EU abandons reform of money market funds

09 March 2014

Controversial proposals that could have killed off Europe's €450 billion-strong fixed-value money market fund industry have been pushed back to the next European Parliament. The EP's negotiator said the move was 'simply unwise and unacceptable', and accused elected MEPs of acting like puppets.

The Parliament’s Economic and Monetary Affairs Committee was due to vote on reform of so-called “constant net asset value” funds, but the vote has been abandoned with the committee said to be “split down the middle” on the proposals.

The European Commission proposed last year that CNAV funds should be forced to hold a cash buffer equal to 3 per cent of their assets to help avert a repeat of the “runs” some funds suffered during the financial crisis. However, opponents argued this would kill off the industry, as the low-margin nature of money market funds would render the creation of a buffer uneconomic.

A last-minute attempt by opponents to float a compromise, which would instead have barred fund sponsors from bailing out their funds in times of distress, failed to break the impasse. Gay Mitchell, an Irish Fine Gael MEP and opponent of mandatory buffers, said: “There has been very little effort to meet genuine concerns about CNAVs. The majority [of committee members] feel we should leave it to the new parliament to give it timely consideration. Rushed legislation would be bad legislation.”

Another opponent of the buffer admitted the move was a “gamble”, given the likelihood that the Socialists, who tend to be more in favour of a buffer, will gain ground in May’s elections. Opponents instead appear to be pinning their hopes on a view that industry regulators might ease up on their push for widescale reform.

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S&D Euro MPs strongly criticised the conservatives and liberals in the European Parliament for blocking an important EU law to regulate money market funds (MMFs), a very important part of the financial sector. The proposed money market funds regulation was put to the vote on 10 March at a meeting of the Parliament's economic and monetary affairs committee in Strasbourg. But opposition from the right wing prevented the vote from taking place.

The European Parliament's negotiator on the topic Saïd El Khadraoui expressed his concerns: "The move to block regulation in the money market funds sector is simply unwise and unacceptable. I am very surprised to see how elected MEPs act like puppets for the financial markets, rather than protecting the citizens who elected them to build a safer European Union.

"A very vocal minority of members of the conservative and liberal parties, clearly serving the interests of the financial industry, have managed to impose their will – for the third time – and to block any proper reform of the money market funds sector, thereby leaving it unregulated and keeping status quo.

"After the financial crisis, the investment runs we have seen on these funds – both in the EU and in the USA – and all the appeals from international and European organisations to urgently regulate this sector, this move is very worrying and a major disappointment." 
 
Money market funds are an important source of short-term financing for financial institutions, corporate bodies and governments, and almost 40 per cent of short-term debt issued by the banking sector is held by MMFs. They represent a crucial link bringing together demand and supply for short-term liquidity with a portfolio of €1,000 billion.

In September last year, the European Commission took a first step by proposing to regulate MMFs. The idea being to make these funds more liquid and stable by imposing strict liquidity and diversification requirements, and a capital buffer for CNAVs (constant net asset value funds, a particular type of money market funds). This capital buffer has been a key issue in the debate.

Saïd El Khadraoui added: "None of the arguments used by the defenders of the CNAVs are justified; the figures clearly show that the vast majority of the CNAV funds will not move out of the EU if a capital buffer is imposed. In addition, the measures they have proposed to tackle financial instability (by imposing liquidity fees) were clearly shown to be inadequate during the crisis."

Press release © S&D