Money market funds, the US-Ireland theme
 

MONEY market funds were at the heart of the 2008 financial crisis, the Fed and Treasury having to engage in a $65 billion bailout of the sector in September 2008.

Now, six years years later, after much thought and debate, the US has unveiled a package for its industry that have particular importance for Ireland and Luxembourg as the main host countries for Europe’s money market funds industry.

Europe’s regulators, and politicians, notably in the form of the EU Commission have in the past year tabled proposals in parallel to the US debate, employing a similar set of tools to fix the vehicle, but with, it's feared, a potentially very different outcome. The Irish industry, EFAMA, our own Central Bank, and others including politicians in the EU, have pointed to the dangers of getting it wrong, to the utter detriment, not just of the Irish and Luxembourg servicing industries but to Europe’s pensioners, SMEs, and economy generally.

Yet, with debate restarting on the issue in the Autumn there is every chance of folly being enacted, notably in the form of a 3% capital buffer as a central part of the EU MMF reforms.

The US proposals are distinctive in that they firmly rejected this approach. Convincing econometric research commissioned by the SEC shows that capital buffers won’t work, in the US, or elsewhere for that matter, actually resulting in an opposite effect than intended. (See: Craig M. Lewis, The Economic Implications of Money Market Fund Capital Buffers (Nov. 2013) ).

Yet, there remain influential advocates of the capital buffer approach in the EU.

The US proposals were carefully crafted, and one of the prime movers in the US reform, SEC Commissioner Daniel Gallagher, has visited Europe this summer to brief policymakers on the new SEC rules in an effort to contribute to a positive and properly tailored outcome for Europe. (See our article in this issue).

The SEC decision looks to be very well crafted, addressing the issues of moral hazard, taxpayer abuse, and the concerns of the asset management industry, and its customers, who must operate in an historically low interest rate environment where the question of constant versus variable NAVs is very real.

It is to be hoped that Europe’s decisionmakers will study the US outcome carefully.