Below, we review yet another session from Crane's Money Fund Symposium, which took place last month in Atlanta. This time, we excerpt from the segment, "Ratings Agency Roundtable: Criteria, Risks, NAVs" with Robert Callagy of Moody's Investors Service, Greg Fayvilevich of Fitch Ratings, and Guyna Johnson of S&P Global Ratings. The session discussed the history and demand for ratings, recent changes in AAA standards, and a number of topics involving monitoring money market funds. (Note: Crane Data subscribers and attendees may access the recordings, Powerpoints and full conference binder via our "Money Fund Symposium 2017 Download Center. Also, next conference event is Crane's European Money Fund Symposium, which will take place Sept. 25-26 in Paris, France, and our next U.S. Money Fund Symposium will take place in Pittsburgh, June 25-27, 2018.)
When asked about the history of fund ratings, Fayvilevich says, "Fitch has been rating money funds since the mid 1990's, and not only money funds, but some ... other vehicles, primarily LGIPs. Ratings stability has been fairly high in the sector.... 'Why we are in this sector?' Clearly, there is investor interest in terms of investment policy guidelines, or ratings, and we are trying to come in and fill that space. [We also want to] educate and provide investors with information about the space. They get information from the fund managers themselves, but generally fund managers will not comment about other [managers]. We are in a position where we are able to give a bit more of an overview, and compare funds across managers.... That's something we have been very focused on, in terms of providing research and coverage."
S&P's Johnson comments, "Over the years, we originally started rating money market funds, and subsequent to that we changed our definition to principal stability fund ratings (PSFRs). The reason we made that change is because of the nomenclature of money market funds in the global industry. We wanted to make sure we were able to have a global opinion of how those funds were rated.... Over the years, we have seen more interest in SMAs, ETFs, and local government investment pools. The benefit of our criteria being global is that if you have a AAAm, and you are a local government investment pool, the definition and the metrics are the same for a European money market fund or a U.S money market fund.... Although we have multiple ratings for money market funds, over the years there has been less demand for money market funds rated lower than triple-A."
When asked, 'Who requests and who pays for the ratings?' Moody's Callagy answers, "The fund sponsors continue to request the ratings. They seek the ratings because they use those ratings to try to gather assets from institutional investors. As we heard from Greg, and earlier in the conference, institutional investors, whether in their investment policy statements or indentures, require that cash to invest in money market funds be invested in a fund that's rated by one or more rating agencies. So the demand continues to come from the fund sponsors. To Guyna's comment about it being a triple-A industry, yes it is. We've heard from corporate treasurers that they would like to see more distribution of ratings, but fund managers continue to manage their portfolios consistent with the guidelines and metrics we use for triple-A fund ratings. Over time we may see that, but to date that continues to be a question mark.
On what kinds of investors require ratings, Callagy says, "Corporate treasurers have a lot of cash on their balance sheets. They are looking to invest that cash in money market funds, an obvious place, as a parking spot for that cash. Many structured finance transactions require within their documents ... that the cash has to be invested in a money market fund, and [many] public finance transactions [do too]. Insurance companies want better capital treatment, so they invest in a rated money market fund. Through the NAIC, they can get better capital treatment on that cash investment. So I think the biggest category of investors in money market funds tends to be corporates, but there are other demands from other types of investors."
Discussing the types of funds, Fayvilevich adds, "A vast majority of rated funds are institutional government money funds. The rest is mostly institutional prime, so the demand is certainly on the institutional side and not so much from the retail side. Retail investors, I think often times are being 'swept' into a money fund.... So that's where the demand is.... Despite the declining number of funds there's actually been an increase in the AUM of rated money funds, and it's been a fairly steady mix between prime and government, again mostly on the institutional side. Except for last year, where this flipped away from prime and into government, and that just has to do with the flows that we've seen. Hopefully as money comes back into prime that mix rebalances to something a little bit more normal."
When asked about changes due to last year's Money Fund Reforms, Johnson tells us, "[We didn't have to] re-rate the portfolios, but we were in constant contact with the sponsors.... We needed to make sure we understood the flows that were coming in. I don't remember there being any material issues with funds as those assets were coming in, that they were going outside of the triple-A metrics. We may have had a few cases where there were large outflows in a prime fund that were unexpected, and it caused the WAM to go outside of the 60 day maximum WAM under our criteria. But other than that it was very seamless from our standpoint."
Fayvilevich states, "We get portfolio information on a regular basis. From my perspective, I think that the reform or pre-reform period was also very smooth and fairly low risk from a metrics perspective. [A]s fund managers were shortening maturities and holding very high levels of liquidity, that fit very well in our matrix. Essentially, there were a number of prime funds that were 100% weekly liquidity coming into reform.... Our biggest concern was unexpected redemptions, and this continues to be an area we look at. But I think the industry handled that very well."
