Published: September 01, 2012
A Fitch money market fund (MMF) rating is far more than just a stamp on a fund. Its value for investors comes from the depth and breadth of the underpinning rating analysis and process. A key component of a Fitch MMF rating is also the regular, independent surveillance performed by Fitch’s analysts, which supports ongoing dialogue with fund managers, so that systematic mechanical reactions are avoided. To better serve investors, Fitch provides information on rated MMFs and developments in the money market industry, notably based on MMF surveillance information, through freely available periodic publications and online tools.
Fitch conducts analysis and assigns ratings on MMFs following a consistent, disciplined process that is applied globally. The diagram in Figure 1 provides a summary view of the major steps followed by Fitch when assigning or reviewing a MMF rating.
Please click image to enlarge
At the start of the rating process, each MMF is assigned to a group of two analysts: the primary (or lead) analyst, and the secondary (or back-up) analyst. Analysts are responsible for leading the analysis and formulating a rating recommendation. The primary analyst is typically responsible for the continuous surveillance of the rating, once it has been assigned, and maintaining the dialogue with the fund manager on analytically-related topics. The secondary analyst is back-up on all tasks.
Once an MMF rating has been assigned, it is subject to a full rating review process at least on an annual basis, with regular intermediate rating surveillance, generally weekly, as detailed below.[[[PAGE]]]
Fitch’s analysis of a MMF is conducted in a manner consistent with its current MMF rating criteria, so that analysts can reach a view on a MMF’s capacity to achieve principal preservation and provide shareholder liquidity through managing credit, market and liquidity risks. Complying with regulatory requirements, our criteria are updated annually.
Please click image to enlarge
A MMF’s credit risk is primarily viewed in terms of the ratings of the portfolio investments and diversification. The market risk is assessed in terms of exposure to general movements to interest rates as well as spread movements. The primary metrics used for this assessment are weighted average maturity to reset (WAM) and weighted average life (WAL). The fund’s liquidity risk is a function of the asset holdings and maturity profile of those assets, as well as the concentration risk of shareholders and their relative stability in times of stress. Fitch’s analysis considers both dimensions, focusing on daily and weekly liquidity.
Using Fitch’s MMF rating criteria, our analysts evaluate the fund structure, the stated investment policy and guidelines, the portfolio holdings and historical data such as net asset value (NAV) per share, assets and redemption activity in the fund. This analysis is complemented by a review of internal procedures, supporting organisational structure and resources to assess whether credit selection, investment control and mark-to-market NAV valuation procedures are adequately covered.
When evaluating a MMF’s portfolio, Fitch considers all the information available in a pragmatic and holistic manner. For example, when assessing the credit quality of portfolio assets, Fitch not only uses its own ratings, but also those assigned by other global rating agencies, without applying any rating notches or adjustment. Similarly, Fitch’s most recent criteria update revised how the agency looks at highly-rated sovereigns when analysing MMF liquidity and repurchase agreement collateral, by de-emphasising the focus on AAA-rated assets and placing more focus on both their credit quality and liquidity.
Sufficient information and access to the fund manager must be available. If Fitch believes that such information, either public or private, is insufficient to form a rating opinion, no MMF rating will be assigned or maintained.
The rating analysis is performed on the basis of information and documents required by Fitch and often provided directly by the fund sponsor, manager or administrator, supplemented by other third-party sources of information to the extent available or judged reliable. An on-site visit of the fund management company, comprising a series of interviews with portfolio managers, research analysts and risk controllers, is also an essential input into the rating analysis.[[[PAGE]]]
MMF ratings are assigned and reviewed using a formalised committee process. The primary analyst incorporates information from his or her research into the rating recommendation and supporting committee package, according to a template specifically defined for MMF ratings. This addresses all relevant information in relation to Fitch’s MMF rating criteria and includes peer group comparisons. During this time, the analyst also maintains a dialogue with the fund manager or sponsor to resolve any outstanding issues.
Committee quorum requirements and decision-making processes that are applied to MMF ratings correspond to those defined in Fitch’s rating policy, which governs all rating committees across the agency’s rating groups globally. Notably, strict rules apply to minimum committee size, eligibility of voting members, role of chairman and independent members.
The rating committee considers the information contained in the committee package and relevant issues, as defined in Fitch’s MMF rating criteria, to arrive at the rating that most appropriately reflects both the current and prospective situations. If the committee agrees that information is sufficient and robust, a rating is assigned. The outcome of the committee is then communicated to the fund manager/sponsor. If there are unresolved issues, the committee meeting may be suspended until the issues are resolved and a rating can be subsequently determined. If a committee cannot reach a consensus, a clear appeal procedure exists for a review of the rating.
All rating actions for new or existing publicly-rated MMFs are published on Fitch’s website and simultaneously released to major newswire services following the completion of a rating review. Importantly, for full disclosure, this is accompanied by a commentary detailing the rationale for the rating decision and the most relevant criteria applied in the rating process.
The timing of the publication reflects the important balance to be maintained between (1) allowing sufficient time for the fund manager/sponsor to review the rating rationale for factual accuracy and the presence of confidential information, and (2) requirements of the ratings users for timely and objective opinions. Ultimately, Fitch retains full editorial control over its rating action commentaries as the review by fund manager/sponsor only relates to the removal of any potential factual inaccuracy or references to non-public information.
Please image click to enlarge
Fitch normally examines rated MMF portfolios weekly to assess the credit quality, liquidity, and maturity characteristics relative to assigned ratings. This surveillance is an essential component of an MMF rating to ensure existing ratings remain appropriate. The low number of funds per analyst at Fitch allows in-depth MMF rating surveillance.
Surveillance reports are normally received weekly from funds’ administrators, i.e., from a source independent from the fund managers. These reports include portfolio holdings, investor concentration, portfolio NAV, WAM and WAL, among other data items. At any time, and in particular during periods of heightened credit and/or liquidity stress or material NAV deviation, Fitch reserves the right to seek information on a more frequent basis.[[[PAGE]]]
While Fitch expects the rated funds to be managed in a manner consistent with the assigned ratings, the agency also believes that MMF ratings should allow for some reasonable ‘cure’ period to remedy temporary deviations when a portfolio deviates from published criteria. In such instances, analysts will seek to understand the cause of the deviation (from criteria) and have discussions with the fund management team as to whether a credible and achievable near-term remedial plan is in place. Sustained, material, adverse deviations will lead to the rating being placed on Rating Watch Negative (RWN) or lowered.
In Fitch’s opinion, a short-term grace period in order to implement a remediation plan better serves the intended user of our ratings – investors – by avoiding unnecessary forced selling.
In addition to the rating action commentaries mentioned above, Fitch also publishes analytical information, comments and reports on a regular or ad-hoc basis. This is to inform MMF investors and other market participants on key features and developments related to rated MMFs or the broader money market industry. All such publications are freely available on the agency website under www.fitchratings.com/FAM and include:
Investors are also encouraged to directly contact fund analysts, whose details are listed on all of the relevant agency’s publications.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
