Memorandum from the Institutional Money
Market Funds Association (IMMFA)
1. The Institutional Money Market Funds
Association (IMMFA) is the trade association representing the
promoters of triple-A rated money market funds and covers nearly
all major promoters of this type of fund outside the USA. Members'
funds under management exceed US$500 billion.
2. Confidence is a critical component of
the financial system. The events of the summer saw confidence
rapidly disappear, due partially to poor information flows and
a lack of understanding of some of the complex instruments in
3. IMMFA recognises that there is no current
European definition of a money market fund, unlike in the USA.
Such a definition would have prevented sweeping generalisations
being made by financial commentators, which ultimately further
exacerbated the turbulence in global financial markets. IMMFA
represents only Treasury-style money market funds, which have
distinct product profiles and objectives, and should not be confused
with any other fund in operation in financial markets.
4. Treasury-style money market funds are
the only fund type permitted under to use amortised accounting
for valuation purposes, in accordance with the Eligible Assets
Directive (due for implementation in July 2008). This, and the
underlying Committee of European Securities Regulators (CESR)
guidance, should provide the definition which would differentiate
between money market fund types. However, IMMFA recognises that
the onus remains with IMMFA to educate market participants and
commentators on the distinctions, definitions and risks inherent
in the different types of money market fund available and prevent
further occurrences of misunderstanding in the market.
5. The nature of Treasury-style money market
fundswhich invest exclusively in short-term, high quality
money market instruments, have a weighted average maturity of
no more than 60 days, and hold assets to maturity, continues to
enable these funds to provide same-day liquidity to investors.
This has been true throughout the most turbulent and volatile
market conditions experienced over the summer months.
6. Recognition of this liquidity has already
been achieved through the amendments made to the UK liquidity
mismatch regime. However, the events of the summer have heightened
the need for liquidity by all financial institutions. Whilst the
pan-European review of liquidity commissioned by the European
Commission will address those instruments eligible as collateral,
we urge consideration of amendments to the UK regime to include
Treasury-style money market funds in advance of this timetable,
in order to provide further liquidity facilities to all financial
institutions in the UK.
7. The Institutional Money Market Funds
Association (IMMFA) are grateful for this opportunity to provide
evidence to the Treasury Select Committee concerning financial
stability and transparency.
8. IMMFA is the trade association representing
the promoters of triple-A rated "treasury-style" money
market funds (Treasury-Style MMFs) and covers nearly all of the
major promoters of this type of fund outside of the USA. Treasury-Style
MMFs are bought primarily by institutions to manage their liquidity
positions and not for "total return" investment purposes.
They are used as an alternative to wholesale money market deposits
by a wide range of investor types as they offer a practical means
of consolidating and outsourcing short-term investment of cash.
9. Comments are provided on two important
areas; (i) a need for standard recognised financial product definitions
and (ii) the provision of robust liquidity facilities.
10. One of the key components of a stable
financial system is the confidence of all those participating
within that system. The events of the summer saw confidence quickly
evaporate, both in wholesale markets, and more latterlyand
visiblyin retail markets.
11. Confidence is inherently built once
there is understanding of the fundamentals of the system. This
understanding may only be achieved through the provision of sufficient
information in a decipherable format that the end user can interrogate.
Principal in this is the production and dissemination of widely
accepted terminology which is recognised by users within that
12. The nature of today's global financial
markets has seen innovative developments of an increasingly complex
nature, masked by an increasingly inaccessible language. However,
the pro-longed benign market conditions prevalent prior to this
summer's turbulence bred complacency which limited the desire
for information from end users. Put simply, the prolonged bull
market was too good an opportunity to make money for product providers
and investors alike without the bother of asking detailed questions
on what was being purchased.
13. The absence of a recognised definition
for money market funds within Europe has seen sweeping generalisations
and assumptions made in relation to any fund which bears this
name. As the trade association representing the providers of Treasury-Style
MMFs, IMMFA has been working tirelessly for a number of years
to educate wider market participants and commentators on the different
types of money market fund on offer in Europe, in an attempt to
provide clarity and latterly to help try to restore some semblance
of confidence in aspects of the wholesale markets.
14. Money market funds first appeared in
the USA in the early 1970s. Their success resulted in amendments
to the Investment Company Act 1940, which instigated direct regulation
of this fund type through Rule 2A-7 of the Securities and Exchange
Commission (SEC). Following the implementation of this Rule in
1983, no fund within the USA is permitted to call itself a "money
market fund" unless it complies with the requirements of
15. In Europe, Treasury-Style MMFsequivalent
to their SEC 2A-7 USA counterparts have been a later development,
but the similar objectives of these funds and subsequent appetite
for them has quickly seen them established as a staple component
of a corporate entity's treasury management. Unfortunately, continental
Europe has over the last 20 years developed a different style
of "money market fund" which has more the characteristics
and investment aims of a total-return, short-dated bond fund (Investment-Style
MMFs). This has undoubtedly added to the confusion for investors.
