May 12, 2010 03:02 PM Eastern Daylight Time

NEW YORK—( BUSINESS WIRE )—Fitch Ratings has reviewed the details of the recently announced reverse repurchase agreement program with money market funds (MMFs) proposed by the Federal Reserve Bank of NY (FRBNY). Given the possibility of large-scale reverse repurchase agreement transactions between rated MMFs and the FRBNY, the review focused on counterparty, collateral and liquidity policies under Fitch’s ratings criteria for ‘AAAmmf’-rated funds.

The program is designed as a policy tool that is available over time to reverse prior system-wide ‘quantitative easing.’ Information on the program can be found at of the FRBNY website (‘www.ny.frb.org ‘) under Reverse Repurchase Program Form Master Repurchase Agreement for Money Market Mutual Funds. According to information posted on the FRBNY’s website, to qualify as a repo counterparty, a money market fund must:

—Be a compliant money market find operating under Rule 2a-7;

—Have at least $20 billion in assets under management for six consecutive months;

—Have at least one year history of operations;

—Be a consistent investor in the tri-party repo market;

—Be able to confirm and arrange settlement of a significant volume of transactions with FRBNY.

In addition, money market funds must be able to satisfy the following transaction requirements in order to qualify as a repo counterparty:

—Execute repo transactions with securities margined at 100%;

—Execute repo transactions with terms of up to 65 business days, subject to an available seven-day put feature;

—Submit minimum bids of $1 billion or greater;

—Execute repo transactions for next day settlement;

—Execute the requisite repo transaction documentation.

Fitch’s rating criteria for ‘AAAmmf’ money market funds outlines minimum credit quality guidelines of ‘A/F1′ for repurchase agreement counterparties, as well as a 25% limit per counterparty. Additionally, Fitch’s criteria looks for over-collateralization levels of 102% supported by collateral consisting of U.S Treasury and government agency securities.

Prior to the FBRNY announcement of an expanded set of counterparties to include money market funds, the over-collateralization requirements in Fitch’s rating criteria were designed to limit market risk arising from holding the collateral in case of a broker/dealer failure. Fitch’s criteria, however, did not envisage repo transactions with the FRBNY as counterparty. As such, the counterparty risk of repo transactions with the FRBNY is not equivalent, in Fitch’s view, to the risks incurred while dealing with other financial entities even if highly rated (‘A/F1′ or higher). Therefore, Fitch views transactions under the FRBNY’s program to be consistent with rating criteria applicable to ‘AAAmmf’ money market funds.

Typically, rated money market funds enter overnight repo transactions for the purposes of managing daily liquidity and satisfying daily liquidity requirements under Rule 2a-7 and Fitch’s criteria. However, from time to time MMFs execute term repos. If the term of the repo exceeds seven days, such a transaction is considered ‘illiquid’ and is limited to 5% of a fund’s total assets by Rule 2a-7.

The FRBNY is currently authorized to conduct RRP transactions for terms up to 65 business days; however, it is expected specific tenors for RRP transactions will be across a range of terms. Under the terms of the MRA, MMFs also may designate an early repurchase date, but no earlier than the seventh calendar day following the day on which the fund entered the transaction.

Per Fitch’s criteria, money market funds rated ‘AAAmmf’ maintain overnight and one-week liquidity of 10% and 25%, respectively, to meet unanticipated redemptions. Fitch views the seven-day demand (put) mechanism as a positive for MMFs’ liquidity positions and would deem these transactions as eligible for the weekly liquidity targets.

Applicable criteria, ‘Global Money Market Fund Rating Criteria’, dated Oct. 5 2009, are available on Fitch’s web site at ‘www.fitchratings.com ‘.

Additional information is available at ‘www.fitchratings.com ‘.

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