June 8, 2011
Criteria | Financial Institutions | Fixed-Income Funds:
Methodology: Principal Stability
Fund Ratings
Criteria Officer:
Mark Puccia, New York (1) 212-438-7233; mark_puccia@standardandpoors.com
Primary Credit Analysts:
Peter Rizzo, New York (1) 212-438-5059; peter_rizzo@standardandpoors.com
Joel C Friedman, New York (1) 212-438-5043; joel_friedman@standardandpoors.com
Secondary Contacts:
Francoise Nichols, Paris (33) 1-4420 7345; francoise_nichols@standardandpoors.com
Ruth Shaw, New York (1) 212-438-1410; ruth_shaw@standardandpoors.com
Andrew Paranthoiene, London (44) 20-7176-8416; andrew_paranthoiene@standardandpoors.com
Table Of Contents
I. SCOPE OF THE CRITERIA
II. SUMMARY OF CRITERIA UPDATE
III. UPDATES TO EXISTING CRITERIA
IV. IMPACT ON OUTSTANDING RATINGS
V. EFFECTIVE DATE AND TRANSITION
VI. METHODOLOGY
1. Evaluating Funds
A. Management
B. Credit Quality
C. Maturity
D. Liquidity
E. Diversification
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Table Of Contents (cont.)
F. Index And Spread Risk
2. Evaluating Security-Specific Risks
A. Callables, Convertibles, And Similar Structures
B. Collateralized Certificates Of Deposit
C. Deposits With Foreign Bank Branches
D. Extendible Investments
E. Interest Rate Swaps
F. Other Funds
G. Repurchase Agreements
H. Reverse Repurchase Agreements And Securities Lending
I. Windows Variable-Rate Demand Bonds/X-Tenders
3. Master-Feeder Funds
4. Bifurcation
5. Parental Support
VII. APPENDIX
A. PSFR Sensitivity Matrix
B. Summary Of Responses To Requests For Comments
C. Highlights Of Changes To PSFR Criteria
D. Glossary
E. Detailed Table Of Contents
VIII. RELATED CRITERIA AND RESEARCH
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Criteria | Financial Institutions | Fixed-Income Funds:
Methodology: Principal Stability Fund Ratings
(Editor's Note: This article supersedes the following articles: "Methodology For Evaluating Fund Management In
Principal Stability Fund Ratings," Aug. 17, 2009, "Treatment Of FDIC-Guaranteed Commercial Paper In Rated
Money-Market Funds," April 9, 2009, "Fixed-Income Funds: Principal Stability Fund Ratings Criteria Updated,"
March 10, 2009, "Fixed-Income Funds: Security-Specific Criteria," Feb. 6, 2007, "Fixed-Income Funds: Market
Price Exposure," Feb. 5, 2007, "Fixed-Income Funds: Principal Stability Fund Ratings Criteria For Offshore And
European Money Market Funds," Feb. 2, 2007, "Fixed-Income Funds: Process And Overview," Feb. 2, 2007,
"Fixed-Income Funds: Management," Feb. 2, 2007, "Fixed-Income Funds: Tax-Exempt Money Market Funds,"
Feb. 2, 2007, and "Fixed-Income Funds: Credit Quality," Feb. 1, 2007.)
1. Standard & Poor's Ratings Services is refining and adapting the methodology for its principal stability fund rating
criteria. These revisions are intended to better account for the risks in funds seeking to maintain principal stability.
These risks include management, credit quality, investment maturity, liquidity, portfolio diversification, index and
spread risk, and security-specific risks. We are publishing this article to help market participants better understand
our principal stability fund rating criteria. This article amends and supersedes principal stability fund rating criteria
(for a full list, see the "Related Research" section) and includes the criteria we are implementing following our
"Request for Comment: Principal Stability Fund Rating Criteria," published Jan. 5, 2010, on RatingsDirect on the
Global Credit Portal and "Request for Comment: Fund Ratings Criteria," published Sept. 17, 2010.
I. SCOPE OF THE CRITERIA
2. The revised criteria apply to principal stability fund ratings on funds globally, excluding Australia and New
Zealand. See "Australian And New Zealand Principal Stability Fund Ratings Criteria," published July 21, 2009.
II. SUMMARY OF CRITERIA UPDATE
3. A principal stability fund rating (PSFR), commonly referred to as a money market fund rating, is a forward-looking
opinion about a fixed-income fund's ability to maintain principal value (i.e., stable net asset value, or NAV). PSFRs
are assigned to funds that seek to maintain stable or, as is prevalent in offshore funds, accumulating NAVs.
4. Principal stability fund ratings have an "m" suffix (e.g., 'AAAm') to distinguish the principal stability rating from
Standard & Poor's issue or issuer credit ratings. The criteria consist of five main sections titled Evaluating Funds,
Evaluating Security-Specific Risks, Master-Feeder Funds, Bifurcation, and Parental Support. The first two main
sections are further divided into subsections.
5. The evaluating funds section covers management, credit quality, maturity, liquidity, diversification, and index and
spread risk. The evaluating security-specific risks section includes criteria for callables, convertibles, collateralized
certificates of deposit (CDs), deposits with foreign bank branches, extendible investments, interest rate swaps, other
funds, repurchase agreements, reverse repurchase agreements/securities lending, and windows variable-rate demand
bonds/X-Tenders.
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Criteria Financial Institutions Fixed-Income Funds: Methodology: Principal Stability Fund Ratings
III. UPDATES TO EXISTING CRITERIA
6. See Appendix C for "Highlights Of Changes To PSFR Criteria."
IV. IMPACT ON OUTSTANDING RATINGS
7. The adoption of our revised PSFR criteria should not have significant ratings implications for rated funds, except for
those that hold unrated counterparty exposures.
V. EFFECTIVE DATE AND TRANSITION
8. These criteria are effective Nov. 1, 2011.
VI. METHODOLOGY
9. These criteria consider the sources of risk in a managed fund's portfolio and investment strategy and assess the
impact that these risks could have on a fund's ability to maintain a stable and/or accumulating NAV. These risks
include credit quality, investment maturity, liquidity, portfolio diversification, index and spread risk, management,
and security-specific risks.
10. The ratings methodology uses a weak link approach, meaning that a fund would need to meet all the key
quantitative criteria under the categories of credit quality, maturity, diversification, and internal controls at a given
rating level in order to receive that rating. Table 1 summarizes the overall framework. Table 2 covers NAV ranges,
table 3 addresses asset credit quality, table 5 addresses maturity, and table 8 covers diversification. Rated funds are
reviewed weekly relative to these criteria.
11. Funds that hold "higher-risk investments" are rated 'BBm'. Investments that have the following characteristics are
"higher-risk investments":
• Securities that are unrated and that Standard & Poor's does not consider to be the equivalent of 'A-1' or better, as
well as securities that are rated below 'A-1' (short term) or below 'A+' (long term if no short-term rating). (See the
sections titled "Unrated guaranteed investments," "Unrated obligations of rated issuers," "U.S. municipal
securities not rated by Standard & Poor's," and "Repo counterparty risk.")
• Issuer concentrations that exceed stated percentages for specific rating categories (see "Diversification" and
"Other funds").
• Newly purchased investments that Standard & Poor's rates 'A-1', that are on CreditWatch with negative
implications, and that mature in more than 30 days.
• Maturity dates in excess of stated maximums for specific rating categories (see "Individual security final
maturity" and "VRN/FRN final maturities").
• Illiquid/limited liquidity investments that comprise more than 10% of fund assets (see "10% limited
liquidity/illiquid basket").
• Interest rate swaps that comprise more than 10% of fund assets (see "Interest rate swaps").
• Maturity extension feature that the investor does not control (see "Extendible investments").
• High price volatility (see "Investments with high price volatility" and "Higher-risk VRNs/FRNs").
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Criteria Financial Institutions Fixed-Income Funds: Methodology: Principal Stability Fund Ratings
12. A glossary of terms is at the end of the article.
13. Some sections of table 1 have been reproduced in each relevant section for ease of use.
Table 1
PSFR Framework
Management
AAAm
AAm
Am
BBBm
The strengths and weaknesses of a fund's management may affect the fund's ability to maintain a stable NAV. The analysis of management does not, in itself, raise the
overall fund rating--the impact of the analysis is either neutral or negative. The management section of the criteria consists of four sections: depth, experience, and
adequacy of staff (one binary test); credit research and analysis (one binary test and one set of potential adjustment factors); pricing (one binary test); and internal controls
(five sets of potential adjustment factors). (See paragraphs 19-33.)
NAV ranges* (see paragraph 32)
+/- 0.25% (0.9975 to
1.0025)
+/- 0.30% (0.9970 to
1.0030)
+/- 0.35% (0.9965
to 1.0035)
+/- 0.40% (0.9960 to
1.0040)
AAAm
50
AAm
20
Am
0
BBBm
0
Maximum 'A-1' investments maturing in more than
five business days (%)¶ (see paragraphs 34-38)
50
80
100
100
Maximum exposure to unrated municipal bonds
secured by escrow account (%) (see paragraphs
48-49)
25
33
40
50
Maximum exposure to municipal securities rated only
by Moody's or Fitch (%)§ (see paragraphs 44-45)
15
20
25
30
Maximum exposure to unrated credit-enhanced
variable-rate demand obligations (VRDOs) (%) (see
paragraphs 46-47)
10
15
20
25
Maturity
Maximum WAM(R) (days)** (see paragraph 59)
AAAm
60
AAm
70
Am
80
BBBm
90
Maximum WAM(F) (days)**¶¶ (see paragraphs
60-64)
90
100
110
120
Maximum final maturity per fixed-rate investment,
nonsovereign government floating-rate investment,
and sovereign floating-rate investments rated below
'AA-' (see paragraphs 57 and 84)
13 months (397 days) 13 months (397 days)
13 months (397
days)
13 months (397 days)
Maximum final maturity per sovereign government
(including sovereign government related/guaranteed)
floating-rate security rated 'AA-' or higher (see
paragraph 84)
Two years (762 days)
Four years (1,492
days)
Five years (1,857 days)
Credit quality
Minimum 'A-1+' as well as 'A-1' investments
maturing within five business days (%) (see
paragraphs 34-38)
Three years (1,127
days)
Liquidity
Limited liquidity/illiquid investments in excess of 10% of a rated fund’s total assets are "higher-risk investments" (see paragraphs 69-72). Given their price volatility, the
following are "higher-risk investments": collateralized debt obligations, credit-linked notes, market value-based securities, investments that possess a maturity extension
feature that the investor does not control (i.e., issuer-controlled or asset/trigger driven). A security is not a "higher-risk investment" if it has an extension tenure of less
than or equal to five business days and the extension event exists to provide additional time for payment/trade settlement issues (see paragraph 73). However,
investments with an extension feature (regardless of the tenure of the extension) that exists to cover a funding shortfall or the issuer's ability to roll its paper (i.e., not a
settlement or delay in timing of guaranty payment) are "higher-risk investments."
Diversification
Maximum per issuer (including debt guaranteed by
the same issuer)--except for the items below (%) (see
paragraph 76)
Maximum per sovereign (i.e., national government)
entity rated ‘'AA-' or higher (%) (see paragraphs
76-80)
Maximum per sovereign entity rated 'A-1' or 'A+' and
that matures in one business day (%) (see paragraphs
76-80)
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AAAm
5
AAm
5
Am
5
BBBm
5
100
100
100
100
25
25
25
25
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Table 1
PSFR Framework (cont.)
Maximum per sovereign entity rated 'A-1' or 'A+' and
that matures between two and five business days (%)
(see paragraphs 76-80)
10
10
10
10
Maximum per sovereign entity rated 'A-1' or 'A+' and
that matures in more than five business days (%) (see
paragraphs 76-80)
5
5
5
5
10
10
10
10
Tiered maximums for investments that are fully
(100%) collateralized or overcollateralized (more than
100%)
See charts 2, 3, and 4
for details.
See charts 2, 3, and
4 for details.
See charts 2, 3,
and 4 for details.
See charts 2, 3, and 4
for details.
Maximum exposure per sovereign government
related/guaranteed entity rated 'AA-' or higher (%)§§
(see paragraphs 78-80)
33
50
67
75
Maximum exposure to another Standard & Poor's
rated fund (%) (see paragraph 99)
10
15
20
25
Maximum per bank rated 'A-1' or higher or 'A+' or
higher for uncollateralized overnight bank deposits,
including uninvested cash (%) (see paragraph 76)
Note: Funds holding "higher-risk investments" are rated 'BBm', even if they meet all the metrics outlined above for a higher rating category. *For all funds, regardless of
rating, daily portfolio pricing, daily marked-to-market NAV calculations, and daily stress testing are monitored when the NAV goes beyond +/- 0.15% deviation.
¶Exposures to securities rated below 'A-1' are "higher-risk investments." §This limit does not apply to securities that possess a direct pay letter of credit rated 'A-1+' or
'A-1' by Standard & Poor’s. **The maximum WAM(R) and WAM(F) limits may be reduced for funds with certain characteristics (such as limited operating history or
start-up funds, small asset size, a concentrated shareholder base, or a new shareholder base with uncertain liquidity needs). ¶¶May be adjusted upward by 30 days if
invested only in government/GSE floaters rated 'AA-' or higher. If a fund invests in a combination of government floaters rated 'AA-' or higher and nongovernment
floating-rate instruments (or sovereigns rated below 'AA-'), the maximum is based on the weighted average of exposures to each type of floater. §§GRE or
government-guaranteed investments rated 'AA-' or higher with final maturities of 30 days or less are excluded from these limits. N.A.--Not applicable.
