November 14, 2014 / 5:20 PM / 5 years ago

Italy opposes cash buffer in proposed EU money market curbs

* Buffer aimed at avoiding run on funds in future crises

* Market argued funds would become unviable

* Negotiations deadlocked for more than a year

* Money market funds are a key element in the financial system

By Carmel Crimmins

DUBLIN, Nov 14 (Reuters) - European Union president Italy has proposed scrapping plans to make money market funds build up cash buffers against future crises, firing the opening shot in renewed negotiations over how to regulate the 1 trillion euro ($1.25 trillion) sector.

Europe is trying to impose curbs on these funds to avoid the kind of panicked withdrawal seen when U.S. bank Lehman Brothers collapsed in 2008, but negotiations have been deadlocked after industry bridled at the proposed buffer, arguing that it would spark an exodus of investors and make the funds unviable.

Money market funds provide a deposit-like facility that buys a wide range of corporate, bank and government securities, providing a key source of short-term funding for companies, banks and governments.

In what it described as a “compromise text”, Italy this week proposed the scrapping of plans drawn up by the EU’s former financial services chief Michel Barnier for funds that maintain a fixed share price to hold a cash buffer equivalent to 3 percent of their assets.

But the Italian plan also narrowed the pool of potential investors largely to retail buyers, who are less likely to cause a run on a fund because they are slower to react to market signals than better-informed corporate investors.

The funds, known as constant net asset value funds (CNAVs), are attractive investments for big companies because they offer a fixed value and a higher return than a bank deposit.

A source familiar with the negotiations said the compromise text was just one contribution and there remains a long way to go before Europe would be able to finalise its reforms.

No one from the Italian presidency was available for immediate comment.

Neena Gill, a centre-left member of the European parliament, is expected to publish her own proposal this month, to be debated by the parliament’s economic affairs committee before going to a full parliamentary vote.

Gill has said she will study new U.S. rules on regulating money market funds.

In its own compromise solution, the United States allowed funds that are invested in government securities as well as funds sold to retail investors to remain as CNAVs, while funds that invested in corporate debt and sold to institutional investors could not offer a guaranteed fixed return. (1 US dollar = 0.8013 euro) (Additional reporting by Huw Jones in London; Editing by David Goodman)

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