November 17, 2014 / 10:01 PM / 5 years ago

Curbs threaten European CNAV money market funds - EU documents

LONDON (Reuters) - A swathe of money market funds in the European Union could be wiped out under new rules proposed by a senior lawmaker in the bloc’s parliament in an attempt to break a legislative deadlock.

The proposal, if approved by the parliament and EU states, would force companies to switch to the other main type of money market fund whose share price floats, creating accounting issues for some of them, or put their money elsewhere.

Europe wants to impose curbs on the CNAV funds, a deposit-like facility that companies and investors use to park cash, to avoid the panicked withdrawals seen when U.S. bank Lehman Brothers collapsed in 2008.

Neena Gill, a British centre-left member of the European Parliament, has proposed in a report seen by Reuters that CNAVs — constant net asset value funds — should be used only by public authorities and small investors.

“In order to mitigate systemic risk, CNAV MMFs should only be operated in the Union as either an EU public debt CNAV MMF or a retail CNAV MMF,” Gill’s report said.

The original draft law, written by the European Commission, had proposed that all CNAV money market funds hold a cash safety buffer equivalent to 3 percent of their assets, but Gill proposes that CNAV funds sold to retail investors are exempt.

CNAV funds that invest at least 80 percent of assets in public debt should also be exempted from a buffer requirement, Gill proposes.

A separate paper from the executive European Commission, seen by Reuters, estimated that CNAVs held assets worth 516.9 billion euros (£412 billion) in October, representing just over half the bloc’s MMF sector. Half of CNAV investors are companies, with public sector investors and retail investors accounting for just 5 percent each.

Lawmakers will debate Gill’s report in coming weeks with some likely to table amendments. An earlier attempt to reach a deal ended in deadlock.

Separately, EU president Italy, which is seeking consensus on the draft rules before negotiating a final deal with parliament, has backtracked from its earlier position of ditching outright the buffer requirement on CNAV funds, a document seen by Reuters showed. The 3 percent buffer has been reinstated.

“CNAV MMFs should only be available to investor groups that have a proven track record not to react instantly to a decline in the net asset value of a fund,” the new Italian compromise added, leaving the definition of investor groups to be decided.

Editing by Ruth Pitchford

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