May 6, 2016 / 3:25 PM / 4 years ago

Dutch propose more flexible EU money market funds rules

LONDON, May 6 (Reuters) - European Union plans to phase out up to half of the bloc’s 1 trillion euro ($1.14 trillion) money market funds (MMFs) could be watered down under a compromise proposed by the Dutch.

EU member states with a strong fund industry presence such as Ireland, Luxembourg and Britain have been battling to prevent the European Parliament phasing out so-called constant net asset value or CNAV funds, which account for half of the MMF market.

The new proposal by the Dutch EU presidency, which has also been spurred by policymakers desperate to fuel economic growth, comes after three years of wrangling over the funds, which are used by thousands of companies for their day-to-day funding.

Some regulators say CNAVs lack transparency as their share price remains unchanged even when markets rise or fall, unlike the share price of variable net asset value (VNAV) funds.

The Dutch presidency has proposed giving CNAVs two years to switch into lower risk public debt instruments, or convert into a VNAV. CNAVs could also convert into a new type of hybrid money market fund known as low volatility net asset value (LVNAV).

The European Parliament, which has joint say with EU states on the draft law, wants CNAVs to convert once the rule comes into force, with LVNAVs losing authorisation within five years under a so-called sunset clause, unless further action is taken.

But under the Dutch EU Presidency compromise, which was seen by Reuters, CNAVs would have two years to make the changes, and LVNAV authorisations would not automatically lapse after five.

Instead, there would be a review of the rules to see how they affect markets and investors before any further changes.

“We hope that the outcome will be one which recognises the important role played by MMFs, facilitates the needs of investors and enables MMFs to provide much needed funding in the economy,” Pat Lardner, chief executive of Irish Funds, said.

The European Fund and Asset Management Association had warned that a sunset clause was at odds with the EU’s capital markets union project which is aimed at raise more cash for the economy from bond and other markets in an effort to reduce the over-reliance of companies on bank loans.

The Institutional Money Market Funds Association, which represents CNAVs, had said the sunset clause could destabilise short-term capital markets for years.

The compromise is to be discussed by EU states next week.

$1 = 0.8749 euros Editing by Alexander Smith

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