Fitch Ratings released a statement on Prime MMF inflows, and S&P Global Ratings is taking steps to revise their bond fund ratings criteria. This follows recent news that Fitch is tweaking its MMF Ratings criteria. (See our May 1 Link of the Day, "Fitch Updates MMF Rating Criteria.") Fitch's latest statement, entitled, "Fed Hikes Help Reverse Money Fund Reform Flows," says, "The increase in target range for the federal funds rate has been a welcome change for money fund managers, allowing for higher yields and the unwinding of voluntary fee waivers, according to a new dashboard from Fitch Ratings." (Note: The original version of this News story incorrectly referred to S&P's release involving money market funds; their update involves bond fund ratings only.)
Fitch Senior Director Greg Fayvilevich comments, "Prime money market funds in particular have benefited from the change in U.S. monetary policy with the past two interest rate hikes helping to widen the yield spread between prime and government funds.... Further spread widening will further incentivize inflows into prime funds, but the rate at which money can return will be constrained by the small size of many existing institutional prime funds."
Fitch explains, "Wider spreads have caused investors to move some assets back to prime after over $1 trillion left the space leading up to reform implementation in October. The prime to government spread widened to 0.33% as of March 31. This is more than double the spread of 0.16% seen on Sept. 30 and significantly higher than the post-crisis average of 0.09%. Stability in net asset value (NAV) as well as conservative liquidity management practices has also helped draw investors back to prime."
They add, "Since adopting the floating NAV structure in October, 95% of observations in daily changes in institutional prime fund NAVs have shown no movement. Additionally, weekly liquidity targets for prime institutional funds continue to be above the 30% regulatory threshold that would trigger the fees and gates features imposed last year."
As we wrote on Monday, a release entitled, "Fitch Updates Global Money Market Fund Rating Criteria," says, "Fitch Ratings has updated its global criteria for rating money market funds (MMFs) and other cash management vehicles. The review is part of our normal criteria review process. No rating changes are expected. Previous versions of the criteria have been retired."
They tell us, "The criteria remain 'principles-based' focusing on the ability of MMFs and other liquidity management products to preserve principle and maintain liquidity through managing credit, market and liquidity risks. Since the focus is on key portfolio risk attributes, the criteria is applicable to constant net asset value (CNAV) funds, variable NAV (VNAV) funds, as well as the European Union's recently proposed Low Volatility NAV (LVNAV) funds, provided the portfolio risk attributes align with Fitch's criteria." (See Fitch's new "Global Money Market Fund Rating Criteria" here.)
The release explains, "Changes to the criteria include: Clarification with respect to agency exposures, i.e. Federal Home Loan Banks et. al. Specifically, all exposures above the 35% concentration threshold should have a maximum maturity of 90 days or less; Reference to Fitch's Derivative Counterparty Ratings assigned to banks, where relevant; More detailed language on Fitch's approach for unrated repo counterparties; The addition of French, U.K. and Dutch sovereign bonds as eligible repo collateral, subject to normal counterparty ratings and overcollateralization criteria; Agency securities must be denominated in the fund's base currency to be eligible to portfolio weekly liquidity, on top of previously-defined features; Clarifications on derivatives usage, defining maximum aggregate derivative risk exposure and subject to unhedged weighted average maturity (WAM) being in line with maximum WAM levels set in the criteria; Addition of a section detailing the approach for determining whether public sector entities qualify as government agencies under the criteria; and, Consolidation of national scale MMF rating criteria into the global MMF rating criteria."
The other release, entitled, "S&P Global Ratings Outlines The Next Steps For Revising Its Fund Credit Quality And Fund Volatility Ratings Criteria," explains, "S&P Global Ratings is updating the market about its plans for finalizing its fund credit quality and fund volatility ratings methodologies. On Sept. 26, 2016, we published requests for comments on proposed changes to our methodologies for assigning fund credit quality ratings (FCQRs) and fund volatility ratings (FVRs) on fixed-income funds globally."
The S&P piece says, "We would like to thank fund sponsors and other market participants who provided feedback during the six-week comment period that followed the publication of the proposed criteria. We are currently assessing the comments we have received to determine whether any potential revisions to the proposed criteria published in the requests for comments are warranted. The feedback includes comments on the following proposals: updated factors and thresholds in the fund credit quality matrix, introduction of a portfolio risk assessment, how we determine rating inputs, and the analysis and application of the qualitative and quantitative assessments."
They explain, "We expect to publish the final FCQR and FVR criteria toward the end of second-quarter 2017. If our timeline changes, we will update the market about our expectations for finalizing and publishing the criteria. When the revised FCQR and FVR criteria are published, we will assign a UCO (under criteria observation) identifier to all ratings in scope of the criteria that are under review. The UCO designation indicates that the ratings are being reassessed due to the introduction of revised criteria.... We expect to complete the review within six months after the publication. Only a rating committee may determine a rating action, and a UCO designation does not constitute a rating action."
Finally, they add, "In addition to publishing the comments, we will also publish an article summarizing the feedback received and indicating how the final criteria differ from the criteria proposed in the request for comment." Related Research includes: Request For Comment: Fund Credit Quality Ratings Methodology, Sept. 26, 2016, and Request For Comment: Fund Volatility Ratings Methodology, Sept. 26, 2016.