14. The criteria also apply to funds that maintain an accumulating NAV (see the glossary for accumulating NAVs). The
maximum NAV decline from the fund's highest price, consistent with each PSFR category, is as follows: 'AAAm,'
0.25%; 'AAm,' 0.30%; 'Am,' 0.35%; 'BBBm,' 0.40%; and 'BBm,' 0.50%. This does not apply to reductions in a
fund's NAV associated with distributions of accrued income.
15. Each section of this article describes cure periods that apply when a fund breaches any metric or threshold before the
rating is lowered. The cure period related to a breach applies only to that specific metric/threshold and to no others
and begins on the date the breach occurs. All cure periods are based on a fund's NAV remaining within the ranges
outlined in table 2 for each rating category.
16. The rating on a fund will be lowered by one category when any specific management actions cause the fund to
breach a metric or threshold listed in table 1 three times over a 12-month period.
17. If a fund consistently breaches a metric or threshold over a 12-month period that is not the result of a specific
management action, the rating will be lowered by one category. The magnitude and frequency of these events will
determine whether a rating action will occur. An example of a rating action that is not a result of specific
management actions is: If a 'AAAm' rated fund experiences more than five occurrences of exceeding the 60-day
maximum weighted average maturity to reset, or WAM(R), by several days because of unexpected shareholder
redemptions, the rating will be lowered to 'AAm'. In addition, if a 'AAAm' rated fund experiences three occurrences
of exceeding the 60-day maximum WAM(R) by more than 10 days because of unexpected shareholder redemptions,
the rating will be lowered to 'AAm'.
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1. Evaluating Funds
18. Funds are rated by evaluating management, credit quality, maturity, liquidity, diversification, and index and spread
risk.
A. Management
19. The strengths and weaknesses of a fund's management may affect the fund's ability to maintain a stable NAV. The
analysis of management does not, in itself, raise the overall fund rating--the impact of the analysis is either neutral or
negative. The management section of the criteria consists of four subsections:
•
•
•
•
Depth, experience, and adequacy of staff (one binary test);
Credit research and analysis (one binary test and one set of potential adjustment factors);
Pricing (one binary test); and
Internal controls (five sets of potential adjustment factors).
1. Depth, experience, and adequacy of staff
20. A fund receives a 'BBm' rating if:
• One person is responsible for critical functions, such as portfolio management, credit analysis, and shareholder
communication (known as key man risk).
• The investment manager does not have measurable experience managing a stable or accumulating NAV fund.
• The fund does not have experienced individuals or procedures in place to manage the portfolio in the absence of
the primary portfolio manager. An example is when an individual with limited stable NAV portfolio management
experience is responsible for the backup portfolio management duties and there is very limited day-to-day
oversight of the backup manager.
• One or a small number of key team members is responsible for a large volume of trading and research across
numerous investment sectors as well as other responsibilities, which could lead to significant disruption of
operations.
2. Credit research and analysis
21. A fund's internal credit analysis, security selection process, and ongoing security surveillance procedures are
important to the maintenance of a stable NAV. A fund receives a 'BBm' rating if:
• It does not have the resources, policies, and procedures to manage the credit risks of the fund's investments to
ensure the fund maintains a stable and/or accumulating NAV (or does not adhere to these policies and
procedures). For example, a fund is assigned a 'BBm' rating if it invests in corporate securities and does not have
an experienced credit research analyst(s) on staff to conduct fundamental credit research (such as analyze income
statements, balance sheets, managements strategy, etc.) to determine an investment's level of credit risk.
• If it does not have detailed, issuer-specific credit analyses (i.e., documented qualitative review of each issuer
regarding components of analysis that factored into the approval of each name). This may be provided by an
outside source.
22. A detailed, consistent, and independent credit analysis process helps facilitate the maintenance of a stable NAV. The
absence of two or more of these factors will result in the PSFR being lowered by one category:
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•
•
•
•
Use of approved issuer list and a process for adding and removing names to eligible issuer list.
Daily monitoring of credit quality of investments and periodic, formal reviews of each issuer.
Process for responding to distressed credit situations.
An internal credit rating scale (this provides evidence that independent analysis has been done, particularly if a
credit committee must assign or approve the internal ratings).
23. The adjustments described in paragraphs 21-22 do not apply if the fund limits investments to maturities of 30 days
or less with the highest Standard & Poor's short-term rating ('A-1+'), or if the fund invests exclusively in sovereigns
rated 'AA-' or higher.
3. Pricing
24. A fund's ability to accurately price investments, including any complex, structured, and derivative securities, is
essential to maintaining a stable and/or accumulating NAV. A fund receives a 'BBm' rating if:
• It does not price investments and calculate a marked-to-market NAV at least weekly.
• The fund manager does not independently review, at least weekly, the prices and marked-to-market NAV
calculated by those primarily responsible for these functions (fund account/administrator/pricing group).
• The fund manager does not obtain two or more dealer bids to verify pricing on investments that are difficult to
price, such as less liquid investments, including investments that have embedded optionality.
4. Internal controls
25. The review of a fund's internal controls includes the fund's operating procedures and risk preferences, trade ticket
verification, disaster recovery/business continuity, stress-testing capabilities, and pricing policies/NAV deviation
procedures. The rating on a fund is lowered by one category for each area where it lacks adequate internal controls.
The downward rating adjustments are cumulative (i.e., if a fund would otherwise receive a rating of 'AAAm', the
lack of adequate internal controls in two areas would lower the rating to 'Am'). A lack of adequate internal controls
across a majority of the areas results in a rating of 'BBm'.
a. Operating procedures and risk preferences
26. A fund manager's daily investment decision-making process--including how decisions are made, who is responsible
for executing them, and what mechanisms are in place to assist management in staying within a fund's internal
and/or regulatory limits--has a material impact on a fund's ability to maintain a stable NAV. The rating on a fund is
lowered by one category if any of the following conditions exist:
• It does not maintain operating procedures to stay within its internal and/or regulatory limits.
• Its managers do not have policies on the risk measurement/management and limits related to its investments. This
includes variable-rate notes (other related instruments such as step-ups, callables, convertibles), structured notes,
derivative instruments, and other potentially less liquid investments.
b. Trade ticket verification
27. The rating on a fund is lowered by one category if:
• The fund either does not maintain an electronic pretrade compliance mechanism to monitor the investment
parameters or does not maintain a procedure to have two signatures/sets of eyes on each trade ticket--one from
the individual executing the trade and one from a portfolio manager or another member of the investment
advisory staff. This reduction does not apply for portfolios that limit investments to only fixed-rate sovereign
governments rated 'AA-' or higher and limit the portfolio WAM(R) to 30 days or less and use one signature/set of
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eyes.
c. Disaster recovery/business continuity
28. The rating on a fund is lowered by one category if:
• It does not have a business continuity plan or there is uncertainty about its ability to execute its business
continuity plan.
• It does not test its business continuity plan at least every two years.
d. Stress-testing capabilities
29. The rating on a fund is lowered by one category if it does not conduct stress tests (using either a proprietary model
or Standard & Poor's PSFR Sensitivity Matrix) at least monthly. This reduction does not apply to a fund that holds
only overnight investments.
30. The stress test for investment-grade-rated funds should show the impact in each of the following scenarios (and a
combination of the scenarios):
• Parallel interest-rate shifts of plus/minus 200 basis points in 25-basis-point increments.
• Asset decreases (i.e., redemptions) of 10%, 15%, 20%, 25%, and the percentage of the largest historical five
business day net redemptions for the fund. Note: If the largest voluntary shareholder is more than 25% of net
assets, then use that larger percentage in the stress test in lieu of the 25%.
• A downgrade on the largest issuer exposure (excluding sovereign government issuers rated 'AA-' or higher).
• The widening and narrowing of credit spreads (based on current market conditions).
31. Standard & Poor's PSFR Sensitivity Matrix is in Appendix A.
e. Pricing policies and NAV deviation procedures
32. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 2. A fund may
have a cure period of up to five business days when its marked-to-market NAV moves beyond the ranges specified
for each rating category.
Table 2
NAV Ranges
NAV
ranges*
AAAm
+/- 0.25% (0.9975 to
1.0025)
AAm
+/- 0.30% (0.9970 to
1.0030)
Am
+/- 0.35% (0.9965 to
1.0035)
BBBm
+/- 0.40% (0.9960 to
1.0040)
BBm
+/- 0.50% (0.9950 to
1.0050)
Dm
> 0.50% (Less than
0.9950)
*For all funds (regardless of rating), daily portfolio pricing, marked-to-market NAV calculations, and stress testing are monitored when the NAV goes beyond +/- 0.15%
deviation, or 0.9985 or 1.0015.
33. The rating on a fund is lowered by one category if:
• The fund does not maintain written policies for dealing with deviations in its marked-to-market NAV. These
policies must include the specific NAV percentage deviations where action is taken, what action is taken, and the
individual responsible for these actions.
• The portfolio managers are unfamiliar with the NAV deviation plan.
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B. Credit Quality
34. The likelihood that the assets held within a fund's portfolio will default--which reflects both capacity and
willingness to pay--or transition to a lower rating is an important factor in a fund's ability to maintain principal
stability. Higher ratings on issuers and obligations generally mean that the rated issuer or obligation will default or
transition to a lower rating less frequently than will lower-rated issuers and obligations.
35. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 3. Each row of
the table specifies a metric and each column corresponds to a PSFR category. Each cell indicates the minimum or
maximum level of portfolio holdings that a fund can have to receive the related PSFR.
Table 3
Portfolio Credit Quality Metrics And Thresholds For PSFR Categories
(%)
Minimum 'A-1+' as well as 'A-1' investments maturing within five business days
AAAm
50
AAm
20
Am
0
BBBm
0
Maximum 'A-1' investments maturing in more than five business days*
50
80
100
100
Maximum exposure to unrated municipal bonds secured by escrow account (see
paragraphs 48-49)
25
33
40
50
Maximum exposure to municipal securities rated only by Moody's or Fitch¶ (see
paragraphs 44-45)
15
20
25
30
Maximum exposure to unrated credit-enhanced variable-rate demand obligations
(VRDOs) (see paragraphs 46-47)
10
15
20
25
*Exposures to securities rated below 'A-1' are "higher-risk investments." ¶This limit does not apply to securities that possess a direct pay letter of credit that Standard &
Poor's rates 'A-1+' or 'A-1'.
36. The levels in table 3 are based on a combined analysis of the yield spread movements resulting from changes in the
underlying credit quality of investments and the data derived from our historical ratings performance study. For
details, see "2010 Annual Global Corporate Default Study And Rating Transitions," published March 30, 2011,
and "Global Short-Term Ratings Performance And Default Analysis (1981-2009)," published May 20, 2010.
37. The analysis of a fund's overall credit quality includes the risks associated with the quality, type, and diversification
of the investments in the fund's underlying portfolio. In order for a fund to be eligible for an investment-grade
rating, all investments should carry a Standard & Poor's short-term rating of 'A-1+' or 'A-1' (or SP-1+ or SP-1), or
Standard & Poor's will consider all of the investments to be of equivalent credit quality. For example, U.S. Treasury
bills are not explicitly rated, but the credit quality is evaluated as equivalent to the U.S. government. When applying
table 3, if an investment has a long-term rating of 'AA-' or higher, with an 'A-2' short-term rating from Standard &
Poor's (which is possible for U.S. municipal securities), the rating is 'A-2'. Table 3 lists the credit quality subfactors
used to evaluate principal stability funds.
38. The 'A-1+' percentage minimums include investments rated 'A-1' that mature in five business days or less because
the historical default rates of 'A-1' paper maturing in five business days or less are similar to default rates of 'A-1+'
rated issuers. In addition, new purchases Standard & Poor's rates 'A-1' (or equivalent) that are on CreditWatch with
negative implications and that mature in more than 30 days are "higher-risk investments." Existing fund holdings
Standard & Poor's rates 'A-1' or better (or equivalent) that are placed on CreditWatch with negative implications
are not "higher-risk investments." Standard & Poor's bank issuer credit ratings determine the credit quality of
uninvested cash deposits.
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1. Determining credit quality
39. For purposes of applying the metrics in table 3, the criteria treat certain securities as possessing short-term Standard
& Poor's ratings when they actually don't. There are four relevant situations.
a. Investments with only long-term ratings
40. For purposes of applying table 3, a security that has only a long-term rating from Standard & Poor's is treated as
having the short-term rating specified in the right-hand column of table 3A.
Table 3A
Imputing Short-Term Ratings From Long-Term Ratings
Long-term rating
'AAA' through 'AA-'
Imputed short-term rating
'A-1+'
'A+'
'A-1'
'A' or lower
"Higher -risk investment" (see paragraph 11)
b. Unrated guaranteed investments
41. The credit quality of unrated guaranteed investments is assessed using the rating on the guarantor. Unrated
investments backed by guarantees that do not meet the characteristics outlined in the "Guarantee Criteria" section
of "Legal Criteria For U.S. Structured Finance Transactions: Select Issues Criteria," published Oct. 1, 2006, or the
LOC criteria in "General Criteria: Methodology And Assumptions: Approach To Evaluating Letter Of
Credit-Supported Debt," published July 6, 2009, are "higher-risk investments."
c. Unrated obligations of rated issuers
42. For purposes of applying table 3 and table 3A, the issuer credit rating on the obligor determines the creditworthiness
of an unrated debt obligation (issue). The asset's position within the obligor's debt capital structure also determines
its creditworthiness. For example, if an issue is unrated and is a senior debt obligation of an issuer rated 'A+', the
security is treated as having a rating of 'A-1.' Unrated subordinated debt from a rated issuer is a "higher-risk
investment."
