October 22, 2010 / 7:38 PM / 9 years ago

MONEY MARKETS-Debate likely on floating NAV for money funds

   * Funds will likely try to resist marking shares to market
 * No direct impact on short-term rates seen after report
 * Euro rates extend rise as liquidity conditions tighten
 (Changes lead, adds quote, U.S. rates, changes byline,
dateline, previous LONDON)
 By Emily Flitter
 NEW YORK, Oct 22 (Reuters) - A proposal from U.S. financial
regulators for new ways to regulate money funds will likely
rekindle controversy in the industry since it contains
suggestions that have been vigorously opposed by a major trade
group, analysts said on Friday.
 While analysts said there wouldn't be immediate changes
visible in the marketplace, the report, issued on Thursday by
the President's Working Group on Financial Markets, a
consortium of regulators, seemed to revive the possibility for
a longer-term shift in the shape of the industry.
 "I don't think this is necessarily a negative or positive
thing that investors should react to right now," said Alex
Roever, head of short-term fixed income strategy at JPMorgan
Securities in New York.
 "What it does is take some of these issues that are still
pretty controversial in the industry and it keeps them alive
and it keeps the discussion going," he said. "At some point
down the line we might see some of these proposals coming to
 Money funds are likely to fight hard against the idea of
adopting a floating net asset value for their shares.
 Currently, most money market shares carry a fixed value of
$1. If the value of shares falls below that mark, investors
looking for risk-free places to put their cash tend to try to
quickly pull out before losing money.
 A floating net asset value, in which shares would be marked
to market constantly, would remove this psychological trigger.
But the Investment Company Institute, the funds' main lobbying
group in Washington, has vigorously opposed a floating net
asset value in the past.
 The ICI has also fought against other elements that
appeared in the report, including the proposal to classify
funds in two different categories: institutional and retail.
 The Securities and Exchange Commission is planning to open
a public comment period to seek reactions to the report.
 Other areas of the U.S. short-term rates markets remained
calm on Friday.
 Banks set the three-month dollar London interbank offered
rate at 0.28844 percent USD3MFSR= for Friday, unchanged from
the previous two days. The equivalent rate for 3-month euros
rose to 0.96875 percent versus 0.96250 percent EUR3MFSR=. For
latest Libor fixings see [ID:nEAP000023].
 In Europe, benchmark interbank lending rates extended their
climb with analysts expecting them to grind higher still in
coming weeks as excess liquidity in money markets dwindles.
 The three-month Euribor rate EURIBOR3MD= -- traditionally
the main gauge of unsecured interbank euro lending and a mix of
interest rate expectations and banks' appetite for lending --
rose to a 15-month high of 1.029 percent, up from 1.025
 The overnight EONIA rate EONIA= rose to 0.862 percent,
four basis points higher than a month ago. It is edging  close
to its June 2009 high of 0.878 percent, which it repeated on
Sept. 30, 2010 after banks slashed their consumption of ECB
funding in a string of key lending operations.
 The rise in EONIA and other short-term money market rates
pushed two-year German bond yields DE2YT=TWEB above 1.0
percent on Thursday -- the first time they have done so since
late March -- as liquidity conditions tighten.
 Strategists said the path for EONIA would be determined by
how much of expiring 3-month loans banks choose to roll over
into an ECB tender next Wednesday.
 In a further sign of the healing process in euro zone money
markets, commercial banks hoarded the lowest amount of cash at
the ECB's overnight vaults. Banks deposited just over 21
billion euros overnight, the lowest since Nov. 10, 2009.
 (Additional reporting by Emelia Sithole-Matarise in London;
Editing by James Dalgleish)

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