Criteria Financial Institutions Fixed-Income Funds: Methodology: Principal Stability Fund Ratings. Table Of Contents

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1 June 8, 2011 Criteria Financial Institutions Fixed-Income Funds: Methodology: Principal Stability Fund Ratings Criteria Officer: Mark Puccia, New York (1) ; Primary Credit Analysts: Peter Rizzo, New York (1) ; Joel C Friedman, New York (1) ; joel_friedman@standardandpoors.com Secondary Contacts: Francoise Nichols, Paris (33) ; francoise_nichols@standardandpoors.com Ruth Shaw, New York (1) ; ruth_shaw@standardandpoors.com Andrew Paranthoiene, London (44) ; andrew_paranthoiene@standardandpoors.com Table Of Contents I. SCOPE OF THE CRITERIA II. SUMMARY OF CRITERIA UPDATE III. UPDATES TO EXISTING CRITERIA IV. IMPACT ON OUTSTANDING RATINGS V. EFFECTIVE DATE AND TRANSITION VI. METHODOLOGY 1. Evaluating Funds A. Management B. Credit Quality C. Maturity D. Liquidity E. Diversification 1

2 Table Of Contents (cont.) F. Index And Spread Risk 2. Evaluating Security-Specific Risks A. Callables, Convertibles, And Similar Structures B. Collateralized Certificates Of Deposit C. Deposits With Foreign Bank Branches D. Extendible Investments E. Interest Rate Swaps F. Other Funds G. Repurchase Agreements H. Reverse Repurchase Agreements And Securities Lending I. Windows Variable-Rate Demand Bonds/X-Tenders 3. Master-Feeder Funds 4. Bifurcation 5. Parental Support VII. APPENDIX A. PSFR Sensitivity Matrix B. Summary Of Responses To Requests For Comments C. Highlights Of Changes To PSFR Criteria D. Glossary E. Detailed Table Of Contents VIII. RELATED CRITERIA AND RESEARCH Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

3 Criteria Financial Institutions Fixed-Income Funds: Methodology: Principal Stability Fund Ratings (Editor's Note: This article supersedes the following articles: "Methodology For Evaluating Fund Management In Principal Stability Fund Ratings," Aug. 17, 2009, "Treatment Of FDIC-Guaranteed Commercial Paper In Rated Money-Market Funds," April 9, 2009, "Fixed-Income Funds: Principal Stability Fund Ratings Criteria Updated," March 10, 2009, "Fixed-Income Funds: Security-Specific Criteria," Feb. 6, 2007, "Fixed-Income Funds: Market Price Exposure," Feb. 5, 2007, "Fixed-Income Funds: Principal Stability Fund Ratings Criteria For Offshore And European Money Market Funds," Feb. 2, 2007, "Fixed-Income Funds: Process And Overview," Feb. 2, 2007, "Fixed-Income Funds: Management," Feb. 2, 2007, "Fixed-Income Funds: Tax-Exempt Money Market Funds," Feb. 2, 2007, and "Fixed-Income Funds: Credit Quality," Feb. 1, 2007.) 1. Standard & Poor's Ratings Services is refining and adapting the methodology for its principal stability fund rating criteria. These revisions are intended to better account for the risks in funds seeking to maintain principal stability. These risks include management, credit quality, investment maturity, liquidity, portfolio diversification, index and spread risk, and security-specific risks. We are publishing this article to help market participants better understand our principal stability fund rating criteria. This article amends and supersedes principal stability fund rating criteria (for a full list, see the "Related Research" section) and includes the criteria we are implementing following our "Request for Comment: Principal Stability Fund Rating Criteria," published Jan. 5, 2010, on RatingsDirect on the Global Credit Portal and "Request for Comment: Fund Ratings Criteria," published Sept. 17, I. SCOPE OF THE CRITERIA 2. The revised criteria apply to principal stability fund ratings on funds globally, excluding Australia and New Zealand. See "Australian And New Zealand Principal Stability Fund Ratings Criteria," published July 21, II. SUMMARY OF CRITERIA UPDATE 3. A principal stability fund rating (PSFR), commonly referred to as a money market fund rating, is a forward-looking opinion about a fixed-income fund's ability to maintain principal value (i.e., stable net asset value, or NAV). PSFRs are assigned to funds that seek to maintain stable or, as is prevalent in offshore funds, accumulating NAVs. 4. Principal stability fund ratings have an "m" suffix (e.g., 'AAAm') to distinguish the principal stability rating from Standard & Poor's issue or issuer credit ratings. The criteria consist of five main sections titled Evaluating Funds, Evaluating Security-Specific Risks, Master-Feeder Funds, Bifurcation, and Parental Support. The first two main sections are further divided into subsections. 5. The evaluating funds section covers management, credit quality, maturity, liquidity, diversification, and index and spread risk. The evaluating security-specific risks section includes criteria for callables, convertibles, collateralized certificates of deposit (CDs), deposits with foreign bank branches, extendible investments, interest rate swaps, other funds, repurchase agreements, reverse repurchase agreements/securities lending, and windows variable-rate demand bonds/x-tenders. 3

