by Nathan Douglas, Secretary General, IMMFA
Regulatory change in the broader financial services industry continues apace, in order to further strengthen the financial system. Money market funds have so far been captured within these regulatory changes, in terms both of restricting the exposure to risks and providing investors with further clarity over the nature of their investment.
The changes made to date
In Europe, the key regulatory change impacting money market funds will be the introduction of a definition of the product. In May 2010, CESR, the Committee of European Securities Regulators, issued guidance which creates the first pan-European definition of a money market fund. The guidance uses a two-tier approach, differentiating between ‘short-term money market funds’ and ‘money market funds’. Both categories include specific criteria which must be met in order for the fund to be classified as a money market fund. These criteria include restrictions on exposure to interest rate and credit risks, with general obligations imposed regarding the risk management of the fund.
There is a notable risk differential between the two categories. The investment parameters within which the short-term money market funds can operate will be tighter than those for the broader money market funds category. The risks within these short-term funds should on average be less than in the broader money market funds category. This is illustrated in Figure 1.