Regulatory proposals under consideration by US and European regulators would, if enacted, fundamentally change the frameworks under which MMFs operate. The proposals have not, however, been finalized yet and there is a wide range of possible outcomes. This updated criteria report reflects, therefore, the current regulatory status quo.
Changes to criteria include:
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Clarification that to be eligible for a high MMF rating prime MMFs may invest up to a maximum of 35 per cent of fund assets in debt securities of supranational and government agencies of high credit quality.
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Clarification of the treatment of securities rated 'A-'on the Long-term scale and 'F1' on the Short-term scale, for the purposes of calculating the portfolio credit factor (PCF), a key measure of credit risk.
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Clarifying maturity and liquidity treatment of floating-rate notes (FRNs) issued by highly-rated sovereigns. A final maturity of up to two years (typically considered as equivalent to 730 days, with a few more days acceptable when buying securities on the "to-be-announced" market) is deemed consistent with Fitch's criteria for MMFs. Sovereign government FRNs maturing in less than 397 days are deemed as meeting daily liquidity eligibility. In addition and in view of their expected solid liquidity, US Treasury FRNs maturing between 397 days and two years are deemed as meeting weekly liquidity eligibility. .
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Repurchase agreements (repo) conducted through the US Federal Reserve's new fixed-rate reverse repo program are treated as government exposure and are not subject to the 25 per cent repo counterparty limit.
The primary focus of this criteria report is on MMFs that seek to achieve principal preservation and provide shareholder liquidity through managing credit, market, and liquidity risks. Under these criteria, MMF ratings can be assigned to those MMFs that operate as constant net asset value (CNAV) funds as well as certain variable net asset value (VNAV) funds that are managed under the same mandate of safety of principal and timely liquidity and demonstrate NAV stability.
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