4 III. UPDATES TO EXISTING CRITERIA 6. See Appendix C for "Highlights Of Changes To PSFR Criteria." IV. IMPACT ON OUTSTANDING RATINGS 7. The adoption of our revised PSFR criteria should not have significant ratings implications for rated funds, except for those that hold unrated counterparty exposures. V. EFFECTIVE DATE AND TRANSITION 8. These criteria are effective Nov. 1, VI. METHODOLOGY 9. These criteria consider the sources of risk in a managed fund's portfolio and investment strategy and assess the impact that these risks could have on a fund's ability to maintain a stable and/or accumulating NAV. These risks include credit quality, investment maturity, liquidity, portfolio diversification, index and spread risk, management, and security-specific risks. 10. The ratings methodology uses a weak link approach, meaning that a fund would need to meet all the key quantitative criteria under the categories of credit quality, maturity, diversification, and internal controls at a given rating level in order to receive that rating. Table 1 summarizes the overall framework. Table 2 covers NAV ranges, table 3 addresses asset credit quality, table 5 addresses maturity, and table 8 covers diversification. Rated funds are reviewed weekly relative to these criteria. 11. Funds that hold "higher-risk investments" are rated 'BBm'. Investments that have the following characteristics are "higher-risk investments": Securities that are unrated and that Standard & Poor's does not consider to be the equivalent of 'A-1' or better, as well as securities that are rated below 'A-1' (short term) or below 'A+' (long term if no short-term rating). (See the sections titled "Unrated guaranteed investments," "Unrated obligations of rated issuers," "U.S. municipal securities not rated by Standard & Poor's," and "Repo counterparty risk.") Issuer concentrations that exceed stated percentages for specific rating categories (see "Diversification" and "Other funds"). Newly purchased investments that Standard & Poor's rates 'A-1', that are on CreditWatch with negative implications, and that mature in more than 30 days. Maturity dates in excess of stated maximums for specific rating categories (see "Individual security final maturity" and "VRN/FRN final maturities"). Illiquid/limited liquidity investments that comprise more than 10% of fund assets (see "10% limited liquidity/illiquid basket"). Interest rate swaps that comprise more than 10% of fund assets (see "Interest rate swaps"). Maturity extension feature that the investor does not control (see "Extendible investments"). High price volatility (see "Investments with high price volatility" and "Higher-risk VRNs/FRNs"). Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

5 12. A glossary of terms is at the end of the article. 13. Some sections of table 1 have been reproduced in each relevant section for ease of use. Table 1 PSFR Framework Management AAAm AAm Am BBBm The strengths and weaknesses of a fund's management may affect the fund's ability to maintain a stable NAV. The analysis of management does not, in itself, raise the overall fund rating--the impact of the analysis is either neutral or negative. The management section of the criteria consists of four sections: depth, experience, and adequacy of staff (one binary test); credit research and analysis (one binary test and one set of potential adjustment factors); pricing (one binary test); and internal controls (five sets of potential adjustment factors). (See paragraphs ) NAV ranges* (see paragraph 32) +/- 0.25% ( to ) +/- 0.30% ( to ) +/- 0.35% ( to ) +/- 0.40% ( to ) Credit quality AAAm AAm Am BBBm Minimum 'A-1+' as well as 'A-1' investments maturing within five business days (%) (see paragraphs 34-38) Maximum 'A-1' investments maturing in more than five business days (%) (see paragraphs 34-38) Maximum exposure to unrated municipal bonds secured by escrow account (%) (see paragraphs 48-49) Maximum exposure to municipal securities rated only by Moody's or Fitch (%) (see paragraphs 44-45) Maximum exposure to unrated credit-enhanced variable-rate demand obligations (VRDOs) (%) (see paragraphs 46-47) Maturity AAAm AAm Am BBBm Maximum WAM(R) (days)** (see paragraph 59) Maximum WAM(F) (days)** (see paragraphs 60-64) Maximum final maturity per fixed-rate investment, nonsovereign government floating-rate investment, and sovereign floating-rate investments rated below 'AA-' (see paragraphs 57 and 84) 13 months (397 days) 13 months (397 days) 13 months (397 days) 13 months (397 days) Maximum final maturity per sovereign government (including sovereign government related/guaranteed) floating-rate security rated 'AA-' or higher (see paragraph 84) Two years (762 days) Three years (1,127 days) Four years (1,492 days) Five years (1,857 days) Liquidity Limited liquidity/illiquid investments in excess of 10% of a rated fund s total assets are "higher-risk investments" (see paragraphs 69-72). Given their price volatility, the following are "higher-risk investments": collateralized debt obligations, credit-linked notes, market value-based securities, investments that possess a maturity extension feature that the investor does not control (i.e., issuer-controlled or asset/trigger driven). A security is not a "higher-risk investment" if it has an extension tenure of less than or equal to five business days and the extension event exists to provide additional time for payment/trade settlement issues (see paragraph 73). However, investments with an extension feature (regardless of the tenure of the extension) that exists to cover a funding shortfall or the issuer's ability to roll its paper (i.e., not a settlement or delay in timing of guaranty payment) are "higher-risk investments." Diversification AAAm AAm Am BBBm Maximum per issuer (including debt guaranteed by the same issuer)--except for the items below (%) (see paragraph 76) Maximum per sovereign (i.e., national government) entity rated 'AA-' or higher (%) (see paragraphs 76-80) Maximum per sovereign entity rated 'A-1' or 'A+' and that matures in one business day (%) (see paragraphs 76-80)

