IMMFA report slams capital buffer proposal for MMFs

A body representing money market fund managers has warned that European proposals to regulate money market funds (MMFs) could take €250 billion out of the European economy.
The Institutional Money Market Funds Association (IMMFA) last week produced a 45-page report criticising proposals being considered by the European Parliament’s economic and monetary affairs committee (ECON).
The proposed reforms have been opposed by councils who are estimated collectively to have around £3.8bn invested in such funds, according to recent DCLG figures.
The IMMFA report pressed the case for an alternative system of regulation based on redemption gates and liquidity fees, saying that the European Union proposals requiring managers to hold a 3% capital buffer would have a significant impact on bank lending and the wider economy.
The report said: “The current assets under management of constant net asset value (CNAV) MMFs are around €480bn. “Applying the proposed 3% buffer would require a total of around €14bn of capital to be set aside.
“Of this, €4bn would be provided by non-bank sponsors, but the balance of €10bn would come from bank sponsors.
“This effect would be amplified, as banks are geared typically between 20 to 25 times, resulting in a reduction of lending to the European economy of €200 to €250bn.”
IMMFA agreed with the conclusion of the US Securities and Exchange Commission that a buffer would still leave money markets vulnerable in a systemic banking crisis.
According to the report, the EU proposal for the regulation of MMFs would, if enacted in its current form, lead to the elimination of CNAV MMFs.
This would mean that investors would be likely to switch their cash to “national champion” banks. However, because these banks do not need short dated funding, they would be likely to lower the interest rate paid to depositors.
The report said: “If, over time, the average reduction was 1% per annum, this would lower income of corporate treasuries and charities in Europe by close to €5bn per annum.”
IMMFA said that imposing a system of redemption gates and liquidity fees would be a cheap and effective alternative to help stop MMF investors from running when markets became distressed.
Investors would be able to access their cash but only in return for a liquidity fee if they do so, ensuring that investors remaining in the fund are no worse off as a result of the withdrawals.
The report said: “The liquidity fee creates a last-mover rather than a first-mover advantage, ensuring that those investors who remain invested in a MMF are protected from the impact of investors who redeem during a period of stress.”
This week, ECON selected its new members, with Italian socialist MEP Roberto Gualtieri taking over as chairman.
The UK’s will be represented by Steven Woolfe and Patrick O’Flynn from UKIP, Anneliese Dodds and Neena Gill from Labour, Conservative Kay Swinburne and Molly Scott Cato from the Green Party.
The committee has yet to decide whether to continue considering the recommendations on MMF reform.