Single-State money funds most exposed to SEC rule change: Fitch

Currently, single-state money market funds make heaviest use of a 25% guarantor exemption.

June 13, 2014 8:59 IST | India Infoline News Service
New Securities and Exchange Commission (SEC) proposals intent upon fostering greater levels of money market fund (MMF) diversification would leave single-state MMFs the most directly affected should they be adopted, according to Fitch Ratings. Currently, single-state money market funds make heaviest use of a 25% guarantor exemption.

Rule 2a-7 currently applies a 10% concentration limit on providers of guarantees or demand features from a single institution. However, this limit applies to only 75% of the portfolio. This creates a 25% basket for guarantees and demand features from a single first tier provider.

To limit indirect risk to a guarantor, the SEC has proposed removing the stipulation that limits the current 10% concentration limit on guarantors to only 75% of the portfolio and instead applying the 10% concentration limit to the fund's entire portfolio.

Single state funds make heavier use of this 25% exemption compared with national tax-exempt and prime money market funds. This reflects the more limited supply of standalone strong issuers in which single state funds can invest and, therefore, a greater reliance on guarantees.

A higher level of guarantor diversification will make it harder for single state funds to meet minimum diversification requirements. Furthermore, it may force these funds to rely on weaker guarantors and/or invest in weaker, less liquid underlying credits.

Based on a portfolio review of 121 Fitch and non-Fitch rated prime MMFs (using data provided by Crane Data, LLC as of March 31, 2014), most diversified funds meet the recently proposed SEC diversification guidelines. These proposals were in addition to the widely discussed floating net asset value and fees and gates proposals.

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