We wrote last week about Clearwater Analytics recent "Money Market Fund Reform" webinar. (See Crane Data's March 29 News, "ICI's Collins Says in Webinar Outflows Due to Rates Not Regulations".) Today, we feature additional excerpts from the webinar, this time quoting Ruth Shaw, an Associate with Standard & Poor's. Shaw discusses the differences and similarities between S&P's 'AAAm' rating and the new SEC money fund guidelines, the stress-testing procedures that ratings agencies perform, and the ratings agency's money fund surveillance and monitoring procedures.
Shaw tells the Clearwater webinar audience, "In general the changes that have been made to 2a-7 bring it closer to our 'AAAm' criteria. The key difference between us and the 2a-7 is that we are proposing a different maximum days for the corporate and government floaters.... At S&P, Tier 2 securities at the time of purchase have never been a part of our criteria for AAA and rated funds. We feel that they are not consistent with criteria for highly rated funds or 'AAAm' rated funds.... I do feel that the limitation of 0.5% is a positive step in reducing overall risk to money market funds."
On the SEC's new liquidity mandates, she explains, "The relevance of the numbers really depends on the makeup of the fund's shareholders base. For institutional funds that have 50% in just one shareholder, maybe this amount of liquidity [30%] isn't enough. On the other hand, for retail funds with really sticky assets that won't be going anywhere, maybe this amount of liquidity is too much. At S&P, we don't have any minimum liquidity criteria because we believe that is really more important to know your shareholder base and to be sure that portfolio managers are aware of the flows and the potential for large redemptions, and that they manage the liquidity according."
Shaw also says, "We have done stress testing since 1994 using our sensitivity matrix. We use the tool to track the sensitivity of the fund's NAV and changes of interest rates while combining various redemption levels. One of the challenges for the application of stress testing scenario is that every fund is different. So, their redemption activity or shareholder makeup is all different. Levels of stress for one fund may not necessarily be appropriate for another.... Most important is really what these companies do with the stress test once they're run. We want to know what is their plan of action and how will they manage the portfolio differently during times of stress."
She says of the new portfolio disclosures and the ratings agency's monitoring, "At S&P we view transparency as extremely positive and as part of our surveillance process. All information that is going to be available on company websites and also on the SEC website, with of course the 60 day lag, is the kind of information be sent to us on a weekly basis. We ask that the fund send their mark-to-market NAV, or their shadow NAV, calculated to 7 decimal places instead of the 4 which is required by the SEC. The posting of the shadow NAV ... on a monthly basis should hopefully begin to make investors more aware that the true NAV of the fund is in fact very slightly above and below that one dollar mark."
Finally, Shaw warns, "One potential risk to the posting of the true NAV to the website, even with the 60 day lag, is that investors might see an NAV of $0.9982, for example, and get nervous and start pulling the their money out of funds. Typically, these NAV movements are quite limited. Hopefully the greater transparency will also lead to more dialogue to fund company and investors. Before redeeming their shares investors will have a better understanding of what's causing pressure in the NAV.... I do believe that overall these new regulations do take an important step towards improving the resilience and the transparency of money funds."