6 Table 1 PSFR Framework (cont.) Maximum per sovereign entity rated 'A-1' or 'A+' and that matures between two and five business days (%) (see paragraphs 76-80) Maximum per sovereign entity rated 'A-1' or 'A+' and that matures in more than five business days (%) (see paragraphs 76-80) Maximum per bank rated 'A-1' or higher or 'A+' or higher for uncollateralized overnight bank deposits, including uninvested cash (%) (see paragraph 76) Tiered maximums for investments that are fully (100%) collateralized or overcollateralized (more than 100%) Maximum exposure per sovereign government related/guaranteed entity rated 'AA-' or higher (%) (see paragraphs 78-80) Maximum exposure to another Standard & Poor's rated fund (%) (see paragraph 99) See charts 2, 3, and 4 for details See charts 2, 3, and 4 for details. See charts 2, 3, and 4 for details. See charts 2, 3, and 4 for details Note: Funds holding "higher-risk investments" are rated 'BBm', even if they meet all the metrics outlined above for a higher rating category. *For all funds, regardless of rating, daily portfolio pricing, daily marked-to-market NAV calculations, and daily stress testing are monitored when the NAV goes beyond +/- 0.15% deviation. Exposures to securities rated below 'A-1' are "higher-risk investments." This limit does not apply to securities that possess a direct pay letter of credit rated 'A-1+' or 'A-1' by Standard & Poor s. **The maximum WAM(R) and WAM(F) limits may be reduced for funds with certain characteristics (such as limited operating history or start-up funds, small asset size, a concentrated shareholder base, or a new shareholder base with uncertain liquidity needs). May be adjusted upward by 30 days if invested only in government/gse floaters rated 'AA-' or higher. If a fund invests in a combination of government floaters rated 'AA-' or higher and nongovernment floating-rate instruments (or sovereigns rated below 'AA-'), the maximum is based on the weighted average of exposures to each type of floater. GRE or government-guaranteed investments rated 'AA-' or higher with final maturities of 30 days or less are excluded from these limits. N.A.--Not applicable. 14. The criteria also apply to funds that maintain an accumulating NAV (see the glossary for accumulating NAVs). The maximum NAV decline from the fund's highest price, consistent with each PSFR category, is as follows: 'AAAm,' 0.25%; 'AAm,' 0.30%; 'Am,' 0.35%; 'BBBm,' 0.40%; and 'BBm,' 0.50%. This does not apply to reductions in a fund's NAV associated with distributions of accrued income. 15. Each section of this article describes cure periods that apply when a fund breaches any metric or threshold before the rating is lowered. The cure period related to a breach applies only to that specific metric/threshold and to no others and begins on the date the breach occurs. All cure periods are based on a fund's NAV remaining within the ranges outlined in table 2 for each rating category. 16. The rating on a fund will be lowered by one category when any specific management actions cause the fund to breach a metric or threshold listed in table 1 three times over a 12-month period. 17. If a fund consistently breaches a metric or threshold over a 12-month period that is not the result of a specific management action, the rating will be lowered by one category. The magnitude and frequency of these events will determine whether a rating action will occur. An example of a rating action that is not a result of specific management actions is: If a 'AAAm' rated fund experiences more than five occurrences of exceeding the 60-day maximum weighted average maturity to reset, or WAM(R), by several days because of unexpected shareholder redemptions, the rating will be lowered to 'AAm'. In addition, if a 'AAAm' rated fund experiences three occurrences of exceeding the 60-day maximum WAM(R) by more than 10 days because of unexpected shareholder redemptions, the rating will be lowered to 'AAm'. Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

7 1. Evaluating Funds 18. Funds are rated by evaluating management, credit quality, maturity, liquidity, diversification, and index and spread risk. A. Management 19. The strengths and weaknesses of a fund's management may affect the fund's ability to maintain a stable NAV. The analysis of management does not, in itself, raise the overall fund rating--the impact of the analysis is either neutral or negative. The management section of the criteria consists of four subsections: Depth, experience, and adequacy of staff (one binary test); Credit research and analysis (one binary test and one set of potential adjustment factors); Pricing (one binary test); and Internal controls (five sets of potential adjustment factors). 1. Depth, experience, and adequacy of staff 20. A fund receives a 'BBm' rating if: One person is responsible for critical functions, such as portfolio management, credit analysis, and shareholder communication (known as key man risk). The investment manager does not have measurable experience managing a stable or accumulating NAV fund. The fund does not have experienced individuals or procedures in place to manage the portfolio in the absence of the primary portfolio manager. An example is when an individual with limited stable NAV portfolio management experience is responsible for the backup portfolio management duties and there is very limited day-to-day oversight of the backup manager. One or a small number of key team members is responsible for a large volume of trading and research across numerous investment sectors as well as other responsibilities, which could lead to significant disruption of operations. 2. Credit research and analysis 21. A fund's internal credit analysis, security selection process, and ongoing security surveillance procedures are important to the maintenance of a stable NAV. A fund receives a 'BBm' rating if: It does not have the resources, policies, and procedures to manage the credit risks of the fund's investments to ensure the fund maintains a stable and/or accumulating NAV (or does not adhere to these policies and procedures). For example, a fund is assigned a 'BBm' rating if it invests in corporate securities and does not have an experienced credit research analyst(s) on staff to conduct fundamental credit research (such as analyze income statements, balance sheets, managements strategy, etc.) to determine an investment's level of credit risk. If it does not have detailed, issuer-specific credit analyses (i.e., documented qualitative review of each issuer regarding components of analysis that factored into the approval of each name). This may be provided by an outside source. 22. A detailed, consistent, and independent credit analysis process helps facilitate the maintenance of a stable NAV. The absence of two or more of these factors will result in the PSFR being lowered by one category: 7