43. For an unrated general obligation (GO) municipal security in the U.S., the rating on the issuer's other rated GO debt
securities determines the creditworthiness of the unrated debt obligation.
d. U.S. municipal securities not rated by Standard & Poor's
a) Municipal securities rated by only Moody's or Fitch
44. Chart 1 depicts the general process for imputing short-term ratings to municipal securities rated by Moody's or Fitch
for purposes of applying table 3. The process shown in chart 1 does not apply to any security from a sector or
category of municipal securities in which (i) Moody's or Fitch has limited market presence or (ii) Moody's or Fitch
applies substantially different rating standards (e.g., Standby Bond Purchase Agreements or state or federal credit
enhancement programs). As shown in the fourth row of table 3, the total proportion of securities rated only by
Moody's or Fitch is subject to specific limits for each PSFR category. These limits do not apply to securities that
possess a direct pay letter of credit rated 'A-1+' or 'A-1' by Standard & Poor's. Any security with an imputed
short-term rating below 'A-1' is a "higher-risk investment."
45. Additionally, the following are "higher-risk investments":
• Securities that are not rated by Standard & Poor's but that are rated in the highest short-term rating category by
Moody's or Fitch and have long-term ratings of 'A1' or 'A+' or lower.
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• Securities that are not rated by Standard & Poor's and are not rated in the highest-short-term rating category by
Moody's or Fitch but that have long-term ratings of Aa1/AA+ or lower.
• Securities supported by bond insurance that Standard & Poor's, Moody's, and Fitch do not rate.
Chart 1
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b) Municipal securities not rated by any NRSRO
(1) Unrated credit-enhanced variable-rate demand obligations (VRDOs)
46. For purposes of applying table 3, an unrated municipal VRDO is a "higher-risk investment," even if it includes bank
credit enhancement (e.g., direct pay letter of credit). However, unrated municipal VRDOs are treated as carrying the
rating on the credit enhancement provider if both of the following statements are true:
• The credit enhancement provider is rated 'A-1' or 'A-1+' by Standard & Poor's, and
• The fund's manager applies credit research and analysis policies for LOC-backed VRDOs that are consistent with
our methodology in "Methodology And Assumptions: Approach To Evaluating Letter Of Credit-Supported
Debt," published July 6, 2009.
47. In addition, tenders supported by bond insurance are "higher-risk investments." As shown in the fifth row of table
3, the total proportion of unrated credit-enhanced VRDOs is subject to specific limits for each PSFR category.
(2) Unrated municipal bonds secured by escrows
48. For purposes of applying table 3, unrated escrowed municipal bonds are "higher-risk investments" unless the fund
manager's independent credit analysis and relevant bond or legal documents are consistent with Standard & Poor's
defeasance criteria. For more details, please refer to "U.S. Public Finance: Defeasance," published June 26, 2007.
49. As shown in the third row of table 3, the total proportion of unrated municipal bonds secured by escrow account is
subject to specific limits for each PSFR category.
2. Effect of investment downgrades
50. A 10-day cure period applies for a breach of the table 3 thresholds as long as the fund's marked-to-market NAV
does not drop below NAV ranges for each rating category (see table 2). As we've noted (see paragraph 15), the cure
period related to a breach of any specific metric or threshold applies only to that specific metric or threshold.
51. The cure periods applied when an investment is downgraded below 'A-1' are outlined in table 4.
Table 4
Cure Periods For Investments Downgraded Below 'A-1'
% of portfolio
Less than or equal to 0.5%
Cure period (calendar days)
397
Greater than 0.5% or less than or equal to 1.0%
120*
Greater than 1.0% or less than or equal to 5.0%
60*
Greater than 5%
7
*Regardless of the short-term rating, if the long-term rating is 'BBB+' and on CreditWatch negative or 'BBB' or lower, the cure period drops to seven calendar days.
3. Custodial credit risk
52. Securities held in custody are less exposed to the insolvency risk of the custodial bank than direct obligations such as
commercial paper and repurchase agreements because of the legal segregation of custodial assets. There is no
minimum rating for a custody bank if the fund's custodial bank is domiciled in a country where the legal and
regulatory framework provide for clear segregation and protection of all fund assets. The domiciles that have
sufficient legal and regulatory frameworks to provide for the safety of assets held with custodians include Australia,
Bermuda, the Cayman Islands, the Channel Islands, Ireland, Japan, Luxembourg, Mexico, New Zealand, the U.K.,
and the U.S.
53. A fund is rated 'BBm' if its assets are held by a custodial bank rated below 'A-2' and the bank is domiciled where the
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legal and regulatory framework does not provide for clear segregation and protection of all fund assets.
54. Custodial banks that are wholly owned by a rated parent receive the same treatment as the parent as long as they
remain integral to the parent's operating strategy and they are prudently operated, as demonstrated by good
risk-management systems and controls and a sound operational infrastructure.
C. Maturity
55. The maturity of an individual investment and a portfolio's weighted-average maturity (WAM) are key measures of
their tolerance and sensitivity to rising interest rates. Two measures of a portfolio's WAM--WAM to reset, or
WAM(R), and WAM to final, or WAM(F)--are used to measure interest rate sensitivity, primarily because they are
easily determined and easily available.
56. WAM(R) uses the interest-rate reset date as the effective maturity in calculating the WAM, whereas WAM(F) is
calculated based on the stated final maturity for each security. WAM(F) is also known as weighted-average life. In
general, the longer the maturity or WAM, the more sensitive a security's value or fund's value is to rising interest
rates. For example, a given interest rate increase would have roughly twice the impact on a fund with a 60-day
WAM relative to a fund with a 30-day WAM, all other factors aside. Table 5 lists the quantitative subfactors used
to evaluate a fund's portfolio maturity risks.
Table 5
Maturity Subfactors
Maximum WAM(R) (days)* (see paragraph 59)
Maximum WAM(F) (days)*¶ (see paragraphs 60-64)
AAAm
60
AAm
70
Am
80
BBBm
90
90
100
110
120
Maximum final maturity per fixed-rate investment, nonsovereign government
floating-rate investment, and sovereign floating-rate investments rated below
'AA-' (see paragraphs 57 and 84)
13 months (397
days)
13 months (397
days)
13 months (397
days)
13 months (397
days)
Maximum final maturity per sovereign government (including sovereign
government related/guaranteed) floating-rate security rated 'AA-' or higher
(see paragraph 84)
Two years (762
days)
Three years
(1,127 days)
Four years
(1,492 days)
Five years
(1,857 days)
*The maximum WAM(R) and WAM(F) limits may be reduced for funds with certain characteristics (such as limited operating history or start-up funds, small asset size, a
concentrated shareholder base, or a new shareholder base with uncertain liquidity needs). ¶May be adjusted upward by 30 days if invested only in government/GSE
floaters rated 'AA-' or higher. If a fund invests in a combination of government floaters rated 'AA-' or higher and nongovernment floating-rate instruments (or sovereigns
rated below 'AA-'), the maximum is based on the weighted average of exposures to each type of floater.
1. Individual security final maturity
57. Individual investments with legal final maturities in excess of 13 months (or 397 days) are "higher-risk
investments," unless they are sovereign floating-rate investments rated 'AA-' or higher or investments with
unconditional demand features (i.e., put) that provide for liquidity within 397 days with an issuer rated 'A-1' or
'A+' or higher. For further details about floating-rate investments, see paragraph 84.
2. Portfolio weighted-average maturity
58. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 5. Each row of
the table specifies a metric, and each column corresponds to a PSFR category. Each cell indicates the maximum
WAM(R), WAM(F), or final maturity per investment that a fund can have to receive the related PSFR.
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a. WAM(R)
59. The relationship between interest rate volatility and NAV volatility limits 'AAAm' rated money market funds to a
maximum WAM(R) of 60 days. There is an inverse relationship between a fund's WAM and the minimum positive
interest rate shift necessary to cause the NAV to fall to a given level. Consider a fund that holds only one Treasury
bill and has a WAM(R) of 60 days. In this case, an instantaneous upward shift of more than 304 basis points
(bps)--holding everything else equal in the fund--would need to occur before the NAV of the model fund would fall
to 0.9950. There is a 60-day maximum WAM(R) for 'AAAm' rated funds because the worst one-day shock to the
federal funds rate since 1990 was nearly 300 bps (283 bps in January 1991). Thus, the maximum WAM(R) for the
'AAm', 'Am', and 'BBBm' categories is based on a fund's ability to withstand interest rate shocks of 250 bps, 225
bps, and 200 bps, respectively, without the NAV dropping by more than 0.50%.
b. WAM(F)
60. WAM(R) can underestimate the interest-rate sensitivity and credit spread risk of a portfolio with floating-rate
investments since the WAM calculation is based off of the floating-rate investments' reset date. See table 5 for the
limits for WAM(F) for each rating category.
61. The maximum WAM(F) will increase by 30 days for all rating categories (e.g., 'AAAm' increases to 120 days) if a
fund invests exclusively in national government (sovereign) or government-sponsored entity (GSE) floating-rate
notes rated 'AA-' or higher. This is because national government (sovereign) or GSE floating-rate investments rated
'AA-' or higher generally exhibit lower spread risk than investments in nonsovereign issuers (or sovereigns rated
below 'AA-').
62. If a fund invests in a combination of government floaters rated 'AA-' or higher and nongovernment floating-rate
instruments (or sovereigns rated below 'AA-'), the maximum WAM is based on a weighted average of the
percentage exposures to each type of floating-rate instruments. Based on these weighted averages, the maximum
WAM(F) will be 90-120 days for funds rated 'AAAm', 100-130 days for 'AAm' rated funds, 110-140 days for 'Am',
120-150 days for 'BBBm', and more than 150 days for 'BBm'.
63. To determine the maximum WAM(F) for a rated principal stability fund that invests in both sovereign government
floating-rate notes (rated 'AA-' or higher) and nonsovereign government floating-rate notes (or sovereigns rated
below 'AA-'): (i) calculate the amount of each type of floating-rate investment as a percentage of the total amount of
floating-rate investments, (ii) multiply the percentages of each type of floating-rate investment by the respective
maximum WAM(F) for sovereign government floaters (rated 'AA-' or higher) and nonsovereign government floaters
(or sovereigns rated below 'AA-'), and (iii) add the results together to get the maximum WAM(F) for the fund (see
table 6).
Table 6
Determining The Maximum WAM(F)
Invested in
floaters ($)
19,000,000
% of
floaters
19.39
'AAA' rated corporate floating-rate
investments
79,000,000
80.61
Total floating-rate investments
98,000,000
'AAA' rated sovereign government
floating-rate investments
x
Max WAM(F) per
floater type
120
=
Contribution to fund max
WAM(F)
23.27
x
90
=
72.55
95.82
Max WAM(F)
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64. When calculating a fund's WAM(F) for purposes of applying table 5, the demand features (i.e., puts or maturity
shortening features) that specify a date on which the principal amount must unconditionally be paid is used, not the
interest rate reset dates.
3. WAM adjustments
65. Table 7 lists the reductions to the maximum WAM(R) and WAM(F) limits identified in table 5 for funds with more
volatile shareholder characteristics such as start-up funds or funds with limited operating history, small asset size, a
concentrated shareholder base, or a new shareholder base with uncertain liquidity needs. The reductions to the
maximum WAM(R) and WAM(F) limits are based on:
•
•
•
•
•
Amount of investments maturing in one business day (overnight);
Number of and diversification of shareholders;
Shareholder communication and characteristics;
Investment advisor experience (see paragraph 20); and
Fund manager policies and procedures to offset the risk of a concentrated or volatile shareholder base. (See table
7 for potential mitigants to WAM adjustments.)
Table 7
WAM Adjustments And Mitigants
The maximum WAM limits (to
reset and to final) will be
lowered for each of the
following:
An investment advisor has no
prior experience managing a
principal stability fund.
A fund with a concentrated
shareholder base (i.e., comprises
10 or fewer accounts).
Reduction in
WAM(R) and
WAM(F)
5 days
5 days
A fund has assets of less than 100 5 days
million (in the fund's base
currency).
Potential mitigants to WAM adjustment
None
1) A process, supported by a successful track record, of managing redemptions of a
concentrated shareholder base. 2) Knowledge of the larger shareholder cash flow needs
and expectations (including expected time horizon of large deposits and whether
shareholders' investments are mandatory or voluntary). 3) A requirement for advance notice
for significant redemptions. 4) Limits on the amount of opportunistic portal money.
Same as above
66. As an example, a fund with an investment advisor--who currently manages fund(s) that Standard & Poor's
rates--requests a new rating on a government money market fund that will soon be launched with only $50 million
from less than 10 shareholders. For 'AAAm', the maximum WAM(R) will likely be 50 days (down from our 60-day
maximum), and the maximum WAM(F) will likely be 110 days (from the 120-day maximum) if no mitigating
factors exist. The maximum WAM limits are reduced by a total of 10 days--five days because it's a fund with only
$50 million, and another five days because of a concentrated shareholder base (10 or fewer accounts).
67. A lower maximum WAM is typically in place for no less than three months.
4. Extensions of maturity
68. A 10-business-day cure period applies when a WAM(R), WAM(F), and/or an investment's final maturity exceeds the
limits for a specific rating category--for instance, because of unexpected shareholder redemptions--before taking a
rating action as long as the fund's marked-to-market NAV does not drop below NAV ranges for each rating
category (see table 2).
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D. Liquidity
69. The liquidity and price volatility of portfolio investments can greatly affect the market value of investments and
result in erosion of a fund's NAV. A fund with a large proportion of relatively illiquid investments is more
susceptible to a sizable decline in its portfolio market value and NAV than a fund that holds highly liquid
investments (see the glossary for a definition of liquidity).
1. 10% limited liquidity/illiquid basket
70. A 10-business-day cure period applies when more than 10% of a fund's investments have limited liquidity or are
illiquid. An investment with limited liquidity or an illiquid investment is an investment that cannot be sold or
disposed of in five business days at approximately the value attributed to it by the fund.
