A press release entitled, "Moody's finalizes new methodology for money market funds," sent out yesterday says, Moody's Investors Service has published its new global methodology for rating money market funds.... The new rating methodology reflects experience gained from the tumultuous period in late 2008 when disruptions in short-term funding markets caused market value declines and record outflows from prime money market funds." The final ratings changes reflect an about-face after a firestorm of criticism over Moody's initial proposals, which included abandoning the triple-A scale and heavily weighting parental support in fund ratings. (See our Sept. 8, 2010, Crane Data News news article, "Moody's Proposes New Money Market Fund Rating Methodology, Symbols," and our Jan. 19, 2011, piece, "Moodys Backs Down From MMF Ratings Change Proposals, Keeps AAA.")
The full paper, "Moody’s Revised Money Market Fund Rating Methodology and Symbols," says, " In this report, we present our revised rating methodology for rating money market funds. The analytical framework uses a set of objective measures to assess portfolio credit quality as well as market and liquidity risks in stress scenarios in order to differentiate among funds. In addition, we are introducing a new set of rating symbols and definitions that better address the unique risks of money market funds and distinguish our money market fund ratings from our credit ratings. This new rating methodology is scheduled to become effective on 20 May 2011, and all existing money market ratings will be migrated then to the new rating symbols based on the new methodology."
It explains, "Our revised money market fund rating methodology incorporates market feedback that we received after publishing our Request for Comment on the same subject in September 2010. Once effective, the new methodology will supersede the following principal methodologies as they apply to money market funds: "Moody's Managed Funds Credit Quality Ratings Methodology" and "Moody's Money Market and Bond Fund Market Risk Ratings", both published in 2004."
Moody's new Rating Methodology continues, "The introduction of Moody's revised money market fund methodology reflects experience gained from the tumultuous period in late 2008 when disruptions in short-term funding markets caused market value declines and record outflows from prime money market funds. During this period, a large money market fund -- The Reserve Primary Fund -- 'broke the buck' and suspended redemptions together with funds managed by the same fund family. Many other funds experienced stress within their portfolios and elevated redemptions at the same time, heightening systemic risk. Ultimately, support from the US Treasury, via the introduction of a guaranty fund for money market fund investors, served to stem investor outflows and prevent a disorderly unwind of money market funds."
It adds, "The financial crisis had a significant impact on investors in money market funds. Some, particularly those invested in Reserve Management Funds, suffered payment delays and principal losses. As a result, investors have become more sensitive to the differences among money market funds and increasingly focused on the wide range of money market fund risks including: 1) vulnerability to market and liquidity risks -- despite portfolios consisting of highly-rated assets -- in addition to credit risk; 2) susceptibility to redemption risk, particularly if there is a concentrated investor base; 3) the quality and stability of the fund sponsor, whose support was generally forthcoming in the crisis, but not certain."
The press release explains "The main elements of the final methodology are: Ratings based on two distinct analytic assessments -- the portfolio credit profile (based on the credit quality of the fund's assets), and portfolio stability profile (including market and liquidity risks); A new set of rating symbols to reflect the distinct meaning of the money market fund ratings compared to Moody's credit ratings on long-term bonds, using a "mf" modifier to highlight the distinct meaning of money market fund ratings (namely, Aaa-mf, Aa-mf, A-mf, Baa-mf, B-mf, C-mf)."
Yaron Ernst, Managing Director of Moody's Managed Investments Group, comments, "Based on extensive engagement with market participants, we believe that our new methodology will benefit investors by clearly identifying rating drivers and by emphasizing the market and liquidity risks associated with money market funds."
