Standard & Poor's published a Q&A on its recent money fund ratings changes entitled, "`A Closer Look At The Revised Principal Stability Fund Ratings Criteria." The update, written primarily by Madeleine Parish and Ruth Shaw, says, "Standard & Poor's Fund Ratings Group released its updated criteria for rating principal stability funds, also known as money market funds, on June 8, 2011 (see "Methodology: Principal Stability Fund Ratings," published on RatingsDirect on the Global Credit Portal). After a five-month implementation period, the criteria went into effect on Nov. 1, 2011, for the principal stability funds we rate. Although our criteria aim to offer a high level of transparency and detail, over the past few months we have received questions from market participants regarding the application of the criteria to areas such as diversification, collateral, cure periods, and the calculation of weighted average maturity to final (WAM[F]), also known as weighted average life."
The "Frequently Asked Questions" include: "Do your criteria only apply at time of purchase? No. Our criteria apply throughout the term of the investment, not only at time of purchase. For example, a fund manager purchases commercial paper that matures in 90 days with an issuer that represents 4% of the fund, and two weeks later, a large redemption pushes that exposure to 6%, causing the fund to breach a quantitative criteria metric. In this scenario, we would apply a 10-business-day cure period for diversification at the time of the criteria breach. Furthermore, if a security is downgraded to 'A-2' from a higher rating category, the cure periods for investments downgraded below 'A-1' would apply, based on the exposure percentage and maturity of the affected investment (see table 1)."
The "Credit FAQ" asks, "Do you consider rounding when determining a breach in criteria? Yes. When determining whether a breach of a quantitative criteria metric has occurred, we apply rounding to the fund holdings provided in weekly surveillance reports. For example, our diversification criteria regarding commercial paper exposure call for a maximum of 5% per issuer. Therefore, we would consider an exposure of less than 5.5% to be within our criteria and exposure of 5.5% or above outside our criteria. In addition, the maximum weighted average maturity to reset, or WAM(R), for 'AAAm' rated funds is 60 days. Therefore, we would consider a WAM(R) of 60.4 days within our criteria and a WAM(R) of 60.5 outside our criteria. However, we do not apply rounding to a money market fund's net asset value (NAV), since we consider the unrounded marked-to-market NAV to at least five decimal places."
S&P continues, "How do you apply your credit quality and diversification criteria for sovereign government-guaranteed programs? We apply our sovereign diversification criteria to securities with a guarantee from a sovereign government--as long as Standard & Poor's has evaluated the sovereign guaranteed program. For example, under our PSFR criteria, we treat securities guaranteed under the U.K. Debt Management Office's 2008 Credit Guarantee Scheme as equivalent to U.K. government securities for the purposes of both our credit quality and diversification criteria. We also treat noninterest-bearing deposits, which the Federal Deposit Insurance Corp. (FDIC) currently guarantees until Dec. 31, 2012, as equivalent to government agencies for the purposes of our credit quality and diversification criteria."
Another question states, "How do you treat securities issued under the FDIC's Temporary Liquidity Guarantee Program (TLGP) for purposes of credit quality and diversification criteria? We consider securities issued under the FDIC's TLGP as FDIC-guaranteed and, therefore, our agency credit quality and diversification criteria would apply. For example, a fund manager could invest up to 5% in General Electric (GE) corporate bonds and then an additional 33.33% in GE's TLGP commercial paper with maturity longer than 30 days and still be consistent with our PSFR criteria."
"How do you treat asset-backed commercial paper (ABCP) programs supported by a sovereign government or government-related entity with respect to your diversification criteria when there isn't an explicit government guarantee? We treat ABCP programs, such as Straight-A Funding LLC and Kells Funding LLC, as separate and distinct issuers. Sovereign government-related entities support these ABCP programs but don't explicitly guarantee the programs' payments. Therefore, our 5% maximum diversification criteria limit applies."
S&P also answers, "Do you treat a bank branch's credit quality as equivalent to the parent company's? How do you apply your diversification criteria to deposits with bank branches? We consider a bank branch's credit quality to be equivalent to its parent company's, unless the branch is located in another jurisdiction. We cap the rating on branches domiciled in foreign jurisdictions at the rating on the "host" sovereign if the sovereign's actions could affect the branch's ability to service its obligations and if the branch's creditors cannot access all of their funds in a timely manner via any other branch located in another jurisdiction. For diversification purposes, we view a branch as the same as the parent company. For example, we consider Deutsche Bank AG (A+/Negative/A-1) and Deutsche Bank AG (Canada Branch) (A+/Negative/A-1) as one entity for diversification purposes."
They address the question, "How do your diversification and credit quality criteria apply to different entities within a bank group? If the entity is legally separate and distinct from its bank holding company and has been assigned a separate credit rating, we would also apply our diversification criteria to that entity. For example, if we rate hypothetical Bank A NV 'A+/A-1' and its hypothetical bank holding company, Bank A Group PLC, 'A/A-1', we would treat these two entities as separate and distinct issuers and apply our issuer diversification criteria to each."
S&P's piece continues, "For diversification purposes, how do you treat municipal securities issued by an issuer on behalf of other obligors? When an issuer issues municipal securities on behalf of a separate obligor, we consider the issuing entity as the "issuer" for diversification purposes. For example, if Illinois Finance Authority (A+/Stable/--) issues debt on behalf of University X, we attribute the exposure to Illinois Finance Authority and not to University X."
They add, "How do you apply your diversification criteria to tender option bonds (TOBs)? If a TOB is issued from its own separate and distinct trust (that is, a separate legal entity) we would consider each trust as a separate issuer when applying our PSFR diversification criteria. Therefore, our diversification of 5% per issuer would apply. However, if the TOB is issued through a "series trust," we would consider that series trust as a single issuer based on our criteria. For example, the Deutsche Bank SPEARs/LIFERs Trust TOB Program Series 1000 bonds are issued from a single legal entity and, thus, under our PSFR criteria, all series issued under this structure will be combined and capped at a maximum exposure of 5% for the investment-grade PSFRs."
Finally, the Q&A asks, "How do you factor variable-rate demand notes (VRDNs) in the WAM(F) calculation? We consider VRDNs to be nonsovereign government floating-rate instruments that should be included in the calculation of a fund's WAM(F) using the unconditional put date. When the VRDNs aren't included in the calculation, the resulting maximum WAM(F) is higher."