71. Securities that have limited liquidity or are illiquid include:
• Nonmarketable and historically less liquid instruments with maturities greater than five business days, unless the
fund holds an unconditional put providing for liquidity within five business days, or if the fund is able to redeem
the investment within five business days with no loss to invested principal. Examples of nonmarketable securities
include repurchase agreements, time deposits, master notes, promissory notes, funding agreements, insurance
policies, and loan participation notes.
• Investments denominated in a currency other than a fund's base currency and swapped back into the fund's base
currency.
• Windows variable-rate demand bonds (VRDBs), X-tenders, and other similar structures (see the "Evaluating
Security-Specific Risks" section for more details).
• CDs that mature in more than five business days that are not traded in a secondary market or are subject to early
withdrawal penalties.
• Pooled bank deposit programs (e.g., Certificate of Deposit Accounts Registry Service [CDARS], Deposit Liquidity
Accounts, Insured Network Deposits, and Federally Insured Cash Accounts [FICA]) with a maturity of more than
one business day. These nonmarketable securities typically impose fees for early withdrawal, and they may
experience a delay in receiving FDIC insurance payments.
72. Marketable securities include CP, banker's acceptances, CDs traded in the secondary market, Treasury bills, and
other short-term, high-quality money market instruments that Standard & Poor's rates 'A-1' or better.
2. Investments with high price volatility
73. Given their price volatility, the following are "higher-risk investments":
•
•
•
•
Collateralized debt obligations.
Credit-linked notes.
Market value-based securities.
Investments that possess a maturity extension feature that the investor does not control (i.e., issuer-controlled or
asset/trigger driven). However, a security is not a "higher-risk investment" if it has an extension tenure of less
than or equal to five business days and the extension event exists to provide additional time for payment/trade
settlement issues (i.e., as is the case with asset-backed commercial paper [ABCP] issuer Straight-A Funding).
• Investments with an extension feature (regardless of the tenure of the extension) that exists to cover a funding
shortfall or the issuer's ability to roll its paper (i.e., not a settlement or delay in timing of guaranty payment).
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E. Diversification
74. A well-diversified portfolio of fixed-income investments will reduce the impact that a negative credit event (i.e., a
short-term rating being lowered to 'A-2' from 'A-1') could have on the value of the overall portfolio.
75. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 8. Each row of
the table specifies a metric and each column corresponds to a PSFR category. Each cell indicates the maximum level
of portfolio holdings that a fund must have to receive the related PSFR. Charts 2, 3, and 4 show how the
diversification criteria outlined in table 8 are applied.
76. A fund is rated 'BBm' if it has an exposure to an issuer (including debt guaranteed by the same issuer) of greater
than 5% of net assets, with the following exceptions:
•
•
•
•
•
Sovereign (i.e., national government) entities;
Sovereign government-related entities;
Overnight bank deposits (including uninvested cash);
Instruments that are at least 100% collateralized; and
Investments in another rated fund.
Table 8
Diversification Subfactors
(%)
Maximum per issuer (including debt guaranteed by the same
issuer)--except for the items below (see paragraph 76)
AAAm
5
AAm
5
Am
5
BBBm
5
Maximum per sovereign (i.e., national government) entity rated 'AA-'
or higher (see paragraphs 76-80)
100
100
100
100
Maximum per sovereign entity rated 'A-1' or 'A+' and that matures in
one business day (see paragraphs 76-80)
25
25
25
25
Maximum per sovereign entity rated 'A-1' or 'A+' and that matures
between two and five business days (see paragraphs 76-80)
10
10
10
10
Maximum per sovereign entity rated 'A-1' or 'A+' and that matures in
more than five business days (see paragraphs 76-80)
5
5
5
5
Maximum per bank rated 'A-1' or higher or 'A+' or higher for
uncollateralized overnight bank deposits, including uninvested cash
(see paragraph 76)
10
10
10
10
See charts 2, 3,
and 4 for details
See charts 2, 3,
and 4 for details
See charts 2, 3,
and 4 for details
See charts 2, 3,
and 4 for details
Maximum exposure per sovereign government related/guaranteed
entity rated 'AA-' or higher* (see paragraphs 78-80)
33
50
67
75
Maximum exposure to another Standard & Poor's rated fund (see
paragraph 99)
10
15
20
25
Tiered maximums for investments that are fully (100%) collateralized
or overcollateralized (more than 100%)
*GRE or government-guaranteed investments rated 'AA-' or higher with final maturities of 30 days or less are excluded from these limits.
77. A 10-day cure period applies for a breach of the table 8 thresholds as long as the fund's marked-to-market NAV
does not drop below the NAV ranges for each rating category (see table 2).
1. Sovereign (i.e., national government) entities
78. Highly rated ('AA-' or higher) sovereign securities are the most liquid and widely traded instruments and have more
stable market values during various market cycles than other short-term investment alternatives.
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a. Sovereign government-related entities and sovereign government-guaranteed securities
79. The maximum exposures of total fund assets to any one sovereign government-related entity or sovereign
government-guaranteed entity rated 'AA-' or higher is 33.33% for 'AAAm', 50.00% for 'AAm', 66.67% for 'Am',
75.00% for 'BBBm', and more than 75% for 'BBm'. GRE or government-guaranteed investments rated 'AA-' or
higher with final maturities of 30 days or less are excluded from these limits.
80. The maximum exposure to investments guaranteed by and GREs related to two or more governments (i.e., World
Bank) is 5%.
b. Newly guaranteed investments
81. Investments that are newly guaranteed by a highly rated (short-term rating of 'A-1+' or long-term rating of 'AA-' or
better) sovereign government (including GREs) could exhibit greater price volatility and spread risk than a
sovereign's or GRE's own debt. The maximum exposure to newly guaranteed investments is 5% until trading
spreads are commensurate with other debt from the same GRE or sovereign agency. Newly guaranteed floating-rate
investments with legal final maturities of greater than two years are "higher-risk investments."
82. Newly guaranteed investments with legal final maturities of more than 397 days but less than two years are
illiquid/limited liquidity investments.
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Chart 2
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Chart 3
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Chart 4
F. Index And Spread Risk
1. Index correlation
83. Variable-rate notes (VRNs) or floating-rate notes (FRNs) tied to indices that are not at least 95% correlated to the
fed funds rate and three-month LIBOR for the past five years are "higher-risk investments." Indices that have
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exhibited historically high correlations to both the federal funds rate and three-month LIBOR include EURIBOR
(Euro Interbank Offered Rate), Prime, 30-day commercial paper (CP), 60-day CP, 90-day CP, one-month LIBOR,
Canadian Dollar Offered Rate (CDOR), three-month Treasury bill, six-month Treasury bill, one-year Constant
Maturity Treasury (CMT), and one-year Treasury bill. Indices that have not exhibited high correlations to either the
fed funds rate or three-month LIBOR include the 11th District Cost of Funds Index and the Two-Year CMT Index.
2. VRN/FRN final maturities
84. Because of the negative impact that spread risk could have on the market prices of VRNs and FRNs, nonsovereign
government floating-rate investments and sovereign floating-rate investments rated below 'AA-' with legal final
maturities greater than one year (397 days) are "higher-risk investments." In addition, sovereign floating-rate
investments rated 'AA-' or higher are "higher-risk investments" if their legal final maturities exceed the following:
•
•
•
•
Two years (762 days) for 'AAAm' rated funds,
Three years (1,127 days) for 'AAm' rated funds,
Four years (1,492 days) for 'Am' rated funds, and
Five years (1,857 days) for funds rated 'BBBm' and lower.
3. Higher-risk VRNs/FRNs
85. The following FRN and VRN investments are "higher-risk investments" for rated principal stability funds:
• Range notes,
• Dual index notes,
• Leveraged notes (notes linked to a multiple of an index) and deleveraged notes (notes linked to a multiple--of less
than one--of an index), and
• Notes based off of indices with less than 95% correlation to the federal funds rate and three-month LIBOR.
2. Evaluating Security-Specific Risks
86. The security-specific risks section addresses how we incorporate various risks into the framework described above.
The criteria cover the following investment structures:
•
•
•
•
•
•
•
•
•
Callables and convertibles,
Collateralized certificates of deposit,
Deposits with foreign bank branches,
Extendible investments,
Interest rate swaps,
Other funds,
Repurchase agreements,
Reverse repurchase agreements and securities lending, and
Windows VRDBs/X-Tenders.
A. Callables, Convertibles, And Similar Structures
87. The calculation of WAM(R) and WAM(F) is based on the final maturity date for callable, convertible, and step-up
bonds. When the issuer exercises the option on the convertible bond to move from a fixed-rate security to a
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floating-rate security, the calculation of the WAM(R) is based on the next interest rate reset date. When the price of
the note does not approximate par value, the final maturity date is used to calculate the WAM(R).
B. Collateralized Certificates Of Deposit
88. Collateralized CDs in the U.S. benefit from being held by a regulated depository institution with a track record of
providing proceeds within five business days to the fund or pool based on the liquidity of the collateral. In the U.S.,
CDs that benefit from the FDIC guarantee receive the same treatment as 'A-1+' rated investments.
89. A fund investing in collateralized CDs receives a 'BBm' rating unless all of the following conditions by bank
short-term rating in table 9 are met.
Table 9
Collateralized Deposits With Banks (Rated And Unrated)
Bank short-term rating
Maximum maturity on deposit
'A-1+' and 'A-1' 'A-2'
397 days
397 days
'A-3' or lower and NR¶
397 days
Collateral* (%, maturity, pricing
frequency)
100%
National government (sovereign) issuers rated National government (sovereign) issuers rated
'AA-' or better at 101%–105%*; priced at least 'AA- or better at 105%–110%*; priced at least
weekly
weekly
Custody of collateral
Held in name of
fund
Held in name of fund
Held in name of fund
Maximum exposure per bank (%)
See flowchart 2
2.50%
0.25%
Maximum aggregate exposure
for collateralized deposits (%)
100%
10% for all rated lower than 'A-1' and NR
10% for all rated lower than 'A-1' and NR
Bank long-term rating
N/A
At least 'BBB' with a stable outlook
N/A
*Actual collateralization amounts depend on maturity, type, and pricing frequency. The more frequently the collateral is priced, the shorter the maturity of the collateral
and the more liquid the collateral (i.e., ‘AA-‘ or higher rated sovereign), the less excess collateral needed to back the deposit. The collateral must be priced at least weekly,
maintained at predetermined collateralization levels on each pricing day, and held in custody in the name of the fund for the fund to be rated investment grade. ¶This
column also applies to banks rated 'A-2' that do not have a long-term rating of at least 'BBB' with a stable outlook. N/A--Not applicable.
90. The specific levels of overcollateralization are calculated using the midpoint of 'AA' and 'A' transactions from the
collateral tables in the following publications: "Leveraged Funds: Market Value Ratings," December 1997 and
"Leveraged Funds: Market Value Criteria and Overcollateralized Requirements," March 1999. "Market Value
Advance Rates For U.S. Treasury Securities," published Sept. 19, 2001, contains the criteria for deposits
collateralized with U.S. Treasury securities. In addition, please refer to "Methodology And Assumptions For Market
Value Securities," published Aug. 31, 2010, for proposed changes to the overcollateralization practices. Since
collateralization levels follow market value criteria, a criteria change would result in revised levels for PSFRs.
91. The maximum aggregate exposure to all collateralized CDs with banks that are rated below 'A-1' or that are not
rated is 10%.
C. Deposits With Foreign Bank Branches
92. For purposes of applying table 3, the credit quality of a branch is equivalent to the bank itself unless the branch is
located in another jurisdiction. In this case, the rating on a branch is capped at the rating on the "host" sovereign if:
• Actions of the host sovereign could affect the branch's ability to service its obligations.
93. AND
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• The branch's creditors cannot access all of their funds in a timely manner via any other branch located in another
jurisdiction.
94. A bank needs to demonstrate all of the following conditions to have ratings higher than the foreign currency ratings
on the country of domicile:
• The institution has sufficient capital and liquidity to cover the stress associated with a sovereign default scenario.
• Institutional characteristics, sovereign policy flexibility, or historical precedence suggest that there is a high
likelihood that the sovereign will not interfere or acquire resources from banks and that the banks are unlikely to
require additional support from the sovereign.
• The financial sector, or at least the specific bank, is in a net external asset position and, in our view, will remain
so.
• The bank has little loan or other asset exposure to the sovereign or the wider public sector, and this will, in our
view, not change.
• The bank's earnings, capital, and other ratios are stronger than those of similarly rated banks in countries with
stronger economies, according to our proposed BICRA methodology.
95. For unrated offshore banking jurisdictions such as the Channel Islands and the Isle of Man, see "The Channel
Islands, Isle of Man, And U.K Sovereign Credit Risk," published Feb. 6, 2004, and for the Cayman Islands, see
"Cayman Islands Offshore Deposits," published Sept. 8, 1999.
D. Extendible Investments
96. Investments that possess a maturity extension feature that the investor does not control (i.e., issuer-controlled or
driven by preestablished metrics of the underlying collateral pool supporting the transaction) are "higher-risk
investments." This treatment does not apply to securities with an extension tenure of less than or equal to five
business days to provide additional time for payment/trade settlement issues as outlined in the program
documentation. The calculation of WAM(R) and WAM(F) is based on the legal final maturity date for these
investments.
E. Interest Rate Swaps
97. The aggregate market value of the interest rate swaps that exceed 10% of fund assets are "higher-risk investments."
In addition, swaps that do not have the following characteristics are "higher-risk investments":
•
•
•
•
Entered into with a counterparty rated 'A-1' or better;
Priced daily;
Rated funds are able to unwind both sides of the swap transaction prior to maturity; and
Rated funds have the right to sell the underlying security while the swap is in force.
