Money Market Funds

How EU legislation damages financial services

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Generally speaking I only blog about things I understand.  But just occasionally I get to hear about issues outside my day-to-day experience.  I think I understand the money market issue that follows, but I’ll be honest – I got someone who knows more about it than I do to draft it (and checked it with a couple of colleagues before letting it loose).  So far as I can tell, it’s a new piece of EU legislation which is entirely unnecessary, and seems to have resulted from French lobbying to impose a continental model on money market funds which will not only damage the City, but is likely also to disadvantage public authorities in the UK which invest in these funds.  Here goes.

There are essentially two flavours of Money Market Funds (MMFs): Constant Net Asset Value (CNAV) and Variable (VNAV) Funds.  The European Parliament is considering a regulation that would require constant net asset value MMFs to either convert to variable net asset value MMFs, or maintain a capital “buffer” of 3% of their total assets.  A 3% buffer will kill most CNAV MMFs.  Investors won’t pay for it.  Managers, unless backed by the largest banks, cannot afford it.

CNAV MMFs are an effective cash management tool for local authorities, charities, universities and businesses.  They provide diversification and credit risk management that investors cannot achieve on their own.  They meet investors’ need for stable value and liquidity by allowing redemptions at a constant NAV per share (usually £1).  CNAV MMF are an important source of short-term funding to governments and business.  They maintain CNAV by holding a diverse portfolio of very short-term, high-quality debt instruments.  They value these assets at amortised cost so they can process same-day redemptions.

A compromise draft is being developed in the ECON Committee.  It would incorporate amendments of a MEP from France, where a form of VNAV MMFs is popular, while dismissing most amendments of MEPs from Britain and other EU countries where CNAV MMFs operate.  The current “compromise” would not save CNAV MMFs and would not hold VNAV MMFs to the same high standards that CNAV MMFs have voluntarily adopted.

Many local authorities, charities, and universities cannot invest in VNAV MMFs because of investment restrictions and operational challenges.  If the proposal is adopted, they would probably move their cash into bank deposits.  But they would lose the diversification that MMFs provide, as the credit risk of their cash investments would be concentrated in a few banks; they would also lose the market rate of return that MMFs pay.  Directing more deposits to the largest banks, of course, also increases systemic risk.  Few among us want to move in that direction.

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3 Responses to Money Market Funds

  1. silverminer says:

    Any financial instrument that is even remotely difficult to understand is one which you don’t want your “money” in. Not that there is any “money” anymore since paper currencies are promissory notes, “promises to pay”, which are debt instruments, not payment in themselves. The joke on the public is that there is nothing to pay with since the gold was stolen in 1931 (in the case of the UK).

    We couldn’t have a worse system of money and banking from the point of view of the general public, who are being systemically robbed by inflation and interest on money created out thin air by private banks. The current system, of course, suits the bankers rather nicely. I had hoped that UKIP would speak out on this issue but it seems to me they’re running scared of the bankers just like the rest of the rest of the parties (except Godders and look what’s happened to him…).

    The proper place for savings is gold and silver bullion stored outside the banking system in safe jurisdictions such as Singapore or Switzerland. Paper promises are for day to day transactions only, ideally in cash “under the mattress” and not in a bank as you are nothing but an unsecured creditor and liable to be bailed in like in Cyprus, which was a trial run for what’s planned for the rest of us.

  2. Mike Stallard says:

    You raise a fundamental problem.
    Who is in charge of the money? Is it French intellectuals? Is it the London/American banking system? Is it the Germans? Is it the Commissioners?
    I don’t understand it either. What I do know is that the Welfare system will collapse if the banks go down. That will not be a pretty sight.

    • silverminer says:

      When you say “money”, Mike, I assume you’re referring to the pieces of paper that originally were receipts for deposits of gold and are now just debt instruments that can be digitally created out of thin air? What is commonly known as money but isn’t (as money is for payment and a “promise to pay” is not, and never can, be payment). It is what is says on it, just a promise of payment.

      The Fed is in charge of the “money” (as they print the reserve currency), for now anyway, but an interesting question is who is in charge of the Fed? It was created by the international banking elites of the time and there is no reason not to suspect the same families are not still in control, chiefly the Rothschilds and Rockefellers. JP Morgan was a Rothschild front man and Chase Manhattan was a Rockefeller bank, now merged as JP Morgan Chase. That’s where the power lies. These are matters of historical record.

      What makes you think the Welfare system collapses if the banks go down? Governments can create “money” out of thin air just as well as the banks can. Banks are fraudulent parasites bleeding us all dry. They create digital currency out of thin air and lend it out at interest, i.e. charging interest on nothing! Fraud! We’d be in jail if we did the same! The issuing power should be brought back under the control of our elected governments not in the hands of private banks. UKIP need to tackle this issue head on (ruffle a few feathers in the City mind…) and back the restoration of the Bradbury Pound (Google it, very interesting). They would then be a true party of the People setting us free from the bankers. Godders had it right:-

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