Treasury Today Country Profiles in association with Citi

UK MP Sajid Javid’s Keynote Speech to IMMFA Annual Dinner

Big Ben in London

Sajid Javid MP, Economic Secretary to the Treasury, addresses the annual dinner of the Institutional Money Market Funds Association (IMMFA) on 12th June.

Good evening. I’m afraid I’ll only be able to join you briefly tonight. I’ve managed to escape a vote at the Commons to get here, and very annoyingly, I’m going to have to leave before dinner.

But I was incredibly keen to make it along tonight because I know – both from my time in the financial sector and as Economic Secretary – that there is a very positive story to be told about money market funds (MMFs). A story that can sometimes get lost amongst banker bashing and ill-informed economic arguments.

So let me start by reassuring you that I know that I understand the vital function played by MMFs.

They provide investors with a valuable cash management tool, and the people that invest in them are often ordinary citizens, pensions, and businesses. They help to maintain liquid markets for short-term bank debt, sovereign debt and commercial paper. They are a stable source of cross border funding for banks. And they help to make both the UK – and Europe as a whole – much less reliant on wholesale bank funding.

So both myself and the UK Government more widely are well aware of the advantages your sector offers our country.

Nevertheless, we find ourselves in a position where many regulators – particularly at a European level – have concerns about the work you do, particularly with regards to systemic risk. While it may be questionable whether further regulation of MMFs is a priority, the debate has moved on from whether or not action should be taken.

Action is being taken.

We know that new regulatory interventions will be made shortly in both the US and the EU, and we know that these will present us with a new challenge. Namely to make sure that these interventions are worthwhile, helpful, and effectively address the legitimate concerns about MMFs, without impairing the crucial role they can play in our economy.

You’ll all be well aware that we are still awaiting the European Commission’s (EC) final proposals. Their earlier version has been available for some time and I can understand the concerns that it raised upon publication. If we want these proposals to be changed into something that is beneficial though – for your sector, for investors and for the UK as a whole – it is up to us to make sure that we tell the positive story about MMFs. Policymakers shouldn’t be – as perhaps they all know – allowed to look at these funds entirely as a prudential problem that needs to be solved.

It is true that they present some risks that need to be addressed, but we need to make sure that policymakers are also reminded of the invaluable functions they provide. And we need to remind them that those functions are actually of benefit to their jurisdictions.

Not only do MMFs benefit the countries in which they are domiciled, it is widely overlooked that a number of jurisdictions in which few – or no MMFs at all – are based, also benefit from the present arrangements. And those jurisdictions should be made aware that damaging the industry would potentially be damaging for their banks, institutions and economies.

I hope it will reassure you to know that the Treasury is not only aware of these arguments, but that we’re already making them in Europe. But if we want to develop this message further, if we want to make sure that policymakers sit up and listen, then we will need help from you.

Firstly, we need to make sure that we have the most up-to-date information and statistics on the potential impact of any proposals, so we need you to work with us. And we also need you to work with investors. After all, any proposals need to be good for investors, as well as MMFs, and it therefore makes sense for the industry to work with investors to develop a co-ordinated position on what should and shouldn’t be in this regulation.

We need you to articulate these asks together.

We have already seen recognition in the US that their first attempt at a regulatory intervention was not sufficiently sympathetic to the benefits that MMFs provide and as a result, we’ve seen new proposals that are much more in line with what industry have been pushing for.

It would be a shame to see a major divergence of standards and regulation between the US and Europe, because if Europe imposes standards that make constant net asset value (CNAV) no longer viable, then there is a very real danger that business will simply be driven to Delaware. And such a circumstance would be of absolutely no advantage to any EU member states.

I’m sure that everyone here tonight will be keeping their eyes and ears peeled – as will my officials at the Treasury – for any further developments in the US, and particularly Europe.

And when these proposals are published, we need to make sure that we are prepared to agree with anything sensible. And we need to make sure that we are ready to challenge – with solid evidence and with support from investors – anything that we think is unsympathetic to the benefits your sector provides.

I’ll look forward to taking that work forward with you. So thank you very much for welcoming me for such a short time this evening. And I hope that you all have an excellent dinner, and a very enjoyable night.