98. For the purposes of applying table 5, WAM(R) and WAM(F) are calculated both including and excluding the effects
of interest rate swaps that reduce portfolio maturities.
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F. Other Funds
99. The fund industry's systemic liquidity risk increases as funds invest significant percentages of their assets in other
funds. An investment in another rated fund will constrain the rating on the investing fund to the rating on the
invested fund, regardless of the size of the investment. For example, Fund A invests in Fund B. If Fund B is rated
'Am', the rating on Fund A is limited to 'Am'. The maximum exposures to any one similarly rated fund are as
follows:
•
•
•
•
•
10% for 'AAAm'
15% for 'AAm'
20% for 'Am'
25% for 'BBBm'
Greater than 25% for 'BBm'
100. There is no maximum aggregate exposure to investments in other rated funds. These diversification guidelines for
investing in other rated funds apply to fund of fund structures but not to feeder or spoke funds in master-feeder and
hub-spoke structures (see the '"Master-Feeder Funds" section). In those structures, the feeder or spoke allows
shareholders to invest in the same basket of assets, in contrast to a fund of funds, where an investor gains exposure
to numerous baskets of assets (i.e., funds).
101. For purposes of applying table 5, a fund's WAM(R) and WAM(F) are calculated using the number of days the
acquired fund is required to redeem shares. However, WAM(R) and WAM(F) are calculated using a shorter
maturity if the acquired fund has agreed, in writing, to provide redemption proceeds within a shorter time.
102. "Interfund lending" is treated the same way as investments in other funds.
G. Repurchase Agreements
103. Repurchase agreements (repos) are contracts involving the simultaneous sale and future repurchase of an asset. In a
repo transaction, a fund lends cash to a counterparty, which posts securities as collateral based on the agreement
and expectation that the counterparty will repay the cash loan to the fund at an agreed-upon date and price in
exchange for the securities. In non-U.S. domiciles, these are typically referred to as reverse repurchase agreements.
104. When a dealer (counterparty) uses the term "repo securities," it generally means it's going to finance securities it
owns or borrows. When an investor (such as a money market fund) uses the term "utilize repo," it generally means
it's going to invest in repo (i.e., finance someone else's securities).
1. Repo maturity
105. The maturity of a repo is the final maturity of the agreement. If the agreement contains an unconditional put that
would result in a shorter effective maturity for the agreement, the put date is used as the maturity date.
2. Repo counterparty risk
106. The credit quality of the counterparty determines the credit quality of a repo because the timing and ownership of
collateral is uncertain. A default by a repo counterparty results in a fund taking possession of the underlying
collateral and could create both liquidity and market risks. Counterparty exposures (such as broker/dealers) that do
not have an explicit issuer or counterparty credit rating of 'A-1' or 'A-1+' from Standard & Poor's or do not have a
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guarantee of their obligations from a Standard & Poor's-rated entity are "higher-risk investments." This applies to
all repos, regardless of the types of collateral backing these transactions.
3. Repo diversification
107. The diversification limits for repos vary based on the collateral supporting the repos. Collateral generally falls into
two categories: traditional and nontraditional.
• Traditional collateral for U.S.-domiciled funds comprises U.S. government and U.S. government agency securities,
including Treasuries, agency discount notes, and agency mortgage-backed securities. For non-U.S.-domiciled
funds, traditional collateral includes highly rated ('AA-' or better or 'A-1+') sovereign government securities or
their explicitly guaranteed agencies. Funds that use these collateral types invest in "traditional repo."
• Nontraditional collateral is everything that is not listed under traditional collateral. For U.S.-domiciled funds, this
includes investment-grade and speculative-grade corporate debt, money market instruments, asset-backed
securities, emerging market debt, and equities. For non-U.S.-domiciled funds, this includes highly rated covered
bonds, corporate debt, asset-backed securities, emerging market debt, and equities. Funds that use these collateral
types invest in nontraditional repos.
108. The different diversification limits based on the collateral supporting these agreements apply when the repos are at
least fully (i.e., 100%) collateralized. Repos that are not fully collateralized and term repos (i.e., maturities beyond
one business day) that do not price and maintain at least 100% collateral on a daily basis are subject to the same
diversification limits as other investments.
109. Table 10 lists the diversification limits for traditional repos (at least 100% collateralized) for investment-grade
PSFRs. Investments that exceed these percentages listed in table 11 are "higher-risk investments."
Table 10
Diversification Guidelines For Highly Rated Repurchase Agreements With Traditional Or Qualifying Collateral
(% exposure per
counterparty)
A-1+
Overnight (one business
day)
50
A-1
25
Two to five business More than five business
days
days*
10
5
10
Maximum aggregate
exposure¶
50
5
25
*The aggregate amount of all repos (regardless of the rating on the counterparty) with maturities of more than five business days is limited to 10% of a fund’s total assets
and is counted toward the 10% maximum for limited liquidity/illiquid investments. ¶Maximum aggregate exposure includes both collateralized and uncollateralized
exposures. For example, if a fund invests 5% in commercial paper with an 'A-1' rated bank, the maximum exposure to an overnight collateralized repurchase agreement
with that same bank would be 20%.
110. In the event a counterparty defaults, nontraditional repos may be subject to greater liquidity and market risks than
traditional repos. Nontraditional repos with exposures to any single counterparty (or broker/dealer) in excess of 5%
of total fund assets are "higher-risk investments."
111. For purposes of evaluating counterparty exposure, repos collateralized by nontraditional collateral held by
U.S.-domiciled funds that meet the following conditions are traditional repos:
112. i. The fund represents that all its repos fall within the definition of a repurchase agreement under the Bankruptcy
Code.
113. OR
114. i. The fund provides a legal opinion satisfactory to Standard & Poor's stating that
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• The fund meets the definition of either a financial institution or financial participant or otherwise qualifies as an
entity entitled to benefit from special protections under the Bankruptcy Code with respect to securities contracts;
and
• The fund's repos qualify as "securities contracts" as defined in the Bankruptcy Code.
115. ii. If the fund enters into repos with financial institutions subject to the Federal Deposit Insurance Act (FDIA), the
fund must provide assurance that the repos satisfy the definitions of "qualified financial contract" under the FDIA in
addition to the definitions of either a repurchase agreement or a securities contract as the case may be.
116. In the U.S., traditional repos and any nontraditional repos that meet the conditions outlined above are qualifying
repos because they receive special treatment under the U.S. Bankruptcy Code. The diversification criteria outlined in
table 10 apply to qualifying repos. Nontraditional repos that do not meet the conditions outlined above are
nonqualifying repos and are subject to the same diversification limits as other investments (i.e., 5%).
117. For purposes of evaluating counterparty exposure, repurchase agreements collateralized by investment-grade
sovereign government bonds are traditional or qualifying repos for funds domiciled or registered outside the U.S.
Repurchase agreements collateralized by all other investments are nontraditional or nonqualifying repos.
118. Chart 4 summarizes the maximum levels of repo exposure by counterparty.
H. Reverse Repurchase Agreements And Securities Lending
119. A reverse repo is a leveraging technique in which a fund agrees to sell a security it owns while simultaneously
agreeing to repurchase it at a future time. In non-U.S. domiciles, these are typically referred to as repurchase
agreements. The fund takes the cash and invests it in another asset. A reverse repo is often viewed as collateralized
borrowing since a fund incurs a liability and uses the security as collateral. In this regard, securities lending is similar
to reverse repo and can also increase the risk level of a money fund portfolio.
120. Counterparty exposures in reverse repo and securities lending transactions that do not have an explicit issuer or
counterparty credit rating of 'A-1' or 'A-1+' from Standard & Poor's or do not have either a guarantee or an
indemnification of their obligations from an entity with a Standard & Poor's issuer rating of 'A-1' or 'A-1+' are
"higher-risk investments."
121. Reverse repos and securities lending transactions have the following limits:
• A maximum maturity of 30 days for 'AAAm', 60 days for 'AAm', 90 days for 'Am', and 120 days for 'BBBm'.
• A maximum of 25% of net assets in transactions with maturities of less than or equal to five business days for all
investment-grade PSFR categories.
• A maximum of 10% of net assets in transactions with maturities that exceed five business days for all
investment-grade PSFR categories. Additionally, these investments are limited liquidity/illiquid assets.
• A maximum aggregate of 25% of net assets for all investment-grade PSFR categories (i.e., if a 'AAAm' rated fund
enters into a 10-day reverse repo totaling 10% of its net assets, the maximum in reverse repo maturing in less
than five business days is 15%).
122. The reinvestment of cash collateral from reverse repos and securities lending transactions is treated the same as other
assets in a fund's portfolio. A fund is rated 'BBm' if the reinvested cash collateral:
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• Is not matched by maturity on both sides. For example, cash from a reverse repo with a seven-day term is
invested in a security with a maximum maturity of seven days is considered matched.
• Exceeds 10% of fund assets reinvested in VRNs or FRNs, and the interest rate reset of the VRNs or FRNs
exceeds the term of reverse repo or securities lending transaction. (For example, securities lent out for seven days
and cash collateral reinvestments in floaters limited to 10%, and the interest rate reset of the floaters should be no
more than seven days.)
123. For purposes of applying table 5, WAM(R) and WAM(F) are calculated by including reverse repos and securities
lending transactions as fund assets (i.e., reinvestment of cash collateral).
124. The following examples show the effects leverage can have on a fund's WAM(R) and WAM(F). Assume an
unleveraged fund invests in U.S. Treasury securities with 60 days to maturity, which means the WAM(R) of the fund
is 60 days. This $100 million portfolio enters into a reverse repo, or lends 25% of its assets and invests the proceeds
in an overnight repo. Although this transaction is matched, the effective WAM(R) increases. If the overnight repo
investment is included in the portfolio, the WAM(R) (gross) could be reported as 48.20 days ([80% times 60 days]
plus [20% times one day] equals 48.20 days). However, because the increase in assets to $125 million has a leverage
effect, the WAM(R) is calculated on a net basis, which is 60 days. To properly determine the WAM(R), the
unleveraged portfolio WAM(R) of 60 days is combined with the WAM(R) of the borrowed assets and results in a
WAM(R) of 60.25 (60 plus [25% times one day]). If the fund invested in a 30-day security, the fund's effective
WAM(R) would be 67.50 days (60 plus [25% times 30]). If a fund only invests in fixed-rate investments, the
leveraged WAM(R) and WAM(F) are the same. However, if the fund invested cash collateral in a floating-rate note
with a final maturity of 300 days and an interest rate reset of one day, the WAM(R) would be calculated using a
one-day maturity for the note and the WAM(F) using a 300-day maturity for the note.
I. Windows Variable-Rate Demand Bonds/X-Tenders
125. Windows variable-rate demand bonds (VRDBs), X-Tenders, and other similar extendible reset structures are term
put bonds and are not evaluated as extendible investments under these criteria. For instance, windows VRDBs
typically possess a weekly interest rate reset and offer a dual put feature. The dual put includes (1) a conditional put
during an initial remarketing window after the initial optional tender and (2) an unconditional put that is several
months after the original tender. Liquidity for payment of a tender is first paid from remarketing proceeds, and then
from the issuer or obligor. The windows structure does not allow the issuer to extend the maturity on the investor at
any point, but it does enable the issuer to pay the investor earlier than expected.
126. For purposes of applying table 5, WAM(R) and WAM(F) are calculated using the long final maturity date for these
instruments. For example, until a fund decides to exercise the put, each day a fund holds these bonds, they are
carried to the long final maturity date for WAM(R) and WAM(F) calculations. If the security pays a floating rate of
interest, depending on the interest rate reset date and the put date, the fund may opt to use the interest rate reset
date in its WAM(R) calculation. Windows VRDBs, X-Tenders, and other similar extendible reset structures are
limited liquidity/illiquid investments.
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3. Master-Feeder Funds
127. The criteria also apply to master-feeder funds, which are sometimes referred to as Hub and Spoke® (a patented term
marketed by Signature Financial Group Inc.). In the master-feeder structure, the feeder fund conducts essentially all
of its investing through the master fund. The master portfolio receives the rating since it holds the underlying
investments of the feeder fund.
4. Bifurcation
128. On occasion, a fund manager may attempt to minimize the impact a downgraded or defaulted security has on a
rated fund by removing the distressed asset from the portfolio and placing the asset into a separate portfolio. This
process, commonly called bifurcation, aims to protect the preexisting portfolio from any losses the distressed asset
has incurred. The PSFR criteria apply to each separate piece when a rated fund is bifurcated.
129. A fund receives a rating of 'Dm' if it bifurcates to avoid realizing a loss of more than 0.50% per share since this
event is equivalent to a distressed exchange. Subsequent to this rating action, the rating on the fund is raised to a
level that reflects its ability to maintain principal value. See "Rating Implications Of Exchange Offers And Similar
Restructurings, Update," published May 12, 2009.
5. Parental Support
130. PSFRs are based on a fund's independent ability to maintain principal stability and limit exposure to losses resulting
from credit risk and do not include a fund sponsor's willingness or ability to support the fund's NAV. However, the
rating does include the measures a sponsor takes or has committed to implement within a five business day cure
period to support the fund's NAV or liquidity (see paragraph 32). Historically, the types of support have generally
included of one or more of the following: credit support agreements, letters of credit, purchasing distressed assets
out of the fund at amortized cost, making cash investments in the fund, and/or creating an escrow/reserve account in
the name of the fund with highly rated entities.
VII. APPENDIX
A. PSFR Sensitivity Matrix
131. Standard & Poor's makes available to all rated funds its own stress testing model called the Standard & Poor's PSFR
Sensitivity Matrix. This model enables the user to stress changes in asset size, interest rate shifts, and credit spread
movements--or a combination of all three (see the glossary for a definition of stress testing).
