The International Capital Markets Association is putting together recommendations to try to improve money market fund transparency.
The ICMA says although such funds are supposed to preserve capital and have daily liquidity, investors have started to voice concerns.
Since the summer of 2007, when some money market funds were temporarily frozen, investors have become concerned about the transparency and risk management of the products.
The ICMA’s Asset Managers and Investors Council (Amic) met with the European Commission in Brussels in December with its initial findings.
The report detailed the issues surrounding the definition of funds, the impact of recent regulatory developments, and future developments.
Some funds are in favour of regulation across Europe. The report says: “Regulatory developments would introduce standardisation and, more importantly, clarify the definition of money market funds.”
The process began after Amic chairman Robert Parker (also vice-chairman of Credit Suisse Asset Management) expressed concerns that funds were not transparent enough.
Nathalie Aubry, adviser, regulatory policy at ICMA, says the main conclusion of the report is that “we need more transparency and funds need to work on risk management procedures”.
“Amic is monitoring the situation and now needs more information,” she says.
Ms Aubry is in the process of compiling a second report that will contain statistics on volumes, prices and a breakdown of the underlying investments of funds.
“We are going through different avenues to collate the data and we will have the second report ready by March 2009,” she says.
“Already Amic has links into supranational authorities and at the next meeting in March we will invite the French regulator,” she says. “Amic is keen to get its word out.”
The report also suggests that the entry cost for money market funds is increasing. Joanna Cound, managing director and chief operating officer for international cash business at BlackRock, agrees.
“Many investment managers have fundamentally underestimated the costs of managing stable NAV money market funds,” she says.
Risk management is key to providing a stable NAV, according to Ms Cound. “It requires significant investment both in investment professionals, including fund managers and credit analysts, and in technology,” she says.
“The cost of getting risk management wrong is high, in some cases requiring managers to support funds through capital injections or the lifting out of securities.”
The ICMA report says the industry winners will be those that achieve critical mass and economies of scale.
That has been demonstrated over the past year. Kathleen Hughes, global head of liquidity EMEA at JPMorgan Asset Management, says the largest funds have performed well since the summer of 2007 and more importantly in the fourth quarter of 2008.
“Asset flows have certainly favoured the larger players,” she says.
Ms Hughes believes this is because clients want good credit analysis and risk management, which comes with investing in large funds.
“We are the largest manager in the international AAA rated liquidity funds space with approx $185bn [£126bn, €144bn] in assets under management in US dollar, euro and sterling denominated liquidity funds,” she says.
JPMorgan Asset Management has a market share of 30 per cent, up from 20 per cent in the summer of 2007.
The ICMA report says because the big players will get bigger, smaller ones will be forced to manufacture products that are sold under a big distributor’s own brand or ultimately merge funds.
Ms Hughes says consolidation has already begun to happen as some smaller funds have decided to exit or reduce their footprint in the international liquidity funds space.
“I would imagine that this trend will continue and that it could take many forms, white labelling being one of them,” she adds.
Heather Dale is a reporter for Ignites Europe, a Financial Times publication, where this article first appeared
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