Money market fund fees to increase by 30bsp under EU proposal

Calculating valueRatings agency Moody's has joined a growing group of critics of the proposed 3% capital buffer for constant net asset value money market funds.

Last week, the European Commission published proposals aimed to reduce the systemic risk posed by money market funds that hold nearly €1 trillion in investor assets.

Although these measures would make money market funds more creditworthy, Moody’s says the move would reduce constant net asset value funds’ attractiveness and cause investors to move their money to other products.

While the capital buffer serves as first-loss protection for MMF investors, Moody’s says asset managers will incur capital costs, further challenging a business that currently earns less than 10 basis points on managed assets.

To earn a sufficient rate of return on capital and continue to offer constant net asset value money market funds, fees would have to increase by at least 30 basis points.

Since the proposal was released, ICI Global, a trade body for investment funds, has criticised the 3% capital requirement as economically unfeasible, operationally complex, and impracticable.

The Irish Funds Industry Association, meanwhile, has called for an alignment between EU and US policies.

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