8 Use of approved issuer list and a process for adding and removing names to eligible issuer list. Daily monitoring of credit quality of investments and periodic, formal reviews of each issuer. Process for responding to distressed credit situations. An internal credit rating scale (this provides evidence that independent analysis has been done, particularly if a credit committee must assign or approve the internal ratings). 23. The adjustments described in paragraphs do not apply if the fund limits investments to maturities of 30 days or less with the highest Standard & Poor's short-term rating ('A-1+'), or if the fund invests exclusively in sovereigns rated 'AA-' or higher. 3. Pricing 24. A fund's ability to accurately price investments, including any complex, structured, and derivative securities, is essential to maintaining a stable and/or accumulating NAV. A fund receives a 'BBm' rating if: It does not price investments and calculate a marked-to-market NAV at least weekly. The fund manager does not independently review, at least weekly, the prices and marked-to-market NAV calculated by those primarily responsible for these functions (fund account/administrator/pricing group). The fund manager does not obtain two or more dealer bids to verify pricing on investments that are difficult to price, such as less liquid investments, including investments that have embedded optionality. 4. Internal controls 25. The review of a fund's internal controls includes the fund's operating procedures and risk preferences, trade ticket verification, disaster recovery/business continuity, stress-testing capabilities, and pricing policies/nav deviation procedures. The rating on a fund is lowered by one category for each area where it lacks adequate internal controls. The downward rating adjustments are cumulative (i.e., if a fund would otherwise receive a rating of 'AAAm', the lack of adequate internal controls in two areas would lower the rating to 'Am'). A lack of adequate internal controls across a majority of the areas results in a rating of 'BBm'. a. Operating procedures and risk preferences 26. A fund manager's daily investment decision-making process--including how decisions are made, who is responsible for executing them, and what mechanisms are in place to assist management in staying within a fund's internal and/or regulatory limits--has a material impact on a fund's ability to maintain a stable NAV. The rating on a fund is lowered by one category if any of the following conditions exist: It does not maintain operating procedures to stay within its internal and/or regulatory limits. Its managers do not have policies on the risk measurement/management and limits related to its investments. This includes variable-rate notes (other related instruments such as step-ups, callables, convertibles), structured notes, derivative instruments, and other potentially less liquid investments. b. Trade ticket verification 27. The rating on a fund is lowered by one category if: The fund either does not maintain an electronic pretrade compliance mechanism to monitor the investment parameters or does not maintain a procedure to have two signatures/sets of eyes on each trade ticket--one from the individual executing the trade and one from a portfolio manager or another member of the investment advisory staff. This reduction does not apply for portfolios that limit investments to only fixed-rate sovereign governments rated 'AA-' or higher and limit the portfolio WAM(R) to 30 days or less and use one signature/set of Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

9 eyes. c. Disaster recovery/business continuity 28. The rating on a fund is lowered by one category if: It does not have a business continuity plan or there is uncertainty about its ability to execute its business continuity plan. It does not test its business continuity plan at least every two years. d. Stress-testing capabilities 29. The rating on a fund is lowered by one category if it does not conduct stress tests (using either a proprietary model or Standard & Poor's PSFR Sensitivity Matrix) at least monthly. This reduction does not apply to a fund that holds only overnight investments. 30. The stress test for investment-grade-rated funds should show the impact in each of the following scenarios (and a combination of the scenarios): Parallel interest-rate shifts of plus/minus 200 basis points in 25-basis-point increments. Asset decreases (i.e., redemptions) of 10%, 15%, 20%, 25%, and the percentage of the largest historical five business day net redemptions for the fund. Note: If the largest voluntary shareholder is more than 25% of net assets, then use that larger percentage in the stress test in lieu of the 25%. A downgrade on the largest issuer exposure (excluding sovereign government issuers rated 'AA-' or higher). The widening and narrowing of credit spreads (based on current market conditions). 31. Standard & Poor's PSFR Sensitivity Matrix is in Appendix A. e. Pricing policies and NAV deviation procedures 32. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 2. A fund may have a cure period of up to five business days when its marked-to-market NAV moves beyond the ranges specified for each rating category. Table 2 NAV Ranges NAV ranges* +/- 0.25% ( to ) AAAm AAm Am BBBm BBm Dm +/- 0.30% ( to ) +/- 0.35% ( to ) +/- 0.40% ( to ) +/- 0.50% ( to ) > 0.50% (Less than ) *For all funds (regardless of rating), daily portfolio pricing, marked-to-market NAV calculations, and stress testing are monitored when the NAV goes beyond +/- 0.15% deviation, or or The rating on a fund is lowered by one category if: The fund does not maintain written policies for dealing with deviations in its marked-to-market NAV. These policies must include the specific NAV percentage deviations where action is taken, what action is taken, and the individual responsible for these actions. The portfolio managers are unfamiliar with the NAV deviation plan. 9

10 B. Credit Quality 34. The likelihood that the assets held within a fund's portfolio will default--which reflects both capacity and willingness to pay--or transition to a lower rating is an important factor in a fund's ability to maintain principal stability. Higher ratings on issuers and obligations generally mean that the rated issuer or obligation will default or transition to a lower rating less frequently than will lower-rated issuers and obligations. 35. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 3. Each row of the table specifies a metric and each column corresponds to a PSFR category. Each cell indicates the minimum or maximum level of portfolio holdings that a fund can have to receive the related PSFR. Table 3 Portfolio Credit Quality Metrics And Thresholds For PSFR Categories (%) AAAm AAm Am BBBm Minimum 'A-1+' as well as 'A-1' investments maturing within five business days Maximum 'A-1' investments maturing in more than five business days* Maximum exposure to unrated municipal bonds secured by escrow account (see paragraphs 48-49) Maximum exposure to municipal securities rated only by Moody's or Fitch (see paragraphs 44-45) Maximum exposure to unrated credit-enhanced variable-rate demand obligations (VRDOs) (see paragraphs 46-47) *Exposures to securities rated below 'A-1' are "higher-risk investments." This limit does not apply to securities that possess a direct pay letter of credit that Standard & Poor's rates 'A-1+' or 'A-1'. 36. The levels in table 3 are based on a combined analysis of the yield spread movements resulting from changes in the underlying credit quality of investments and the data derived from our historical ratings performance study. For details, see "2010 Annual Global Corporate Default Study And Rating Transitions," published March 30, 2011, and "Global Short-Term Ratings Performance And Default Analysis ( )," published May 20, The analysis of a fund's overall credit quality includes the risks associated with the quality, type, and diversification of the investments in the fund's underlying portfolio. In order for a fund to be eligible for an investment-grade rating, all investments should carry a Standard & Poor's short-term rating of 'A-1+' or 'A-1' (or SP-1+ or SP-1), or Standard & Poor's will consider all of the investments to be of equivalent credit quality. For example, U.S. Treasury bills are not explicitly rated, but the credit quality is evaluated as equivalent to the U.S. government. When applying table 3, if an investment has a long-term rating of 'AA-' or higher, with an 'A-2' short-term rating from Standard & Poor's (which is possible for U.S. municipal securities), the rating is 'A-2'. Table 3 lists the credit quality subfactors used to evaluate principal stability funds. 38. The 'A-1+' percentage minimums include investments rated 'A-1' that mature in five business days or less because the historical default rates of 'A-1' paper maturing in five business days or less are similar to default rates of 'A-1+' rated issuers. In addition, new purchases Standard & Poor's rates 'A-1' (or equivalent) that are on CreditWatch with negative implications and that mature in more than 30 days are "higher-risk investments." Existing fund holdings Standard & Poor's rates 'A-1' or better (or equivalent) that are placed on CreditWatch with negative implications are not "higher-risk investments." Standard & Poor's bank issuer credit ratings determine the credit quality of uninvested cash deposits. Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

