Ireland set to oppose EU plans on cash buffers for funds

Ireland, home to almost a third of the European Union’s €1 trillion money-markets industry, is set to oppose EU plans to make funds build up cash buffers against future crises.

The proposal could force European funds, an important source of short-term financing for banks, companies and governments, to shut down, said Finance Minister of State Simon Harris. Ireland seeks support from other EU states against the plan to enforce “crude” cash buffers, which may have “horrendous” unintended consequences, he said.

“Ireland shares the EU view and the commission’s view that we have to better regulate shadow banking,” Mr Harris said. “To go ahead with a capital buffer structure as a regulatory instrument would damage the industry here, but also throughout the EU, and could lead to an outflow of investment from Europe.”

The EU money-market fund industry is concentrated in France, Ireland and Luxembourg. Funds domiciled in these three countries account for more than 95% of the EU market, according to European Commission data.

Such funds hold more than a fifth of short-term debt securities issued by governments and corporates in the bloc and more than a third of short-term bank debt.

Regulators have sought stricter curbs on money-market funds since the September 2008 collapse of the $62.5bn (€48bn) Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers, triggered a wider run on the industry that helped freeze global credit markets.

Michel Barnier, European Commissioner for internal market and services, put forward a draft law last year in an attempt to boost funds’ resilience to crises.

Mr Barnier’s proposals would require funds that maintain a fixed share price, known as constant net-asset value, or CNAV, to build up a cash buffer equivalent to 3% of assets.

Almost €273bn of CNAV funds are domiciled in Ireland, making it the main base in the EU for such assets under management, according to EU data published last year.

MEPs earlier this year split over how to take the measures forward, with some backing calls from the European Systemic Risk Board, a group of EU authorities including the European Central Bank and the Bank of England, for an outright ban on CNAV funds, by forcing them to convert to a floating share price.

— Bloomberg