ASIC today released the findings of a proactive review of managed investment schemes that are money market funds.
Money market funds typically invest in government bills, very short-term bank certificates and other loans that are highly rated liquid – which means the assets can be turned into cash quickly - and offer daily redemption. The investment objectives are capital preservation and yield generation.
Money market funds have grown substantially over several decades in overseas markets. One implication of their growth is the increased role they play in the short-term funding markets and their wide use by wholesale and retail investors. In September 2008 concerns with some money market funds, in particular in the US, alerted regulators to the systemic relevance of money market funds. This has prompted reviews of their regulation, both in the United States and in Europe and by the International Organization of Securities Commissions (IOSCO).
ASIC conducted a systemic review of money market funds in Australia following these international developments.
‘We found that money market funds in Australia do not share many of the characteristics that are prevalent in US and Europe and have little impact on the short-term funding market in Australia,’ ASIC Commissioner Greg Tanzer said.
‘For example, the susceptibility of money market funds to runs, or investors wanting to exit the fund simultaneously, appears low in Australia because of the the absence of any significant mismatch between liquidity and redemption terms, the use of marked to market valuations and the existing ability of fund managers to freeze redemptions in turbulent times.’
The role of money market funds in the Australian short-term funding market is significantly smaller compared to overseas markets. Estimates put the short-term funding market to be around $250.6 billion. It is estimated that money market funds represent no more than 9.5% of the short-term funding market and currently account for 0.5% of financial system assets in Australia.
‘Our analysis to date does not support regulatory intervention for money market funds. The current regulation and market practice in Australia is aligned with IOSCO recommendations’ Mr Tanzer said.
‘However, we will liaise with industry to encourage standardisation in product branding to better distinguish funds that are known as 'enhanced' money market funds from other money market funds. We consider it would be preferable if the term "money market fund" or similar terms such as 'cash', were used only by funds that have a low weighted average life and dollar weighted average maturity.’
Background
The review’s aim was to increase ASIC’s understanding of key characteristics and risks, including the liquidity, asset maturity, NAV structure, redemption terms, credit risk, and investment and investor profiles, and to consider whether or not any regulatory intervention was warranted in Australia.
Money market funds account for 1.3% of the total managed funds industry in Australia. With a total of $24.4 billion funds under management (on an unconsolidated basis), Australian money market funds are estimated to account for less than 1% of the global money market fund industry.
There has been increasing interest, in both the United States and Europe, in money market funds and the role they play in the financial system. This has prompted reviews of the regulation of money market funds within those jurisdictions. New laws governing the promotion and operation of money market funds are being considered in the United States, and similar initiatives are being implemented in Europe. In addition there has been work underway in the International Organization of Securities Commissions (IOSCO).
IOSCO published its policy recommendations on money market funds in October 2012. See 'FR07/12 Policy Recommendations for Money Market Funds, Report of the Board of IOSCO' which can be downloaded as a PDF from IOSCO's website.
Download Report 324 Money markets funds (REP 324)