EU’s Money Market Cash-Buffer Plan Faces Irish OppositionJoe Brennan and Jim Brunsden
Ireland, home to almost a third of the European Union’s $1.3 trillion money-markets industry, is set to oppose European Union plans to make funds build up cash buffers against future crises.
The proposal could force European funds, an important source of short-term financing for banks, companies and governments, to shut down, said Simon Harris, a junior Irish finance minister. Ireland seeks support from other EU states against the plan to enforce “crude” cash buffers, which may have “horrendous” unintended consequences, he said.
“Ireland shares the EU view and the commission’s view that we have to better regulate shadow banking,” Harris said in an interview in Dublin. “To go ahead with a capital buffer structure as a regulatory instrument would damage the industry here, but also throughout the EU, and could lead to an outflow of investment from Europe.”
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 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 bloc and more than a third of short-term bank debt.
Regulators have sought stricter curbs 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.
Michel Barnier, the EU’s financial-services chief, put forward a draft law last year in an attempt to boost funds’ resilience to crises.
Barnier’s proposals would require funds that maintain a fixed share price, known as constant net-asset value, or CNAV, to build up a cash buffer equivalent to 3 percent of assets.
Almost 273 billion euros of CNAV funds are domiciled in Ireland, making it the main base in the EU for such assets under management, according to EU data published last year. Luxembourg has the second-largest pool of CNAV assets at 132 billion euros.
European Parliament lawmakers earlier this year split over how to take the measures forward, with some backing calls from the European Systemic Risk Board, a group of EU authorities including the European Central Bank and the Bank of England, for an outright ban on CNAV funds, by forcing them to convert to a floating share price.
Barnier’s proposals require approval by the EU parliament and a weighted majority of national governments to take effect.
Harris says Ireland seeks allies on the matter in the new European Commission led by President Jean-Claude Juncker, who “could have a strong understanding” of the issues as former Luxembourg prime minister, and Barnier’s successor designate, the U.K.’s Jonathan Hill.
Barnier is set to stand down at the end of October. The new commission will have the power to review draft laws that are in the pipeline and withdraw them for further work. One factor that may be weighed by the new commission is that plans for regulating the U.S. industry have evolved since Barnier made his proposal.
Under plans approved by the U.S. Securities and Exchange Commission in July, so-called prime money funds, a subset of the CNAV industry that caters to institutional investors and primarily buys riskier securities, would be forced to reveal share price fluctuations. Funds will have two years to comply with the change.
The SEC’s rules also would allow boards of directors of money funds to temporarily suspend withdrawals or impose fees when a fund faces an inability to meet redemptions.
Ireland would favor the introduction of such “redemption gates” to prevent investor runs, according to Harris.
“There’s a recognition that there needs to be better regulation and regulatory oversight of the money-market funds,” he said. “I’m quite confident that common sense will prevail” as the proposals are subjected to political debate.
Irish Finance Ministry officials told a parliamentary committee hearing in June that much of the country’s concerns about the 3 percent buffer would be alleviated if it were calculated based on risk-weighted assets, as is the case with banks.
“We are not comparing like with like when comparing these funds to banks,” Aidan Carrigan, assistant secretary in the ministry’s financial services division, told the hearing.