How Ratings are Affecting Money Market Funds

by Britta Hion, Director, BlackRock Investment Management

The 2007-2009 credit crisis brought about fundamental changes in the landscape for money market funds. Not least of these is the role and importance of Credit Ratings Agencies (CRAs). Regulators responded to a pre-crisis perceived over-reliance on CRAs in the securities industry and by investors by proposing laws that would specifically prohibit the reference to issuer ratings in legislation. In turn CRAs amended their credit matrices, or the scoring process they used to gauge the credit strength of issuers and their various instruments, often resulting in a downward shift in their credit assessments of specific counterparties. From a number of perspectives it has become arguably less likely that CRAs will continue to play as significant a role for the money market industry as they have done up to this point.

In our view CRAs are important as an information point to the investment process for both asset managers and clients but should be viewed as just one component in a process that should include dialogue and partnership between an asset manager and a money market fund investor.

A confluence of factors has led to a difficult investing environment as cash investors seek to find balance between their quest for stability, liquidity and yield. In this article, we explore what the impact has been on money market funds (MMFs) and options that may help cash investors find relief in this challenging environment.

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