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Governance of Money Market Funds

by David Rothon, IMMFA Director

When investors place cash in a money market fund, they understand that the objectives of the fund are the provision of security and liquidity. There are several investment risks which the fund manager must navigate in order to achieve these objectives, but other than investment restrictions, what arrangements exist in order to ensure that a money market fund continues to operate on a daily basis? We explore below the key governance provisions within money market funds  which help them to function consistently without any problems.

Regulation, regulation, regulation

Financial regulation has evolved over many years to become an industry in itself. However, the development of financial regulation shows no signs of slowing, with increasing appetite for more detailed rules to be imposed on all entities operating within the financial services arena. Funds are firmly caught by existing regulatory obligations; these rules are designed to deliver investor protection, market confidence and financial stability.

After July 2011, any fund based in Europe which refers to itself as a money market fund will have to adhere to specific investment parameters.

Detailed rules have been imposed on funds throughout Europe for some years, and the internal compliance team of the fund manager will monitor these rules to ensure the fund is compliant. However, it is only this year that we will see the introduction of a regulatory definition of a money market fund in Europe. After July 2011, any fund based in Europe which refers to itself as a money market fund will have to adhere to specific investment parameters. If a fund does not adhere to these, it cannot call itself a money market fund. This regulatory definition should provide clarity to investors by restricting the universe of funds which may call themselves a money market fund.