By Francesco Guarascio
BRUSSELS (Reuters) - European Union institutions have agreed on new rules for money market funds that will eliminate some kinds of funds and create others, EU officials said on Wednesday.
Money market funds (MMFs) provide short-term financing to investors and companies. The 1 trillion-euro ($1.07 trillion) industry is an important source of funding for the real economy, but the funds also pose risks to financial stability.
The EU talks on stricter rules for MMFs - which have lasted more than three years - came after the 2007-08 global financial crisis, which showed the funds may spread and amplify risks. The risks are particularly acute with those guaranteeing fixed returns even when markets fall.
Those funds, called constant net asset value or CNAV funds, create a risk because their share price does not change even when markets fall, exposing them to failure risks during crisis.
Under an agreement struck by the European Parliament and representatives of EU states, only funds dealing with public debt will be allowed to maintain a fixed-return policy, although details are still being negotiated. The original plan envisaged phasing CNAVs out over two years.
Variable net asset value (VNAV) funds would be maintained - their share price changes in line with market fluctuations, making them safer.
A new category of funds, low-volatility net-asset value or LVNAV funds, has been created to increase the financial safety of the industry.
After pressure from states with the largest fund industries in the EU - particularly Luxembourg, Ireland and Britain - the Parliament agreed to scrap a "sunset clause" meant to shut down the new category of funds five years after the new rules come into effect.
The initial plan was to set up LVNAVs as a transition while CNAVs were phased out.
"The key objectives of preventing the future systemic risks and runs on the funds have been addressed," Neena Gill, the British lawmaker in charge of the issue, said in a statement.
"We regard the agreement on MMFs as extremely good news," Olivier Guersent, the European Commission's director general for financial services, told a conference on Wednesday in Brussels.
The agreement requires final adoption by the European Parliament and the Council of EU states, and some technical details will need to be clarified, a European Parliament note said.
The Council said the deal reached covers the "core issues" including liquidity and diversification requirements and assets in which MMFs can invest, including the role of government debt.
(Reporting by Francesco Guarascio, editing by Larry King)