Attempts to tidy up the European money market funds (MMFs) sector after last year’s turmoil have stirred up a hornets’ nest, with some providers arguing that the new definitions from trade bodies IMMFA and EFAMA don’t go far enough.
2008 was a testing time for the sector which sells a promise of providing instant liquidity with a little yield. In recent years so-called enhanced or dynamic MMFs promised extra yield by investing in securities with longer dated maturities or asset-backed securities that quickly became illiquid in the credit crunch.
When investors panicked and made a run on these funds, some broke the buck – like the US’s Reserve Primary Fund, whilst others had to suspend redemptions – such as BNP Paribas’s Parvest Dynamic ABS.
To try and restore confidence, and help investors make a distinction between the conservative funds and those that are more yield-seeking, industry associations IMMFA and EFAMA are reclassifying the European sector into “short term” MMFs, with weighted average maturities of 60 days or less, and “regular” MMFs, with weighted average maturities of up to a year.
Those funds running weighted average maturities of over a year – said to comprise some 100 billion euros in assets – will be thrown out of the sector after a lengthy transition period which runs until end-June 2012.