11 1. Determining credit quality 39. For purposes of applying the metrics in table 3, the criteria treat certain securities as possessing short-term Standard & Poor's ratings when they actually don't. There are four relevant situations. a. Investments with only long-term ratings 40. For purposes of applying table 3, a security that has only a long-term rating from Standard & Poor's is treated as having the short-term rating specified in the right-hand column of table 3A. Table 3A Imputing Short-Term Ratings From Long-Term Ratings Long-term rating 'AAA' through 'AA-' 'A+' Imputed short-term rating 'A-1+' 'A-1' 'A' or lower "Higher -risk investment" (see paragraph 11) b. Unrated guaranteed investments 41. The credit quality of unrated guaranteed investments is assessed using the rating on the guarantor. Unrated investments backed by guarantees that do not meet the characteristics outlined in the "Guarantee Criteria" section of "Legal Criteria For U.S. Structured Finance Transactions: Select Issues Criteria," published Oct. 1, 2006, or the LOC criteria in "General Criteria: Methodology And Assumptions: Approach To Evaluating Letter Of Credit-Supported Debt," published July 6, 2009, are "higher-risk investments." c. Unrated obligations of rated issuers 42. For purposes of applying table 3 and table 3A, the issuer credit rating on the obligor determines the creditworthiness of an unrated debt obligation (issue). The asset's position within the obligor's debt capital structure also determines its creditworthiness. For example, if an issue is unrated and is a senior debt obligation of an issuer rated 'A+', the security is treated as having a rating of 'A-1.' Unrated subordinated debt from a rated issuer is a "higher-risk investment." 43. For an unrated general obligation (GO) municipal security in the U.S., the rating on the issuer's other rated GO debt securities determines the creditworthiness of the unrated debt obligation. d. U.S. municipal securities not rated by Standard & Poor's a) Municipal securities rated by only Moody's or Fitch 44. Chart 1 depicts the general process for imputing short-term ratings to municipal securities rated by Moody's or Fitch for purposes of applying table 3. The process shown in chart 1 does not apply to any security from a sector or category of municipal securities in which (i) Moody's or Fitch has limited market presence or (ii) Moody's or Fitch applies substantially different rating standards (e.g., Standby Bond Purchase Agreements or state or federal credit enhancement programs). As shown in the fourth row of table 3, the total proportion of securities rated only by Moody's or Fitch is subject to specific limits for each PSFR category. These limits do not apply to securities that possess a direct pay letter of credit rated 'A-1+' or 'A-1' by Standard & Poor's. Any security with an imputed short-term rating below 'A-1' is a "higher-risk investment." 45. Additionally, the following are "higher-risk investments": Securities that are not rated by Standard & Poor's but that are rated in the highest short-term rating category by Moody's or Fitch and have long-term ratings of 'A1' or 'A+' or lower. 11

12 Securities that are not rated by Standard & Poor's and are not rated in the highest-short-term rating category by Moody's or Fitch but that have long-term ratings of Aa1/AA+ or lower. Securities supported by bond insurance that Standard & Poor's, Moody's, and Fitch do not rate. Chart 1 Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

