Travis Barker, Chairman of the London-based Institutional Money Market Funds Association spoke recently about the challenges that money market funds faced during the credit crisis. He noted at IMMFA's recent annual meeting that, "Out of crisis comes opportunity. And the opportunity IMMFA has been presented with is to 'get back to basics', to redefine what money market funds are (or ought to be), and to reassert their economic purpose."
A press release issued by IMMFA said that "Mr. Barker praised the ongoing work of the European Fund and Asset Management Association (EFAMA) to develop 'a common EU definition of money market funds' and "announced a significant revision of the IMMFA Code of Practice." Barker said, "First, the Code should be revised to ensure that it can operate as a stand-alone definition of an IMMFA Fund; Second, that those revisions should incorporate relevant learning points from the crisis -- for example, by elaborating the importance of liquidity management; and Third, that `the revised Code should continue to approximate, where possible, with rule 2a7, including those amendments to 2a7 recently proposed by the Investment Company Institute in its Report of the Money Market Working Group."
Barker's speech (see full text here) said, "It must seems strange that IMMFA would hesitate before answering the question 'what is a money market fund?' but the crisis revealed the answer to be unexpectedly complex... The EU UCITS Directive establishes minimum standards for investment funds, but leaves the definition of fund categories to national supervisors (or national trade associations where relevant). Consequently, different categories of money market fund have arisen in different countries, in response to different client demands."
He continued, "For example, a significant category of money market fund has arisen in France, another in Germany, and another in Ireland/Luxembourg. That last category is represented by IMMFA, and is modeled on US money market funds (commonly referred to as '2a-7 funds', after the relevant section of the Investment Company Act 1940). So, the answer to the question: 'what is a money market fund?', is: 'it depends.' Some categories of money market fund are very narrowly defined in terms of minimum credit quality and maximum duration. Other categories permit broader exposure to credit and duration. Still others impose few -- or no -- credit and duration limits, but define the product in terms of a money market benchmark."
"Ordinarily, the existence of different categories of money market fund would not be a cause for concern. Vive la difference! However, during the crisis, different categories responded differently to the extraordinary contraction in liquidity. To be sure, all categories of money market fund found it difficult to sell assets to raise cash, but those which had taken extended credit and duration risk were, by definition, worst affected. This complicated the attempts of regulators and central bankers to assess and respond to the situation," said Barker.
He explained, "After the immediate crisis had passed, the EU commissioned a high-level committee ... [to] make appropriate recommendations. Amongst other things, the de Larosiere Report recommends: '[T]he need for a common EU definition of money market funds, and a stricter codification of the assets in which they can invest in order to limit exposure to credit, market and liquidity risks.' The complex task of proposing 'a common EU definition of money market funds' has fallen in the first instance to the `European Fund and Asset Management Association (EFAMA) .... Naturally, IMMFA fully supports de Larosiere's recommendation, and we are encouraged by the progress and direction of EFAMA's work."
Finally, Barker said, "Closer to home, the crisis revealed that IMMFA's own Code of Practice doesn't provide a stand-alone definition of a money market fund. Rather, key parts of the definition are, in effect, out-sourced to the rating agents as a consequence of the requirement that IMMFA funds be triple-A rated. IMMFA has therefore surveyed its members on the Code who have confirmed: First, that those revisions should incorporate relevant learning points from the crisis -- for example, by elaborating the importance of liquidity management; Second, that the Code should be revised to ensure that it can act as a standalone definition of an IMMFA fund; and Third, that the revised Code should continue to approximate, where possible, with rule 2a-7, including those amendments to 2a-7 recently proposed by the Investment Company Institute (ICI) in its Report of the Money Market Working Group."
