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IOSCO Publishes Money Market Fund Regulation Recommendations

by Ulrika Lomas,, Brussels

12 October 2012

The International Organization of Securities Commission (IOSCO) has published a final report on its proposed recommendations for the regulation and management of money market funds (MMFs) across jurisdictions.

IOSCO’s work on MMFs is a part of the efforts by the Financial Stability Board (FSB), following instructions from the G20, to strengthen the oversight and regulation of the shadow banking system, as endorsed by the G20 November 2011 Cannes Summit.

The MMF industry is significant in size, since it represented approximately USD4.7 trillion in assets under management in the first quarter of 2012 and around one fifth of the assets of collective investment schemes worldwide. The United States and Europe represent around 90% of the global MMF industry.

The FSB requested that IOSCO undertake a review of potential regulatory reforms of MMFs, as, following their performance during the 2007-2008 financial crisis, their potential to spread or even amplify a crisis was highlighted, and regulators were alerted to their systemic relevance.

IOSCO’s final report was approved by its Board during its meeting on October 3 to 4 in Madrid, even though it was recorded that a majority of the Commissioners of the US Securities and Exchange Commission (which recently failed to agree further MMF reforms in the US) did not support its publication. There was no other objection.

As requested by the FSB, IOSCO’s 15 new recommendations in its report seek to supplement the existing frameworks where IOSCO considers there is room for further reforms and improvements, even after the reforms undertaken on MMFs both in the US and Europe in 2010. It was also noted that other reforms have also been adopted in countries such as Canada, China, India and South Africa.

IOSCO’s recommendations are articulated around key principles for valuation, liquidity management, use of ratings and disclosure to investors. For example, specific limitations should apply to the types of assets in which MMFs may invest and the risks they may take, and MMFs should comply with the general principle of fair value when valuing the securities held in their portfolios.

MMFs should also establish sound policies and procedures to know their investors. Although IOSCO does not recommend imposing concentration limits, it does recommend that MMFs establish specific safeguards in the case of large investors in order to reduce the likelihood of significant and unexpected redemption requests. Such safeguards could, it says, include limiting further purchases from a single investor, requiring a minimum holding period or imposing a longer notice period for a large redemption.

MMFs should hold a minimum amount of liquid assets to strengthen their ability to face redemptions and prevent fire sales, should periodically conduct appropriate stress testing, and should have tools in place to deal with exceptional market conditions and substantial redemptions pressures.

In addition, MMF regulation should strengthen the obligations of the responsible entities regarding internal credit risk assessment practices and avoid any mechanistic reliance on external ratings, and their supervisors should seek to ensure credit rating agencies make more explicit their current MMF rating methodologies.

As the size, features and systemic relevance of money market funds differ significantly from country to country, IOSCO has recognized that the implementation of the recommendations may vary from jurisdiction to jurisdiction, depending on local conditions and circumstances, and that the implementation of some recommendations may need to be phased in.

In fact, while one of the objectives of its recommendations is to promote the emergence of international standards for the regulation of money market funds, IOSCO has also recognized that the differences that remain among jurisdictions could raise cross-border issues and regulatory arbitrage concerns.

IOSCO proposes to conduct a review of the application of its recommendations within two years with a view to assess whether the recommendations should be revised, complemented or strengthened.

TAGS: investment | law | banking | financial services | investment funds | United States | G20 | standards | regulation | European Union (EU) | services | Europe

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