Risk Management

SEC Strips Out Credit Ratings for Money Funds

A low credit rating on a short-term security will no longer prohibit a money market fund from investing in it.
Katie Kuehner-HebertSeptember 17, 2015
SEC Strips Out Credit Ratings for Money Funds

The Securities and Exchange Commission on Wednesday adopted measures to remove credit rating references in the rules that govern money market funds. The move is part of a continuing effort since the financial crisis to rely less on the opinions of credit-rating agencies.

“Reducing reliance on credit ratings to determine which securities money market funds can hold is an important part of our efforts related to these funds,” SEC chair Mary Jo White said in a press release.

The money market fund rule 2a-7 currently requires money market funds to invest only in securities that have received one of the two highest short-term credit ratings or, if they are not rated, securities that are of comparable quality. The rule also requires a money market fund to invest at least 97% of its assets in securities that have received the highest short-term credit rating.

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The amendments will eliminate these requirements, the SEC said. Instead, a money market fund is limited to investing in a security if the fund determines that the security presents minimal credit risks after analyzing certain prescribed factors.

The SEC had previously adopted new regulations to strip references to ratings out of some of its other rules, in accordance with the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank requires the SEC to review its rules that use credit ratings as an assessment of creditworthiness and replace those credit-rating references with other appropriate standards, according to Reuters.

“But the agency has struggled a bit more with how to come up with a proper alternative way to measure creditworthiness for money funds, which are highly liquid investments that many companies use for cash management,” Reuters wrote.

The rules adopted Wednesday will be effective 30 days after their publication in the Federal Register, and the compliance date will be Oct. 14, the SEC said.

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