Scottish Widows Investment Partnership has warned that the FSA’s proposed changes for money market funds could cripple the £381bn industry.
It claims there is a mismatch between moves to cut risk and FSA rules aiming to improve capital security in banks. Money market funds face pressure to reduce duration of assets they hold because of industry sentiment that it is risky to hold longer-dated assets. But new FSA rules mean banks have to hold additional capital for any shorter-dated assets.
Swip investment manager for fixed income Douglas McPhail says: “New regulations proposed will mean the length of assets that each must now hold are targeted at opposite ends of the maturity spectrum. For money market liquidity funds, a key provider of bank funding, the emphasis is on the short term. For banks, it is focused on the longer term.”
He says money market fund managers have been forced to slash the weighted average maturities of assets in the funds in a bid to reduce their risk levels.
The funds are now having to adopt weighted average maturities as low as 30 days to attract top ratings from agencies, which is half the industry standard of 60 days.
But the FSA’s new rules on liquidity for banks insist that for any assets under 90 days maturity, the organisations must hold the same amount in capital.
McPhail says: “These new regulations are at loggerheads.”