Note: The October issue of Crane Data's Money Fund Intelligence newsletter will be sent to subscribers this morning, as will our products with monthly data as of Sept. 30, 2011.... Fitch Ratings issued a press release entitled "Regulatory Proposals to Strengthen U.S. Money Market Funds Should Enhance Credit Profiles and a brief report entitled, "U.S. MMFs: New Reforms on the Horizon." yesterday. The ratings agency's statement says, "Regulatory proposals that further strengthen U.S. money market funds (MMFs) would likely be a net positive from a credit perspective depending on the specific details of ultimate changes, according to a special report published by Fitch Ratings. The industry, regulators and other market participants have presented a range of proposals to reform the industry, including: the establishment of a capital or liquidity buffer to absorb future losses or redemption pressures; redemption fees or other limits on redemptions; or adoption of a floating net asset value (NAV)."
The release continues, "Fitch notes that not all of the proposals are mutually exclusive, and maintaining the existing regulatory framework, which was strengthened in 2010 following the 2008 financial crisis, is also a potential outcome. A subordinated share class designed to absorb a limited amount of losses ahead of MMF investors could be viewed by Fitch as similar to hybrid capital such as contingent convertible notes (CoCos), used by banks and insurance companies. Rating such subordinated shares, especially at the investment-grade level, would depend on variety of factors, including total leverage, redemption terms, alignment of interests, and structural protections."
It adds, "Depending on the ultimate outcome of the reform discussions, Fitch would factor into its ratings any new conflicts of interest that may arise due to different classes of shareholders, unintentional incentives to reach for yield, or changes in how Fitch views the sponsors' implicit or explicit commitment to the fund. Fitch would also evaluate how any regulatory-related added costs affect the economics of managing a MMF."
Managing Director for the U.S. Fund and Asset Manager Ratings Group Nathan Flanders comments, "Fitch's existing money market fund ratings are not under review and not contingent on further regulatory change and Asset Manager Ratings Group.... Fitch does not endorse any specific proposal and will adjust its criteria and ratings accordingly if necessary." The release adds, "Economic uncertainties and the current low yield environment present challenges and constraints in contemplating different regulatory proposals. Fitch notes capital buffers and/or back-up facilities come at a cost that could prove to be uneconomic in the current interest rate setting."
