Europe's ESRB, or European Securities Rulemaking Board published a "Recommendation of the ESRB of 20 December 2012 on funding of credit institutions," last week, which recommended a mandatory move to floating NAVs for all European money funds. It says under "Recommendation A -- Mandatory move to variable net asset value," "The Commission is recommended to ensure that the relevant Union legislation: 1. requires money market funds (MMFs) to have a fluctuating net asset value; 2. requires MMFs to make general use of fair valuation and to restrict the use of amortised cost accounting to a limited number of predefined circumstances." A summary from Sweden's Riksbank entitled, "The ESRB: bank funding and the regulation of money market funds" tells us, "The European Systemic Risk Board (ESRB) has published two recommendations. The first concerns bank funding and is based on the ESRB's assessment that even secured funding can pose risks to financial stability. The second recommendation aims to reduce the systemic risks that certain types of money market fund can give rise to.... The ESRB's second recommendation aims to reduce the systemic risks arising from money market funds. The recommendation mainly applies to money market funds with a constant net asset value (CNAV). During the financial crisis, these funds were subject to bank runs. This led to major disruptions on the money market which in turn exacerbated the financial crisis. Several financial institutions that offered money market funds through their fund management companies were also forced to inject money to protect unit holders who had invested in these funds. This undermined the financial standing of these financial institutions. To counteract the risk of such situations arising again, global standards for the regulation of money market funds have been drawn up. This has been done by the Financial Stability Board (FSB) together with the International Organization of Securities Commissions (IOSCO). The ESRB's recommendation calls on the European Commission to support the implementation of these standards within the EU. The ESRB recommends the prohibition of money market funds that offer CNAVs. The ESRB also recommends the introduction of stricter requirements for reporting and liquidity management in money market funds. At present there are no money market funds with a constant net asset value in Sweden. However, other parts of the recommendation will have consequences for the Swedish money market funds."

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