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18 Jan 2011
New York, January 18, 2011 -- In September 2010, Moody's Investors Service published a Request
for Comment on a proposal to change its global rating methodology for
money market funds. A broad range of comments have been received,
reflecting feedback from investors, sponsors, consultants,
trade groups and regulators on this proposal. With the comment
period now over and comments under review, Moody's would like to
update the market on its plans for revising the methodology.
BACKGROUND ON MOODY'S PROPOSED MONEY MARKET FUND RATINGS APPROACH
The proposed revisions to Moody's rating methodology reflected experience
gained from the tumultuous period in late 2008 when disruptions in short-term
funding markets caused market value declines and record outflows from
prime money market funds. During this period a large money fund,
The Reserve Primary Fund, "broke the buck" and suspended
redemptions along with other funds managed by the same fund family.
Many other funds experienced stress within their portfolios as well,
and saw elevated redemptions in the wake of financial stresses and The
Reserve Funds' suspensions. Ultimately, support from
the US Treasury, via the introduction of a guaranty fund for money
fund investors, served to stem investor outflows and prevent a disorderly
unwind of money market funds.
Against this backdrop, Moody's proposed to update its money
fund methodology and requested market feedback on a number of key changes,
- Ratings determination based on two distinct analytic assessments
-- the portfolio credit profile (based on the credit quality of the
fund's assets), and portfolio stability profile (including
market and liquidity risks);
- A set of objective measures to be used in a composite evaluation
of these two key factors for the purpose of making rating distinctions;
- Explicitly factoring a sponsor's creditworthiness into
the rating, especially for top rated funds, to reflect the
extensive history of sponsors' financial and operational support;
- Introduction of a new set of rating symbols to reflect the distinct
meaning of our money market fund ratings compared to Moody's credit
ratings on long-term bonds.
MARKET FEEDBACK ON MOODY'S METHODOLOGY PROPOSAL
Moody's has received substantial feedback on our proposal to change
the methodology for rating money market funds, via written commentary,
through teleconference briefings and phone conversations, and at
a number of roundtables we sponsored following the release of our Request
for Comment. Among the more prominent themes that emerged from
these communications were the following:
- There was broad support for our proposed expansion and formalization
of specific portfolio metrics as the basis for determining ratings,
and for the periodic disclosure of those metrics as part of our research
in the money market sector. The market supported the identification
of differentiating factors among funds.
- While some investors told us that their investment governance
process could accommodate a new set of rating symbols, many indicated
that their current investment guidelines and/or indenture covenants referenced
Moody's more traditional rating symbols and that revising those
investment guidelines would be extremely difficult, if even possible.
While recognizing the rationale for emphasizing the distinction between
money fund ratings and long-term credit ratings, many suggested
that a modifier added to our current rating symbols -- rather than
an entirely new set of symbols -- would adequately distinguish them
from credit ratings.
- We heard from a number of market participants that, by
long-established market convention, particular meaning has
become attached to -- and portfolio guidelines developed around --
"the highest rating category". Because of this,
they noted that our proposal to further segment within the highest rating
category by introducing an MF1+ rating could be confusing to investors
and disruptive to the market.
- Some expressed concern over our intention to consider sponsorship
as a factor in our money market fund ratings. These respondents
argued that despite a long history of sponsor support as a critical factor
in preserving money market fund stability, future support is less
certain, assessment of sponsors involves judgment, and our
considering sponsorship could cause investors to over-rely on sponsors'
implicit support for their funds.
- A number of respondents offered specific comments on the computation
of our proposed fund portfolio metrics and/or the calibration of those
metrics relative to the component rating factor categories.
MOODY'S CONSIDERATION OF MARKET FEEDBACK AND REVISED APPROACH
Moody's appreciates the attention paid to our proposal for updating
our approach to rating money market funds and the time taken by numerous
investors and other market participants to share with us their feedback
on its specific elements. Having carefully considered market feedback,
we intend to publish a final methodology that is consistent with the analytic
approach outlined in our Request for Comment, but reflects certain
changes to the calibration and representation of the ratings. We
believe that this approach will benefit investors by increasing emphasis
on market value and liquidity risks while also minimizing market disruption
by preserving some key attributes of our existing rating system.
The main changes we intend to incorporate into our final methodology are:
- The top rating category will not be segmented as had been originally
- We will represent the ratings using symbols more consistent with
our current system and market convention, using a "mf"
modifier to highlight the distinct meaning of these managed fund ratings
(namely, Aaa-mf, Aa-mf, A-mf,
Baa-mf, B-mf, C-mf). This symbol
system limits the potential for market disruption while still addressing
one requirement of the Dodd-Frank financial reform Act --
to use distinct symbols for ratings with distinct meanings.
- The methodology is re-designed to reflect a fund's
own characteristics and thus strong sponsorship will not enhance a fund's
rating. At the same time, we expect funds to operate in a
stable environment, with minimal incremental risk stemming from
their sponsor's own operational, market or funding challenges.
In that context, the quality of a fund's sponsor will continue
to be a factor in our ratings, including our expectation that funds
rated in the top rating category (Aaa-mf) would be sponsored by
firms having an investment-grade or equivalent credit profile.
However, we anticipate only a modest number of funds to receive
lower ratings because of a negative impact from our sponsor assessment.
- While the rating factors proposed in our Request for Comment
will remain intact, we may incorporate minor revisions in the calculation
of some of these factors based on feedback received; we are currently
reviewing and testing these items.
PROCESS AND TIMELINE FOR REVISING METHODOLOGY AND UPDATING RATINGS
Moody's expects to finalize and release our revised rating methodology
for money market funds during the first quarter of 2011. After
its release, we will obtain updated information from rated funds
and begin to evaluate those funds using the revised approach. Because
updating ratings will require both expanded analysis using new information
and changes to Moody's systems and databases to accommodate the
altered rating symbols, we currently anticipate publishing updated
ratings under the new methodology in the second quarter, but will
update the market further in the event that our timeline changes.
"Request for Comment: Moody's Proposes New Money Market Fund Rating
Methodology and Symbols," which details the originally proposed
methodology, is available on moodys.com.
NOTE TO JOURNALISTS ONLY: For more information, please call
one of our global press information hotlines: New York +1-212-553-0376,
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MD - Managed Investments
Managed Investments Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Senior Vice President
Managed Investments Group
Moody's Investors Service
Moody's Investors Service
Moody's: Update on Money Market Fund Ratings Methodology
250 Greenwich Street
New York, NY 10007
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