A press release sent out yesterday says, "The Institutional Money Market Funds Association (IMMFA) has today published an updated set of Position Papers on the European Commission's proposal for a new Regulation for money market funds: "Regulation of the European Parliament and of the Council on Money Market Funds ('MMFR')". IMMFA supports many of the provisions in the MMFR. The introduction of minimum liquidity and diversification requirements, "know your client" policies and enhanced transparency will make money market funds (MMF) even stronger and improve their resilience in stressed market conditions. IMMFA also proposes additional measures such as the use of trigger-based liquidity fees and gates to meet regulators' desire to reduce run risk in MMF whilst maintaining them as an effective product for investors." (Note: Crane Data will be hosting its second annual European Money Fund Symposium September 22-23, 2014, in London, where these issues will be discussed in detail.)
The London-based IMMFA explains, "The position papers address in addition many of the fundamental questions raised in the policy debate on MMF debate including: Why accounting funds as variable NAV (VNAV) rather than constant or stable NAV (CNAV) has no impact on the degree of risk in the financial system; What might become of the E480bn invested in European CNAV MMFs if key aspects of the proposal are implemented; Why investors find CNAV MMF so useful; and The role CNAV MMF play in funding SMEs and other businesses across Europe."
Susan Hindle Barone, Secretary General of IMMFA, comments, "Money market funds are a key component of the capital markets and an invaluable tool for many of the enterprises which are the engine-room of recovery and growth in Europe. We are keen to work with regulators to ensure that we address the real issues at the heart of the MMF debate. The key to reliable, robust funds lies in liquidity and transparency. Liquidity fees and redemption gates are the most direct and effective measure to dampen volatility in stressed market conditions. We hope that these position papers assist in a fuller understanding of this important sector."
The release adds, "IMMFA also announced changes to its Board composition following its AGM last week. Jonathan Curry of HSBC Global AM was confirmed as Chair of IMMFA for a further year. Kathleen Hughes of Goldman Sachs was re-elected and James Finch of UBS Global AM elected as Board Directors of IMMFA. Susan Dargan of State Street Global Services was re-elected as Board Director representing Associate Members."
The full set of "IMMFA Position Papers" subtitled, "Regarding the European Commission Proposal for a Regulation on Money Market Funds," explains, "The following documents comprise an industry response to the European Commission's Proposal." The "IMMFA Summary Position on Money Market Fund Reform," says about "Money Market Funds," "Money Market Funds (MMFs) form a large and important sector of the European mutual fund industry, with just under E1 trillion assets under management. They are used by both retail and institutional investors, across many European countries. They are cash management vehicles, which provide investors with access to professional credit and operational risk management skills, in a transparent, low-cost and easy-to-use format. As well as being a useful tool for investors, MMFs are important for the wider European economy. By aggregating the cash holdings of a wide range of investors, they are able to provide scale funding for banks, financial institutions, corporations and businesses. They are also the leading investors in the short-term securitised asset market, which has been identified by both the European Central Bank and the Bank of England as a key market to improve the credit flow from the financial sector to the wider economy."
It continues, "The Institutional Money Market Funds Association (IMMFA) represents MMF managers and sponsors, who offer MMFs to institutional investors. In addition to "short term MMF" regulations and UCITS regulations, all IMMFA members abide by a Code of Practice that sets out the best standards of investment risk management for MMFs. IMMFA works with policy makers and regulators to provide information and advice about the European money markets, and to represent the views of MMF managers and investors in discussions about the future regulation. IMMFA welcomes the European Commission's desire to establish more consistent and more transparent regulation of the MMF sector in Europe. IMMFA shares the Commission's aim to ensure that the MMF sector is well prepared for the possibility of distressed financial markets in the future; and to ensure that the MMF sector does not become a conduit through which market contagion passes on to the banking sector."
