In July of 2009, the Securities and Exchange Commission proposed significant amendments to Rule 2a-7, the rule that regulates money market funds. Issued in response to the severe problems that money market funds have experienced since the fall of 2007, the proposed amendments affect many aspects of Rule 2a-7, including its requirements relating to portfolio quality, maturity, liquidity and diversification. We have summarized below the proposed amendments that could most directly affect the asset-backed commercial paper (ABCP) market and the markets for other currently money market eligible (generally Class A-1) tranches in term asset-backed securities (ABS) transactions. Comments must be received by the Commission by September 8, 2009.
Eliminating the Rating Requirement. The Commission has again requested comments on a proposal to eliminate the use of minimum credit ratings as one of the criteria for money market fund investments. The Commission first raised this possibility last year, as part of a broad initiative to reduce reliance on credit ratings in its rules (see, “SEC Proposes to Reduce Reliance on Credit Ratings in its Rules and Forms”). While a substantial majority of commenters opposed this proposal last year, the Commission has asked commenters to consider it again, along with other possible measures to encourage more independent credit risk analysis.
Supplemental Guidance on Credit Risk Evaluation and Liquidity for ABS. The Commission has asked whether Rule 2a-7 should be amended to provide specific guidance to fund boards (or their delegates) as to how to confirm that ABS represent minimal credit risks (an existing requirement for eligible securities, in addition to the current rating requirement) and to address liquidity issues relating to ABS. In particular, prompted by the liquidity problems with structured investment vehicles (SIVs), which generally did not committed liquidity facilities covering 100 percent of their ABCP, the Commission has raised several possible liquidity requirements for consideration, including:
- That fund boards (or their delegates) evaluate whether ABS benefit from a committed liquidity line or similar credit support.
- That money market funds be limited to investing in ABS that the manager concludes can be paid upon maturity with existing cash flow, so that payment is not dependent on the ability of the issuer to rollover debt.
- That ABS be subject to unconditional demand features in order to be eligible for purchase by money market funds.
For more information about any matter raised in this Alert, please contact Robert F. Hugi at +1 312 701 7121, or any of the partners in our Securitization practice.