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September 1, 2013 6:53 am
The European Commission is set to push ahead with a series of controversial reforms that will effectively “kill off” the continent’s €450bn fixed value money market fund industry.
A draft law expected to be unveiled by Brussels on Wednesday will call for so-called “constant net asset value (CNAV)” funds to be forced to hold a 3 per cent cash buffer to help avert a repeat of the “runs” some funds suffered during the financial crisis.
With fees for such funds – which invest in high-quality, short-term money market instruments and trade at a fixed €1 or $1 a share except in extremis – as low as 8-10 basis points, industry figures said the proposal was uneconomic, even with a lengthy phase-in period. The Commission estimates the 3 per cent buffer would raise fees from 21bp to 30bp but help insulate investors from losses.
“This would be a de facto abolition of CNAV funds. A requirement to hold 3 per cent is simply uneconomic,” said Susan Hindle Barone, secretary-general of the Institutional Money Market Funds Association. “We expect that most CNAV providers will convert their funds to variable NAV.”
Syed Kamall, a UK Conservative MEP, said: “I don’t think the industry is crying wolf. It does seem that the commission’s proposals would basically close that part of the market.
“We have to be very clear what we are killing off and what we have solved,” added Mr Kamall, who said investors fled money market funds during the crisis not because they had a constant NAV structure, but because they were exposed to paper issued by “wobbly” financial institutions.
The Commission’s proposals are part of a broader clampdown on “shadow banks”, intermediaries that provide finance to the real economy but are outside the scope of prudential banking regulation.
Money market funds hold 38 per cent of the short-term debt issued by European banks but, following the collapse of Lehman Brothers in 2008, the US, Germany and Luxembourg had to step in to halt a run on their money funds. Despite this, 62 US and European funds were bailed out by their sponsors at a cost of at least $12.1bn, according to Moody’s. The Commission will also propose a series of reforms that cover both the CNAV and VNAV sectors.
An earlier leaked proposal that money market funds should be barred from accepting collateral with a maturity of longer than 397 days, eliminating 80-90 per cent of the collateral currently used, is likely to be softened, at least for government debt.
But funds will be barred from seeking ratings from rating agencies, while sponsors of VNAV funds will no longer be allowed to bail them out if they suffer losses. Measures to stop funds smoothing returns by using amortised cost accounting could mean investors have to wait a day to make redemptions.
Sven Giegold, a German Green MEP, who has called for Brussels to back a call from the European Systemic Risk Board to ban CNAV funds outright, said a 3 per cent buffer was the “minimum” level CNAV funds should face. “If you guarantee that [investors] can get their money back, it’s very similar to what a bank offers and 3 per cent is just [a bank’s] leverage ratio,” he said. “The banks have to hold additional capital and liquidity, therefore this seems to me the level playing field we are looking for.”
The reforms will need to be agreed with the European Council and Parliament, a process unlikely to be completed before May’s European elections.
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