Early this morning, the Brussels-based European Fund and Asset Management Association and the London-based Institutional Money Market Funds Association published a report entitled, "EFAMA and IMMFA Recommendation for a European Classification and Definition of Money Market Funds" (link pending). The report says, "There is currently no common definition of money market funds across Europe." This effort "defines clear-cut rules to clarify what the 'money market fund' label should include," according to a press release issued jointly by the two organizations.
The full report says, "`At the end of 2008, European money market funds had EUR 1,350 billion under management, compared to EUR 1,186 billion at end 2007.... The main domiciles of money market funds at end 2008 were France (EUR 488 billion), Luxembourg (EUR 335 billion) and Ireland (EUR 319 billion). These three domiciles represented 85% of the European money market funds market."
The effort "is justified in view of the wide variety of definitions of money market funds that characterise the European market at present.... [T]here are in the marketplace pooled investment products that carry the 'money market' fund label, whereas they are taking on more risk than do money market funds. This situation is a source of confusion for investors, which is detrimental the long-term attractiveness of money market funds. From this perspective, converging towards a common definition in Europe is of long-tem benefit to investors, investment management companies and regulators."
The release explains, "The [new] classification rests on a revised, more robust single category of money market funds composed of two types -- short-term and regular -- defined in a way that limit the main risks to which money market funds are exposed, i.e. interest rate risk, credit/credit spread risk and liquidity risk. The Board of Directors of EFAMA and the members of IMMFA have unanimously endorsed the proposal, and both associations are committed to seek the support of fund managers, regulatory authorities and performance measurement agencies in ensuring that the definition is used across Europe."
They add, "EFAMA and IMMFA also agree that all existing money market funds falling outside the definition of short-term and regular money market funds should be allowed to keep the money market fund label for a transitional period of 3 years. During this time, these funds should be grouped in national fund classification systems in a separate category, under the name 'other' money market funds. By 30 June 2012, any funds that continue to fall outside the proposed definition will no longer be classified as money market funds."
Jean-Baptiste de Franssu, President of EFAMA, says, "The financial crisis has generated investor nervousness about the risks taken by some money market funds. By proposing to reserve the money market fund label to funds designed to generate money market like returns, while aiming at preserving capital and maintaining strong liquidity, our objective is to enhance investor information about the exact nature of money market funds, thereby enhancing investor protection and securing the long-term attractiveness of money market funds."
Travis Barker, Chairman of IMMFA, adds:, "Given the increased attention on and concerns about money market funds, the need for a pan-European definition is more necessary than ever. It is crucial that investors understand the nature of their investment. The new definitions will help to clear up any investor confusion or uncertainty."
While we appreciate any effort by Europe and others to restrict the use of the term "money market fund" to only those vehicles adhering to strict regulatory oversight and abiding by strict quality, maturity, diversity, and soon liquidity, standards like those in the U.S., we believe the splitting of categories will continue to only confuse the marketplace. We would urge Europe to restrict the term "money market" to only the "short-term," highest quality, and most liquid securities. However, we look forward to the discussion and appreciate the efforts of IMMFA and EFAMA. (Note that IMMFA Chairman Travis Barker is scheduled to speak at Crane's Money Fund Symposium in Providence August 25.)