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Table 11
Standard & Poor's PSFR Sensitivity Matrix
WAM(R)
60
WAM(F)
120
Shares outstanding ($)
500,000,000
Total fund assets ($)
499,250,000
Market value (NAV)
0.998500
Credit spread movement
(bps)
50
% total credit
(nongovernment) securities
(of portfolio)
25
% corporate floaters (of
portfolio)
15
Total $ loss
(750,000)
Total $ gain
0
Selected
shareholders
Largest
redemption
over five
consecutive
business
days
200
0.994179
0.993355
0.993604
0.994315
175
0.993889
0.994118
150
0.994646
0.995114
0.994423
125
0.995581
100
0.996049
0.994956
0.995490
0.994632
0.995146
0.994772
0.995228
75
0.996516
50
0.994884
0.995295
0.995127
Gain
(loss)
0.995736 (2,558,219)
0.995519
0.996079 (2,352,740)
0.995705
0.995910
0.996421 (2,147,260)
0.995685
0.996116
0.996301
0.996764 (1,941,781)
0.995659
0.996142
0.996527
0.996693
0.997106 (1,736,301)
0.996024
0.996173
0.996598
0.996938
0.997084
0.997449 (1,530,822)
0.996984
0.996558
0.996687
0.997055
0.997349
0.997476
0.997791 (1,325,342)
25
0.997452
0.997091
0.997200
0.997511
0.997760
0.997867
0.998134 (1,119,863)
0
0.997919
0.997625
0.997714
0.997968
0.998171
0.998258
0.998476
(914,384)
(25)
0.998387
0.998159
0.998228
0.998425
0.998582
0.998650
0.998818
(708,904)
(50)
0.998854
0.998692
0.998741
0.998881
0.998993
0.999041
0.999161
(503,425)
(75)
0.999322
0.999226
0.999255
0.999338
0.999404
0.999432
0.999503
(297,945)
(100)
0.999790
0.999760
0.999769
0.999795
0.999815
0.999824
0.999846
(92,466)
(125)
1.000257
1.000294
1.000283
1.000251
1.000226
1.000215
1.000188
113,014
(150)
1.000725
1.000827
1.000796
1.000708
1.000637
1.000607
1.000531
318,493
(175)
1.001192
1.001361
1.001310
1.001164
1.001048
1.000998
1.000873
523,973
(200)
Redemptions/subscriptions
(%)
1.001660
1.001895
1.001824
1.001621
1.001459
1.001389
1.001216
729,452
(12)
439,444,861
(23)
385,000,000
Basis boint shift
Shares outstanding
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(20)
(10)
400,000,000 450,000,000
0
5
20
500,000,000 525,000,000 600,000,000
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Table 11
Standard & Poor's PSFR Sensitivity Matrix (cont.)
Stress
% of fund redemption
10.02 No
Top 10 shareholders
Shareholder 1
$
50,000,000
Shareholder 2
40,444,200
8.10 Yes
Shareholder 3
38,456,871
7.70 No
Shareholder 4
15,067,896
3.02 No
Shareholder 5
12,456,985
2.50 Yes
Shareholder 6
10,871,596
2.18 No
Shareholder 7
9,875,645
1.98 No
Shareholder 8
7,563,121
1.51 Yes
Shareholder 9
5,312,879
1.06 No
Shareholder 10
3,215,468
0.64 No
Stress top 10
193,264,661
38.71 No
Total fund assets
499,250,000
Largest
five-day
redemption
(%)
23
100 60,464,306.00
B. Summary Of Responses To Requests For Comments
132. On Jan. 5, 2010, we published "Request for Comment: Principal Stability Fund Rating Criteria," and on Sept. 17,
2010, we issued an additional RFC on our counterparty criteria for PSFRs. Market participants sent about 24
responses for each request for comment to the criteria comments mailbox. The comments addressed a wide variety
of issues that extended beyond the questions asked, though we found the responses were generally supportive of the
greater transparency and clarity of the proposed criteria.
WAM(F)
133. One question we asked was whether the proposed WAM(F) limits are consistent with the risk profiles of highly
rated principal stability funds. We received nearly unanimous agreement concerning the introduction of WAM(F)
criteria. The majority of managers said that the 120-day maximum WAM(F), also known as weighted average life,
adequately protects money market funds against market risk. We have adopted the WAM(F) criteria for all PSFR
categories, as proposed in our request for comment.
Correlation guidelines for indices
134. We asked several correlation-based questions, including whether we should continue to base our correlation
guidelines for indices of floating-rate investments on the federal funds rate, three-month LIBOR, one-month LIBOR,
or a combination. The vast majority of fund managers stated that we should continue to base our correlation
guidelines on the federal funds rate and that we should include the three-month LIBOR index as well. Most
managers responded that three-month LIBOR is more appropriate than one-month LIBOR for our correlation
guidelines.
Limited liquidity/illiquid investments
135. Respondents were nearly unanimous in their belief that nonmarketable and historically less liquid investments with
maturities greater than seven days (or five business days), where no unconditional put exists, are limited
liquidity/illiquid investments. Alternatively, they stated that these same types of investments maturing in five
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business days or less are not limited liquidity/illiquid investments. The updated criteria define an investment with
limited liquidity or an illiquid investment as an investment that cannot be sold or disposed of in five business days at
approximately the value attributed to it by the fund.
Diversification criteria
136. On the question regarding whether managers think the less-restrictive diversification (issuer concentration) criteria
for certain highly rated issuers are consistent with highly rated funds, we received mixed responses. Generally,
managers of 2a-7 registered funds agreed with our proposals, while managers of non-2a-7 funds indicated that the
diversification limits were too restrictive. We have standardized our diversification criteria (concentration limits)
across all investment-grade PSFR categories to limit exposure to any one issuer to 5%, with less restrictive
diversification guidelines for sovereigns, collateralized transactions, uncollateralized overnight bank deposits, and
investments in other rated money market funds.
Stress testing
137. Concerning stress testing, we asked whether the interest-rate changes of 25 bps, 50 bps, 75 bps, and 100 bps,
coupled with redemption levels of 10%, 15%, 20%, and 25% (or worst one-day net redemption percentage),
respectively, are suitable for rated fund stress tests. We also asked whether weekly stress testing would be the
appropriate frequency. Some portfolio managers commented that the funds should be stressed at higher interest rate
shifts, while others believed that interest rate shifts were not appropriate means of stress testing a portfolio given the
short-term nature of money market funds. In terms of the proposed redemption levels, some responded that the
levels should be greater, while others said that we should not define the parameters for which a fund should be
stressed. One overarching theme that many respondents addressed concerned the frequency that these stress tests
should be performed. Most market participants disagreed with our proposal that funds perform stress tests on a
weekly basis. Instead, it was suggested that funds conduct stress tests on either a monthly basis, quarterly, or not at
all. The updated criteria state that the rating on a fund is lowered by one category if it does not conduct stress tests
(using either a proprietary model or Standard & Poor's PSFR Sensitivity Matrix) at least monthly.
Non-Standard & Poor's rated U.S. municipal securities
138. Most managers did not respond to our question as to whether they believe a 15% maximum on the amount of
non-Standard & Poor's rated U.S. municipal securities that do not have the highest short-term rating from Moody's
and/or Fitch with credit/liquidity support from an entity rated 'A-1' or better from Standard & Poor's is suitable for
rated funds. Of the few that did respond, they suggested that securities rated at least 'AA' by another NRSRO
ensures sufficient credit quality. The updated criteria state that securities that are not rated by Standard & Poor's
and are not rated in the highest-short-term rating category by Moody's or Fitch but that have long-term ratings of
Aa1/AA+ or lower are "higher-risk investments."
Fund purchases of defeased debt not rated by Standard & Poor's
139. On the question regarding our proposed methodology for reviewing fund purchases of defeased debt that is rated by
Moody's and/or Fitch (but not by Standard & Poor's) or not rated by any NRSRO, we received few responses from
fund managers. Those that commented generally agreed with our proposal (which we have implemented as
proposed) that fund managers provide us their independent credit analysis and relevant bond documents for us to
determine, prior to purchase, if the security is consistent with the relevant PSFR category. Only one fund manager
responded that defeased debt that is rated by Moody's and/or Fitch (but not rated by Standard & Poor's) should be
taken at face value and that an independent analysis of the investments would therefore not be warranted.
www.standardandpoors.com/ratingsdirect
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Unrated counterparties
140. We received a significant amount of feedback regarding whether unrated counterparties pose potentially significant
credit risk to highly rated funds that have a PSFR or FCQR (Fund Credit Quality Rating). The vast majority of
market participants responded that they do not agree with our proposal that unrated counterparties pose potentially
significant credit risks to highly rated funds. Many expressed concern that the proposed criteria, if implemented,
would cause a disruption to short-term funding markets. Nearly all stated that the presence of a Standard & Poor's
rating should not be the sole factor in determining an entity's creditworthiness, but rather that an independent
analysis the asset manager conducts is sufficient. In addition, many managers suggested that although the credit
quality of the counterparty is an important consideration, they give more weight to the quality of the underlying
collateral, the level of overcollateralization, and the transaction's structural integrity. Although our fund ratings
criteria consider counterparty ratings and collateral types for purposes of diversification in repos, we generally do
not take into account the amount of overcollateralization, the timing of repo contract termination payments, the
enforceability of repurchase contract terms and conditions, and jurisdictional considerations with regard to initial
and variation margin postings. Fund analysis is not contract specific, and our highest ratings (i.e., investment grade)
assume little uncertainty regarding sufficiency, timing, and ownership of collateral. Therefore, we view the credit
quality of counterparties as the most important factor in protecting against potential losses given the uncertainty
surrounding the liquidation of pledged collateral in a bankruptcy.
141. We asked market participants whether their opinions change if the unrated counterparty is 50% or more owned by
a rated parent. We received a range of responses. In general, they commented that the level of credit risk in an
unrated subsidiary rises incrementally as the percentage of ownership by the parent declines, reflecting uncertainty
as to the degree of commitment of ongoing parental support. Many fund managers stated that their views change if
the unrated counterparty is not a wholly owned subsidiary of a rated parent. In such cases, they would view these
unrated counterparties less favorably. Others said that if the unrated counterparty was less than 50% owned (rather
than 100% owned) by a corporate parent, then this would be a concern. Other participants that responded said that
they would only conduct transactions with counterparties that are either explicitly rated or possess a guarantee from
a rated parent. Finally, some managers expressed that their own internal credit process should determine the
eligibility of counterparties and that parental ownership and/or an explicit rating should not be relied upon to
determine the eligibility of that counterparty for our rated funds.
142. The updated criteria state that counterparty exposures (such as broker/dealers) that do not have an explicit issuer or
counterparty credit rating of 'A-1' or 'A-1+' from Standard & Poor's or do not have a guarantee of their obligations
from a Standard & Poor's-rated entity are "higher-risk investments." This applies to all repos, regardless of the
types of collateral backing these transactions.
C. Highlights Of Changes To PSFR Criteria
Table 12
Highlights Of Changes To PSFR Criteria
Criteria item
General
'G' rating modifier
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
We assigned the 'G' rating modifier to
Proposed eliminating the 'G' rating
PSFRs (e.g., 'AAAm-G') when the
modifier.
portfolio consists primarily of direct U.S.
government securities.
Standard & Poor’s | RatingsDirect on the Global Credit Portal | June 8, 2011
Adopted as proposed; the 'G' rating modifier
has been eliminated.
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
"Higher-risk
investments"
None
None
Criteria item
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
Provided an outline of the management
factors evaluated to determine PSFR.
None
Management
General management
rating factors (i.e.,
measures used to
provide ratings
differentiation based
on management's
resources, operational
policies, and risk
management)
www.standardandpoors.com/ratingsdirect
Added clarifying language that funds that hold
"higher-risk investments" are rated 'BBm'.
Investments that have the following
characteristics are "higher-risk investments":
--Securities that are unrated and that
Standard & Poor's does not consider to be the
equivalent of 'A-1' or better, as well as
securities that are rated below 'A-1' or below
'A+'. --Issuer concentrations that exceed
stated percentages for specific rating
categories. --New investments that Standard
& Poor's rates 'A-1', that are on CreditWatch
with negative implications, and that mature in
more than 30 days. --Maturity dates in excess
of stated maximums for specific rating
categories. --Limited liquidity/illiquid
investments that comprise more than 10% of
fund assets. --The market value of interest
rate swaps that comprise more than 10% of
fund assets. --Maturity extension feature that
the investor does not control. (An exception is
when a security has an extension tenure of
less than or equal to five business days and
the extension event exists to provide
additional time for payment/trade settlement
issues as outlined in program documentation.)
--High price volatility.
The analysis of management does not, in
itself, raise the overall fund rating--the impact
of the analysis is either neutral or negative.
The management section of the criteria
consists of four sections that maintain binary
tests or potential adjustment factors: --Depth,
experience, and adequacy of staff (one binary
test); --Credit research and analysis (one
binary test and one set of potential
adjustment factors); --Pricing (one binary test);
and --Internal controls (five sets of potential
adjustment factors).
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Credit research and
analysis factors
Provided an outline of the factors of
credit research and analysis used to
determine PSFR.
None
A fund receives a 'BBm' rating if: --It does not
have the resources, policies, and procedures
to manage the credit risks of the fund's
investments to ensure the fund maintains a
stable and/or accumulating NAV (or the lack
of adherence to these policies and
procedures). --Detailed, issuer-specific credit
analyses (i.e., documented qualitative review
of each issuer speaking to components of
analysis that factored into the approval of
each name). This may be provided by an
outside source. ---- The absence of two or
more of these factors will result in the PSFR
being lowered by one category: --Use of
approved issuer list and a process for
adding/removing names to eligible issuer list.
