Two weeks ago, the London-based Institutional Money Market Funds Association, or IMMFA, a trade group representing triple-A rated, "U.S.-style" money market funds in Europe, held its 10th anniversary dinner and featured a speech by Eddy Wymeersch, Chairman of CESR, the Committee of European Securities Regulators. We recently obtained a copy of Wymeersch's comments and excerpt from them below. (See also our May 20 News "European Regulators Keep Two-Tiered Definition of Money Market Fund".)
Wymeersch told the IMMFA dinner, "[The] Money Market Funds industry is one of the important segments of the collective investment industry, and deserves full attention of the regulators as it is considered to be the safest segment of the market. Investors consider investment in money market funds as equivalent to depositing their money in a bank account, and are -- or better: were -- not well aware of the risks that may exist even in such an investment vehicle that often they considered as being quite simple and straightforward."
He continued, "The Reserve Primary Fund in the US has been a rude awakening for all of us, regulators included. The subsequent fraud charges brought against the manager of this fund only underline the dangers of being not fully transparent to investors about the composition of the funds and its liquidity especially after massive requests for redemption have been introduced.... Both in the US and in Europe this evolution is now receiving considerable attention, to better protect investors and avoid these confidence undermining events to happen again."
"CESR -- this is the securities regulators of the 27 EU Member states -- has also worked on the subject, mainly in terms of 'truth in the portfolio', i.e. making clear to investors what are the essential characteristics of the fund. As you know CESR cannot impose legally binding requirements, but is acting by way of recommendations and guidance. In this case the guidance is expected to be followed up by the national authorities and to have it implemented at the national level.... In the future, some of these matters may be the subject of a 'binding technical standard', that will have the character of a full European regulation, effectively applicable in the national legal order of the Member states," he explained.
Wymeersch said, "CESR's approach has been to deal with the name under which MMF are presented for investment. It requires Member states to use only two standardised designations, avoiding confusion with other types of portfolios. The latter remain fully free, but cannot be presented under the MMF-label. To that extent, the CESR document contains a list of translations in all EU languages, creating thereby a protected area, comparable to a trademark. The basic approach followed by CESR is directly inspired by the EFAMA - IMMFA study on MMFs of July 2009. It constitutes a good example of the fruitful dialogue between the profession and the regulator."
He continued, "CESR's statement distinguishes ... 'Short-Term Money Market Funds' and 'Money Market Funds' which operate a longer weighted average maturity and weighted average life. This proposal differs from the one that was originally adopted, distinguishing 'money market funds' from 'long term money market funds'. But the basic idea is the same: in actual practice, the first category are the funds that are really close to the money market and hence are more short term, incorporate less risk, better liquidity, etc and those funds that somewhat move away from these objectives without taking a long term perspective, as than they would be gradually come close to bond funds, and all the possible variations in between."
Finally, Wymeersch said, "But with this guidance, the work is not finished. One can expect in the future additional attention being addressed essentially to the liquidity issue, as liquidity concerns may trigger systemic risks and lead to contagion effects. Therefore stricter liquidity requirements will be necessary, along with the possibility to suspend the redemption period, or even introduce redemptions in kind. In the US the liquidity requirement has been established at 10% on a daily basis, and 30% on a weekly basis.... The choice between fixed NAV or floating NAV will however have to be decided.... These considerations are also in line with the reforms that are being considered in the US. Additional questions are likely to be raised e.g. on the application of the bank levy to asset managers, having an indirect effect on the fund management and return."
