EUROPE – The European Commission has recommended investors limit their total money market fund (MMF) portfolio exposure to a single issuer at 5%.
Presenting guidelines for improving the MMF market as part of its shadow banking regulation, the Commission set out to ensure that MMFs could better withstand redemption pressure in stressed market conditions by enhancing their liquidity profile and stability.
The regulation also seeks to avoid a scenario similar to the one seen in 2007-08, when MMFs recorded significant losses due to investments in asset-backed securities and other assets deemed low risk.
The losses sparked a wave of redemptions from investors that put dozens of funds under water.
Under the new rules, the Commission will require MMFs to have at least 10% of their portfolio in assets that mature within a day and another 20% that mature within a week.
"This requirement," the Commission said, "is there to allow the MMFs to repay investors that want to withdraw funds at short notice."
Additionally, to prevent single issuers from figuring too largely in the net asset value (NAV) of a given MMF, exposure to a single issuer will be capped at 5% of the fund's portfolio.
The Commission added that, to take account of the constant NAV, MMFs would be required to establish a predefined capital buffer.
"This buffer will be activated to support stable redemptions in times of decreasing value of the MMFs' investment assets," the Commission said.
According to Michel Barnier, internal market and services commissioner, the Commission has already regulated banks and markets "comprehensively" and now needs to address the risks posed by the shadow banking system.
"It plays an important role in financing the real economy, and we need to ensure it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors," he said.
The Commission will now seek approval from the European Parliament and then the European Council to introduce its proposal on money market funds.
Commenting on the new rules, Jim Fuell, head of global liquidity sales for the EMEA region at JP Morgan Asset Management, pointed out that the Commission adopted a number of key concepts from the Institutional Money Market Funds Association (IMMFA) Code and US SEC rule 2a-7.
"These are powerful changes, which should better prepare those MMFs not currently complying to manage through stressed market conditions," he said.
However, the Investment Company Institute (ICI) argued that the Commission's proposal "neither serves investors nor meets those basic standards for rulemaking".
"In particular," it added, "it's troubling the proposal would impose a 3% capital requirement for constant net asset value MMFs, a proposal that two major bodies have already rejected.
"Both the European Systemic Risk Board and the US Securities and Exchange Commission have cited concerns about the ongoing cost of capital requirements and the possibility that capital requirements could drive many, if not most, MMF sponsors out of the business, thereby depriving investors, issuers and economies of the benefits these funds provide."
According to the ICI, the 3% capital NAV buffer is "simply economically infeasible, operationally complex and impracticable".