Mutual fund industry lobbyists are resisting any regulatory reform effort that would see mutual funds treated like banking products.
In a response to a consultation initiated by the International Organization of Securities Commissions (IOSCO) concerning possible reforms to address the systemic risks posed by money market funds, the Investment Funds Institute of Canada echoes the submission of the International Investment Funds Association (IIFA), stressing that there are substantial differences between investment funds and bank products.
It says that it is “critical” for IOSCO and the Financial Stability Board (FSB), to recognize the different roles investment funds and banks play in the global financial system when considering possible reforms.
“Because investment funds differ significantly in their business and operation models, we believe it is imperative that bank-like regulation not be imposed upon investment funds,” it says. In particular, it resists the idea that funds could be required to establish a capital buffer, or that they be mandated to move from constant net asset value valuations to variable net asset value.
“Requiring money market fund managers to back-stop losses, and to provide for those losses through a capital requirement, would fundamentally undermine the economic viability of money market funds, and would convert them from an investment product into a de facto banking product,” it says.
IFIC also opposes any effort to craft uniform global regulations for money market funds. It says that the existing differences in local regulations, and differing local market conditions, “are so significant and fundamental as to make the crafting of detailed world-wide regulatory approaches inappropriate”.
It warns that imposing a common approach could have unintended adverse consequences, rather than help mitigate risks. Indeed, it argues that any major regulatory reforms could create unintended risks.
“Many of the policy options under consideration by IOSCO would represent fundamental structural changes to the money market fund industry. While the benefits that the proposed policy options would bring are unclear, we believe that a fundamental change to the regulation of money market funds would create substantial uncertainty and potentially systemic risk,” it says. “We therefore urge IOSCO and other regulatory authorities to exercise extreme caution as they proceed in the consideration of money market fund reforms.”