We learned from Moody's latest "Weekly Credit Outlook" about pending changes to Canadian money fund regulations in a brief entitled, "Rules on Canadian Money Market Funds Will Strengthen Credit Quality but Could Have Gone Further." Moody's one-page summary cites a publication from the Canadian Securities Administrators (CSA), which appears intended to bring Canadian money fund regulations more closely in line with the U.S. Security & Exchange Commission's Rule 2a-7 of the Investment Company Act of 1940.
Moody's writes, "On 25 June, the Canadian Securities Administrators (CSA) published proposed changes to the definition of a Canadian money market fund (MMF) intended to improve the liquidity and credit quality of MMFs. The proposed definition is a credit-positive step, but stops well short of eliminating 'break-the-buck' risk. Money market funds in Canada were buffeted by the financial crisis generally, and more specifically by the collapse of the country's non-bank asset-backed commercial paper (ABCP) market in August 2007, which resulted in a number of parent companies coming to the support of funds stressed by illiquid ABCP holdings."
They continue, "The CSA's proposed MMF definition takes positive portions of the recently adopted US Securities and Exchange Commission (SEC) rule 2a-7 amendments for US MMFs, as it requires them to maintain a weighted-average life (WAL) of 120 days or less, and hold 5% of assets under management in overnight investments and 15% in less than seven-day investments. The introduction of liquidity buckets and shorter WAL requirements will limit risk-taking by MMFs and enhance funds' ability to meet unexpected redemptions. The proposed definition also incorporates more restrictive requirements on portfolio credit quality, since money market funds will be allowed to invest only in assets that have an approved credit rating. However, contrary to the new SEC requirements, the CSA's proposal does not recommend changes to portfolio diversification or weighted-average maturity requirements, nor does it require MMFs to perform periodic stress testing."
The Canadian Securities Administrators' (CSA) release says, "The [CSA] published for comment proposed amendments to National Instrument 81-102 Mutual Funds and related instruments, which represents the first phase of the modernization of investment fund product regulation. The proposed amendments are part of a process to update existing regulation of mutual funds in the wake of product developments in recent years. The amendments include proposals to: codify the exemptive relief from regulatory requirements which was frequently granted to certain mutual funds, such as exchange-traded funds; and create new requirements for money market funds."
It continues, "These amendments are intended to simplify processes and reduce regulatory costs incurred by both new and existing mutual funds," said Jean St-Gelais, Chair of the CSA and President and Chief Executive Officer of the Autorite des marches financiers (Quebec). "This is an important first step in the CSA's approach to modernize existing mutual fund product regulation."
The CSA release adds, "The proposed amendments to National Instrument 81-102 Mutual Funds as well as related instruments, including National Instrument 81-106 Investment Fund Continuous Disclosure, and the CSA Notice and Request for Comments are available on various CSA members' websites. The comment period is open until September 24, 2010.... The CSA, the council of securities regulators of Canada's provinces and territories, coordinates and harmonizes regulation for the Canadian capital markets."
Canada's money fund and mutual fund markets remain miniscule when compared to the U.S. The Investment Funds Institute of Canada, the trade group for Canadian mutual funds, shows money market fund assets totalled $45.1 billion as of the end of May 2010, down 38.3% from a year earlier. The IFIC shows total Canadian mutual fund assets of $600.5 billion.
