An analysis of the EU's regulation applicable to money market funds and its implications for Malta

Abstract

Although Money Market Funds are known to be safe because of their high liquidity, the financial crisis during the fall of 2007 attested that these funds are not resilient enough to be immune to financial turmoil. During the Financial Crisis, a U.S. based money market fund had to be liquidated because of its dependence on a major bank that went bankrupt. This turmoil in the U.S. together with uncertainties in the European Union Financial system, made investors uneasy and reduced confidence even in the 'safety' of Money Market Funds. This led governments to step up and guarantee the constant net asset value to prevent runs on MMFs. Witnessing these events unfold, in September 2013 the European Commission put forward a proposal on Money Market Funds entitled 'Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds'. The exposure of MMFs to systemic risk experienced during the financial crisis and later during the Sovereign Debt Crisis triggered debate on an international and European level by policymakers which resulted in the issuance of guidelines and subsequently the proposal. Thus the proposal aims at mitigating the risk and the vulnerability of these funds during future financial crises. The dissertation will be a study of how the proposal put forward by the European Commission would affect the Maltese Money Market funds if it will be implemented. The purpose of this dissertation is to help the reader understand important aspects iii of the European Commission's proposal which proved to be rather debatable by the relevant economic and banking associations. Furthermore, the study includes an extensive research about the Money Market Funds in Malta and the impact of the new proposal on the mentioned funds from the perspective of the MMFs managers in Malta. Such research will be mainly provided by interviews to local practitioners. Therefore, the research aims at providing a holistic view to the reader about the current and the future direction of Money Market Funds, focusing mainly on the local funds. This dissertation is a study of how the proposal would affect the Maltese Money Market funds if it is to be accepted and implemented in Malta as one of the member states of the European Union.