November 10, 2008 / 4:37 PM / 11 years ago

Money fund groups calls for global liquidity fix

LONDON (Reuters) - The financial crisis requires a global solution for money market funds, including a liquidity pool for struggling funds, the chairman of the UK money market fund association told Reuters.

The U.S. Federal Reserve agency set up last month to provide liquidity to its domestic money market could serve as an example to Europe and elsewhere to tackle the crisis, Donald Aiken, chairman of the International Money Market Funds Association (IMMFA), said in an interview.

“It would be an interesting concept. Maybe it is something for the future we could look at,” said Aiken who is also managing director at Morgan Stanley (MS.N) Investment Management.

“It is fair to say that the global markets now require a global liquidity solution,” he said.”

The Fed last month set up the Money Market Investor Funding Facility (MMIFF) to boost liquidity in the domestic money market fund industry through five special-purposes vehicles that can purchase instruments from money market funds.

The five vehicles can buy up to $600 billion in assets, including dollar-denominated certificates of deposits.

Money market funds are viewed as a low-risk investment, paying slightly higher interest rates than bank savings accounts. Many money market mutual funds buy commercial paper, short-term debt companies use to fund day-to-day operations.

The U.S. intervention was prompted by one of the country’s biggest money funds, Reserve Primary Fund, “breaking the buck” — which meant that investors were facing losses on their principal.

This led to a torrent of redemptions from other money market mutual funds as investors became anxious about their liquidity and have been reluctant to provide term funding. The Fed facility was aimed at unfreezing these markets.

“We would like to have a similar vehicle as in the United States. They have taken a lot of measures in the United States on the money market funds and it will create competitive disadvantages for Europe,” said Peter de Proft of the European Fund Management Association Efama.

European authorities have not taken any specific measures to prop up money market funds and are lagging behind the U.S. in its protection of the money market fund industry, De Proft said.

“In the money market there is a lack of liquidity, in Europe too liquidity could be improved,” he said.

New guarantees were particularly important given the emergence of the pan-European funds known as UCITS.

“When you have Pan European funds like UCITS, it would be sensible in the future to have a pan European solution,” IMMFA’s Aiken said, adding the ECB should be in charge.

Last month the European Fund and Asset Management Association (Efama), told Reuters fund managers were lobbying the European Central Bank and national central banks to extend bank deposit guarantees to money market funds as a pre-emptive measure, should a redemption stampede occur in Europe too.

Editing by David Holmes; Editing by Erica Billingham

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