MEPs vote for MMF compromise

The threat posed by European reforms which could have hit local authority investments in money market funds (MMFs) has all but receded, following a vote in Brussels.

The European Parliament’s economic and monetary affairs committee (ECON) voted by 35 to 18 for a compromise draft document, which would allow public bodies to continue investing in constant net asset value MMFs.

The text also removed original clauses which would have required MMFs to hold a 3% capital buffer, in favour of a system of redemption gates and liquidity fees.  These would make it harder for investors to withdraw their money quickly from MMFs, thus preventing a run on the funds in any future financial crisis.

Michael Quicke, chief executive of CCLA, which had campaigned against the original proposals, said: “We are pleased to see that ECON recognises the need to retain CNAV MMFs for certain client sectors such as charities and public sector bodies.

“If this remains the case then our Public Sector Deposit Fund will continue to be available as a CNAV MMF for its target base, a wide range of local authority and public sector organisations throughout the UK.”

The compromise agreement would allow three categories of new CNAV MMF:

• Retail: Available only to charities, non-profit organisations, public authorities and public foundations.
• Government:  99.5% of assets must be invested in government securities, and it must meet diversification requirements.
• Low volatility: Available to all investors which must meet strict conditions and which would be replaced after five years with variable net asset value funds.

In addition, MMFs would be required to follow strict liquidity and concentration requirements and have sound stress testing processes and internal assessment procedures.

The assets of a MMF would have to be valued at least once a day and the result published daily. Additional, weekly, reporting rules were also approved.

A statement on behalf of the European Association of Corporate Treasurers (EACT) welcomed the vote.

It said: “We believe that the consequences of the proposed reforms would have been a higher concentration of funds in a small number of systemically risky banks and an outflow of funds from the EU, neither of which we believe are desirable outcomes from the overall policy perspective.”

However, it said that the sunset clause imposed on the Low Volatility funds could cause reluctance in fund managers to set up such funds and therefore limit their offering on the market.

A statement by Green MEP and financial affairs spokesperson Eva Joly said the deal meant MMFs were being, “let off the regulatory hook in spite of their role in fuelling damaging sovereign debt speculation”. Green politicians had called for the phasing out of CNAVs altogether.

The text adopted by the committee will be voted on by the full Parliament before negotiations with the member states begin. The vote is planned for April.