Money-Market Funds Face Capital Buffer Rules in EU Plan
Banks and asset managers running money-market funds may be forced by the European Union to raise capital buffers and hoard easy-to-sell assets as part of a regulatory push to tame the $4.7 trillion global industry.
Michel Barnier, the EU’s financial services chief, set out plans to toughen regulation of the funds, saying they were part of a shadow-banking system that could pose risks to stability if left unchecked.
The EU must ensure that “benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors,” Barnier said in an e-mailed statement today.
Regulators have sought tighter restrictions on money-market funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on the industry that helped freeze global credit markets.
Money funds act as intermediaries between shareholders seeking liquid investments and borrowers seeking short-term funding. They typically invest in money-market instruments such as commercial paper and government debt.
The EU plans include requiring funds that maintain a fixed share price to build up a cash buffer equivalent to 3 percent of their assets, according to the statement. Funds that are already in place before the rules become law would have 3 years to fully meet the requirement.
The European Fund and Asset Management Association, a group representing the investment management activities of banks including HSBC Holdings Plc (HSBA) and JPMorgan Chase and Co., has warned that setting capital requirements for money funds risks destabilizing their business model and confusing investors, who may simply look elsewhere.
Under the draft EU plans, funds with either fixed or floating share prices would face limits on the timespan of their investments, and minimum rules on diversifying their portfolios.
Funds would be forced to hold at least 10 percent of their assets in instruments that mature within a day, and 20 percent in securities that mature within a week.
Other parts of the draft EU rulebook would further limit the assets that funds can invest in, and ban them from activities including short selling and securities financing transactions.
The EU money-market fund industry is concentrated in France, Ireland and Luxembourg. Funds domiciled in these three countries account for more than 95 percent of the EU money fund market, according to European Commission data.
Such funds hold more than a fifth of short-term debt securities issued by governments and corporates in the 28-nation bloc and more than a third of short-term bank debt. The EU industry has about 1 trillion euros ($1.3 trillion) of assets under management.
Funds with a fixed share price have come in for particular attention from regulators, as they give “an impression of safety even though money funds are subject to credit, interest rate and liquidity risk,” the International Organization of Securities Commissions said last year. The failure of one fund to honor this commitment can put pressure on others, and trigger runs, Iosco said.
The disorderly failure of a money-market fund could “cause broader consequences, such as contagion to the real economy and bail-out risks for their sponsor and, ultimately, public authorities,” the commission said in today’s statement. “These problems can have repercussions across the European Union, since both investments in MMFs and investments by MMFs are largely performed across borders,” it said.
The International Monetary Fund and global regulators at the Financial Stability Board have urged national governments to press ahead with regulating money-market funds, identified as part of the global shadow-banking system. Iosco published a set of recommendations to regulators last year.
The EU measures, which require approval from the European Parliament and national governments to take effect, have some parallels to draft rules issued by the U.S. Securities and Exchange Commission.
The SEC has sought views on two proposals, one of which would impose a floating-share value on the riskiest money-market mutual funds, while the other would allow them to suspend redemptions in times of stress.
Barnier also unveiled broader plans for toughening regulation of shadow banking, according to the EU’s website.
The EU is weighing measures such as tightening rules on re-lending or re-investment of collateral provided on securities financing transactions, and extending which kinds of firms are covered by minimum capital rules, the commission said.
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