The leaked draft forms part of a global regulatory backlash against constant NAV money funds, which invest in high-quality, short-term money market instruments and trade at a fixed €1 or $1 a share except in extreme circumstances.
Brussels argues constant net asset value (NAV) funds are susceptible to “massive and sudden redemption requests”, which can create systemic risks given that money market funds hold 38 per cent of short-term debt issued by European banks.
The Commission’s draft proposals state that constant NAV funds must maintain a 3 per cent cash buffer to absorb losses, amounting to €14.7 billion. All money market funds would also be barred from accepting collateral with a maturity of longer than 397 days to back repo trades. This will eliminate 80-90 per cent of the collateral currently used, say industry sources. It could potentially force funds to switch excess cash into unsecured commercial paper.
Further rules would stop funds from smoothing returns by using amortised cost accounting, bar them from seeking ratings from rating agencies and prevent sponsors from bailing funds out beyond the 3 per cent buffer.
The buffer is widely considered the most damaging proposal. “Three per cent will basically kill the CNAV industry in Europe. Even if it’s negotiated down, we still believe that the vast majority of CNAV funds will get out of the business”, one industry figure told. “The vast majority don’t believe capital is appropriate.”
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