Callagy comments, "The ratings post-crisis have been pretty stable. During the crisis, we obviously had big actions, specifically with the Reserve Fund breaking the buck and the suspended redemptions during that time.... But post-crisis the ratings have been very stable. We didn't make any major changes to our methodology. Ahead of the reforms ... we didn't see anything from the regulations that required us to change that. Some of the changes that we did make were around our repo guidelines.... We relaxed some of our repo criteria.... Our banking colleges made some changes to their bank rating methodology.... Since our ratings take into consideration the credit quality of the instruments of a money market fund, we are now using some different inputs in our credit model."
Fayvilevich also says, "By policy we have to review the rating criteria at least once a year. There haven't been any major changes over the last couple of years, but we always find a couple of tweaks that we make. We try to keep the criteria [relevant] to the market. Obviously markets evolve, so we feel that we need to make changes every once and a while. In the latest review a couple months ago, one of the changes we made, we changed our concentration around certain U.S agencies. Obviously, the Federal Home Loan Bank has been essentially one of the largest issuers in the money markets ... so we added a little bit more of an allowance. `Previously, in the last review, we made changes to our repo guidelines as well. We added some allowance for F-2 repo within 7 days, that's something that wasn't allowed for Triple A money funds previously."
He continues, "Again, we review criteria every year. So before reform, we put in a little bit more language describing how we view floating NAV versus constant NAV, and how we look at fees or gates. We did indicate that we look for a liquidity buffer above the 30% weekly threshold, which I think makes sense, and that's how fund managers operate anyway. I can give an example from the European side a couple years ago when we were heading into negative rate territory, we did put some clarification in our methodology explaining how we look at negative yields.... Those are the kind of changes we make on an annual basis."
Johnson adds, "There are a couple things other rating agencies do that are a little bit different.... [O]ur PSFR criteria does not have a specific liquidity buffer, so we don't have scripted measures for that that coincide with SEC's rules. However ... we'll look at the top ten shareholders to see whether or not there is liquidity there, so it comes out in a different manner.... Our group is continually reviewing our criteria, there is a very formalized process when we decide to make a change. So a request for comment goes out [and] we give the market a chance to formally provide us with their comments.... It's not like we're operating in a vacuum.... Our PSFR criteria was updated in 2011, and again in 2013, so right now we don't have any requests for comment. However, in the ultra-short space, we do have a request for comment that's outstanding for our fund credit quality and fund volatility ratings, which is essentially a bond fund rating, where we can go as short as 18 months, up to 10 years."
When asked about their favorite risk measures, Fayvilevich tells us, "Liquidity is probably my favorite, or maybe least favorite measure to look at these days. We actually get a weekly report on liquidity for all funds we rate on a daily basis, and we monitor that very closely as compared to flows. We also get shareholder composition from all the fund managers. I think that's one thing in general the ratings agencies have a view of that the rest of the market doesn't.... Fund managers want to show investors that they're managing that weekly liquidity really well.... Because of investor's focus on this measure, that's what we're really focused on."
When asked about what information ratings agencies get, Callagy responds, "We get mostly what you get, maybe a little more information on investor concentration. But the challenge with the investor information we receive is generally it comes in anonymous form, so, it doesn't give you clarity around the granularity of the shareholder basis of these funds. One of the metrics we look at around liquidity is liquidity of the fund relative to its top three shareholders.... We try to make a dialogue with the fund managers to get their views on how they're managing their portfolios, and the environment and how that's dictating their investments or investment allocation."
He adds, "We get portfolio holdings on a monthly basis.... With respect to the Moody's rated funds, the Moody's bank team took action on Canadian banks as well as the Australian banks given the change in view of the operating environment those banks operated within. We had concerns in Australia and Canada about the housing market, the household sector, those rating actions put stress on the credit profiles of the money market funds that we rate because Canada was a decent size allocation for money market funds.... That's something from a current risk perspective we are watching. We don't think it's going to result in any rate changes at this point, but the reality is if you were double-A rated banking systems, it does put pressure on Moody's fund ratings."
Finally, Johnson says, "With respect to monitoring, our money funds are monitored on a weekly basis. So the portfolio holdings are being uploaded to our proprietary system on a weekly basis and we are looking at by comparison to the fund credit quality ratings, those are uploaded to us and viewed on a monthly basis.... Our 2013 criteria, that's the most recent PSFR criteria, has a section in it called cure periods. And in those cure periods is where it's very clear as to if a particular metric has been either in active ... or passive breach. We have very specific guidelines as to what is going to happen, so how many days does a sponsor have to cure, or get the fund back to the triple-A guidelines. Cure periods range from 5 business days to 10 business days to 20 business days they are categorized by the time of the cure period and how impactful the breach is. We do visit our clients annually."
