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 The new regulations are designed to ensure stability in money market
funds, which are used by companies and investors to park cash for
short periods. The funds experienced mass withdrawals when U.S. bank
Lehman Brothers collapsed in 2008, which contributed to the chaos
across financial markets.
The original proposals would have required more than half the funds
in the sector to hold a buffer or capital equivalent to 3 percent of
their assets as a safeguard in market turbulence.
The industry complained that such a buffer would make these funds,
known as constant net asset value funds (CNAVS) uneconomic, which
would give corporate treasurers fewer options in terms of where to
park cash.
Now the European Parliament's economic affairs committee has voted
to ditch the capital buffer requirement.
It has adopted a new approach similar to rules introduced in the
United States, where the funds would have fees and "gates" aimed at
making it harder for investors to withdraw their cash in a crisis.
The new plans also create three new categories of CNAVs, one for
holding only European Union government debt and another for just
retail investors.
A third category, a so-called "low volatility" version, would
effectively be a vehicle for phasing out remaining CNAV funds over
five years. These would be replaced with variable net asset value
funds, where the value of the fund moves with the market. About half
of Europe's money market funds already have this feature.
The European Association of Corporate Treasurers (EACT) said it
appreciated the lawmakers' decision to allow for new types of CNAV
funds without a capital buffer.
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But EACT said its members were worried that the phasing out of low
volatility funds could deter fund managers from setting up new
funds, thereby limiting the availability of funds on the market.
The European Parliament and EU states have joint say on the draft
law and member states have to reached a deal among themselves before
both sides sit down to agree a final text that will become law.
Under the version backed by lawmakers on Thursday, all money market
funds, including variable net asset value funds, must meet minimum
liquidity requirements and limit how much can be invested in any
given asset.
No money market fund would be allowed to receive external support at
any time, including from their sponsors, making it clear what would
happen in a crisis.
(Editing by Jane Merriman)
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