08.21.2013
By Terry Flanagan

Money Market Funds Face Barrage of Reforms

Money market funds are facing an onslaught of regulations on both sides of the Atlantic.

Various international and European regulatory initiatives, such as the October 2012 recommendations from the International Organization of Securities Commissions (Iosco) have been taken to address risks associated with money market funds. In addition, the Financial Stability Board is expected to issue its final recommendations on all shadow banking work streams in September 2013.

In Europe, the European Commission has prepared a draft Proposal for a Regulation on Money Market Funds, which it is expected to release in September 2013. The European Stability Review Board (ESRB) has issued recommendations that are similar to the Iosco recommendations published in October 2012. In particular, money market funds should be required to have a floating net asset value, and should be required to hold minimum amounts of daily and weekly liquid assets.

Interactive Data Corp. has seen a spike in demand for its evaluated pricing services for money market instruments this year.

“During the course of the year we have seen a large increase in demand for our daily money market valuations,” said Paul Williams, senior manager at Interactive Data. “This demand is coming from U.S. clients who hold European instruments as well as from European clients.”

On an aggregate basis, European money market funds serve mostly institutional investors, although in some individual countries they are typically a retail product. There is an important non-EU investor base for European money market funds. The interconnectedness of money market funds with the rest of the financial system is further increased via the relationship with their sponsors, often banks.

In the United States, the Securities and Exchange Commission on June 5, 2013 proposed two alternative amendments to Rule 2a-7, the rule governing money market funds.

The first proposed alternative would require institutional prime money market funds to operate with a floating NAV. A money market fund’s share price would fluctuate daily, based on the market price of portfolio securities, rounded to the nearest 1/100th of one percent. This proposal would exempt retail money market funds, which would still be able to maintain a stable NAV. Retail money market funds would be defined as those funds that restrict shareholder redemptions to no more than $1 million per shareholder per day.

Under the second alternative, all money market funds would continue to transact at a stable share price but would have the ability (and sometimes the obligation) to use liquidity fees and redemption gates in times of market stress. Under this alternative, funds whose level of weekly liquid assets falls below 15 percent of total assets would be required to impose a 2 percent liquidity fee on redemptions.

“The proposals mark the latest step in a long march toward money market reform since calls for change began after the Reserve Primary Fund broke the buck in the fall of 2008,” said Jay Baris, chair of the investment management practice at law firm Morrison & Foerster, in a blog posting.

Interactive Data’s teams of evaluators operate in three major time zones to evaluate approximately 2.8 million fixed-income and international equity issues every day, covering a broad range of instruments that include global asset-backed securities (ABS), mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).

“We provide a very granular approach to valuations, taking into account time to maturity and structural details of each instrument,” Williams said. “We have analysts located in Europe who are specialists in European money markets, and who use the same methodology as their colleagues in New York.”

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