13 b) Municipal securities not rated by any NRSRO (1) Unrated credit-enhanced variable-rate demand obligations (VRDOs) 46. For purposes of applying table 3, an unrated municipal VRDO is a "higher-risk investment," even if it includes bank credit enhancement (e.g., direct pay letter of credit). However, unrated municipal VRDOs are treated as carrying the rating on the credit enhancement provider if both of the following statements are true: The credit enhancement provider is rated 'A-1' or 'A-1+' by Standard & Poor's, and The fund's manager applies credit research and analysis policies for LOC-backed VRDOs that are consistent with our methodology in "Methodology And Assumptions: Approach To Evaluating Letter Of Credit-Supported Debt," published July 6, In addition, tenders supported by bond insurance are "higher-risk investments." As shown in the fifth row of table 3, the total proportion of unrated credit-enhanced VRDOs is subject to specific limits for each PSFR category. (2) Unrated municipal bonds secured by escrows 48. For purposes of applying table 3, unrated escrowed municipal bonds are "higher-risk investments" unless the fund manager's independent credit analysis and relevant bond or legal documents are consistent with Standard & Poor's defeasance criteria. For more details, please refer to "U.S. Public Finance: Defeasance," published June 26, As shown in the third row of table 3, the total proportion of unrated municipal bonds secured by escrow account is subject to specific limits for each PSFR category. 2. Effect of investment downgrades 50. A 10-day cure period applies for a breach of the table 3 thresholds as long as the fund's marked-to-market NAV does not drop below NAV ranges for each rating category (see table 2). As we've noted (see paragraph 15), the cure period related to a breach of any specific metric or threshold applies only to that specific metric or threshold. 51. The cure periods applied when an investment is downgraded below 'A-1' are outlined in table 4. Table 4 Cure Periods For Investments Downgraded Below 'A-1' % of portfolio Cure period (calendar days) Less than or equal to 0.5% 397 Greater than 0.5% or less than or equal to 1.0% 120* Greater than 1.0% or less than or equal to 5.0% 60* Greater than 5% 7 *Regardless of the short-term rating, if the long-term rating is 'BBB+' and on CreditWatch negative or 'BBB' or lower, the cure period drops to seven calendar days. 3. Custodial credit risk 52. Securities held in custody are less exposed to the insolvency risk of the custodial bank than direct obligations such as commercial paper and repurchase agreements because of the legal segregation of custodial assets. There is no minimum rating for a custody bank if the fund's custodial bank is domiciled in a country where the legal and regulatory framework provide for clear segregation and protection of all fund assets. The domiciles that have sufficient legal and regulatory frameworks to provide for the safety of assets held with custodians include Australia, Bermuda, the Cayman Islands, the Channel Islands, Ireland, Japan, Luxembourg, Mexico, New Zealand, the U.K., and the U.S. 53. A fund is rated 'BBm' if its assets are held by a custodial bank rated below 'A-2' and the bank is domiciled where the 13

14 legal and regulatory framework does not provide for clear segregation and protection of all fund assets. 54. Custodial banks that are wholly owned by a rated parent receive the same treatment as the parent as long as they remain integral to the parent's operating strategy and they are prudently operated, as demonstrated by good risk-management systems and controls and a sound operational infrastructure. C. Maturity 55. The maturity of an individual investment and a portfolio's weighted-average maturity (WAM) are key measures of their tolerance and sensitivity to rising interest rates. Two measures of a portfolio's WAM--WAM to reset, or WAM(R), and WAM to final, or WAM(F)--are used to measure interest rate sensitivity, primarily because they are easily determined and easily available. 56. WAM(R) uses the interest-rate reset date as the effective maturity in calculating the WAM, whereas WAM(F) is calculated based on the stated final maturity for each security. WAM(F) is also known as weighted-average life. In general, the longer the maturity or WAM, the more sensitive a security's value or fund's value is to rising interest rates. For example, a given interest rate increase would have roughly twice the impact on a fund with a 60-day WAM relative to a fund with a 30-day WAM, all other factors aside. Table 5 lists the quantitative subfactors used to evaluate a fund's portfolio maturity risks. Table 5 Maturity Subfactors AAAm AAm Am BBBm Maximum WAM(R) (days)* (see paragraph 59) Maximum WAM(F) (days)* (see paragraphs 60-64) Maximum final maturity per fixed-rate investment, nonsovereign government floating-rate investment, and sovereign floating-rate investments rated below 'AA-' (see paragraphs 57 and 84) Maximum final maturity per sovereign government (including sovereign government related/guaranteed) floating-rate security rated 'AA-' or higher (see paragraph 84) 13 months (397 days) Two years (762 days) 13 months (397 days) Three years (1,127 days) 13 months (397 days) Four years (1,492 days) 13 months (397 days) Five years (1,857 days) *The maximum WAM(R) and WAM(F) limits may be reduced for funds with certain characteristics (such as limited operating history or start-up funds, small asset size, a concentrated shareholder base, or a new shareholder base with uncertain liquidity needs). May be adjusted upward by 30 days if invested only in government/gse floaters rated 'AA-' or higher. If a fund invests in a combination of government floaters rated 'AA-' or higher and nongovernment floating-rate instruments (or sovereigns rated below 'AA-'), the maximum is based on the weighted average of exposures to each type of floater. 1. Individual security final maturity 57. Individual investments with legal final maturities in excess of 13 months (or 397 days) are "higher-risk investments," unless they are sovereign floating-rate investments rated 'AA-' or higher or investments with unconditional demand features (i.e., put) that provide for liquidity within 397 days with an issuer rated 'A-1' or 'A+' or higher. For further details about floating-rate investments, see paragraph Portfolio weighted-average maturity 58. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 5. Each row of the table specifies a metric, and each column corresponds to a PSFR category. Each cell indicates the maximum WAM(R), WAM(F), or final maturity per investment that a fund can have to receive the related PSFR. Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

