Fitch Ratings has updated its global criteria for rating money market funds (MMFs) and other cash management vehicles, taking into account significant market and regulatory changes affecting the sector. (For full report see: Global Money Market Fund Rating Criteria.) Fitch expect that no rating changes as a result of these changes to the cirtieria. Fitch write that “fund managers may adjust their MMFs following the release of the new criteria and Fitch would expect those changes to be made by end-January 2016. Previous versions of the criteria have been retired.”

Changes to MMF criteria

The primary focus of this criteria report is on MMFs and other cash management vehicles that seek to achieve principal preservation and provide shareholder liquidity through managing credit, market, and liquidity risks. Under these criteria, MMF ratings can be assigned to those MMFs and liquidity vehicles that operate as constant net asset value (CNAV) funds as well as variable net asset value (VNAV) funds that are managed under the same mandate of safety of principal and timely liquidity and demonstrate NAV stability.

The main changes to Fitch’s MMF criteria include:

• clarification that the ratings assigned under these criteria apply to all liquidity management products, including vehicles that are not regulated MMFs, in order to provide investors with a comparable measure of risk across traditional money funds and less regulated and/or newly emerging cash management products
• emphasising that these rating criteria are principle-based, focusing on funds' key risks - credit, liquidity, and market risk - in a holistic manner
• the ability for rated MMFs to engage in repurchase agreements (repo) with counterparties rated 'A-'/'F2' or 'BBB+'/'F2' for maturities of one week or less. Such repos must be 102% over-collateralised by high quality government securities, are subject to 10% counterparty concentration limits, and are limited in the aggregate to 25% of portfolio assets
• increased weekly liquidity threshold to 30% from 25% for 'AAAmmf' funds
• incorporation of additional liquidity cushions for regulated MMFs that are subject to liquidity metrics triggers for the implementation of liquidity fees and redemption gates
• explicit 10% limit introduced for illiquid securities combined with a 120 maximum maturity limit at the 'AAAmmf' level
• increased maximum maturity for government floating-rate securities to 762 days from 730 days
• reduced maximum maturity for non-government floating-rate securities at 'Ammf' level to 397 days from two years
• simplified approach for a fund's exposure to its affiliates, with maximum maturity set at 45 days
• restricted investments in other MMFs, provided they are rated 'AAAmmf', to 10%
• introduced explicit 10% limit for the notional value of derivatives (interest rate and currency) as percentage of total portfolio assets
• for currency derivatives, changed current criteria to focus on specific currencies
• introduced limits on exposure to fund manager's affiliates at 'AAmmf' and 'Ammf' levels
• surveillance frequency changed to twice per month from weekly
• MMF rating definitions changed to explicitly recognise the conditions under which negative interest rates can be consistent with preservation of principle.