The London-based Institutional Money Market Funds Association (IMMFA), the trade group that represents triple-A rated, stable value ("U.S.-style") money market funds in Europe, released a statement yesterday in reaction to the European Union's "proposed rules on money market funds." IMMFA writes, "The European Commission has today released the proposal for a new Regulation for money market funds: "Regulation of the European Parliament and of the Council on Money Market Funds." IMMFA members are committed to providing high quality, effective products but this ill-considered Regulation will effectively mandate a conversion to variable NAV MMF to the detriment of investors, issuers and the economy in general. IMMFA supports the introduction of minimum liquidity requirements, "know your client" policies, the use of trigger-based liquidity fees and gates and enhanced transparency. These reforms would make MMF even stronger and meet regulators' desire to reduce run risk in MMF whilst maintaining them as an effective product for investors." (Note: IMMFA Chairman Jonathan Curry will be giving the keynote address at our upcoming European Money Fund Symposium, which will take place Sept. 24-25 in Dublin.)
Susan Hindle Barone, Secretary General of IMMFA, comments, "Some of the measures in today's EC proposal will make a positive contribution to the robustness of money market funds, but there are several which are extremely unhelpful, to investors and to the short-term debt markets in general. We reject the assertion that there is a greater degree of systemic risk inherent in constant NAV money market funds. The European Commission has not demonstrated that CNAV funds are more susceptible to run-risk than VNAV funds and the discrimination between these two accounting techniques is unjustified."
The release explains, "IMMFA does not believe that requiring a 3% capital buffer for CNAV MMF will enhance systemic stability. Holding capital is inappropriate for investment funds and would fundamentally change the nature of the relationship between the investor, the fund manager and the CNAV fund. With the requirement for a 3% capital buffer, IMMFA expects that CNAV providers will convert their funds to VNAV. It is uneconomic for an asset manager to hold 3% capital against a MMF. Even assuming that a 3% capital buffer were affordable, its imposition would require European domiciled CNAV MMF to raise E14bn, E10bn by banks and E4bn by independent asset managers. Assuming banks are currently levered x20 – x25, reassigning the capital from other business to cover the MMF buffer would withdraw E200bn-E250bn from the European economy."
They explain, "The result is a de facto abolition of CNAV funds leading to fewer choices for investors. The proposals conflict with three of the FSB's five key principles (appended below) for new regulatory measures aimed at shadow banking concerns. Focus: The EC has not demonstrated that CNAV funds are more susceptible to run-risk than VNAV funds; the 3% buffer requirement does not target a cause of systemic weakness. Proportionality: With no material difference in risk between these two types of fund, it is disproportionate to impose a 3% capital buffer on one type but not on the other. Effectiveness: Given the SEC's decision to reject the use of capital buffers for US MMF, there is now a serious risk that cross border arbitrage opportunities will be created. There are no material differences between the money markets in US and the EC to justify such a markedly different regulatory response."
IMMFA writes, "Amortised cost accounting is a pragmatic way to evaluate the fair value of money market instruments, is compliant with UCITS and has been accepted by the FASB as compliant with GAAP. The prohibition of amortised cost accounting will make it impractical to operate MMF and offer liquidity on a 'same-day' basis, damaging the value money market funds have for investors and therefore the value the funds have for the broader economy."
Finally, they add, "Beyond these fundamental issues, there are numerous other prescribed changes which would make the continued operation of MMF difficult whilst apparently achieving little in terms of the stated aims. These would include: Removal of fund ratings – problematic to investors; An excessively prescriptive credit analysis process; Restriction on eligible assets – specifically the restrictions on ABCP; Finally, the transition period for these changes is given as 6 months. This will not be practicable given the extensive operational and educational changes which would be necessary."
A separate release, entitled, "ICI Global and ICI Disappointed with EU Proposal for Money Market Fund Regulation," commented, "ICI Global Managing Director Dan Waters and ICI General Counsel Karrie McMillan made the following statement about the European Commission's proposal for the regulation of money market funds published today: "ICI and ICI Global support additional regulation that will strengthen money market funds in the European Union and protect their investors. But any new rules must be created through a transparent process supported by strong research and public dialogue. Unfortunately, the proposal released today neither serves investors nor meets those basic standards for rulemaking.""
They add, "In particular, it's troubling that the proposal would impose a 3 percent capital requirement for constant net asset value money market funds -- a proposal that two major bodies have already rejected. Both the European Systemic Risk Board and the U.S. 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, money market fund sponsors out of the business, thereby depriving investors, issuers, and economies of the benefits these funds provide. The 3 percent capital NAV buffer is simply economically infeasible, operationally complex, and impracticable."
