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Addressing systemic risks associated with market-based finance activities - Resilience of the EU financial sector in the global context
The European Parliament: market makers
By Gepp Dennis - Senior Vice President, Managing Director and Chief Investment Officer, Cash, Federated Investors (UK) LLP
In April 2015 the European Parliament approved an approach for European Money Market Fund reform. In doing so, the EP put on its market-making hat and attempted to design new investment products for European Investors. With time to evaluate the unfortunate result of the U.S. MMF reform, the end result of EP’s creativity could be a successful model for global MMF regulation for years to come – subject to a few adjustments.
The EP had the foresight to know that applying capital to an investment product which is already 100% capitalised is not appropriate and would place European Investors and Markets at a global disadvantage by eliminating a short-term investment vehicle which provides almost 600 billion Euros in short term financing. The EP recognised that a viable alternative would need to be found. To address these issues the EP designed a “Low-Volatility MMF.” While described as a constant product, in reality the EP has delivered a Variable MMF alternative, which, in normal market conditions can provide European Investors with a stable return, yet should satisfy global regulators by varying in price when markets move outside the norm.
The EP further enhanced the safety and stability of all European Money Market funds by prohibiting the use of Sponsor Support in most instances and thereby eliminating both the systemic risk of contagion to the banking system and any risk that investors could consider MMFs to be “guaranteed” investment products.
Successful model for global MMF regulation for years to come – subject to a few adjustments.
To have a chance to succeed the “LVNAV MMF” must not be subject to a Sunset Provision and the Government CNAV MMF must not discriminate against non-EU countries nor EU member states whose currency is not the Euro. Market displacement in the US may serve as a guiding light, with European policy makers having an opportunity to prevent the unintended consequences that have severely disrupted and increased the cost of financing in the U.S.
All stakeholders will benefit from the retention and strengthening of a sound and stable base of short term funding. A robust European MMF system which provides investors sound alternatives in VNAV, LVNAV and Government CNAV can provide that stability for years to come.