the final criteria adopted, our analysis of the underlying securities, and certain other factors. The proposed PSFR criteria updates we are contemplating relate to asset maturities, floating-rate securities, limited liquidity/illiquid investments, credit quality, diversification, and stress testing."

The release says, "[W]e are considering reducing the maximum portfolio weighted average maturity (WAM) ... for 'AAm' and 'Am' rated funds. We are not currently considering any changes to the 60-day maximum WAM criteria for 'AAAm' rated funds. Second, we are considering adopting spread WAM criteria for all PSFR categories.... Third, we are considering removing all exceptions to the 397-day maximum final maturity guidelines per individual security except for those in place for sovereign floating-rate securities."

Possible changes include: "[F]or an investment-grade PSFR we are also considering the feasibility of requiring floating-rate investments to reset to indices that we view as highly (i.e., more than 95%) correlated with Libor, in addition to fed funds.... [W]e are considering reducing the maturity of 'nonmarketable' securities that count toward the limited liquidity/illiquid basket from greater than seven days to greater than one business day."

"We are also considering a 10% concentration limit for uncollateralized overnight deposits with an 'A-1' or better rated depository institution or sovereigns.... Second, we are considering creating more detailed and consistent counterparty exposure criteria for repurchase agreements and collateralized certificates of deposit. Third, we are contemplating criteria to limit exposures to any one 'issuer group' to 10% to be eligible for an investment-grade PSFR. Lastly, to qualify for an investment-grade PSFR, we are contemplating reducing the maximum exposure that any one rated fund invests in another rated fund to 5% from 25%," says S&P.

Finally, they say, "We are considering establishing criteria stating that ... all funds must conduct weekly stress testing and submit sample results at our annual review meetings. Since 1984, we have assigned PSFRs, which express our opinion regarding a fund's ability to maintain principal stability and to limit exposure to losses due to credit, market, and/or liquidity risks. We currently assign PSFRs to more than 500 money market-type funds in the U.S., Europe, and offshore jurisdictions. PSFRs are based on a detailed quantitative assessment of fund investments and an in-depth qualitative assessment of fund management. The rating categories range from 'AAAm' (extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit, market, and/or liquidity risks) to 'Dm' (failure to maintain principal stability resulting in a realized or unrealized loss of principal)."

Note that two of the S&P report's authors, Peter Rizzo and Joel Friedman, are scheduled to speak later this month at Crane's Money Fund Symposium in Providence R.I. Rizzo will be on "Future of Money Funds Discussion on Sunday, August 23, while Friedman will be on a "Revamping AAA Money Fund Ratings" panel on Tuesday, August 25. We expect to hear more about possible changes in triple-A ratings for money funds then.

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