17
Citi Perspectives
| Q1/Q2 2015
anticipate large redemptions. In
addition, MMF managers will have
to do some internal credit risk
assessment to avoid overreliance
on external ratings. The proposed
rules would apply to all funds that
invest in money market instruments
— regardless of whether the basic
parameters of the fund are governed
by the Undertakings for Collective
Investment in Transferable Securities
rules or whether the MMF operates
as an alternative investment fund
according to Alternative Investment
Fund Managers Directive.
The European approach seeks to
align with the international work on
shadow banking, mainly with the
recommendations formulated by
the Financial Stability Board and the
European Systemic Risk Board. On
most issues, such as the liquidity
rules, issuer diversification and
customer profiling, the EU proposals
seek to mirror the rules already
applicable in the U.S. Differences
in approach result from the fact
that the current European market
is structured differently from other
jurisdictions. The U.S. is more
advanced in its reform of MMFs
than Europe. In July 2014, the SEC
passed new regulations that will
be implemented over a two-year
period through to 2016. The rules
have two main components: First,
a floating NAV for institutional
prime/commercial paper (CP)
MMFs. Second, liquidity fees and
redemption gates for all institutional
MMFs (if liquid assets drop below
certain thresholds and subject to the
discretion of the MMF’s board).
These changes have prompted
investor concerns regarding issues
such as liquidity access, principal
preservation, tax (capital gain/
loss) and accounting (MMFs may
potentially no longer be considered
a cash equivalent). The industry
also remains concerned that a
floating NAV could severely impair
short-term corporate and financial
institutional funding markets, given
their reliance on MMFs as a conduit
for financing, and also push CP rates
higher (corporates may compensate
by issuing more CP directly to
investors). Liquidity fees and
redemption gates provide funds with
the flexibility to manage/mitigate
potential heavy redemptions during
times of stress, but ultimately
restrict investors’ liquidity.
