Fitch on MF Ratings, Liquidity
Fitch Ratings issued a release, "Money Fund Rating Puts Investor Liquidity at Risk." It says, "Money market funds are being forced to implement sweeping structural reforms by October 2016. Prime and municipal (tax-exempt) MMFs -- favored liquidity management options for businesses, local governments and not-for-profits -- face the most significant changes, Fitch Ratings says. A clear lesson from the financial crisis is the importance of maintaining an appropriate level of conservatism when assigning 'AAA' ratings. Investors will rely on these ratings while making critical decisions in the next few months on how to manage their cash post MMF reform. Many may not fully appreciate the important changes taking place for MMFs and the critical differences in ratings methodologies among the top three rating agencies. Treasurers and cash managers place a premium on principal preservation and timely liquidity. Money fund reform will increase liquidity risk due to fees and gates tied to weekly liquidity triggers. Fitch's money fund ratings address safety of principal and timely liquidity." It continues, "New regulation require MMFs to place provisions for liquidity fees or gates and switch from a constant to floating net asset value when assessing their positions. The regulation specifically ties fee and gate provisions to the amount of a fund's weekly liquid assets. If these assets fall below 30%, the fund's board may impose a liquidity fee of up to 2%. The board may also suspend redemptions for up to ten business days. If weekly liquidity drops below 10% of total fund assets, fund boards are required to impose a 1% redemption fee, unless the board determines that the fee would not be in the fund's best interest or that a higher (or lower) fee is more appropriate. Most industry observers believe investors will closely monitor a fund's cushion above the 30% trigger and proactively redeem their investment if a fund gets too close to a redemption trigger. In anticipation of these sweeping changes to MMFs, Fitch updated its Global Money Market Fund Rating Criteria, in December 2015." It adds, "A Fitch rating is an opinion on a MMF's ability to meet the dual objectives of preserving invested principal and timely liquidity. In other words, Fitch's rating opines on the likelihood that investors will get their money back on time and in full, upon request. Reflecting this emphasis on timely liquidity, Fitch's criteria set minimum guidelines that include a meaningful liquidity cushion above mandatory liquidity-based triggers. This means that funds rated 'AAAmmf' by Fitch will need to maintain weekly liquidity in excess of 30% to forestall the potential for a gate or redemption fee." Fitch concludes, "Investors need to understand fundamental differences in rating criteria that can impact a $1 trillion market. Nowhere is this more important than in the area of liquidity management, where investors value return of principal more than return on principal."
