Hats off to Moody's Investors Service for stepping up its ratings policies for money market funds — even though the move has cost the ratings firm some business.
As Ignites reported yesterday, Moody's revised policy for rating money funds, placing more emphasis on liquidity and the strength of the sponsoring company, has cost the ratings firm almost 50 money fund clients since September.
The new ratings methodology took effect on Monday, but it has been publicly in the works for more than a year as Moody's and other ratings firms try to keep pace with the developing regulatory focus on money market funds.
As the nearly $3 trillion money market fund category, represented by the Investment Company Institute, struggles to maintain the status quo, regulators and ratings firms are busy rebuilding the landscape.
The most prominent issue, fueled by the September 2008 breaking of the buck by the Reserve Primary Fund, is the idea of a floating-net-asset value for money funds.
The money fund industry prefers the existing practice of keeping the NAV constant at $1 because it's good for business.
Institutional investors, which now represent 70% of all money fund investors, like the predictability of a constant NAV.
But, as we learned in 2008 when exposure to bonds from Lehman Brothers Holdings Inc. forced the Reserve Fund's NAV below $1, most retail investors still operate under the impression that a money market fund is somehow guaranteed and insured.
What Moody's, and to a lesser extent, Fitch Inc., have done is shifted from an implicit sponsor support of money funds to an almost explicit support of the products.
When Fitch revised its methodology for rating money funds in January 2010, the ratings firm lost a small number of money fund clients, according to a company representative.
But most money funds, which pay the ratings firms to evaluate and grade the funds, ideally want at least two sets of ratings. And now that Moody's is on board, that leaves Standard & Poor's as the only remaining major ratings firm without a revised methodology.
Although public statements out of S&P have suggested the company is planning to revise its money fund rating methodology, the changes have yet to take effect.
This is just the tip of the iceberg of changes looming for the money fund category.
For example, the ICI has proposed the introduction of a kind of insurance fund to backstop any sponsoring company, should its money market fund need help maintaining the $1 NAV.
It's a nice idea, but not one likely to gain the support of regulators, who appear increasingly bent on letting money funds' NAVs float.