16. However, there is no regulation within
Europe similar to that in the USA to define a money market fund
and to restrict the use of the name. Consequently, a plethora
of cash funds operate under the general money market fund banner.
The absence of a recognised definition has seen contamination
of the reputation of all money market funds following the action
taken by AXA Investment Management to support its LIBOR-plus funds
and BNP Paribas in relation to is asset-backed security funds,
which were widely quoted as money market funds in the global press
when in fact they lacked the stable pricing and strong liquidity
characteristics inherent in a Treasury-Style MMF.
17. A Treasury-Style MMF is a collective
investment scheme (CIS) that invests in quality money market instruments
as defined by the Eligible Assets Directive (EAD) such as: fixed
deposits; certificates of deposit, repurchase agreements, commercial
paper (including asset backed); and floating rate notes, and is
used mainly for corporate liquidity cash management purposes.
All Treasury-Style MMFs must be awarded a triple-A rating from
one of the three recognised independent credit rating agencies,
and must also have the lowest susceptibility to market interest
rate volatility. IMMFA only represents the interests of providers
of Treasury-Style MMFs.
18. Treasury-Style MMFs should not be confused
with their Investment-Style MMF counterparts which seek to achieve
enhanced total-returns (ie combined capital and interest returns)
by taking greater risks. These `enhanced' or "dynamic"
funds have more the characteristic of short-dated bond funds.
The enhanced yield opportunity results from the usual risk-reward
conundrum of higher credit and/or market risk combined with lower
liquidity. Whilst markets were stable, the susceptibility to market
volatility of these funds was not evident, and the greater risk
was accepted by investors seeking more competitive returns. When
markets became volatile and investors sought to redeem their investments,
the liquidity risk inherent within many of these funds became
immediately apparent, with significant reductions in fund values
caused by the "forced-selling" of quality credit assets
into illiquid markets, triggered by difficulties in valuing assets,
resulting in many cases for capital support to be provided by
willing sponsors or parents.
19. The important distinction between the
two types of money market funds was not made on numerous occasions
throughout the market turbulence; for example, Kate Burgess in
the Financial Times described the distinction as being "blurred".
However, as explained the risk profile and objectives of each
type are fundamentally different and are intended to meet the
requirements of different types of investors.
20. Whilst Treasury-Style MMFs have the
characteristics to maintain capital security and increase liquidity
in the most volatile and illiquid of market conditions, Investment-Style
MMFs are simply not as robust and cannot provide an investor with
the same level of comfort.
21. Treasury-Style MMFs are the only investment
fund type permitted to value their assets portfolio on an amortised
accounting basissimilar to most banks. This has been recently
confirmed in the Eligible Assets Directive 2007/16/EC, and is
recognition of the lower levels of risk presented by such funds.
22. IMMFA believes that the fact that Treasury-Style
MMFs are the only mutual funds permitted to value assets using
this methodology provides an opportunity to create a unique regulatory
definition that would help resolve the historic definitional confusion
that exists between liquidity and `total-return' money market
funds as recently evidenced during the market turmoil. However,
at present the onus remains on IMMFA to educate market participants
and commentators on the distinction, definitions and risks inherent
in the different types of money market funds available in the
absence of a regulatory taxonomy.
23. IMMFA is also taking steps to enhance
the information which is made available to investors in a Treasury-Style
MMF. This need had been identifiedin advance of the events
of the summerin recognition that the implementation of
the Capital Requirements Directive would attract greater investment
from financial institutions which in turn would necessitate greater
provision of management information, especially for credit risk
and large exposure calculation purposes.
24. However, IMMFA recognises that we also
have lessons to learn from recent events, especially the need
for meaningful data provision in market turmoil situations in
order to retain investor confidence in Members' funds. We are
therefore planning to work closely with investors to determine
their information requirements and if possible to produce this
in a standardised format.
25. Treasury-style MMFs have capital preservation
and liquidity as their main two investment objectives with the
achievement of competitive returns of secondary importance. As
such, they provide an ideal opportunity to enhance European prudential
26. There are two basic types of Treasury-Style
MMFs available; constant net asset value (CNAV) and accumulating
net asset value (ANAV). Both types use amortised accounting to
value their underlying asset portfolios. Shares in CNAV funds
are issued with an unchanging face value (eg £1 per share).
Income in the fund is accrued daily and can either be paid out
monthly to the investor or used to purchase more shares in the
fund. ANAV funds operate under the same investment guidelines
as CNAV funds and income is accrued daily. However, unlike CNAV
funds, income is not distributed; instead income is reflected
by an increase in the value of the shares.
