Rating approach and process
A stable NAV pool or money market fund rating
reflects Standard & Poor’s opinion of the safety of
invested principal based on an analysis of portfolio
credit quality, market price exposure, and manage-
ment. Credit quality incorporates the credit risk of
securities and the counterparty risk of transaction-
based investments, such as repurchase agreements
(repos). Market price exposure relates to the poten-
tial for a decline in the market value of a money
market fund’s assets. Within this area, Standard &
Poor’s looks at weighted average maturity (WAM),
liquidity, investment concentration, variable-rate
securities, securities lending and reverse repos, share-
holder composition, and NAV deviation procedures
to name a few. In addition, the analysis of manage-
ment is based on a meeting with senior fund officials,
and on both public and private information.
The rating process begins when Standard &
Poor’s receives a written request to rate a particu-
lar pool or fund. At this point, the analyst
assigned to the fund asks for certain pertinent
information regarding the fund. Upon review of
the information, the analyst schedules a manage-
ment meeting with fund officials. The analyst next
discusses the fund with a rating committee com-
posed of senior Standard & Poor’s Fund Services’
analysts. The committee examines all relevant
information uncovered in the rating process.
Following the analyst’s rating presentation, the
committee votes on a final rating. Subsequently,
this rating is monitored on a weekly basis to
ensure accurate and current ratings. Additionally,
Standard & Poor’s conducts annual management
review meetings for each rated fund to evaluate
any changes that may have occurred in policy, phi-
losophy, personnel, operations, and controls.
Credit quality
Credit quality analysis is focused on the risks asso-
ciated with the quality, type, and diversity of the
instruments that comprise the portfolio. The credit
quality assessment for each instrument is based on
the rating that Standard & Poor’s has assigned to
the security. The minimum credit quality standards
for each pool are based on the fund’s rating catego-
ry and maturity structure. For example, pools rated
‘AAAm’ are expected to maintain at least 50% in
securities rated ‘A-1+’ by Standard & Poor’s with
no more than 50% in securities rated ‘A-1’ by
Standard & Poor’s. Additionally, securities that are
on Standard & Poor’s CreditWatch list with nega-
tive outlooks should be limited to maturities of 30
days or less. For further information and in-depth
analysis please refer to the most recent Standard &
Poor’s Fund Ratings Criteria publication.Repurchase agreements (Repos)
While Standard & Poor’s recognizes the importance
of the collateral securing repurchase agreements
(repos), our main focus with regards to the risk in
these securities is the creditworthiness of the coun-
terparty. Generally speaking, the underlying securi-
ties in traditional repos are typically ineligible
investments for money market funds, either because
of their maturity (longer than 397 days) or type
(e.g., certain mortgage-backed securities). A fund
that takes possession of such collateral will have to
sell it as soon as possible. Any delay in a fund’s
ability to sell the securities could create both liquid-
ity and market risks that are inappropriate for
money funds. This is especially true for non-tradi-
tional collateral, as these security types (e.g., non-
investment grade corporates, equities) possess high-
er potential price volatility than traditional collater-
al. For these reasons, Standard & Poor’s ratings cri-
teria calls for all counterparties used by highly rated
money market funds to be rated either ‘A-1’ or
‘A-1+’. The following bullets outline specific repo
criteria for ‘AAAm’ rated money market funds and
pools:
■The aggregate amount of all repos (regardless of
the rating) with maturities of more than seven
calendar days may not exceed 10% of a fund’s
total assets.
■Overnight repos with any single ‘A-1’ issuer are
limited to no more than 25% of a fund’s total
assets.
■Repos with maturities beyond overnight and less
than or equal to seven days with any single Issuer
(‘A-1+’) are limited to no more than 25% of a
fund’s total assets.
■Repos with maturities beyond overnight and less
than or equal to seven days with any single issuer
(‘A-1’) are limited to no more than 10% of a
fund’s total assets.
For these criteria, the maturity of a repo is
defined as the absolute maturity of the agreement.
If, however, the agreement contains a put that
would result in a lower effective maturity for the
agreement, Standard & Poor’s will review the repo
documentation to be certain of the unconditional
nature of the put feature. Standard & Poor’s has
the same criteria for both triparty and deliverable
repos. However, where a tri-party repo is used,
Standard & Poor’s will examine the fund adviser’s
procedures ensuring that the proper type and
amount of collateral is received. Standard & Poor’s
repo diversification criteria for funds rated ‘AAm’,
‘Am’ and ‘BBBm’ is identical to the bullets above
except for the permitted exposure to ‘A-2’ issuers314 Standard & Poor’s Public Finance Criteria 2007
Other Criteria