The European Union is moving closer to imposing tighter restrictions on money-market funds after years of wrangling, while stopping short of restrictions the industry said would upend the 1 trillion-euro ($1.1 trillion) market.
The plan set for approval by EU finance ministers on Friday would require funds to toughen up risk management and invest in more liquid assets that can be easily traded in volatile markets should investors rush to pull out their money. It offers a way for many funds to continue quoting a fixed share price, known as a constant net-asset value, to banks, corporations and other investors who rely on them for short-term funding.
“It is important to have an agreement on this essential file, to ensure the future stability and viability” of the money-market fund industry, said Jeroen Dijsselbloem, the Dutch finance minister, whose country holds the EU's rotating presidency. The market is “an important source of short-term finance to the real economy,” he said on June 15.
Regulators around the world have sought stricter limits on the industry since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which was unable to maintain a stable net-asset value after the default of Lehman Brothers Holdings Inc. The fund's failure triggered a wider run on the industry that helped freeze global credit markets, and prompted the U.S. government to step in to backstop the industry. The U.S. Securities and Exchange Commission finally adopted restrictions in 2014 after a four-year effort that met tough opposition from money-fund managers and business lobbies.
The money-fund market in Europe is roughly split at the moment between constant and variable net-asset value funds with the asset-management arms of JPMorgan Chase & Co. and Goldman Sachs Group Inc., as well as Amundi SA and BlackRock Inc., among the top fund managers, according to data compiled by Fitch Ratings and Bloomberg. The market is heavily concentrated in Ireland and Luxembourg, which are both home primarily to constant value funds, and France, which is largely home to variable funds.
Money funds operate at the heart of the financial system. Corporate treasurers that have large amounts of cash often invest money in short-term funds, which then buy short-term debt issued by banks, governments and financial institutions. As a result, corporations get a small return on their investment while financial firms get access to a ready source of funding. The European Commission has estimated that 40% of banks' short-term debt is held by money-market funds.
The European Commission, the EU's Brussels-based executive arm, initially proposed a money market fund regulation in 2013. The European Parliament settled on its negotiating position on the bill in early 2015. When the bloc's 28 member states endorse their stance, talks can begin—probably next month —with the parliament on a final version of the legislation.
The commission's proposal would have required funds to maintain capital to meet investors' requests to redeem funds and to absorb losses in stressed markets. The industry successfully pushed back against this idea, which was dropped by both the parliament and member states.
Under the member states' proposal, constant-value funds could remain if they invest almost entirely in government debt. The funds could also transition to become so-called low-volatility net-asset value funds, which would retain a constant share price so long as they meet curbs on investments and maintain sufficient liquidity to meet redemptions.
The European Parliament also suggested the low-volatility concept, but would bar their authorization after five years. The member states dropped that so-called sunset clause, after opposition from lobbying groups such as the Institutional Money Market Funds Association, which represents constant value funds in Europe.
'Workable Alternative'
“We believe the compromise text on LVNAV would make them a workable alternative option to current CNAV funds,” Alastair Sewell, head of fund and asset manager ratings in Europe and the Asia-Pacific region at Fitch Ratings, said in an interview. “They would be more restricted in their investment capability. They would be arguably more conservative than some CNAV funds are currently.”
The debate will now turn to differences in the proposal about what kinds of assets the fixed and variable funds can invest in. The constant and low-volatility funds have more stringent requirements than the variable funds on their need to hold assets that mature on a daily or weekly basis. The requirements are meant to ensure liquidity in short-term funds of both types.
The issue of liquidity proved a late sticking point in member states' negotiations, when the U.K., Ireland and Luxembourg squared off against France and Germany over whether to allow government debt to be used for a liquidity buffer.
While this obstacle was overcome, the Luxembourg Finance Ministry said the compromise text has “a number of shortcomings, notably —but not only —in the area of the liquidity requirements.” These will need to be addressed when talks begin with the European Parliament, a ministry spokesman said.
Neena Gill, lead lawmaker in the EU assembly on this bill, also pointed to liquidity requirements as an issue where member states and the parliament don't see eye to eye. The member states' removal of the sunset clause on low-volatility funds is another, she said. Still, Gill said she hopes for a final agreement on the legislation in early autumn.
Bloomberg News
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