Standard & Poor's published a paper entitled, "New Regulatory Rules Likely Will Have A Limited Impact On U.S. Nonbank Financial Company Ratings" last week, which said, "When the global financial markets are in crisis, the risk that one or a few nonbank financial companies could destabilize the financial system rises. In an effort to manage this risk, Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act created the Financial Stability Oversight Council (FSOC) under the U.S. Treasury. The FSOC's purpose is to determine whether a nonbank financial company poses a threat to U.S. financial stability. If the FSOC determines that a nonbank financial company poses a threat, the Board of Governors of the Federal Reserve will supervise the entity and subject it to a higher level of regulatory supervision, known as "prudential standards." The FSOC recently released its final rules and plans for making these determinations."

It continues, "Standard & Poor's Ratings Services expects the FSOC's final rules will apply to only a handful of rated entities and will have a minimal, if any, ratings impact on traditional and alternative asset managers, independent brokers, finance companies, and insurance companies. However, the FSOC may determine that a number of open-end investment companies, specifically large money market funds, could pose a threat to U.S. financial stability. If that happens and if the Federal Reserve imposes capital, liquidity, or other requirements, we believe that money market funds' operational flexibility and ability to compete effectively could weaken."

S&P writes, "Title I of the Dodd-Frank Act defines nonbank financial companies as entities that are predominately (85% of consolidated gross revenues) engaged in financial activities, as the Bank Holding Company Act of 1956 defines. Nonbank financial companies exclude bank holding companies, national securities exchanges, securities clearing agencies, boards of trade, derivatives clearing organizations, and certain other institutions. Title I gives the FSOC the authority to determine whether a nonbank financial company will be subject to the Fed's supervision and prudential standards. This would be the case if the nonbank financial company is in material financial distress (imminent danger of default or insolvency) that poses a threat to the financial system of the U.S., or if the company's size, complexity, interconnectedness, and mix of activities pose a threat to the U.S. financial system, regardless of whether the company is experiencing financial distress."

They explain, "The FSOC must apply 10 statutory considerations when it makes its determination. In so doing, the FSOC will employ a three-stage process. In the first stage, it will analyze nonbank financial companies based on six quantitative measures. It will use existing data from public and regulatory resources. The companies that exceed the asset size threshold plus one or more of the remaining five quantitative measures could move onto the second stage, during which the FSOC will evaluate their risk profiles using a wider variety of quantitative information that is available from public and regulatory resources. In the third stage, the FSOC will use quantitative and qualitative information it receives from the companies to determine whether they are potential threats to the financial stability of the U.S."

S&P's report features a table (using Crane Data info) of the "10 Largest Money Market Funds," which includes: JPMorgan Prime Money Market Fund (CJPXX) $115.9B (AAAm), Fidelity Cash Reserves (FDRXX) $115.5B, Vanguard Prime Money Market Fund (VMMXX) $113.1B, JPMorgan US Government Money Market Fund (OGVXX) $59.8 (AAAm), Fidelity Institutional MM Money Market Portfolio (FNSXX) $59.6B, Fidelity Institutional MM Prime Money Market Portfolio (FIPXX) $53.1 (AAAm), Federated Prime Obligations Fund (POIXX) $48.9 (AAAm), BlackRock TempFund (TMPXX) $44.7B (AAAm), Federated Government Obligations Fund (GOIXX) $34.1B (AAAm), and Schwab Cash Reserves Fund (SWSXX) $33.9B. (Data is as of March 31, 2012. Source: Crane Data LLC. The report also contains a table of the 20 largest families; see or MFI XLS for the latest version of this table.)

The report adds, "If the FSOC determines that a large money market fund poses a threat to financial stability, the fund would come under the Fed's supervision and would also have to comply with prudential standards. In applying prudential standards, the Fed could require the money market fund to maintain a certain level of liquidity, beyond what the SEC requires, or meet certain capital requirements. This would put the fund at a competitive disadvantage to the money market funds not subject to prudential standards. If a money market fund is unable to maintain a stable net asset value (NAV) as a result of having to comply with the Federal Reserve's prudential standards, Standard & Poor's may lower its PSFR on the fund."

S&P also says, "In addition to the work the FSOC is doing, the SEC is considering new rules that, we believe, could hurt the entire money market fund industry. The SEC is considering two new proposals: floating NAV and redemption holdbacks combined with minimum capital requirements. We believe either of these proposals, if enacted, could result in reintermediation of funds back into the U.S. banking industry from money market funds. This could strengthen the U.S. banking industry's funding profile, but it could greatly reduce money market funds' competitiveness. Again, if a money market fund is unable to maintain a stable NAV as a result of having to comply with the SEC's proposals, Standard & Poor's may lower its PSFR on the fund."

They add, "Asset managers are in good shape to handle potential regulatory oversight. Among the largest asset managers that we rate, we have identified three independent asset managers with more than $50 billion of assets under management (AUM) in money market funds. We used this $50 billion AUM threshold only to be consistent with the $50 billion total consolidated assets threshold. The three independent asset managers are FMR LLC (A+/Stable/A-1), the manager of Fidelity branded investment products with more than $400 billion in money market funds, BlackRock, with more than $140 billion, and Invesco Holding Co. Ltd. (A-/Stable/--), with $58 billion. Just missing the $50 billion cutoff is Western Asset Management, a subsidiary of Legg Mason Inc. (BBB/Stable/--) with nearly $49 billion of money market fund assets. Charles Schwab, besides being a retail broker and a deposit gathering bank, also manages more than $150 billion of proprietary money market funds."

Finally, S&P's report says, "We have not factored into our CCRs the risks that any traditional asset manager could face Fed supervision and prudential standards. Firms like FMR, BlackRock, and Invesco could sell or stop operating their money market funds if prudential standards became too burdensome. The impact on their operations would not be severe because they have sufficiently diverse businesses or mix of AUM. In addition, these three asset managers, as well as Schwab, have been waiving a large portion of their advisory fees because of historically low interest rates. If these companies decide to leave the money market fund business, we believe their credit risk exposure would decline. Our traditional asset manager ratings analysis considers the possibility that a manager may decide, for business reasons, to support its money market funds when the capital markets are in distress. This happened during the global credit crisis in 2008, when several asset managers provided support for their money market funds."

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