Fund groups have criticised a proposal to create low volatility net asset value (LVNAV) money market funds, which was voted through by MEPs this week.
The MEP vote advances a number of changes that could become law and alter how the €1 trillion money market fund industry operates.
A LVNAV fund would invest mainly in EU government debt and would be required to keep its net asset value stable in strict conditions.
It is one of two funds that MEPs want to replace constant net asset value funds (CNAVs).
The range of proposals voted through by the European Parliament are designed to reduce systemic risk in money market funds that are potentially vulnerable to a large exit by investors in times of stress.
The European Fund and Asset Management Association (Efama) says the “stringent requirements” placed upon the LVNAV, in particular a requirement that these funds would cease to exist after five years, make this product “unworkable for fund managers and unusable by investors of MMFs [money market funds] in the long term”.
Efama strongly encourages EU legislators to seek a permanent alternative solution to the current CNAV model that will allow investors to take advantage of the benefits of money market funds.
The Institutional Money Market Funds Association says the LVNAV structure is “not an adequate substitute for the CNAV product. Only a very small proportion of the current CNAV market would be able to transition into this new MMF formulation”.
The Council of Ministers still has to agree its position on money market funds before the proposals can move forward.
Other proposals are for money market funds to have in place liquidity fees and redemption gates to stem outflows.
Efama warns that some of the changes could threaten the EU Capital Markets Union, which is designed to match savers and borrowers more efficiently.
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