We agree with the definition of sole or mechanistic reliance on ratings. Investors regard the quality of credit analysis as essential, such quality being met in the diversity of information points as inputs into holistic credit analysis. As such, we would reinforce the European Supervisory Authoroties’ position that an exclusive and passive reliance on ratings is contrary to sound investment decisions. BlackRock believes that an asset manager undertaking its own rigorous and consistent credit analysis best serves the interests of the client. Third party ratings are but one information point in our credit analysis – ratings are not a substitute for an asset managers’ own credit analysis.
Ratings provide a reference point that end-investors use to evaluate a security or an issuer’s potential eligibility for the inclusion in a portfolio. End-investors use credit ratings to compare portfolios and to define minimum investment criteria. Typically, end-investors’ holdings in specific instruments that carry third party ratings, or funds that invest primarily in such instruments, will be limited by specific investment guidelines. Minimum investment criteria that reference third party ratings provide direction to asset managers as to what securities the end-investor considers appropriate for portfolio inclusion. References to external ratings in investment guidelines play an important role to ensure investment according to pre-determined risk tolerance and/or performance expectations (see BlackRock ViewPoint, “Credit Rating Agencies: Reform, Don’t Eliminate”, July 2013).
Please see our response to question 3.
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.