The European Commission proposal unveiled on Wednesday aims to tame a fund sector that lubricates financial markets with short-term money but worries regulators by offering banklike promises that are vulnerable to investor panics.
To address the funds’ systemic risks, Michel Barnier, the EU Commissioner responsible for financial regulation, wants them to stockpile liquid assets and – when offering a guaranteed share price to investors – build capital buffers to avert runs.
These curbs are tougher than expected US reforms – which are likely to include important exemptions – and are vehemently opposed by the $2.9 trillion money fund industry. But Mr Barnier resisted a last-ditch push from the finance ministers of France and Germany, who in a joint letter on Monday called on him to go further and outlaw fixed-value funds altogether.
The Commission reform proposal comes at a late stage of the legislative calendar and will struggle to be passed into law before next year’s European Parliament elections, which will herald a new set of personalities and priorities in Brussels.
Under Mr Barnier’s proposal, fixed-value funds representing close to half of Europe’s money fund industry face a mandatory 3 per cent capital cushion, to be built up through a three-year transition.
Other measures limit the assets that funds can invest in and the time span of the instruments. Funds will be obliged to hold at least 10 per cent of assets in instruments that mature on a daily basis and an additional 20 per cent in assets that mature in a week. Money market funds will be prevented from asking credit rating agencies to rate them under the draft.
The reforms come against the backdrop of a global regulatory push to tether non-bank lending markets. Regulators see the sheer size of the money market sector and its close ties to regulated banks, which stand behind the vast majority of funds as sponsors, posing systemic risks during stressed market conditions.
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