Response to joint Consultation on mechanistic references to credit ratings in the ESAs’ guidelines and recommendations
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However, we are concerned about the prohibition for managers of MMFs to seek fund level ratings and to reference credit rating agency (CRA) ratings at the instruments level, as set out in the European Commission’s proposal of Money Market Funds (MMFs) Regulation published in September 2013.
MMF fund level ratings are important for end-investors for a number of reasons. Fund level ratings allows the end-investor to identify analogous MMFs on which to carry out further research and work ahead of their final investment decision. It also allows them to contrast the performance of MMFs with baseline requirements in terms of liquidity and credit management. Credit rating agencies provide a level of independent monitoring and analysis that is difficult for end-investors to pursue on their own. For example, credit rating agencies are recipients of material non-public information on issuers, such as future financing plans, to which end-investors are not privy. A ban on external ratings would also be punitive on end-investors as they will otherwise have to commission such ratings at their own expense.
The prohibition of referencing CRA ratings will lead to less consistency and comparability across MMFs for the end-investor. Without fund level ratings or comparable risk information provided by CRA ratings at the instrument level, the only way for end-investors to differentiate between MMFs will be relative yield, which we believe to be a retrograde step.
In particular, do you agree with the proposed revisions of the ESMA Money Mar ket Funds Guidelines? If not, please suggest an alternative.
We agree with the proposed revisions of the ESMA Money Market Funds Guidelines in relation to the use of external ratings. BlackRock is committed to fundamental research and independent credit evaluation. BlackRock has its own credit analysis framework, which consists of four different pillars: qualitative analysis, quantitative analysis, key positive characteristics and key negative characteristics. We conduct a qualitative assessment of management and industry positioning and a quantitative analysis of corporate capital structures. In the key positive characteristics, we look at the management team, their pricing power and capital structure (among other things), while we focus on volatile revenues, downside risks that cannot be clearly defined and weak management teams under key negative characteristics (see BlackRock ViewPoint, “Reform of Credit Rating Agency regulation in Europe: An End-Investor Perspective”, April 2012). Our credit analysts apply an independent assessment of each security both prior to a security’s inclusion in an end-investor’s portfolio and throughout the holding period. We believe that this conforms to ESMA’s expectations of how MMF investors should use credit ratings.However, we are concerned about the prohibition for managers of MMFs to seek fund level ratings and to reference credit rating agency (CRA) ratings at the instruments level, as set out in the European Commission’s proposal of Money Market Funds (MMFs) Regulation published in September 2013.
MMF fund level ratings are important for end-investors for a number of reasons. Fund level ratings allows the end-investor to identify analogous MMFs on which to carry out further research and work ahead of their final investment decision. It also allows them to contrast the performance of MMFs with baseline requirements in terms of liquidity and credit management. Credit rating agencies provide a level of independent monitoring and analysis that is difficult for end-investors to pursue on their own. For example, credit rating agencies are recipients of material non-public information on issuers, such as future financing plans, to which end-investors are not privy. A ban on external ratings would also be punitive on end-investors as they will otherwise have to commission such ratings at their own expense.
The prohibition of referencing CRA ratings will lead to less consistency and comparability across MMFs for the end-investor. Without fund level ratings or comparable risk information provided by CRA ratings at the instrument level, the only way for end-investors to differentiate between MMFs will be relative yield, which we believe to be a retrograde step.