--Daily monitoring of credit quality of
approved investments and periodic, formal
review of each issuer. --Process for
responding to distressed credit situations.
--An internal credit rating scale (this provides
evidence that independent analysis has been
done, particularly if a credit committee must
assign or approve the internal ratings). The
adjustments do not apply if the fund limits
investments to maturities of 30 days or less
with the highest Standard & Poor's short-term
rating ('A-1+') or invests exclusively in
sovereigns rated 'AA-' or higher.
Breaches of
metric/threshold of
quantitative criteria
and cure periods for
breaches
Provided general guidance as to how
we would evaluate various deviations,
such as active versus passive,
frequency of occurrence, and some
quantitative measures regarding when
a rating action would be taken.
None
We have established detailed cure periods
that drive rating decisions. For example: --Up
to 5 business days for NAV deviations --10
business for diversification and other credit
quality metrics --10 business days for maturity
deviations --Tiered cure periods for
investments downgraded below 'A-1' based
on percent of exposure and long-term issuer
rating and CreditWatch status. ----- The rating
on a fund will be lowered by one category
when three specific management actions
cause the fund to breach a metric/threshold
listed in table 1 over a 12-month period. If a
fund consistently breaches a metric/threshold
over a 12-month period that is not the result
of a specific management action, the rating
will be lowered by one category. The
magnitude of these events determines the
frequency of the breaches used to lower the
fund rating.
Standard & Poor’s | RatingsDirect on the Global Credit Portal | June 8, 2011
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Stress testing
None
Proposed that all funds conduct
weekly stress testing and submit
sample results at our annual
review meetings. The weekly
stress test should show the impact
of each of the following scenarios
(and a combination of those
scenarios): 1. Parallel interest-rate
shifts of +/- 25, 50, 75, and 100
basis points; 2. Asset decreases
(i.e., redemptions) of 10%, 15%,
20% and 25%. (If the historical
largest one-day net redemption for
the fund was more than 25%
and/or the largest voluntary
shareholder is more than 25%,
then those larger percentages
should be used in the matrix in lieu
of the 25%.)
Criteria item
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
Credit quality
Counterparty (i.e., repo) Unrated entities that are at least 50%
directly owned by rated parents are
considered to have the same level of
credit risk as the parent when
considering counterparty credit risk for
these transactions.
Counterparties should have an
explicit issuer or counterparty
credit rating from Standard &
Poor's or a guaranty of their
obligations from a Standard &
Poor's rated entity.
The rating on a fund is lowered by one
category if it does not conduct stress tests at
least monthly. This reduction does not apply
to a fund that holds only overnight
investments. The stress test for
investment-grade-rated funds should show
the impact in each of the following scenarios
(and a combination of those scenarios):
--Parallel interest-rate shifts of plus/minus
200 bps in 25-basis-point increments. --Asset
decreases (i.e., redemptions) of 10%, 15%,
20%, 25%, and the percentage of the largest
historical five business day net redemptions
for the fund. Note: If the largest voluntary
shareholder is more than 25% of net assets,
then use that larger percentage in the stress
test in lieu of the 25%. --A downgrade of the
largest issuer exposure. --The widening and
narrowing of credit spreads (based on current
market conditions).
Adopted as proposed
Deposits with foreign
bank branches
Bank deposits with a branch outside the
parent bank's domicile should be with
host sovereign countries that are rated
at least 'A-1'. When calculating the
fund's credit quality breakdown, the
lower of the ratings on the bank or the
sovereign should be used. Obligations
from a branch located in a host
sovereign country that is rated below
'A-1' would be eligible if secured with a
letter of guarantee by, or issued as a
direct obligation of, a parent bank
(issuer/counterparty) rated 'A-1' or
'A-1+'. An exception to this rule can be
made when an offshore domicile
permits banks to operate with an
offshore bank license rather than a local
bank license.
Exposures to 'A-2'
rated credits
0% for 'AAAm'; 5% overnight for 'AAm'; 0% maximum for all
Adopted as proposed
10% overnight for 'Am'; 25% overnight investment-grade PSFR categories.
for 'BBBm'; No max for 'BBm'
Municipal securities
not rated by Standard
& Poor's
If the security does not have a
short-term rating from Moody's or Fitch,
the long-term rating must be in one of
the two highest categories.
www.standardandpoors.com/ratingsdirect
The credit quality of a branch is equivalent to
the bank itself unless the branch is located in
another jurisdiction. In this case, the rating on
a branch is capped at the rating on the "host"
sovereign if: Actions of the host sovereign
could affect the branch's ability to service its
obligations. AND The branch's creditors
cannot access all of their funds in a timely
manner via any other branch located in
another jurisdiction. (See paragraphs 92-95
for additional details.)
Proposed that if the security does
not have a short-term rating from
Moody's or Fitch, the long-term
rating must be in the highest
category.
Adopted as proposed
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Unrated municipal
bonds secured by an
escrow account
None
Proposed that rated funds provide Adopted as proposed
us their independent credit
analysis and relevant bond
documents for us to determine
whether the security is consistent
with the relevant PSFR category.
Defeased debt is reviewed to
assess whether there are credit,
legal, or operational considerations
that are not consistent with our
methodology, which generally
provides for full and timely
payments to investors.
Unrated securities
backed by municipal
bond insurance
None
Proposed that unrated municipal
Adopted as proposed; considered "higher-risk
securities backed by bond
investments"
insurance are inconsistent with the
criteria for investment-grade
PSFRs.
Maximum exposure to
municipal securities
rated only by Moody's
or Fitch
For all PSFRs, typically up to 10% (if
certain conditions are met), but may
vary based on maturity of securities.
15% maximum aggregate exposure
to investments that meet these
conditions: --Rated in the highest
short-term rating category by
Moody's or Fitch and has a
long-term rating in the two highest
rating categories. --Rated in the
highest short-term rating category
by Moody's or Fitch, and has a
long-term rating that is in the
highest rating category by Moody's
or Fitch.
Adopted as proposed, but expanded criteria
for rating categories below 'AAAm'. The
maximum percentage exposures to
investments that meet the conditions outlined
below for each rating category are: 'AAAm' =
15%; 'AAm' = 20%; 'Am' = 25%; 'BBBm' =
30%; 'BBm' > 30%; 'Dm' = N.A. --Rated in the
highest short-term rating category by Moody's
or Fitch and has a long-term rating in the two
highest rating categories. --Rated in the
highest short-term rating category by Moody's
or Fitch, and has a long-term rating that is in
the highest rating category by Moody's or
Fitch. (Note: These limits do not apply to
securities that possess a direct pay letter of
credit rated 'A-1+' or 'A-1' by Standard &
Poor's. )
Maximum exposure to 10% for all rating categories
unrated
credit-enhanced
VRDOs; following
additional credit review
None
AAAm' = 10%; 'AAm' = 15%; 'Am' = 20%;
'BBBm' = 25%; 'BBm' > 25%; 'Dm' = N.A.
Maximum exposure to
unrated municipal
bonds secured by an
escrow account;
following additional
credit review
None
AAAm' = 25%; 'AAm' = 33%; 'Am' = 40%;
'BBBm' = 50%; 'BBm' > 50%; 'Dm' = N.A.
None
Standard & Poor’s | RatingsDirect on the Global Credit Portal | June 8, 2011
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Custodian credit risk
Generally, a rated fund's custodian
None
should be rated at least 'A-2' by
Standard & Poor's or be deemed
equivalent to 'A-2' in consultation with
Standard & Poor's fund analysts.
Nevertheless, if the legal and regulatory
framework for a domicile where assets
held by a custodian of rated funds
proves for clear segregation and
protection of all fund assets, with quick
and timely retrieval of those assets in
the event of the custodial bank
insolvency, then a lower minimum
rating requirement may be acceptable
for the custodial bank. Domiciles that
have sufficient legal and regulatory
framework in place to provide for the
safety of assets held with custodians
include: Australia, Bermuda, Cayman
Islands, Channel Islands, Ireland, Japan,
Luxembourg, Mexico, the U.K., and the
U.S.
Criteria item
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
Floating-rate credit cards ABS =
maximum scheduled (or expected)
maturity of two years (762 days).
Floating-rate auto ABS = maximum
legal final maturity of two years (762
days)
Maximum legal final maturity of
397 days
Adopted as proposed
Maximum legal final
maturity for
floating-rate securities
from nonsovereign
government issuers or
sovereign government
issuers rated below
'AA-'
Two years (762 days)
Maximum legal final maturity of
397 days
Adopted as proposed
Maximum WAM(R)
AAAm' = 60; 'AAm' = 75; 'Am' = 90;
'BBBm' = 90; 'BBm' > 90; 'Dm = N/A
AAAm' = 60; 'AAm' = 70; 'Am' = 80; Adopted as proposed
'BBBm' = 90; 'BBm' > 90; 'Dm' =
N/A
WAM(F), also known
as weighted average
life
None
AAAm' = 90; 'AAm' = 100; 'Am' =
Adopted as proposed
110; 'BBBm' = 120; 'BBm' > 120;
'Dm' = N/A May be increased by
30 days if invested only in
government/GSE floaters. If the
fund invests in a combination of
government and nongovernment
floaters, the maximum is based on
the weighted average of exposures
to each type of floater (i.e.,
between 90 and 120 days for
'AAAm').
Maturity
Maximum legal final
maturity for
asset-backed securities
(e.g., credit cards and
auto loans)
www.standardandpoors.com/ratingsdirect
There is no minimum rating for a custody bank
if the fund's custodial bank is domiciled in a
country where the legal and regulatory
framework provide for clear segregation and
protection of all fund assets. The domiciles
that have sufficient legal and regulatory
frameworks to provide for the safety of assets
held with custodians include Australia,
Bermuda, the Cayman Islands, the Channel
Islands, Ireland, Japan, Luxembourg, Mexico,
New Zealand, the U.K., and the U.S. A fund
receives a rating of 'BBm' if its assets are
held by a custodial bank rated below 'A-2' and
the bank is domiciled where the legal and
regulatory framework does not provide for
clear segregation and protection of all fund
assets. Custodial banks that are wholly
owned by a rated parent receive the same
treatment as the parent as long as they
remain integral to the parent's operating
strategy and they are prudently operated, as
demonstrated by good risk-management
systems and controls and a sound operational
infrastructure.
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Weighted average
maturity (WAM)
adjustments
Maximum WAM(R) can be lowered for
a particular rating category if: --Fund is
managed by inexperienced fund
manager. --Asset size is less than $100
million. --Fund has a highly
concentrated or highly volatile
shareholder base. --Operating history is
limited. --High concentrations (more
than one-third) in any one U.S.
government agency issuer.
None
Criteria item
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
Liquidity
FDIC Temporary
Liquidity Guarantee
Program (TLGP)
guaranteed
floating-rate securities
These securities with legal final
maturities of more than 397 days but
less than two years should count
toward the fund's 10% limited
liquidity/illiquid basket.
Proposed excluding these from a
rated fund's 10% limited
liquidity/illiquid basket.
Adopted as proposed
The following securities should be
included in the limited liquidity/illiquid
basket (maximum 10%): Securities that
possess an extension feature controlled
by the issuer, CDOs, CLNs, and market
value-based securities.
Proposed the following securities
were inconsistent with our rated
funds: Securities that possess an
extension feature controlled by the
issuer, CDOs, CLNs, and market
value-based securities.
Adopted as proposed and added the following
qualifier: If a security has an extension tenure
of less than or equal to five business days,
and the extension event exists to provide
additional time for payment/settlement issues
(i.e., as in the case with Straight-A Funding),
than those securities would be consistent
with investment-grade PSFR criteria.
See other sections of this table
categorized as "liquidity" for
details proposed in the RFC.
Securities that have limited liquidity or are
illiquid include: --Nonmarketable and
historically less liquid instruments with
maturities greater than five business days,
unless the fund holds an unconditional put
providing for liquidity within five business
days or if the fund is able to redeem the
investment within five business days with no
loss to invested principal. --Investments
denominated in a currency other than a fund's
base currency and swapped back into the
fund's base currency. --Windows variable-rate
demand bonds (VRDBs), X-tenders, and other
similar structures (see the "Evaluating
security-specific risks" section for more
details). --CDs that mature in more than five
business days that are not traded in a
secondary market or are subject to early
withdrawal penalties. --Pooled bank deposit
programs (e.g., Certificate of Deposit
Accounts Registry Service [CDARS], Deposit
Liquidity Accounts, Insured Network Deposits,
and Federally Insured Cash Accounts [FICA])
with a maturity of more than one business
day.
Investments with high
price volatility
Limited liquidity/illiquid Published a detailed list and criteria
investments
regarding limited liquidity/illiquid
investments. The update in the right
column of this row outlines a similar
approach to determining an
investment's liquidity and updates the
list of investments that are illiquid or
possess limited liquidity.
Standard & Poor’s | RatingsDirect on the Global Credit Portal | June 8, 2011
The maximum WAM limit (to reset and to
final) will likely be reduced by five days for
each of the following: --An investment advisor
has no prior experience managing a principal
stability rated fund. --A fund has a
concentrated shareholder base (i.e.,
comprises 10 or fewer accounts). --A fund has
assets of less than 100 million (in the fund's
base currency). See table 7 for potential
mitigants to WAM adjustments.
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Marketable securities
and nonmarketable
securities
None
In our proposal, marketable
securities were defined as
securities that can be easily
converted into cash and generally
have highly liquid markets,
allowing the security to be sold in
a short time at a price that is at or
near the value as marked in the
portfolio. Marketable securities
include CP, banker's acceptances,
Treasury bills, and other
short-term, high-quality
money-market instruments rated
'A-1' or better. Examples of
nonmarketable securities include
repurchase agreements, time
deposits, CDs, master notes,
promissory notes, funding
agreements, and loan participation
notes.
