New rules may be “death sentence” for money market funds

Coins fallingProposals to tighten regulation of money market funds in Europe, particularly the controversial plan to impose a 3% capital buffer on some funds, could deal a fatal blow to this

market segment, says a research firm.

"Europe wants more safeguards including tighter investment criteria, no short selling, and issuer and securities exposure limits," says Barbara Wall, a Cerulli director. "So far, so reasonable, but other proposals are less palatable and potentially destructive."

The proposal to impose a 3% capital buffer on funds that use a constant net asset value is particularly unwelcome, says Cerulli, because it will cost an extra 30 basis points at a time when many investors are already losing money on their money market funds.

Other controversial proposals include a ban on money market fund sales to retail customers.

Angelos Gousios, a senior analyst at Cerulli, says the buffer proposal is likely to drive all but the biggest groups out of the market.

"The net result will be fewer, but bigger funds – so potentially a bigger individual systemic risk – and less liquidity in the financial system with fewer buyers of government bonds,” says Gousios. “Or, precisely the issues that Europeans should be seeking to avoid."

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