15 a. WAM(R) 59. The relationship between interest rate volatility and NAV volatility limits 'AAAm' rated money market funds to a maximum WAM(R) of 60 days. There is an inverse relationship between a fund's WAM and the minimum positive interest rate shift necessary to cause the NAV to fall to a given level. Consider a fund that holds only one Treasury bill and has a WAM(R) of 60 days. In this case, an instantaneous upward shift of more than 304 basis points (bps)--holding everything else equal in the fund--would need to occur before the NAV of the model fund would fall to There is a 60-day maximum WAM(R) for 'AAAm' rated funds because the worst one-day shock to the federal funds rate since 1990 was nearly 300 bps (283 bps in January 1991). Thus, the maximum WAM(R) for the 'AAm', 'Am', and 'BBBm' categories is based on a fund's ability to withstand interest rate shocks of 250 bps, 225 bps, and 200 bps, respectively, without the NAV dropping by more than 0.50%. b. WAM(F) 60. WAM(R) can underestimate the interest-rate sensitivity and credit spread risk of a portfolio with floating-rate investments since the WAM calculation is based off of the floating-rate investments' reset date. See table 5 for the limits for WAM(F) for each rating category. 61. The maximum WAM(F) will increase by 30 days for all rating categories (e.g., 'AAAm' increases to 120 days) if a fund invests exclusively in national government (sovereign) or government-sponsored entity (GSE) floating-rate notes rated 'AA-' or higher. This is because national government (sovereign) or GSE floating-rate investments rated 'AA-' or higher generally exhibit lower spread risk than investments in nonsovereign issuers (or sovereigns rated below 'AA-'). 62. If a fund invests in a combination of government floaters rated 'AA-' or higher and nongovernment floating-rate instruments (or sovereigns rated below 'AA-'), the maximum WAM is based on a weighted average of the percentage exposures to each type of floating-rate instruments. Based on these weighted averages, the maximum WAM(F) will be days for funds rated 'AAAm', days for 'AAm' rated funds, days for 'Am', days for 'BBBm', and more than 150 days for 'BBm'. 63. To determine the maximum WAM(F) for a rated principal stability fund that invests in both sovereign government floating-rate notes (rated 'AA-' or higher) and nonsovereign government floating-rate notes (or sovereigns rated below 'AA-'): (i) calculate the amount of each type of floating-rate investment as a percentage of the total amount of floating-rate investments, (ii) multiply the percentages of each type of floating-rate investment by the respective maximum WAM(F) for sovereign government floaters (rated 'AA-' or higher) and nonsovereign government floaters (or sovereigns rated below 'AA-'), and (iii) add the results together to get the maximum WAM(F) for the fund (see table 6). Table 6 Determining The Maximum WAM(F) 'AAA' rated sovereign government floating-rate investments 'AAA' rated corporate floating-rate investments Invested in floaters ($) % of floaters Max WAM(F) per floater type Contribution to fund max WAM(F) 19,000, x 120 = ,000, x 90 = Total floating-rate investments 98,000, Max WAM(F) 15

16 64. When calculating a fund's WAM(F) for purposes of applying table 5, the demand features (i.e., puts or maturity shortening features) that specify a date on which the principal amount must unconditionally be paid is used, not the interest rate reset dates. 3. WAM adjustments 65. Table 7 lists the reductions to the maximum WAM(R) and WAM(F) limits identified in table 5 for funds with more volatile shareholder characteristics such as start-up funds or funds with limited operating history, small asset size, a concentrated shareholder base, or a new shareholder base with uncertain liquidity needs. The reductions to the maximum WAM(R) and WAM(F) limits are based on: Amount of investments maturing in one business day (overnight); Number of and diversification of shareholders; Shareholder communication and characteristics; Investment advisor experience (see paragraph 20); and Fund manager policies and procedures to offset the risk of a concentrated or volatile shareholder base. (See table 7 for potential mitigants to WAM adjustments.) Table 7 WAM Adjustments And Mitigants The maximum WAM limits (to reset and to final) will be lowered for each of the following: An investment advisor has no prior experience managing a principal stability fund. A fund with a concentrated shareholder base (i.e., comprises 10 or fewer accounts). A fund has assets of less than 100 million (in the fund's base currency). Reduction in WAM(R) and WAM(F) Potential mitigants to WAM adjustment 5 days None 5 days 1) A process, supported by a successful track record, of managing redemptions of a concentrated shareholder base. 2) Knowledge of the larger shareholder cash flow needs and expectations (including expected time horizon of large deposits and whether shareholders' investments are mandatory or voluntary). 3) A requirement for advance notice for significant redemptions. 4) Limits on the amount of opportunistic portal money. 5 days Same as above 66. As an example, a fund with an investment advisor--who currently manages fund(s) that Standard & Poor's rates--requests a new rating on a government money market fund that will soon be launched with only $50 million from less than 10 shareholders. For 'AAAm', the maximum WAM(R) will likely be 50 days (down from our 60-day maximum), and the maximum WAM(F) will likely be 110 days (from the 120-day maximum) if no mitigating factors exist. The maximum WAM limits are reduced by a total of 10 days--five days because it's a fund with only $50 million, and another five days because of a concentrated shareholder base (10 or fewer accounts). 67. A lower maximum WAM is typically in place for no less than three months. 4. Extensions of maturity 68. A 10-business-day cure period applies when a WAM(R), WAM(F), and/or an investment's final maturity exceeds the limits for a specific rating category--for instance, because of unexpected shareholder redemptions--before taking a rating action as long as the fund's marked-to-market NAV does not drop below NAV ranges for each rating category (see table 2). Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