Marketable securities include CP, banker's
acceptances, CDs traded in the secondary
market, Treasury bills, and other short-term,
high-quality money market instruments that
Standard & Poor's rates 'A-1' or better.
Examples of nonmarketable securities include
repurchase agreements, time deposits, master
notes, promissory notes, funding agreements,
insurance policies, and loan participation
notes.
Maturity of
nonmarketable
securities that count
toward 10% limited
liquidity/illiquid basket
Nonmarketable securities that mature
within seven days (five business days)
count toward the 10% limited
liquidity/illiquid basket.
For all PSFR levels, proposed to
reduce the maturity threshold for
nonmarketable securities that
count toward our 10% limited
liquidity/illiquid basket to one
business day from seven days (five
business days).
Maintained original criteria that states:
Nonmarketable securities that mature within
five business days count toward the 10%
limited liquidity/illiquid basket.
Criteria item
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
Diversification
Fully collateralized
25%
investment per 'A-1'
rated counterparty (one
business day)
None
No change; 25%
Fully collateralized
10%
investment per 'A-1'
rated counterparty (two
to five business days)
None
No change; 10%
Fully collateralized
investment per 'A-1'
rated counterparty
(greater than five
business days)
5%
Adopted as proposed; 5%
Fully collateralized
No maximum
investment per 'A-1+'
rated counterparty (one
business day)
50%
Adopted as proposed; 50%
Fully collateralized
25%
investment per 'A-1+'
rated counterparty (two
to five business days)
10%
Adopted as proposed; 10%
Fully collateralized
investment per 'A-1+'
rated counterparty
(greater than five
business days)
5%
Adopted as proposed; 5%
10%
10%
www.standardandpoors.com/ratingsdirect
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Fully collateralized
investment per 'A-2'
rated bank
--Maturity limit on deposit = one day
--Collateral (%, maturity, pricing
frequency) = 101% with U.S. Treasury
securities/priced at least weekly
--Maximum exposure per bank = 2.5%
--Maximum aggregate exposure = 5%
--Long-term bank rating = at least 'BBB'
with a stable outlook
--Maturity limit on deposit = 397
Adopted as proposed
days --Collateral (%, maturity,
pricing frequency) = 101%-105%
based on the maturity of the
security and the collateral pricing
frequency. National government
(sovereign) issuers rated 'AA' or
better. --Maximum exposure per
bank = 2.5% --Maximum aggregate
exposure for all rated lower than
'A-1' and NR = 10% --Long-term
bank rating = At least 'BBB' with a
stable outlook
Fully collateralized
investment per 'A-3' or
lower-rated bank and
unrated bank
Same as above
--Maturity limit on deposit = 397
days --Collateral (%, maturity,
pricing frequency) = 105%-110%
based on the maturity of the
security and the collateral pricing
frequency. National government
(sovereign) issuers rated 'AA' or
better.--Maximum exposure per
bank = 0.25% --Maximum
aggregate exposure for all rated
lower than 'A-1' and NR = 10%
--Long-term bank rating = None
Adopted as proposed
Maximum aggregate
fully collateralized
investment exposure
per 'A-1' rated repo
counterparty
25%
None
No change; 25%
Maximum aggregate
fully collateralized
investment exposure
per 'A-1+' rated
counterparty
No maximum
50%
Adopted as proposed; 50%
Fully collateralized
5%
maximum exposure for
nontraditional
(nonqualifying) repos
per 'A-1+' or 'A-1' rated
counterparties (all
maturities)
None
No change; 5%
Maximum exposure to
any one similarly rated
or higher-rated fund
25%
5%
AAAm' = 10%; 'AAm' = 15%; 'Am' = 20%;
'BBBm' = 25%; 'BBm' > 25%; 'Dm' = N.A.
Maximum per issuer
for maturities of one
business day
(uncollateralized or not
fully collateralized)
25%
5% (10% overnight bank deposits
rated A-1 or better)
Adopted as proposed; 5% (10% overnight
bank deposits rated A-1 or better)
Maximum per issuer
for maturities two to
seven days
(uncollateralized or not
fully collateralized)
10%
5%
Adopted as proposed; 5%
Maximum per issuer
for maturities > seven
days (uncollateralized
or not fully
collateralized)
5%
None
No change; 5%
Standard & Poor’s | RatingsDirect on the Global Credit Portal | June 8, 2011
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Maximum exposure per
sovereign government
related/guaranteed
entity rated 'A-1+' or
'AA-' or higher
Maximum 33.33% exposure to any
single government agency. When
exposures exceed 40%, a lower
maximum WAM will be applied. (For
example, 50% exposure to any one
agency will reduce maximum WAM by
eight days.) For government-only money
market funds, no shorter WAM is
applied if exposures beyond the 33.33%
maximum mature in 30 days or less.
Proposed that for all
investment-grade-rated funds,
investments that exceed 33.33% in
any one agency would comprise
maturities of 30 days or less.
The maximum exposures of total fund assets
to any one sovereign government-related
entity or sovereign government-guaranteed
entity are: 'AAAm' = 33%*; 'AAm' = 50%*;
'Am' = 67%*; 'BBBm' = 75%*. (Note: *GRE or
government-guaranteed investments rated
'AA-' or higher with final maturities of 30 days
or less are excluded from these limits.) The
maximum exposure to investments
guaranteed by and GREs related to two or
more governments (i.e., World Bank) is 5%.
Sovereign (national
government) 'A-1+'
rated (all maturities)
No maximum
No change
No change; no maximum
Sovereign (national
25%
government) 'A-1' rated
(overnight)
No change
No change; 25%
Sovereign (national
10%
government) 'A-1' rated
(two to five business
days)
No change
No change; 10%
Sovereign (national
5%
government) 'A-1' rated
( > five business days)
No change
No change; 5%
Criteria item
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
The underlying index of a variable- or
floating-rate instrument resets to
indices that are highly (i.e., more than
95%) correlated with the effective fed
funds rate
The underlying index of a variable- Adopted as proposed
or floating-rate instrument would
reset to indices that are highly (i.e.,
more than 95%) correlated with
three-month LIBOR, in addition to
the current criteria for maintaining
a correlation of at least 95% of the
effective fed funds rate
Previous criteria
Proposed changes in 2010 RFCs Updated criteria
Index and spread risk
Floating-rate
securities--index used
in the variable-rate
adjustment formula
Criteria item
Security-specific risks
Repo diversification
Did not have different guidelines based
criteria for funds
on types of collateral.
domiciled or registered
outside the U.S.
www.standardandpoors.com/ratingsdirect
None
Traditional or qualifying repo diversification
criteria apply if investment-grade sovereign
government bonds collateralize the
repurchase agreements (e.g., 25% per 'A-1'
rated counterparty for overnight repo). If
anything other than investment-grade
sovereign government bonds collateralizes the
repurchase agreement, our methodology
applies the nontraditional or nonqualifying
criteria, that is 5% maximum per
counterparty.
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Table 12
Highlights Of Changes To PSFR Criteria (cont.)
Interest rate swaps
None
None
Interfund lending
Adherence to the following guidelines
None
is consistent with investment practices
of highly rated funds: --Opinion written
by either in-house or external counsel
for the fund evidencing that the fund
lending cash has a lien on the
borrowing funds' assets that is senior to
that of fund shareholders and service
providers (i.e., custodians, distributors,
and investment advisers). --Established
guidelines that specify percentages that
each rated fund may lend (to each fund
and in aggregate) as well as the
percentages that each borrowing fund
may borrow. Additionally, rated funds
should: --Refrain from lending to funds
with more than 35% emerging markets
exposure; --Refrain from lending to
funds that have lost greater than 25%
of their assets within the past five
business days (through any combination
of redemptions and market
depreciation); --Refrain from borrowing
from other funds, except to meet
emergency liquidity needs (i.e., not to
leverage the fund or otherwise enhance
yield); and --Provide details of these
transactions as part of the weekly
surveillance information.
The aggregate market value of the interest
rate swaps that exceed 10% of fund assets
are "higher-risk investments." In addition,
swaps that do not have the following
characteristics are "higher-risk investments":
--Entered into with a counterparty rated 'A-1'
or better; --Priced daily; --Rated funds are able
to unwind both sides of the swap transaction
prior to maturity; and --Rated funds have the
right to sell the underlying security while the
swap is in force. For the purposes of applying
table 5, WAM(R) and WAM(F) are calculated
both including and excluding the effects of
interest rate swaps that reduce portfolio
maturities.
Interfund lending in our rated funds is
evaluated the same way that funds investing
in other funds are evaluated.
D. Glossary
Accumulating NAV funds
143. Accumulating NAV funds generally operate under the same investment guidelines as constant NAV funds, and
income is accrued daily. However, unlike constant NAV funds, income is not distributed. Instead, income is
reflected in an increase in the value of the fund shares and is realized upon redemption of those shares at a higher
price.
Dilution
144. Dilution can accelerate fund losses when interest rates are rising, causing a fund to break the dollar. Breaking the
dollar occurs when a fund's marked-to-market NAV drops below $0.995, at which point investors are redeemed at
$0.99. For example, a 200-basis-point rise in interest rates causes a 60-day WAM portfolio's market value to drop
to $0.996712 per share. A subsequent 35% redemption (paid out at $1.00 per share) dilutes the portfolio's market
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Criteria Financial Institutions Fixed-Income Funds: Methodology: Principal Stability Fund Ratings
value to $0.994942, thus breaking the dollar (see table 13).
Table 13
NAV Dilution--Assumptions
Portfolio asset value:
$100 million
Weighted average maturity:
60 days
Number of shares:
100 million
Share value:
$1.00
Share price:
$1.00
Event 1: Interest rates rise 200 basis points (2.00%)
Result
Number of shares:
100,000,000
Portfolio value drops to:
$99,671,233
Unrealized loss:
$328,767 ($100,000,000 -$99,671,233)
Share value
$0.996712 ($99,671,233/100,000,000 shares)
Share price:
$1.00 per share
Event 2: Following event 1, fund experiences 35% redemption
Result
Number of shares:
Portfolio value drops to:
65,000,000
$64,671,233 ($99,671,233 - $35,000,000)
Unrealized loss:
$328,767
Share value:
$0.994942 ($64,671,233/65,000,000 shares)
Share price:
$0.99 per share
Hot money
145. Hot-money investors move their investments in and out of a fund based primarily on interest rate movements. These
shareholders can introduce a high level of volatility to the asset base of a fund.
Index and spread risk
146. Index risk is the possibility that the coupon of a VRN or FRN will not adjust in tandem with money market rates.
Spread risk is the possibility that the spread on a floating-rate note will be lower than the prevailing market rate.
Index risk can arise when the variable-rate coupon's adjustments are based on a non-money market index, a money
market index in which the coupon adjusts based on a multiple (or fraction) of the index, or an index based on the
difference (or spread) between two or more indices.
Liquidity
147. The liquidity of a security refers to the speed at which that security can be sold or disposed of in the ordinary course
of business at approximately the value ascribed to it by the fund.
Money fund portal
148. Money fund portals are Web-based systems that offer a simplified way for investors to transact with funds.
Stress testing
149. Stress testing (sometimes referred to as "scenario" or "what-if" analysis) can be an effective tool to track the
sensitivity of a fund's marked-to-market NAV to changes in interest rates, credit spread movements, net
redemptions, and the combined effects of these items.
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WAM(R) and WAM(F)
150. To more accurately monitor a rated fund's interest rate and spread risk, two measures of a portfolio's WAM are
used--WAM to reset, or WAM(R), and WAM to final, or WAM(F). WAM(R) uses the interest-rate reset date as the
effective maturity in calculating the WAM, whereas WAM(F) (also known as weighted average life, or WAL) is
calculated based on the stated final maturity for each security.
E. Detailed Table Of Contents
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Criteria Financial Institutions Fixed-Income Funds: Methodology: Principal Stability Fund Ratings
VIII. RELATED CRITERIA AND RESEARCH
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
2010 Annual Global Corporate Default Study And Rating Transitions, March 30, 2011
Request for Comment: Fund Ratings Criteria, Sept. 17, 2010
Global Short-Term Ratings Performance And Default Analysis (1981-2009), May 20, 2010
Request For Comment: Principal Stability Fund Rating Criteria, Jan. 5, 2010
Methodology For Evaluating Fund Management In Principal Stability Fund Ratings, Aug. 17, 2009
Treatment Of FDIC-Guaranteed Commercial Paper In Rated Money-Market Funds, April 9, 2009
Fixed-Income Funds: Principal Stability Fund Ratings Criteria Updated, March 10, 2009
Fixed-Income Funds: Security-Specific Criteria, Feb. 6, 2007
Fixed-Income Funds: Market Price Exposure, Feb. 5, 2007
Fixed-Income Funds: Principal Stability Fund Ratings Criteria For Offshore And European Money Market Funds,
Feb. 2, 2007
Fixed-Income Funds: Process And Overview, Feb. 2, 2007
Fixed-Income Funds: Management, Feb. 2, 2007
Fixed-Income Funds: Tax-Exempt Money Market Funds, Feb. 2, 2007
Fixed-Income Funds: Credit Quality, Feb. 1, 2007
Leveraged Funds: Market Value Criteria and Overcollateralization Requirements, March 1999
Leveraged Funds: Market Value Ratings, December 1997
These criteria represent the specific application of fundamental principles that define credit risk and ratings
opinions. Their use is determined by issuer- or issue-specific attributes as well as Standard & Poor's Ratings
Services' assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology
and assumptions may change from time to time as a result of market and economic conditions, issuer- or
issue-specific factors, or new empirical evidence that would affect our credit judgment.
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