A press release entitled, "Fitch Assigns First-Time Rating to Federated Prime Private Liquidity Fund" indicates that the first of a handful of "private" money market funds is approaching launch and live status. It says, "Fitch Ratings has assigned an 'AAAmmf' rating to the Federated Prime Private Liquidity Fund, a separately designated series of Federated Private Liquidity Funds, a Delaware statutory trust, managed by Federated Investment Counseling (Federated). The fund commenced operations on September 22 and Fitch's analysis was conducted based on the fund's expected portfolio composition and Federated's experience in managing funds with similar strategies."

Fitch explains, "The 'AAAmmf' rating assignment reflects: The fund's expected overall credit quality and diversification; Expected low exposure to interest rate and spread risks; Expected holdings of daily and weekly liquid assets consistent with shareholder profile and concentration; The capabilities and resources of Federated. The Fund is intended to serve as a cash management vehicle for qualified eligible investors. The trust and the fund are exempt from registration as an investment company pursuant to Section 3(c)(7) of the Investment Act of 1940, as amended."

The release continues, "The fund will not reserve the right to impose a liquidity fee or to suspend redemptions temporarily in accordance with Rule 2a-7(c)(2). The fund seeks to maintain a stable net asset value (NAV) of $1.00 per share by valuing its assets at their amortized cost.... The fund seeks to maintain a diversified, high credit quality portfolio consistent with Fitch's criteria for 'AAAmmf' rated money market funds (MMFs), by investing in highly rated securities with limited exposure to individual issuers."

Fitch comments, "The fund seeks to limit interest rate and spread risk by maintaining a weighted average maturity (WAM) below 60 days and a weighted average life (WAL) below 120 days.... The fund seeks to maintain sufficient levels of daily and weekly liquidity to meet investors' flows. At a minimum, the fund seeks to maintain 10% of its portfolio in daily liquid assets and 30% in weekly liquid assets."

They tell us, "While the fund will not be subject to the liquidity fees and redemption gates provisions of Rule 2a7, the fund has the right to delay redemptions under certain circumstances, including if the fund is liquidating or to protect shareholder interests, as outlined in the fund's private placement memorandum.... The fund seeks to provide current income in line with prevailing money market rates, while aiming to preserve capital consistent with these rates and to maintain a high degree of liquidity."

Fitch adds, "The fund's investment adviser is Federated Investment Counseling, a subsidiary of Federated Investors, Inc. As of Sept. 30, 2015, Federated Investors, Inc had approximately $351 billion in total assets under management. Fitch views Federated Investors, Inc's investment advisory capabilities, financial and resource commitments, operational controls, corporate governance and compliance procedures as consistent with the 'AAAmmf' rating assigned to the funds."

They state, "The fund does not have an independent board of directors that provides oversight. However, the fund has an advisory board of Federated employees that performs certain functions of a Rule 2a7 registered MMF's board of directors, including receiving periodic reporting on the fund's operations and reviewing conflicts of interest. Federated, as a registered investment advisor and trustee of the fund, has a fiduciary responsibility to act in the fund's best interests."

Fitch writes, "The rating may be sensitive to material changes in the credit quality, market risk, and/or liquidity profiles of the fund. Temporary deviations from metrics outlined in Fitch's criteria need not automatically result in a rating change, provided the fund manager is able to address them with credible near-term remedial actions. However, material adverse and continued deviations from Fitch's guidelines for any key rating driver may lead to the rating being placed on Rating Watch Negative or downgraded."

Finally, they say, "Fitch will receive fund holdings information and other pertinent fund data from the fund's administrator -- Federated Administrative Services -- to conduct surveillance against ratings guidelines and to maintain the MMF rating."

Last week, Federated's Deborah Cunningham commented at our European Money Fund Symposium in London, "We just last week started a collective fund that is outside of the SEC's domain and is instead regulated by the Department of Labor. Pennsylvania is its overseer at this point. That product looks and feels like a 2a-7 money fund of old.... That product is designed to attract ... ERISA assets."

She added, "We have a private fund that's designed for non-ERISA assets and very similar coming to market this week, hopefully. It will have a similar structure ... and will continue to use amortized cost. That product will be starting with a 1.00 NAV ... and also will have triple-A ratings. We think the AAA's for these types of products make it a little easier ... to negotiate and get comfortable with them going forward."

We learned from some potential investors that Federated plans to offer two share classes (charging 10 bps and 15 bps with a 25 and 5 million minimums), but that the lower priced "Founders" shares will only be available until the fund reaches 5 billion in assets. The private fund won't commence until it reaches 1 billion in assets, and it intends to adhere to money funds' liquidity, quality, maturity, diversity and disclosure guidelines. It will also be available via "portals". In a FAQ, Federated says it will disclose yield, liquidity, MNAV and other information on its website, but that the Private Placement Memorandum will not be available there. (Crane Data plans on tracking this and any of these funds once they begin publishing performance information.)

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