Fitch on New Rules for LGIPs
Fitch Ratings issued a press release, "New US GASB Rules Recognize Stable Investor Base of LGIPs." It explains, "US municipal accounting rules will soon permit certain externally managed local government investment pools (LGIPs) to qualify for reporting constant net asset values (NAV) without meeting the standards applied to US money market funds. The change better aligns accounting rules with characteristics of LGIPs and their investors, says Fitch Ratings. Under the current US Governmental Accounting Standard Board (GASB) requirements, certain LGIPs can report a constant NAV only when conforming to the SEC's Rule 2a-7, which is a set of qualification standards specific to US money market funds, not LGIPs. Though GASB originally embraced the SEC framework, on Dec. 7 the board reversed course and voted to delink LGIPs from money market fund regulation. While the new standard removes the direct reference to Rule 2a-7, GASB replicated many of Rule 2a-7's risk-limiting provisions. However, the rule excludes some of Rule 2a-7's recent structural amendments such as the switch to floating NAV reporting or the requirement to implement liquidity fees and redemptions gates during times of stress." It continues, "LGIPs (with total assets of approximately $250 billion according to iMoneyNet and JP Morgan) are less likely than prime money funds (with $3.1 trillion in assets according to the SEC) to experience a run or otherwise pose the types of systemic risks that compelled the SEC to amend Rule 2a-7.... While the SEC recently removed the required use of ratings in credit analysis for money fund managers, GASB largely maintained the requirement to provide for an easy-to-use and uniform standard of risk measurement. In addition, GASB will only require LGIPs to calculate their shadow NAV on a monthly basis, in contrast to the SEC's requirement of daily valuation. The high cost of money fund reform has forced small managers to restructure or leave the space altogether. However, GASB's new rules will likely allow small municipalities to continue managing LGIPs effectively." (See our Nov. 30 News, "GASB Prepares to "De-Link" LGIP Rules from SEC's 2a-7 MMF Reforms.") In other news, see The Wall Street Journal's "A Fed Move Would Create Some Winners".
