IMMFA Attacks Proposed EC Regulation of Money Market Funds

The European Commission’s (EC) newly-released proposal for a new regulation for money market funds (MMFs) is “ill-considered”, says the Institutional Money Market Funds Association (IMMFA).

The association was responding to the issue of ‘Regulation of the European Parliament and of the Council on Money Market Funds’. It claimed that while IMMFA members are committed to providing high quality, effective products the EC regulation” will effectively mandate a conversion to variable net asset value [NAV] MMF to the detriment of investors, issuers and the economy in general.”

It added that the IMMFA supports the introduction of minimum liquidity requirements, ‘know your client’ [KYC] policies, the use of trigger-based liquidity fees and gates and enhanced transparency. These reforms “would make MMF even stronger and meet regulators’ desire to reduce run risk in MMF whilst maintaining them as an effective product for investors.”

“Some of the measures in today’s EC proposal will make a positive contribution to the robustness of MMFs, but there are several which are extremely unhelpful, to investors and to the short-term debt markets in general,” said Susan Hindle Barone, secretary general of IMMFA.

“We reject the assertion that there is a greater degree of systemic risk inherent in constant NAV MMFs. The EC has not demonstrated that constant net asset value [CNAV] funds are more susceptible to run-risk than variable net asset value [VNAV] funds and the discrimination between these two accounting techniques is unjustified.”

IMMFA added it does not believe that requiring a 3% capital buffer for CNAV MMF will enhance systemic stability, commenting:

  • Holding capital is inappropriate for investment funds and would fundamentally change the nature of the relationship between the investor, the fund manager and the CNAV fund.
  • With the requirement for a 3% capital buffer, IMMFA expects that CNAV providers will convert their funds to VNAV. It is uneconomic for an asset manager to hold 3% capital against a MMF.
  • Even assuming that a 3% capital buffer were affordable, its imposition would require European domiciled CNAV MMF to raise €14bn, €10bn by banks and €4bn by independent asset managers. Assuming banks are currently levered x20 – x25, reassigning the capital from other business to cover the MMF buffer would withdraw between €200bn and €250bn from the European economy.
  • The result is a de facto abolition of CNAV funds leading to fewer choices for investors.

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