09 April 2014

PensionsEurope: Position on money market funds

On 4 September 2013, the EC issued a proposal for a Regulation on Money Market Funds. In the view of many Members of PensionsEurope, the proposed regulation is to a large extent "overshooting" its aim and unnecessarily prescriptive.

The proposal is one of the outcomes of the wider debate on the further regulation of the shadow banking system, i.e. the system of credit intermediation that involves entities and activities outside the regular banking system. PensionsEurope does feel that any such regulation should be proportionate and that institutional investors, occupational pension funds and their asset managers more in particular, should not unnecessarily be restricted in their investment options. Occupational pension funds and their asset managers often invest in Money Market Funds (MMFs), primarily for purposes of managing their liquidity needs on a short-term basis.

Long-term institutional investors, such as pension funds and their asset managers, also have liquidity needs which are managed efficiently through short-dated instruments like MMFs. For instance, pension funds and their asset managers need to keep a cash surplus for the payments of retirement benefits to pension beneficiaries, or for the refunds of contributions or to transfer values for members leaving service. Additionally, cash reserves are also needed to fund other payments that might arise at short notice such as margin payments for derivatives. In particular, the smaller pension funds that do not have a Global Master Repurchase Agreements (GMRAs) in place make often use of MMFs to take indirect collateralised exposure via reverse repos.

PensionsEurope fears that the proposed regulation of MMFs will drive occupational pension funds and their asset managers out of these types of investments. If this was the case, and taking into account their continuing short-term liquidity needs, alternative short-term products such as repo markets or bank deposits will then need to be considered. This may leave pension funds and their asset managers increasingly exposed to single counterparties, which may also have adverse consequences in terms of required risk/return profiles.

The proposed further MMF regulation may thus, paradoxically, expose occupational pension funds to increased risk. It should be noted that Pensions Europe does not want to preclude that one short-term investment option (e.g. in MMFs) is better than others (e.g.in repo markets and/or bank deposits). PensionsEurope considers that each of these investment options serves its own specific objective and by combining them pension funds, regardless of their size, are able to better meet their short-term liquidity needs and diversification objectives.

Full position paper

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