17 D. Liquidity 69. The liquidity and price volatility of portfolio investments can greatly affect the market value of investments and result in erosion of a fund's NAV. A fund with a large proportion of relatively illiquid investments is more susceptible to a sizable decline in its portfolio market value and NAV than a fund that holds highly liquid investments (see the glossary for a definition of liquidity) % limited liquidity/illiquid basket 70. A 10-business-day cure period applies when more than 10% of a fund's investments have limited liquidity or are illiquid. An investment with limited liquidity or an illiquid investment is an investment that cannot be sold or disposed of in five business days at approximately the value attributed to it by the fund. 71. Securities that have limited liquidity or are illiquid include: Nonmarketable and historically less liquid instruments with maturities greater than five business days, unless the fund holds an unconditional put providing for liquidity within five business days, or if the fund is able to redeem the investment within five business days with no loss to invested principal. Examples of nonmarketable securities include repurchase agreements, time deposits, master notes, promissory notes, funding agreements, insurance policies, and loan participation notes. Investments denominated in a currency other than a fund's base currency and swapped back into the fund's base currency. Windows variable-rate demand bonds (VRDBs), X-tenders, and other similar structures (see the "Evaluating Security-Specific Risks" section for more details). CDs that mature in more than five business days that are not traded in a secondary market or are subject to early withdrawal penalties. Pooled bank deposit programs (e.g., Certificate of Deposit Accounts Registry Service [CDARS], Deposit Liquidity Accounts, Insured Network Deposits, and Federally Insured Cash Accounts [FICA]) with a maturity of more than one business day. These nonmarketable securities typically impose fees for early withdrawal, and they may experience a delay in receiving FDIC insurance payments. 72. Marketable securities include CP, banker's acceptances, CDs traded in the secondary market, Treasury bills, and other short-term, high-quality money market instruments that Standard & Poor's rates 'A-1' or better. 2. Investments with high price volatility 73. Given their price volatility, the following are "higher-risk investments": Collateralized debt obligations. Credit-linked notes. Market value-based securities. Investments that possess a maturity extension feature that the investor does not control (i.e., issuer-controlled or asset/trigger driven). However, a security is not a "higher-risk investment" if it has an extension tenure of less than or equal to five business days and the extension event exists to provide additional time for payment/trade settlement issues (i.e., as is the case with asset-backed commercial paper [ABCP] issuer Straight-A Funding). Investments with an extension feature (regardless of the tenure of the extension) that exists to cover a funding shortfall or the issuer's ability to roll its paper (i.e., not a settlement or delay in timing of guaranty payment). 17

18 E. Diversification 74. A well-diversified portfolio of fixed-income investments will reduce the impact that a negative credit event (i.e., a short-term rating being lowered to 'A-2' from 'A-1') could have on the value of the overall portfolio. 75. A PSFR can be no higher than the lowest category associated with the metrics enumerated in table 8. Each row of the table specifies a metric and each column corresponds to a PSFR category. Each cell indicates the maximum level of portfolio holdings that a fund must have to receive the related PSFR. Charts 2, 3, and 4 show how the diversification criteria outlined in table 8 are applied. 76. A fund is rated 'BBm' if it has an exposure to an issuer (including debt guaranteed by the same issuer) of greater than 5% of net assets, with the following exceptions: Sovereign (i.e., national government) entities; Sovereign government-related entities; Overnight bank deposits (including uninvested cash); Instruments that are at least 100% collateralized; and Investments in another rated fund. Table 8 Diversification Subfactors (%) AAAm AAm Am BBBm Maximum per issuer (including debt guaranteed by the same issuer)--except for the items below (see paragraph 76) Maximum per sovereign (i.e., national government) entity rated 'AA-' or higher (see paragraphs 76-80) Maximum per sovereign entity rated 'A-1' or 'A+' and that matures in one business day (see paragraphs 76-80) Maximum per sovereign entity rated 'A-1' or 'A+' and that matures between two and five business days (see paragraphs 76-80) Maximum per sovereign entity rated 'A-1' or 'A+' and that matures in more than five business days (see paragraphs 76-80) Maximum per bank rated 'A-1' or higher or 'A+' or higher for uncollateralized overnight bank deposits, including uninvested cash (see paragraph 76) Tiered maximums for investments that are fully (100%) collateralized or overcollateralized (more than 100%) Maximum exposure per sovereign government related/guaranteed entity rated 'AA-' or higher* (see paragraphs 78-80) Maximum exposure to another Standard & Poor's rated fund (see paragraph 99) See charts 2, 3, and 4 for details See charts 2, 3, and 4 for details See charts 2, 3, and 4 for details See charts 2, 3, and 4 for details *GRE or government-guaranteed investments rated 'AA-' or higher with final maturities of 30 days or less are excluded from these limits. 77. A 10-day cure period applies for a breach of the table 8 thresholds as long as the fund's marked-to-market NAV does not drop below the NAV ranges for each rating category (see table 2). 1. Sovereign (i.e., national government) entities 78. Highly rated ('AA-' or higher) sovereign securities are the most liquid and widely traded instruments and have more stable market values during various market cycles than other short-term investment alternatives. Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

19 a. Sovereign government-related entities and sovereign government-guaranteed securities 79. The maximum exposures of total fund assets to any one sovereign government-related entity or sovereign government-guaranteed entity rated 'AA-' or higher is 33.33% for 'AAAm', 50.00% for 'AAm', 66.67% for 'Am', 75.00% for 'BBBm', and more than 75% for 'BBm'. GRE or government-guaranteed investments rated 'AA-' or higher with final maturities of 30 days or less are excluded from these limits. 80. The maximum exposure to investments guaranteed by and GREs related to two or more governments (i.e., World Bank) is 5%. b. Newly guaranteed investments 81. Investments that are newly guaranteed by a highly rated (short-term rating of 'A-1+' or long-term rating of 'AA-' or better) sovereign government (including GREs) could exhibit greater price volatility and spread risk than a sovereign's or GRE's own debt. The maximum exposure to newly guaranteed investments is 5% until trading spreads are commensurate with other debt from the same GRE or sovereign agency. Newly guaranteed floating-rate investments with legal final maturities of greater than two years are "higher-risk investments." 82. Newly guaranteed investments with legal final maturities of more than 397 days but less than two years are illiquid/limited liquidity investments. 19

20 Chart 2 Standard & Poor s RatingsDirect on the Global Credit Portal June 8,

21 Chart

22 Chart 4 F. Index And Spread Risk 1. Index correlation 83. Variable-rate notes (VRNs) or floating-rate notes (FRNs) tied to indices that are not at least 95% correlated to the fed funds rate and three-month LIBOR for the past five years are "higher-risk investments." Indices that have Standard & Poor s RatingsDirect on the Global Credit Portal June 8,