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Alfi hits out at money market fund reform plans
10 September 2013
Banking buffer rules not applicable to money market funds, the Luxembourg association argues
Money market funds
The Association of the Luxembourg Fund Industry (Alfi) has attacked proposals by the European Commission to apply more stringent regulation to money market funds (MMFs) as “unjustified”, “dangerous” and puts the market “at risk”.
ALFI said the Commission's Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds, published on 4 September, which will extend banking-style buffer regulation to MMFs, was a dangerous move that might put markets at risk.
Marc Saluzzi, chairman of Alfi, said the body was “very concerned” about the impact of the proposed regulation.
“[MMFs} represent 15% of the European investment fund industry. They are important source of short-term financing for the economy. The rules proposed by the Commission, especially those on eligible assets and diversification, are too stringent and even exceed the rules governing Ucits, which is unjustified,” he said.
As these funds account for 40% of all short-term debt issued by the banking sector, the EU argued MMFs are systemically important.
The EU's proposals are designed to reduce the level of systemic risk that the sector poses to the banking sector and corporates, by imposing greater buffer requirements and liquidity for fund redemptions, as well as more robust risk management and assessment.
The proposed regulation would require MMFs to hold minimum levels of liquidity to satisfy redemptions. Constant NAV (CNAV) MMFs – MMFs that seek to maintain a stable €1 per share when investors redeem or purchase shares – would have to hold a 3% buffer to cushion redemptions when the fund's assets may decrease in value.
Saluzzi added: “The cost of capital buffers are simply too high for CNAV money market funds, particularly in the current low-interest environment.”
ALFI added that the capital buffer would create problems for fund managers that offer CNAV products globally, if the US SEC doesn’t apply the same regulation.
He added: “Money market funds play a critical role in the short term financing markets. Regulation should not put them at risk.”