The European Banking Federation (EBF) welcomes the European Commission’s Communication on Shadow Banking[1] and is concerned over aspects of its proposal for a Regulation on Money Markets Funds[2] (MMFs).

The Commission proposal to regulate MMFs, intends to ban certain transactions like repo agreements, and would restrict the instruments these funds can invest in. In addition, it would demand a cash buffer equal to at least 3% of total value of assets for Constant Net Asset Value MMFs which could represent up to 10 times the return achieved by such funds. Furthermore MMFs would have to comprise at least 10% of assets maturing daily and at least 20% of assets maturing weekly, which may prove difficult to maintain if assets are removed from the investable scope.

“Some of these proposals do not seem particularly well suited to Europe’s reality”, declared Guido Ravoet, EBF Chief Executive. It is important to strike a sensible balance between the need for greater transparency for investors with increased stability on the one hand while retaining MMFs as important providers of short term funding for banks, companies and public authorities.”

 In the EU, money markets funds are mainly used by corporations seeking to invest their excess cash over a short period of time, which can ultimately be used by banks as a source for funding to support lending to the real economy.

Some 80% of MMFs already fall under the UCITS framework (Undertakings for Collective Investment in Transferable Securities) and 20 % will soon fall under the Alternative Investments regime, Ravoet commented:  “Some of the more far-reaching proposals may prove redundant or the risk already captured to a large extent by newly devised fund regulations”. There is also the possibility that, having similar instruments with two underlying regulatory regimes may be confusing for investors.”

While the shadow banking system represents roughly 95% of United States banking liabilities, shadow banking in Europe amounted to just 18% of EU bank liabilities in 2012, which represented a contraction of 12 % according to ESMA – the European Securities Markets Authorities.

It is of course important that there is effective oversight over all parts of the financial system, however, money market funds must be retained as important providers of short term funding for banks, companies and public authorities.