Bloomberg writes "Money-Market Funds May Win EU Reprieve as Lawmakers Seek Deal," which discusses the European Union's tentative proposal to regulate money market funds by implementing a 3% capital buffer, and the possibility it may fail or get diluted in next Monday's vote. It says, "Money-market funds may get an extra two years to build up cash buffers intended to ward off crises, as European Parliament legislators seek to resolve a clash over draft rules that the industry has warned would harm lending."
Bloomberg says, "Said El Khadraoui, the lawmaker leading work on the measures, said he's weighing options including giving funds an extra two years to meet the buffer requirement in a bid to clinch a deal at a vote on Feb. 17. There is "fierce opposition" to the buffers from some members of the assembly's Economic and Monetary Affairs Committee, El Khadraoui said by telephone." They quote him, "It's unclear whether a buffer could be accepted by the committee in its vote on Monday."
The article explains, "Next week's Brussels vote will indicate parliament's negotiating position on the plans ahead of talks with national governments on the final version of the law. El Khadraoui said he may also seek to insert a review clause to examine how well the measures work in practice. Michel Barnier, the EU's financial services chief, put forward the draft law in September in an attempt to boost funds' resilience to crises. Barnier's proposals would require funds that maintain a fixed share price, known as constant net-asset value, or CNAV, funds, to build up a cash buffer equivalent to 3 percent of their assets."
Bloomberg adds, "Funds that are already in place before the rules become law would have three years to fully meet the requirement. This would be extended to five years in El Khadraoui's plan. Some members of the parliament committee back calls from the European Systemic Risk Board, a group of EU authorities including the European Central Bank and Bank of England, for an outright ban on CNAV funds. Others are opposed, warning that scrapping the funds would lead to increased funding costs for businesses and governments, and boost the economy's reliance on bank lending."
Finally, the piece says, "While legislators are split over the need to introduce buffers "everybody agrees at least there should be a gating mechanism" that would protect CNAV funds from runs by limiting how fast investors could withdraw their cash in a crisis, he said. It is "very unlikely" that a deal on the legislation can be reached with governments before EU parliament elections scheduled for May, meaning work on the measures will extend into late 2014, El Khadraoui said."
In other news, J.P. Morgan Securities published its latest "Prime money market fund holdings update". Authors Alex Roever, Teresa Ho, and Chong Sin write, "After a sharp decline in bank holdings at year-end, bank holdings bounced back strongly in January as banks and dealers made more supply available to liquidity investors. MMF participation in the inaugural 2y Treasury FRN was light as the auction spread was too rich for much of the MMF community. Allocations to the Fed overnight reverse repo (O/N RRP) remained elevated through January as the decline in T-bill supply forced funds to search for substitutes." (See yesterday's "News" for our review of the latest Money Fund Portfolio Holdings too.)
They add, "MMFs took down about $1.7bn of the inaugural $15bn 2y Treasury FRN auction which represents about 11% of the total offering amount. Prime MMFs were the largest buyers, taking down $885mn of the auction. Treasury MMFs took down $668mn and government/agency MMFs bought $131mn. Although Treasury MMFs were the second largest participants of the auction, as a percentage of total assets, Treasury MMFs committed more assets to the FRNs at 1.14% versus prime MMFs which committed just 0.70%. The average size of Treasury FRN holdings across the funds was $80.2mn and the average size of the funds was $9.56bn. The largest buyer was a $79.5bn prime MMF which bought $474.5mn of the auction. The smallest buyer was an $87mn government/agency MMF that bought only $800k."
Finally, JPM writes, "Prime MMFs total bank holdings increased by $65bn in January, driven mostly by increases in European bank CDs and time deposits. French and German bank holdings increased by $25bn and $11bn, respectively mostly via CDs and repo while increases in time deposits holdings with non-Eurozone European banks drove increased exposures to those regions. Non-Eurozone Yankee bank holdings experienced broad declines while US bank holdings declined by $11bn, reflecting the reversal of the one-off increase in repo supply provided by one US bank at year-end."
