(The following statement was released by the rating agency)
July 09 – Fitch Ratings says that there are no rating implications following the
implementation of new regulations for South African money market funds (MMFs).
Fitch believes that the newly implemented regulatory framework may lead some
South African MMFs to consider adding unrated corporate exposures to the
portfolio. Under the previous regulatory framework, issuer diversification and
eligibility rules were driven by ratings, while the new regulatory framework
replaces ratings with market capitalisation (among other criteria). In practice,
many MMFs may be unable to add unrated exposures to their portfolios given the
investment guidelines governing the funds in their investor mandates, which
typically include ratings-based limits. Furthermore, the majority of high
quality issuers considered for inclusion in MMF portfolios are usually rated.
Fitch would not be able to rate a fund with a material unrated corporate
exposure at the ‘AA+(zaf)’ Fund Credit Rating level (i.e. where Fitch rates some
South African MMFs currently).. Fitch bases its Fund Credit Rating analysis on
the underlying credit quality of a fund’s portfolio, as expressed in the ratings
assigned to the invested instruments. Absent public credit ratings Fitch
typically assumes the issuer’s credit quality is equivalent to a ‘CCC(zaf)’
rated issuer, which has a strongly negative impact in Fitch’s calculation of a
fund’s weighted average rating factor and as a result its Fund Credit Rating.
Consistent with its rating criteria and in only very limited circumstances,
Fitch may consider a fund manager’s own internal credit assessment of an unrated
issuer in its rating analysis, provided that Fitch is comfortable with the
rigour of the fund manager’s credit research process and outputs.
As of end-June 2012, no Fitch-rated South African MMF had exposure to unrated
corporates. The credit quality of these funds is high and Fitch does not expect
any material change in portfolio strategy among the rated funds. Fitch monitors
funds’ portfolios at least monthly.
Fitch views positively the clarification of maturity limits for South African
MMFs. Under the newly implemented regulatory regime South African MMF’s weighted
average maturity (WAM, a measure based on time to the next interest-rate reset
date) is limited to 90 days and weighted average life (WAL, a measure based on
time to final legal maturity) is limited to 120 days. Previously applicable
regulation did not distinguish between WAM and WAL and as a result a temporary
90-day limit was enforced for funds’ WAMs and WALs pending the implementation of
the revised regulations.
In Fitch’s opinion, some South African MMFs may now elect to marginally extend
their maturity profiles. However, the potential increase to funds’ WALs is
limited to an increase of only 30 days so Fitch does not expect any major
changes. Rated South African MMFs typically maintain conservative maturity
profiles consistent with the newly implemented regulatory framework. The new
regulation allows for the use of interest rate risk hedging. Fitch will monitor
rated funds and the industry closely to determine the take-up and use of
interest rate risk hedging in South African MMFs. Fitch maintains ratings of MMF
employing interest rate hedging in other jurisdictions.
Fitch understands that the newly implemented regulatory framework provides for
the continued inclusion of asset-backed commercial paper (ABCP) conduits in
South African MMFs, subject to minimum issuer (or the related group issuer’s)
capital and reserves. Maximum exposure per ABCP conduit will be capped at 5% per
the new regulations and aggregate exposure to ABCP at 20% of a fund’s total
portfolio. The aggregate issuer exposure limit is a new addition to the
regulatory framework which will limit funds’ maximum exposure to ABCP conduits,
while the replacement of ratings-based issuer diversification limits with an
issuer limit of 5% for ABCP will substantially reduce maximum allowable exposure
to any individual ABCP conduit. Fitch would therefore expect ABCP to form a
smaller but nonetheless still meaningful component of the eligible investment
universe of South African MMFs. Funds that do use ABCP will likely need to
reduce overall and individual exposures.
South Africa’s Financial Services Board implemented Notice 80 of 2012 from 1
July 2012, which covers collective investment schemes, including MMFs, under the
Collective Investment Schemes Control Act (number 45 of 2002).