Citi's Tuffy on ESMA Consultation
Citi Securities Services writes on "Money Market Fund Reform, The Other Shoe Drops." Author Sean Tuffy tells us, "Following the Securities and Exchange Commission's (SEC) review of its money market fund regulations last month, the European Securities and Markets Authority (ESMA) released its own consultation on potential reforms to the EU's money market fund regulation. After the volatility last March and April, many regulators around the globe are looking to address the liquidity issues that were experienced. ESMA acknowledges that actions taken by the US Federal Reserve to help backstop the US money market fund industry also helped to quell issues with European domiciled funds. Even though European governments did not have to take direct action, ESMA thinks it's prudent to review the regulations." He continues, "In an encouraging sign of internationalism, many of the ESMA's proposals mirror what the SEC is reviewing; including the idea to decouple regulatory thresholds from suspensions or gates to limit liquidity stress. ESMA has also suggested to extend swing pricing, a mechanism that allows managers to adjust the price of a fund to mitigate the impact of large shareholder activity on other investors, to money market funds. While additional liquidity tools will likely be welcomed by the industry, given how some money market funds operate it may not be as useful of a solution. As expected, ESMA may look to loosen the rules that prohibit fund sponsors from providing support to money market funds. The concern is that this prohibition may be overly restrictive and that sponsor support may be a better outcome for investors." Citi's Tuffy adds, "Similar to the US, the core issue is whether constant NAV funds are still appropriate or should all money market funds prices be floating, similar to other open-ended mutual funds. This subject has come up in previous money market fund reform discussions in the past, but regulators have never pulled the trigger. However, in light of the fact that money market funds have run into difficulty twice in nearly a decade, there may be a greater willingness by regulators to call for structural reform. If this happens, it may have major implications across the market that could reshape short-term debt and upend some firms' business models." (See our March 30 News, "ESMA Posts Consultation Report on Potential Reform of European MMFs.")
