Sept. 3 (Bloomberg) -- Banks and asset managers running money-market funds face a regulatory push from the European Union amid warnings from lenders that the plans may kill off part of the $4.7 trillion global industry.
Michel Barnier, the EU’s financial services chief, will call for the funds to hoard easy-to-sell assets and in some cases to meet minimum capital requirements, in a bid to limit the scope for excessive risk taking, according to a document obtained by Bloomberg News.
Regulators need to counter the threat of “investor runs” on a fund, according to the document, a draft version of proposals to be presented by Barnier tomorrow. Money funds, a type of investment vehicle focused on short-term, high-quality assets, “play a central role in the short-term funding of entities like banks, corporations and governments” meaning a run could have “broader macroeconomic consequences.”
Regulators are working to impose tighter restrictions on money-market 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 the industry that helped freeze global credit markets.
Money funds act as intermediaries between shareholders seeking liquid investments and borrowers seeking short-term funding. They typically invest in money-market instruments such as commercial paper and government debt.
The EU plans include requiring money-market funds that maintain a fixed share price to build up a cash buffer equivalent to 3 percent of their assets, according to the draft.
Funds that are already in place before the rules become law would have 3 years to fully meet the cash-buffer requirement. This is longer than in an earlier draft of the plans, which would have required funds to comply with the measure six months after the law is published.
The European Fund and Asset Management Association, a group representing the investment management activities of banks including HSBC Holdings Plc and JPMorgan Chase and Co., has warned that setting capital requirements for money funds risks destabilizing their business model and confusing investors, who may simply look elsewhere
Funds with a fixed share price have come in for particular attention from regulators, as they give “an impression of safety even though money funds 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 runs, Iosco said.
The EU money-market fund industry is concentrated in France, Ireland and Luxembourg. Funds domiciled in these three countries account for more than 95 percent of the EU money fund market, according to European Commission data.
Under the draft EU plans, funds would face limits on the timespan of their investments, and minimum rules on diversifying their portfolios. One rule would prevent funds from exposing themselves to potential losses on securitizations amounting to more than 10 percent of their assets.
Other parts of the draft EU rulebook would limit the assets they can invest in, and ban them from taking part in activities including short-selling and securities financing transactions such as repos. Funds would also be banned from paying ratings companies to assess their creditworthiness.
--Editors: Peter Chapman, Anthony Aarons