Money market fund managers should be able to close funds temporarily and impose fees on investors who want to redeem them in order to prevent a run on the sector, a trade body says.
The International Money Market Fund Association (IMMFA) says this would stem flows out of money market funds and ensure investors are treated fairly.
The IMMFA has produced a series of papers marking out its proposals in the face of regulatory changes in the sector aimed at reducing systemic risk.
IMMFA says these “redemption gates and liquidity fees” are mechanisms that make it impossible for investors to run from their money market funds unless they pay a premium for liquidity during a distressed market.
These mechanisms are the equivalent for the mutual fund industry of bank holidays in the banking industry, the body says.
The IMMFA notes that a number of other solutions have been proposed, with the aim of dissuading investors from running from their funds during distressed market conditions. These include requiring funds to hold a capital buffer of 3% of the net asset value of the fund, or requiring them to change their pricing structure - both for the assets in the fund and the fund itself.
The European Commission has supported the use of a capital buffer, the move to variable pricing for these funds, and the move to mark-to-market pricing of assets within them.
However, the IMMFA believes that these changes would be “highly disruptive” to the sector, raising costs for investors and borrowers, without reducing risks
Money market funds form a large part of the European mutual fund industry, with just under €1 trillion of assets under management. As well as being cash management vehicles, they are also important for the wider European economy, says the IMMFA. By aggregating the cash holdings of a wide range of investors, the funds can provide scale funding for banks, financial institutions, corporations and businesses.
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