* EU readies first shadow banking reform
* Some funds face cash buffer requirement
* Funds could get time to build up buffer
* Industry says buffer won't bolster financial stability
By Huw Jones
LONDON, May 23 About half of the European
Union's trillion euro money market funds would have to set aside
a chunk of cash under a proposed EU reform to make a run on a
fund in rocky markets less likely.
Money market funds (MMFs) hold short term financial
instruments such as deposits and commercial paper. They are used
by big companies to park money and manage cash flows.
Until the 2007-09 financial crisis, they were seen as a safe
place to place cash that could be withdrawn quickly.
The sector drew the attention of policymakers with a run on
the Reserve Primary Fund in the United States, which "broke the
buck" in 2008 when its net asset value fell below a dollar a
share. This indicated a loss at what was seen as a safe
investment vehicle and sparked runs in the wider sector.
The draft EU law, a copy of which was obtained by Reuters,
calls for a major type of fund to have a cash buffer to help
keep the financial system stable.
The industry is hoping for a last minute change of heart by
the EU's European Commission, which is writing the draft law
that will need approval from EU states and the European
Parliament to take effect.
A Commission spokeswoman said the proposal is likely to be
published in late June.
The buffer requirement would be for so-called constant net
asset value funds (CNAV) whose share price shows little change
over time, like the U.S. fund that broke the buck.
"These CNAV funds must establish and maintain at all times a
buffer amounting to at least 3 percent of the total value of
their assets," the EU document said.
An EU official said on condition of anonymity the 3 percent
buffer proposal is likely to remain in the final proposal but
funds could be given time to reach that level.
The London-based Institutional Money Market Funds
Association (IMMFA), an industry body, said a requirement for a
cash buffer won't improve stability of the financial system.
"We support changes which make these products more robust,
but don't support those which seek to address a perceived risk
rather that an actual one," IMMFA said in a statement.
Money market funds in the EU hold a trillion euros and are
mainly domiciled in France, Ireland and Luxembourg, with
investments and investors from across the 27-nation bloc. Banks
issue 85 percent of financial instruments held by the funds,
with the rest coming from big companies and governments.
The United States is also reforming its $2.6 trillion money
market funds sector and has faced push-back from industry.
The Financial Stability Board, the regulatory task force for
the G20 group of economies, is due to report in September on its
recommendations for supervising so-called shadow banks,
The EU reform is the bloc's first in the shadow banking
sector which lies outside mainstream banks and handles credit.
Regulators worry that as mainstream banks become more regulated,
risky activities will shift to less supervised shadow banks.