An outright ban on sponsor support has not to date formed part of the regulatory reforms proposed by the Commission or ESMA. However, the ESRB, an EU-wide body established in 2010 to monitor risks to the continent’s financial system, is believed to be readying a consultation on whether sponsor support should be outlawed.
The origins of this consultation can be found in a document entitled “Occasional Paper Series, June 2012, Money Market Funds in Europe and Financial Stability”, in which the ESRB examined the extent of regulation of money market funds (“MMFs”) in the EU.
In this paper the ESRB observed that “uncertainty about availability of [sponsor] support”, which although often expected is not guaranteed, “may have fuelled runs” on MMFs. It also said that bailouts risked spreading contagion to banks that sponsor MMFs. If a bank is “forced to provide substantial liquidity in order to prevent a fund from being suspended and triggering a panic that could also spread to its own retail client base due to the reputational risk involved ... this could exceed the bank’s capital reserves, leading to a failure and contagion to other banks,”.
The paper lists a number of policy options for regulation of MMFs. The following option is put forward to address sponsor support issues: “(f) designing a framework to address sponsor issues and the relationship between a money market fund, its sponsor bank and any affiliates thereof, particularly in respect of CNAV funds”. This wording clearly does not contemplate draconian measures, such as an outright ban on sponsor support. It is noteworthy, however, that the Paper subsequently states that “the policy options under discussion will be influenced by the desired future shape of the industry (e.g. the transformation of MMFs into “quasi-banks” or the imposition of additional constraints on existing business models within the scope of market/investment fund regulation).”
We will keep you informed of developments, particularly the content of the ESRB consultation once it has been released.