S&P FAQ on MMF Reforms & Ratings
Earlier this month, S&P Global Ratings published the FAQ, "What Is The Potential Impact To PSFRs Based On The Proposed Amendments To Money Market Funds?" They tell us, "On Dec. 15, 2021, the Securities and Exchange Commission (SEC) proposed for public comment amendments to Rule 2a-7. According to the proposal, the amendments are designed to improve the resiliency and transparency of MMFs following the liquidity stresses experienced in March 2020 in connection with the pandemic and the associated stresses in short-term credit markets. We are limiting our discussion in this FAQ to the key proposals that we have determined to be the most relevant to registered MMFs rated under our principal stability fund rating (PSFR) criteria. First, a material rule change under the proposed amendments includes the elimination of mandatory liquidity fee and redemption gate provisions, and decoupling these requirements from minimum liquidity thresholds.... Other proposed changes to Rule 2a-7 include the requirement for institutional prime and institutional tax-exempt MMFs to implement swing pricing policies and procedures. All MMFs would be required to clarify their use of reverse distribution mechanisms under a potential negative interest rate environment, increase their daily liquid asset (DLA) and weekly liquid asset (WLA) minimum requirements to 25% and 50% from 10% DLA and 30% WLA, respectively, and calculate WAM and WAL based on the percentage of each security's market value in the portfolio. Finally, technical changes to stress testing would decouple stress testing from liquidity fees." S&P explains, "A PSFR, commonly referred to as a money market fund rating, is forward-looking opinion about a fixed-income fund's ability to maintain principal value (i.e., net asset value [NAV]). PSFRs are typically assigned to funds that seek to maintain stable or, as is prevalent in non-U.S. funds, accumulating NAVs. The quantitative aspect of our PSFR analysis focuses primarily on the creditworthiness of the fund's investments and counterparties, and also assesses its investments' maturity structure and management's ability and policies to maintain the fund's stable NAV. Below, we answer questions on how we view these proposals under our current PSFR methodology." They tell us, "We would likely view the elimination of the regulatory linkage between the gates and fees to the minimum liquidity thresholds as a positive for MMF principal stability providing the removal reduces the risk of large redemption requests in anticipation of a gate or fee imposition.... In our view, the removal of automatic linkages will not, in practice, decouple investors' redemption decisions from their view of MMFs' liquidity positions, but it may reduce the likelihood of correlated shareholder redemption requests.... We would likely view the regulatory establishment of a minimum liquidity for MMFs as supportive of principal stability in concept. But the exact design of any metrics and stress tests could still lead to some potential distortions and are unlikely to reflect future stress conditions. We also anticipate investors would redeem their shares if they see a narrowing in the liquidity buffer over even a conservative minimum liquidity threshold.... We have assigned PSFRs since December 1983; as of Feb. 28, 2022, we rated about 260 funds globally totaling more than US$4 trillion. Quite often, no two MMFs have the same characteristics, particularly when viewing investor composition and each investor's unique liquidity requirements. We have opted not to establish minimum daily and weekly liquidity metrics as part of our PSFR criteria because we assess funds management's approach to maintaining adequate liquidity given their unique shareholder needs. Our qualitative review of fund management assesses a fund manager's strategy for maintaining sufficient liquidity based on specific shareholder needs and expectations." S&P asks, "How would S&P Global Ratings view the implementation of swing pricing, if adopted?" The piece responds, "We view swing pricing, which reduces redemption proceeds if made during a period of high shareholder redemption demand, as likely not supportive of principal stability. Although swing pricing can help reduce liquidity demands on funds, it also means investors may find the value of their investments being reduced. Consequently, such pricing may serve as a factor to shift potential liquidity pressures to other parts of the financial markets. A decision to use a liquidity management tool, such as swing pricing, could lead to a rating change due to a fund's inability to maintain NAV stability or to meet redemption requests on a full and timely basis, which could result in the investor getting less than the value of their investment back."