27. The underlying assets of Treasury-Style
MMFs must have a fixed maturity date, or maximum interest reset
period, of no more than 397 days, and the weighted average maturity
(WAM) which measures the market interest rate risk in a fund's
asset portfolio must not exceed 60 days. This is crucial in reducing
market risk from significant interest rate volatility and to ensure
that a fund can provide same-day liquidity to investors. In effect,
a Treasury-Style MMF operates as a "hold-to-maturity"
fund in that it seeks to ensure that it has sufficient assets
maturing each day to meet any potential investor redemptions.
28. Quality assurance is to a large extent
provided by the fund's rating. The rating criteria stipulate the
fund's asset range and restrictions (such as quality, type and
currency), acceptable counterparty risk and acceptable choice
of custodian. Treasury-style MMFs are all registered under the
UCITS Directive 85/611/EEC and are subject to the associated legislative
requirements and regulations imposed within the fund's domicile.
In addition, IMMFA operates a Code of Practice, designed to maintain
highest standards of market practice by members.
29. During the market turbulence of recent
months, Treasury-Style MMFs have maintained strong credit quality
and liquidity throughout. There have been no downgrades of a triple-A
rated Treasury-Style MMF on either side of the Atlantic, and no
assets held within an IMMFA members' Treasury-Style MMF have been
placed on market-watch by any credit rating agency.
30. The short-term nature of the funds is
specifically designed to provide liquidity for investors as and
when required. The constant maturity stream of underlying holdings
ensured that same-day liquidity was available throughout the most
illiquid conditions experienced in August and September.
31. The ability to value assets on an amortised
basis enables Treasury-style money market funds to hold assets
to maturity. There has been no "fire-selling" of assets,
with redemption being made at par at maturity. This strategy ensures
that susceptibility to market volatility is reduced to a minimum.
32. The market turbulence saw investors
flee for security and quality. Members' funds have grown significantly
over the summer to record highs, with over US$504 billion in funds
under management as at October 2007. This growth is a clear indication
that the underlying principles of Treasury-Style MMFsof
capital security and liquiditymake them a valuable component
of a treasurer's liquidity cash management policy.
UK LIQUIDITY REGULATIONS
33. The liquidity of credit institutions
within the UK is subject to one of two regulatory regimes; (i)
the liquidity mismatch regime; or (ii) the Sterling Stock liquidity
regime. Amendments to the liquidity mismatch regime to permit
holdings in a qualifying money market fund
to be eligible for liquidity purposes were only formally introduced
to the FSA Handbook on 6 October 2007. This was too late to provide
additional liquidity facilities to UK banking institutions when
they were needed most during the summer.
34. Whereas amendments have been made to
the liquidity mismatch regime, no corresponding changes were made
to the Sterling Stock liquidity regime. The outcome of the pan-European
liquidity review, initiated by the European Commission before
any of the events of the summer had begun to unfold, will include
determination of the list of eligible collateral for liquidity
purposes, which may influence the UK Sterling Stock liquidity
35. However, we strongly advocate that Treasury-style
money market funds are included as eligible collateral within
all liquidity regimes in operation throughout Europeincluding
the Sterling Stock liquidity regime. The performance of these
Treasury-style money market funds in stressed conditions is indicative
of their robustness and low levels of volatility. The ability
to have access to liquidity in all circumstances is a fundamental
necessity for all financial institutions, the importance of which
cannot be underestimated following the events of the summer. Further,
whilst the pan-European review of liquidity will present an ideal
opportunity to widen the list of eligible collateral (where appropriate),
the events over the summer highlight a pressing need for liquidity
provision in advance of the timescale of any European Commission
review. We therefore recommend that appropriate amendments to
the UK Sterling Stock liquidity regime be considered in advance,
and independent of, the work of the European Commission.
36. Treasury-style MMFs are able to provide
a solution to liquidity needs; however, IMMFA recognise that we
have a responsibility to further enhance our liquidity provision
for the benefit of Treasury-Style MMF investors. To that end,
we are currently working on an initiative to improve our liquidity
provision still further, through the introduction of the ability
to repo Treasury-Style MMF shares. This would not only allow investors
to monetise their holdings by entering into a repo with a counterparty
who was willing to take the shares as collateral but also support
lender of last resort activities during a general market turmoil
situation as currently experienced. Such a facility would provide
further liquidity to the investor, whilst the counterparty to
the repo would receive collateral which would not redeem at anything
13 Financial Times, 29 August 2007 "Casualties
still emerging from credit crisis" by Kate Burgess. Back
As defined in Article 18 of the MiFID Implementing Directive 2006/73/EC. Back