* Money market funds face stiffer rules
* Reform marks start of clampdown on 24-trillion euro sector
* G20 leaders to tackle shadow banking this week
By John O'Donnell and Huw Jones
BRUSSELS/LONDON, Sept 4 Special funds used by
big companies to park billions of euros of cash face stricter
rules to make them safer, the European Commission said on
Wednesday, taking a first step to reform unregulated finance
known as shadow banking.
The draft law will regulate money market funds, demanding
some set aside cash buffers to avoid a panic should many
investors withdraw their money at once.
This would lower what EU financial services chief Michel
Barnier said was a risk to the financial system from the
trillion euro sector but users of the funds warn that demanding
they hoard more for a rainy day would make them too expensive.
The changes are part of efforts to shine a light on shadow
banking, a 24-trillion-euro industry in Europe that comprises
money market funds, some hedge funds, and firms involved in
securities lending and repurchase markets.
Such groups borrow and lend, just like banks do, but because
they are not banks they often fall outside the remit of
regulation, which is why they are considered to operate in the
'shadow' of traditional finance.
In the European Union, money market funds are mainly based
in France, Ireland and Luxembourg and are heavily used by
companies and banks which borrow from them.
For companies, they are an alternative home for short-term
cash. Unlike banks, they have no access to support from central
banks such as the European Central Bank if things go wrong.
But the vast unchartered territory unnerves regulators in
part because the sector is closely intertwined with banks, who
often sponsor the funds as well as relying on them for finance
"We have regulated banks and markets comprehensively," said
Barnier, the EU Commissioner who has led a four-year revamp of
financial rules. "We now need to address the risks posed by the
shadow banking system."
The European plans draw on ideas in a global blueprint that
will be submitted for approval to the world's 20 leading
economies when their leaders meet in Russia on Thursday and
Friday. In some cases, the EU reform is more ambitious.
HEART OF CRISIS
The reform is a response to the 2007-2008 financial crisis,
which was brought on by the collapse in prices of securities
tied to risky home loans.
"Shadow banking was at the heart of the crisis," said
Frederic Hache, a former derivatives banker who works with
public-interest group Finance Watch. "As bank regulation has
since tightened, activity may shift into the shadow sector."
The most controversial element in Barnier's proposal is a
requirement for one type of money market fund, known as constant
net asset value (CNAV) funds, to hold a cash buffer equivalent
to 3 percent of their assets.
Such funds seek to maintain a stable 1 euro per share when
investors redeem or buy shares in them, to keep the value of
their holding steady.
The buffer would provide a safety cushion in case there is a
run on the fund, as seen in the United States when the value of
one U.S. fund "broke the buck" and fell below $1 per share.
The industry says the reform would be too costly.
"Imposing a three percent buffer would make money market
funds unviable," said Martin O'Donovan, deputy policy and
technical director at Britain's Association of Corporate
Treasurers. "To cover that, their rates would no longer be
Funds whose share price floats in line with performance are
spared the buffer requirement. Imposing the buffer is meant to
prompt CNAV funds to convert to funds with floating share
prices, which are seen by regulators as more transparent.
The funds in the EU, which include BlackRock and Legal &
General, are evenly split between the two types.
The European Union's 28 member states and the bloc's
parliament have the final say on the draft law and some changes
The United States is also discussing new rules for money
market funds but has stopped short so far of proposing cash
Barnier also published a "roadmap" on how the EU plans to
move ahead with regulating other parts of the shadow banking
sector, including a proposal to boost transparency by collecting
and exchanging data among regulators.
Banks could be required to hold more capital to cover risks
from links to shadow banking. Shadow banking intuitions
themselves could be required to hold capital, the EU executive