A Treasurer's Guide to Money Market Funds 2012

The World Behind Fitch’s MMF Ratings by Charlotte Quiniou, CFA, Director in Fitch Ratings Fund and Asset Manager Rating Group
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.

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Disciplined procedures ensure consistency
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. 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

Figure 1 - MMF Rating Process Summary
Request for rating

Dialogue with fund’s sponsor/manager

Fund manager meeting

At least annually Meetings with portfolio managers, credit analysts, risk managers, control and operations staff

Dialogue with fund manager

As need be • To discuss major market developments • To understand potential deviations from criteria • Potential grace period to remedy deviations

Rating analysis

At least annually • Fund assessment through Fitch’s criteria • Review of fund documents and procedures • Incorporation of qualitative considerations

Fund rating surveillance

Generally weekly • MMF portfolio examined generally weekly • More frequently if need be • Based on reports from fund administrators

Rating committee

Fitch conducts analysis and assigns ratings on MMFs following a consistent, disciplined process that is applied globally.

At least annually • Rating recommendation, committee package • Minimum committee quorum requirements • Outcome communicated to fund manager

Rating dissemination

At least annually • Press release announcing the rating • Fund added to Fitch’s Funds Surveillance web tool

Source: Fitch

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A Treasurer's Guide to Money Market Funds 2012

intermediate rating surveillance, generally weekly, as detailed below.

Figure 2 – MMF Rating Surveillance
Source

Multi-dimensional criteria for credit, market and liquidity risks assessment
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. 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.

Fund Administrator • Portfolio holdings • Portfolio data

Fitch and other data sources • Reconciliation • Ratings, issuers,

Data

• Fitch proprietary fund surveillance application
Fitch Monitoring
• Computation of key metrics • Automated controls • Repository database

• Liaison with fund manager if deviation from Fitch’s criteria • Rating Action as warranted

Frequency

Weekly or monthly; more frequently if need be
Source: Fitch

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.

Fitch’s most recent criteria update revised how the agency looks at highly-rated sovereigns when analysing MMF liquidity and repurchase agreement collateral, by deemphasising the focus on AAA-rated assets and placing more focus on both their credit quality and liquidity.

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.

Pragmatic approach: no rating notching, focused on market dynamics
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,

Informed decision requires onsite review and third-party sources
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

Committee-driven decisions mitigate subjective biases
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

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A Treasurer's Guide to Money Market Funds 2012

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.

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.

Wide rating dissemination
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.

Fitch’s MMF surveillance: weekly, holding level, sourced from fund administrators
Fitch normally examines rated MMF portfolios weekly to assess the credit quality, liquidity,

Figure 3 – Fitch Funds Surveillance Web Tool – Selected Sample Views

Source: Fitch

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A Treasurer's Guide to Money Market Funds 2012

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.

Highlights
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Fitch’s MMFs ratings are assigned following a consistent, disciplined process that is applied globally Rating decisions are committee driven. Rating criteria are public and annually updated Fitch has adopted a pragmatic and holistic approach Fitch serves investors through its online surveillance tool, publications and analysts’ availability

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Dialogue with fund managers, no knee-jerk reaction
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.
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Fitch’s Funds Surveillance online tool: this web-based tool provides consistent, current and historical surveillance information, key metrics and analytical data on rated MMFs. It is updated every month, based on the surveillance data received from fund administrators, and is available on the agency’s website (www.fitchratings.com/FAM > Surveillance, see Figure 3) Monthly MMF Snapshot: a report published on a monthly basis, which provides consistent and comparable portfolio analytics across all US and European MMFs publicly rated under Fitch’s Global MMF rating criteria. All

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data is based on fund surveillance reports received from the fund administrators and fund managers Sector update on US and European MMFs, commenting on major developments relating to MMFs in these regions and providing data on Fitch rated MMFs, or more broadly on the larger universe of MMFs, when data is available. These reports are published on quarterly or semi-annual basis.

Investors are also encouraged to directly contact fund analysts, whose details are listed on all of the relevant agency’s publications. I

Fitch believes that MMF ratings should allow for some reasonable ‘cure’ period to remedy temporary deviations when a portfolio deviates from published criteria.

Fitch serves investors: online tool, publications, analysts’ availability
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:

Charlotte Quiniou, CFA Director in Fitch Ratings Fund and Asset Manager Rating Group
Charlotte Quiniou is a director in Fitch Ratings Fund and Asset Manager Rating Group. She is responsible for rating and reviewing European asset managers and managed funds. Prior to joining Fitch in 2004, she worked for five years at Barclays Private Clients (now Barclays Wealth Management) in London as a performance and risk analyst to develop portfolio analytics tools and internal reportings on investment strategies implemented across the department (equities, bonds, balanced and alternative multimanagement). Charlotte earned a BS-equivalent in Finance and a Master degree in Strategy and Control from the University Paris Dauphine. She is a CFA charterholder and a member of the CFA Institute.

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