The most significant noise has come from the Committee of European Securities Regulators (CESR), which has just issued proposals for a two-tier approach to definition, separating very liquid short-term funds from more risky longer-dated funds.
Longer-dated funds typically hold riskier underlying securities with greater duration, but with the expectation of higher returns. Short-dated funds – where investors can get their money back in a matter of days – tend to stay closer to Libor and have more liquid instruments in their portfolio.
CESR recommends in both cases specific disclosure should be required to draw attention to the difference between the money market fund, and investment in a bank deposit.
“It should be clear, for example, that an objective to preserve capital is not a capital guarantee. Longer-term money market funds should be required to provide sufficient information to explain the impact of the longer duration on the risk profile,” it said. The industry has until the end of December to submit proposals to CESR based on its review published in October.
Earlier this year, the European Fund and Asset Management Association (Efama) and the Institutional Money Market Funds Association (IMMFA) issued broadly similar proposals to CESR’s, arguing for funds to be either short term or ‘regular’ in order to limit interest rate and credit risks. Any funds that don’t fit into one of these criteria should be given a transitional period of three years to exit the market.
The Association of British Insurers (ABI) meanwhile has called for funds to rule out certain assets entirely, including asset-backed commercial paper, and the introduction of a sterling funds sub-set “investing in relatively simple instruments” such as time deposits and government securities.
“The ABI definition is not a definition that we would necessarily support,” said Travis Barker, chairman of IMMFA, who believed the CESR proposals would mean European funds more aligned to US 2a-7 type funds, which restrict investments based on quality, maturity and diversity. “This could be good news for the industry and the shareholder,” he added.
