EU clamps down on money market funds to tame a fund sector that lubricates financial markets with short-term money but worries regulators by offering banklike promises that are vulnerable to investor panics

September 4, 2013 11:11 am

EU clamps down on money market funds

By Alex Barker in Brussels

Regulatory divisions over reining in “shadow banking” were laid bare by a Brussels clampdown on money market funds that falls short of Franco-German demands for a “brutal” ban yet still riles the industry and goes beyond US proposals. The European Commission proposal unveiled on Wednesday aims to tame a fund sector that lubricates financial markets with short-term money but worries regulators by offering banklike promises that are vulnerable to investor panics.To address the funds’ systemic risks, Michel Barnier, the EU commissioner responsible for financial regulation, wants them to stockpile liquid assets and – when offering a guaranteed share price to investors – build capital buffers to avert runs.

These curbs are tougher than expected US reforms – which are likely to include important exemptions – and are vehemently opposed by the $2.9tn money fund industry. But Mr Barnier resisted a last-ditch push from the finance ministers of France and Germany, who in a joint letter on Monday called on him to go further and outlaw fixed-value funds altogether.

“We believe this is something that is important for our economy. I prioritised security and safety rather than come up with a formal and brutal ban against them,” said Mr Barnier, in reference to so-called constant net asset value funds, which typically offer investors a stable $1 or €1 per share redemption.

An outright ban would hit Luxembourg- and Ireland-registered funds managing some €480bn and force them to move to variable share prices. Such a move was recommended last year by central bankers and regulators on the European Systemic Risk Board, which monitors financial risk across the bloc.

When a prominent US fund “broke the buck” during the financial crisis in 2008, it was followed by a wave of withdrawals across the industry and government intervention to restore confidence.

Dan Waters of ICI Global, the investment fund trade body, said the capital buffer “is simply economically infeasible, operationally complex and impracticable”. Business groups, such as Britain’s CBI, urged policy makers to “tread carefully”.

The commission reform proposal comes at a late stage of the legislative calendar and will struggle to be passed into law before next year’s European parliament elections, which will herald a new set of personalities and priorities in Brussels.

Under Mr Barnier’s proposal, fixed-value funds representing close to half of Europe’s money fund industry face a mandatory 3 per cent capital cushion, to be built up through a three-year transition.

Other measures limit the assets that funds can invest in and the time span of the instruments. Funds will be obliged to hold at least 10 per cent of assets in instruments that mature on a daily basis and an additional 20 per cent in assets that mature in a week. Money market funds will be prevented from asking credit rating agencies to rate them under the draft.

The reforms come against the backdrop of a global regulatory push to tether non-bank lending markets. Regulators see the sheer size of the money market sector and its close ties to regulated banks, which stand behind the vast majority of funds as sponsors, posing systemic risks during stressed market conditions.