Fund firms drop demand for money market liquidity

LUXEMBOURG (Reuters) - European fund firms, who were calling on the region's central banks for greater liquidity for money market funds, have quietly dropped their demand as flows to the sector have improved, a senior fund manager said.

The move suggests that investors are becoming more confident about liquidity -- which dried up last year when banks stopped lending to each other -- following large rate cuts from central banks another money-pumping activities.

In October 2008, the European Fund and Asset Management Association (Efama) had said the funds industry was lobbying the European Central Bank and national central banks to inject liquidity into money market funds.

"There was some lobbying but that has died down. The situation has definitely improved but it's a bit of a double-edged sword if you look at what happened in the U.S. -- getting support from the central banks and governments comes with increased regulation or increased scrutiny," said Kathleen Hughes, managing director and head of global liquidity EMEA at JP Morgan Asset Management.

Hughes, who is also on the board of directors at the Institutional Money Market Funds Association (IMMFA), told the Reuters Funds Summit in Luxembourg on Tuesday the challenge the funds industry is now faced with is to educate regulators and central banks on conservative funds performance versus the broader money market fund in Europe.

She said her firm's money market funds had seen a 125 percent increase in investment flows between summer 2007 and the end of 2008.

It outstripped the industry's 29 percent growth, she said, and included some $85 billion alone in 2008's fourth quarter.