EU Money-Market Fund Clients Seen at Risk in Oversight Patchwork

Money-market funds lack consistent supervision across the European Union, hampering investor protection, the bloc’s chief markets regulator said.

National regulators have varying approval processes for money-market funds, rely on different sources of data for their supervisory decisions and six of the 20 jurisdictions that monitor the funds have yet to implement guidelines from the European Securities and Markets Authority, the regulator said.

“Our mapping on money market funds has identified that there is a need for further convergence in supervisory practices, as ultimately, divergence may hamper the proper protection of investors and may result in an unlevel playing field,” Steven Maijoor, ESMA chairman, said in an e-mailed statement.

ESMA released guidelines in 2010 to harmonize supervision of money-market funds across the EU, where about 1,256 funds operate, according to the watchdog. Money-market funds may be subject to tougher rules in future and be required to hold minimum levels of liquid assets as part of a bid to tighten oversight of the $4.7 trillion global industry.

Michel Barnier, the EU’s financial services chief, may require money-market funds that maintain a fixed share price to build up a cash “buffer” equivalent to 3 percent of their assets. Barnier has identified regulation of money-market funds as a priority in the bloc’s efforts to rein in so-called shadow banks.

Regulators are working to impose tighter restrictions on the 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 money funds that helped freeze global credit markets.

The International Monetary Fund and global regulators at the Financial Stability Board have urged national governments to press ahead with regulating money-market funds, and shadow banking more generally.