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Regulators Mull New Rules for Major Money Market Funds

By Zhang Yu and Han Wei
Yu’e Bao, the world’s largest money market fund, is among institutions with
Yu’e Bao, the world’s largest money market fund, is among institutions with "systematic importance" facing new rules by China's securities regulator and its central bank. Photo: Visual China.

(Beijing) — Major money market funds including Alibaba-backed Yu’e Bao are expected to face new rules as regulators tighten oversight of liquidity risks in the country’s booming fund market.

The China Securities Regulatory Commission, the nation’s top securities regulator, and the central bank will jointly work out specific rules covering “money market funds with systemic importance,” according to new industry guidelines issued Friday.

Yu’e Bao, the investment product of Ant Financial, is the world’s largest money market fund, managing 1.4 trillion yuan ($210 billion) gathered from China’s hundreds of millions of online investors by the end of the second quarter.

The capital size of Yu’e Bao accounts for 27% of the country’s total money market fund value. Its capitalization is equivalent to that of a mid-sized commercial bank in China, but the fund is exempt from maintaining cash reserves against possible bad debt as banks are required to do.

In August and May, Yu’e Bao twice cut its maximum investment ceiling for individual investors to 100,000 yuan from 1 million yuan before May. This raised expectations that regulators would step up supervision of the 5 trillion yuan money market fund sector.

The plan to impose new rules on major money market funds was mentioned in a set of new guidelines for the mutual fund industry issued Friday by the CSRC. The guidelines outline detailed requirements on fund managers’ investment arrangements to prevent liquidity risks. They will take effect Oct. 1.

Data from Asset Management Association of China (AMAC), which oversees the mutual fund industry, showed that the total assets of mutual funds reached 9.9 trillion yuan by the end of June, more than half of it in money market funds.

The new guidelines require a money market fund to invest no more than 10% of total assets in financial products issued by institutions with ratings lower than AAA and no more than 2% in products issued by a single institution.

A fund manager’s total money market investments in a single commercial bank’s deposits and other assets should not exceed 10% of the bank’s net assets, under the guidelines.

Analysts said they expect the new rules to force many fund managers to adjust their money market products because deposits and interbank deposits are now the main investment targets for such funds.

Official data showed that by the end of June, 57% of assets managed by China’s money market funds were in the form of bank deposits and reserves, while 18% were invested in interbank deposits.

Seventeen fund companies each held more than 20 billion yuan of interbank deposits at the end of June, exceeding the 10% cap applied to most commercial banks, according to Lu Zhengwei, chief economist at Industrial Bank.

The CSRC said fund managers will have six months to adjust their businesses to comply with the new rules. The timeframe for systemically important funds will be set separately.

The new mutual fund guidelines follow the separate release Wednesday by the State Council and the CSRC of new rules targeting improper practices in the growing private investment-fund industry.

The draft rules, which will be open for public comment until Sept. 30, require private fund managers to tighten scrutiny of investors’ risk tolerance and set limits on the number of investors in any single privately offered fund to prevent excess risks.

Contact reporter Han Wei (weihan@caixin.com)

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