S&P on Fund Ratings and Reform
Standard & Poor's issued a release today, "Principal Stability Fund Ratings Will Likely Hold Steady Amid Money Market Fund Reform. It reads, "In evaluating the impact these reforms have on Standard & Poor's principal stability fund ratings (PSFRs) -- or MMF ratings -- we focus on whether they could impair a MMF's ability to maintain its principal value. Additionally, the amendments have a two-year implementation period that gives investment managers, fund complexes, and shareholders the benefit of time to digest the amendments and react accordingly. Important to note, however, is that the new tools provided by these amendments are untested. As such, during a time of market stress, the tools and their usage could result in unintended and unanticipated consequences for the market. Our current assessment is that it is unlikely that the amendments to the rules will affect our MMF ratings. We continually evaluate our criteria to determine whether changes to the criteria are warranted to maintain the standards we believe are consistent within each rating category. Standard & Poor's rates 420 funds globally for principal stability with assets totaling US$2.3 trillion. Of that amount, 70% are domiciled in the U.S., representing nearly 300 funds with assets of $1.6 trillion. Of the U.S.-domiciled funds we rate, 53% are prime and municipal, and the remaining 47% is in government funds (including Treasury)." On trends in the marketplace, S&P states, "We understand that the market expectation is that these amendments, as currently structured, are likely to lead to some flows out of prime funds and into government funds. It is understood to be likely because the current yield difference between those types of funds is compressed enough such that shareholders may not feel compelled to keep their funds parked in prime funds as the new rules take effect. However, while flows will likely occur in the near term, the two-year period before implementation, coupled with shareholder understanding, tolerance, and acceptance of the floating NAV, may be enough that flows could slow or even reverse. This may be more noticeable if rates rise and the spread between the yields on those funds revert to historical levels. The amendments could further skew short-term investment options with regard to supply and demand. Fund managers have expressed to us their observations that a shortage of investment products seem to exist in the "30 days and in" space, especially from those issuers in the financial sector.... In addition, further consolidation could be a result of the amendments. This could lead to smaller fund sponsors finding it difficult to justify the additional operational costs that the amended rules may dictate. That may be an unintended consequence of the SEC's amendments as concentration of several large managers would seemingly be in contrast with diversification and liquidity."
