EU looks to U.S. for solution to stalemate in reform of money market funds
By Huw Jones
LONDON (Reuters) - European Union lawmakers will study new U.S. rules to help them to end a year-long deadlock over how to regulate the bloc's 1 trillion euro ($1.3 trillion) money market funds (MMF) sector.
MMFs are used by companies to park cash and earn a moderate return, and by banks to manage short-term cashflow.
The stalemate is over whether to require funds to hold a capital buffer equivalent to 3 percent of assets on a type of MMF known as constant net asset value (CNAV), the share price of which stays at 1 euro regardless of fluctuations in the price of assets held.
The aim of the draft EU law is to stem any runs on the funds by investors during financial crises, but the industry says a buffer would make CNAV funds uneconomic.
The proposal needs approval from the European Parliament and EU states to come into force.
Neena Gill, a centre-left member of parliament who is sponsoring the bill, told its economic affairs committee on Monday the options she is considering to broker a deal.
These include light tweaks to the draft, keeping the buffer, and possible limits on withdrawals during a crisis.
She will also examine reform being introduced by the U.S. Securities and Exchange Commission (SEC).
"The third area I want to explore is a variation of the capital buffer, to sort of building a European version of the U.S. reform," Gill said, referring to U.S. exemptions for some funds.
MODERATE U.S. REFORMS
In July the SEC adopted moderate reforms for the sector after industry pushback and splits among SEC commissioners.
The U.S. reform forces "prime" money funds sold to institutional investors to float their values, instead of letting them maintain a stable value at $1 a share.
But in a partial victory for the industry, retail and government funds are exempt from the float requirement. The United States also approved "gates" to limit withdrawals in rocky markets for some funds.
Gill's suggestion to look at the American rules was backed by the centre-right.
"The SEC made a decision in July to reject the capital buffer proposal," said Brian Hayes, a lawmaker from Ireland. A buffer would make the EU less attractive internationally and is not workable, he said.
Hard left and Green lawmakers said tough rules were needed.
"CNAVs falsify market prices and go against market transparency," said Green party lawmaker Eva Joly, who wants this type of fund phased out over two years.
Gill aims to put a deal to a committee vote in late February ahead of a full parliament ballot in March. A final deal would then be thrashed out with member states.
(1 US dollar = 0.7895 euro)
(Editing by David Goodman)
