Regulation aimed at making the global financial system safer may spell trouble for Europe's 1 trillion euro ($1.4 billion) money market funds sector, where managers are handing assets to bigger rivals, pushing more risk into fewer hands.
The threat of costly red-tape is already forcing consolidation among the largest players in what watchdogs call the 'shadow banking' system, a network of loosely regulated private equity, hedge and money funds that together are large enough to topple the global financial system. Financial regulators argue that this shadow banking sector was a key contributor to the financial crisis.
They want a crackdown on shadow banking, which could compel money market managers - who look after cash for clients seeking alternatives to bank deposits - to hold capital against the money they manage. This could provide a cushion if these highly liquid funds saw a sudden spike in outflows as happened during the crisis.
Regulators worry that a fire sale of the short-dated AAA debt these funds invest in could spark a new credit crisis. But providers say the proposal is already driving non-specialists out of the sector and could place undue stress on the balance sheets of managers who choose to stay in.
"Enhanced regulation, particularly the prospect of holding capital, is focusing groups on what is their core and non-core business and whether they can manage existing or create competitive products in this space," said Mark Stockley, head of international cash at BlackRock. The new rules would be akin to the new bank capital regime, known as Basel III, that banks are presently grappling with.
The proposals are seen as so demanding by some members of the asset management industry that only super-sized groups or bank-owned managers would be able to cope with it. Standard Life Investments (SLI) and Henderson Group, who between them run about 220 billion pounds in assets, both passed up their cash funds to Deutsche Bank Advisors in 2011, citing such hefty regulatory burdens.
"We are a bank and therefore our ability to deal with this kind of banking-style regulation is more aligned," said Reyer Kooy, head of institutional liquidity management UK & Ireland at Deutsche Bank Advisors, explaining his reasons for the bank's aggressive growth plans in the cash fund sector."This is a business we have a large amount of resource allocated to, and a business we feel very comfortable about growing out," he added. Moody's Investor Service Senior Analyst Dagmar Silva feels Henderson and Standard Life are unlikely to be the last managers who decide to exit the sector rather than comply, echoing worries of managers who say more concentration would hurt investor choice and ramp up liabilities of the biggest players.
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