EU May Require Cash Buffer for Money Funds

European regulators consider tighter restrictions on funds.

Money-market funds may be forced by European Union regulators to hold minimum levels of liquid assets, and in some cases to hoard cash reserves, as part of a bid to toughen oversight of the $4.7 trillion global industry.

Michel Barnier, the EU’s financial services chief, may require money-market funds that maintain a fixed share price to build up a cash “buffer” equivalent to 3 percent of their assets, according to draft proposals obtained by Bloomberg News. Barnier has identified regulation of money-market funds as a priority in the bloc’s efforts to rein in so-called shadow banks.

Regulators are working to impose tighter restrictions on the funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on money funds that helped freeze global credit markets.

The International Monetary Fund and global regulators at the Financial Stability Board have urged national governments to press ahead with regulating money-market funds, and shadow banking more generally.

Funds with a fixed share price have come in for particular attention from regulators, as they give “an impression of safety even though MMFs are subject to credit, interest rate and liquidity risk,” the International Organization of Securities Commissions said last year. ‘The failure of one fund to honor this commitment can put pressure on others, and “trigger a run” that destabilizes the financial system, IOSCO said.

The EU money-market fund industry is concentrated in France, Ireland and Luxembourg, according to European Commission data. Funds domiciled in these three countries account for more than 95 percent of the EU MMF market.

Chantal Hughes, a spokeswoman for Barnier, didn’t have an immediate comment. Money-market funds are investment funds that focus on short-term, high quality assets, acting as intermediaries between shareholders seeking liquid investments and borrowers seeking short term funding, IOSCO said.

Funds would also be forced to conduct internal stress tests under the proposals.

“Uniform rules will be introduced to ensure a minimum level of daily and weekly liquid assets,” according to the document. The move will improve funds’ “ability to satisfy investor redemptions.”


Renewed Plans

Under the draft EU plans, money-market funds would also face binding rules on the types of assets they can invest in, limits on how much business they can do with a single counterparty, and restrictions on short selling. The funds are typically invested in short-term money-market instruments such as commercial paper and U.S. Treasury bills.

Fidelity Investments, Vanguard Group Inc. and Charles Schwab Corp., three of the five largest U.S. money-market fund managers, signaled earlier this year they can’t stop renewed plans by U.S regulators to overhaul rules for the industry.

The staff of the U.S. Securities and Exchange Commission is developing a draft set of rules that may include proposals to force funds to adopt a floating share price, a plan the industry has said would destroy the appeal of money funds.

A similar plan prepared last year under the direction of former SEC Chairman Mary Schapiro was rejected by three of her four fellow commissioners in August, even before they were presented with a formal draft.

Republican Commissioner Daniel M. Gallagher said in a Jan. 16 speech he expected to see the proposals before the end of March.

The Schapiro plan would have given funds the option of floating their share price or creating capital buffers to absorb potential losses and imposing withdrawal restrictions to prevent shareholder runs. Fund executives have also attacked the concept of capital buffers as being either too small to be effective or too big to afford.

Among new rules introduced by the SEC in 2010, U.S. money funds were required to meet minimum liquidity levels for the first time. The funds must hold at least 10 percent of assets in cash or securities easily converted into cash within one day, and 30 percent within seven days.


Bloomberg News

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