EU sets sights on money market fund reform

European regulators are calling for reforms of the continent’s €1.4tn money market fund sector after it came close to buckling under the coronavirus-induced market stress in March, an event that would have had ripple effects across the financial system.

Investors pulled huge sums from money market funds — short-term instruments that are used to manage cash flow — when the coronavirus crisis escalated earlier this year.

In Europe, outflows were close to the levels seen in the 2008 financial crisis, mirroring similar redemptions in the US. Redemptions on both sides of the Atlantic subsequently abated due to the intervention of central banks.

But influential voices including the EU’s top financial regulator and the French markets watchdog are concerned about how close the system came to experiencing a large-scale liquidity crisis and are urging reforms.

Robert Ophèle, chairman of the Autorité des Marchés Financiers, said some European money market funds were “on the brink of being suspended”, a situation that would have been “a disaster with detrimental spillover effects throughout the whole financial sector”.

The comments underline how the coronavirus market sell-off has revived questions about the systemic risks posed by asset management.

Money market funds are a systemically important part of the financial system as they provide a vital source of short-term funding for many companies. They are also vulnerable to destabilising runs if investors panic and exit en masse during market stress, as occurred when the Reserve Primary fund “broke the buck” in 2008. 

The fact that the March problems occurred despite significant reforms having already been made to money market funds after the 2008 crisis is a major concern for regulators. The previous reforms were designed to make the funds more robust and better able to cope with investor runs.

According to the AMF, the March outflows were of a similar magnitude to those experienced in 2008 but over a shorter time period. In France alone, outflows reached €46bn in just three weeks.

Steven Maijoor, chairman of the European Securities and Markets Authority, said money market funds “did not respond adequately to the turmoil” in March, noting they avoided breaching their limits because of the support of central banks. “Further reforms of the regulatory framework for these funds is needed,” he said.

Gerry Cross of the Central Bank of Ireland, which oversees one of the largest money market fund hubs in Europe, echoed this view at a meeting with asset managers last month.

The European regulators’ calls come after recent comments from US policymakers advocating a review of the money market fund rule book.

Natasha Cazenave, head of policy and international affairs at the AMF, told the Financial Times the March events highlighted disparities between the US and the EU frameworks.

In the US, banks are allowed to provide support to their money market funds, whereas this is prohibited in Europe, a feature that should be reviewed, said Ms Cazenave.

The International Organization of Securities Commissions, the global umbrella body for securities regulators, recently began analysing the robustness of money market funds.

Ms Cazenave said: “[March] was a real life stress test that raised a number of questions that we have to answer. [We need to] make sure we have the right diagnosis of what happened, what the vulnerabilities in the system are and what an appropriate response would be.”

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