Regarding the "European Commission Reform Proposals," the paper comments, "Nonetheless, IMMFA believes that some of the Commission's draft reform proposals will not achieve these shared aims. Indeed, some of the proposals are likely to make the European money markets less effective. If implemented in full, these new regulations will make it more expensive for European businesses to raise funds for new investment and more expensive for individuals and institutions to manage their cash holdings. Yet, the money markets will remain vulnerable to systemic risks. IMMFA has produced a series of papers which explain in more detail what MMFs are and why they are important to the European economy. They also describe, in some detail, why some of the European Commission's proposals should be amended or withdrawn. These papers make the case for a MMF sector that is safer and more transparent, and which continues to provide services to investors and borrowers in a cost-effective manner."
IMMFA writes of "The Major Risks," "MMFs lend money to a range of borrowers, including governments and government agencies, banks and other financial institutions, corporations and businesses. The main risk to the investors in a MMF is that one of these borrowers fails to repay their loan. A second risk is that market participants judge it unlikely that a borrower will be able to repay, and the price of this borrower's debt falls in value in the secondary market. The best defence against these risks is to diversify the portfolio, with a wide range of high-credit quality assets of short-duration."
They explain, "Well-run MMFs employ a range of risk mitigation strategies and are very unlikely to suffer defaults or significant falls in value. However, if other mutual funds or money market investors encounter problems with their asset holdings, and sell significant volumes of assets into the secondary markets to liquidate their positions, these credit problems can be quickly transmitted to MMFs, a process known as "contagion". Falling prices of bad assets drag down the prices of good assets. In such circumstances, MMF investors might decide to switch from bank and corporate credit to government credit, and a run on MMFs might result."
IMMFA says about "How to Reduce these Risks," "In a distressed market, where prices of both good and bad assets are falling, and where investors embark on a flight to quality, even well-run MMFs are vulnerable. Regardless of the amount of liquid assets in the fund, and the credit quality of these assets, when there is a sudden and significant demand from investors to redeem their holdings, all MMFs face major challenges. The manager has to decide whether to liquidate their asset holdings to meet redemption requests, probably incurring losses and possibly amplifying the rate of falling prices. Or, the manager could shut the fund temporarily, imposing a fee on investors who need to redeem, thereby stemming the flow of cash out of the money markets while ensuring that all investors are treated fairly."
The paper continues, "IMMFA strongly supports this second course of action, namely introducing redemption gates and liquidity fees. These mechanisms make it impossible for investors to run from their MMFs unless they pay a premium for liquidity during a distressed market. These mechanisms are the equivalent for the mutual fund industry of bank holidays in the banking industry. Whereas asset sales by MMFs into falling markets would be likely to accelerate investor flight, the introduction of redemption gates and liquidity fees would help to decelerate the spread of contagion."
It adds, "A number of other solutions have been proposed, with the aim of dissuading investors from running from their MMF during distressed market conditions. These include requiring MMFs to hold a capital buffer of 3% of the net asset value of the fund, or requiring MMFs to change their pricing structure -- both for the assets in the fund and the fund itself. The European Commission has supported the use of a capital buffer, the move to variable pricing for MMFs and the move to mark-to-market pricing of assets within a MMF."
The paper explains, "IMMFA believes that these changes would be highly disruptive of the MMF sector, raising costs for investors and borrowers, without in any way reducing the risks that are inherent in the wider money markets. IMMFA believes that regulatory reforms should focus on the actual causes of risk -- the quality of the assets and the ability of investors to redeem their holdings -- rather than superficial issues concerning fund structures and prices."
Finally, IMMFA's "Conclusion" says, "There is no evidence to suggest that changes to accounting and pricing structures within MMF would stop investors from running when markets become distressed. By contrast, imposing redemption gates and liquidity fees would be a cheap and effective solution. IMMFA supports the introduction of smart regulatory reform, which will preserve the benefits of the MMF sector -- for investors and borrowers -- while reducing systemic risk."
