In yet another move that could hurt the triple-A money fund ratings business, Standard & Poor's appears poised to change its Fund Ratings Criteria to require ratings on all repo counterparties. An S&P "Fund Ratings" RFP sent out Friday says, "This Request For Comment proposes criteria regarding the evaluation of counterparty credit risk for funds with principal stability fund ratings (PSFRs) and fund credit quality ratings (FCQRs), including the use of repurchase agreements (repos). The proposed criteria revisions apply to all global rated funds with PSFRs and FCQRs."

The RFC's Summary comments, "Standard & Poor's Ratings Services is proposing to modify criteria for assessing counterparty credit risk in funds with PSFRs and FCQRs. These counterparty transactions include repos, reverse repurchase agreements, swaps, forward purchases, foreign-exchange contracts, and other hedging positions. Specifically, when evaluating funds with PSFRs and FCQRs we propose that counterparties (e.g., broker/dealers) that do not have an explicit issuer or counterparty credit rating from Standard & Poor's or do not have a guaranty of their obligations from a Standard & Poor's-rated entity will be viewed as having high credit risk. We are not seeking to make any additional criteria changes for the use of repos at this time, nor are we considering reviewing collateral in lieu of having highly rated counterparties."

S&P is seeking input on the following questions: "Do you believe that unrated counterparties pose potentially significant credit risk to highly rated funds that have a PSFR or FCQR? Does your opinion change if the unrated counterparty is 50% or more owned by a rated parent?"

They explain, "Based on the existing counterparty exposures of funds with a PSFR or FCQR, we believe most funds will likely modify their eligible counterparty list for rated funds or withdraw their fund ratings. However, for other funds, we believe the implementation of these criteria will result in substantial rating changes because many funds currently have significant exposure to unrated counterparties."

S&P says of its "Methodology," "Funds commonly hold significant exposure to counterparties through the use of repos, swaps, and other transactions. Key to these exposures is the counterparties' credit risk. Existing criteria for funds with PSFRs and FCQRs state that unrated entities that are at least 50% directly owned by rated parents are considered to have the same level of credit risk as the parent when considering counterparty credit risk for these transactions.... We are now proposing an update to our ratings criteria for assessing the counterparty credit risk of unrated subsidiaries of rated banks and finance companies that transact repos and other obligations with funds that have a PSFR or FCQR."

It adds, "In light of the significant turbulence and dislocation in the banking sector during the past few years, we are now reevaluating the ongoing parental support of these subsidiaries in assessing the subsidiaries' creditworthiness. We believe it is important to understand a subsidiary's stand-alone credit profile, the strategic significance of the subsidiary to the group, and the parent's ultimate willingness to provide extraordinary support if needed. Given this uncertainty, we are proposing that repos and other obligations from unrated counterparties be viewed as high-risk assets."

Finally, they say, "We likely will assess the credit risk of obligations from an unrated counterparty as inconsistent with investment-grade PSFRs.... In addition, although our fund ratings criteria consider counterparty ratings and collateral types for purposes of diversification in repos, we generally do not take into account for rating purposes collateral sufficiency, timing of repo contract termination payments, enforceability of repurchase contract terms and conditions, or jurisdictional considerations with regard to initial and variation margin postings." S&P proposes an implementation period of 150 days after the final criteria are published and "encourage[s] all interested market participants to submit comments in writing on the proposed criteria by end of business Oct. 18, 2010."

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