The European Commission recommended new rules for money-market funds Wednesday that would set capital buffers for funds that do not allow their net asset value to float.
The new proposal aims to ensure that MMFs can better weather stressed market conditions by enhancing their liquidity profile and stability. The EC shares a common fear with the SEC—that a loss in confidence in MMFs could lead to a run on the funds, like what happened to the Reserve Primary Fund in 2008.
Money-market funds hold about 22 percent of short-term debt issued by European governments and companies and 38 percent of short-term debt issued by the banking sector. The EU MMF industry is primarily based in France, Ireland and Luxembourg. Funds in these three countries account for more than 95 percent of the EU MMF market.
“We now need to address the risks posed by the shadow banking system,” said Michel Barnier, Internal Market and Services Commissioner of the EC, in a statement. “It plays an important role in financing the real economy and we need to ensure that it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors.”
The EC is proposing that all Europe-based funds either value their assets daily or set aside a capital reserve worth 3 percent of their assets under management. This cash buffer would compensate the differences between the stable NAV of €1 and the prices movements of the assets in the underlying portfolio, the EC said.
MMFs would also be required to have at least 10 percent of their portfolio in assets that mature within a day and another 20 percent that mature within a week. This requirement would allow MMFs to repay investors who wish to withdraw funds at short notice. To ensure that no single issuer would bear “undue weight” in a CNAV MMF, single issuers would be capped at 5 percent of the MMF’s portfolio. For standard MMFs, the cap would be set at 10 percent.
MMFs would also face limits on the timespan of their investments and the assets that they can invest in, and bans on credit ratings, short-selling and securities financing transactions.
The proposal is tougher on MMFs than the controversial reforms proposed by the U.S. Securities and Exchange Commission. The SEC reforms, by comparison, required only prime MMFs that invest in corporate debt to float their NAV. Funds that invest in government debt and retail funds would be allowed to have a stable NAV under the reforms.
Still, the EC reforms are easier on MMFs than the recommendations recently proposed by the European Systemic Risk Board, which called for an outright ban on CNAV funds. The ESRB said in February that CNAV MMFs pose “systemic risks” to the financial system, The Wall Street Journal noted.
Nevertheless, the MMF industry has fired back at the EC over its proposal. The Institutional Money Market Funds Association (IMMFA) said that the regulations would “effectively mandate a conversion to variable net asset value [NAV] MMF to the detriment of investors, issuers and the economy in general.”
Additionally, the European Fund and Asset Management Association warned that setting capital requirements would confuse investors and could cause them to invest elsewhere, Bloomberg reported.
In order for the proposals to take effect, they must be approved by EU governments and the European Parliament.