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China imposes new regulations on money market funds

Chinese regulators are introducing new regulations on money-market mutual funds (MMFs) to protect against systemic risk, the Financial Times has reported.06 Sep 2017

China's Securities Regulatory Commission has issued regulations requiring MMFs to limit their exposure to any single borrower and to assets with lower credit ratings, the Financial Times said.

MMFs are open-ended mutual funds that invest in short-term debt securities such as commercial paper and government debt, and are attractive due to their relative safety and high yields. 

MMFs form part of the 'shadow banking' sector. The term shadow banking generally refers to the provision of credit either fully or partially outside of the regular banking system. Shadow banking activities are typically subject to less stringent regulatory oversight than traditional banking activities, or none at all. However, these activities and the entities that carry them out can also run into financial difficulties. 

Chinese MMFs must not hold cash deposits, bonds or other assets from a single bank worth more than 10% of that bank’s net assets and assets from a single institution must not exceed 2% of an MMF’s net assets, the Financial Times said. 

An MMF may not hold more than 10% of it assets in instruments issued by banks or companies with a credit rating below triple A, the newspaper said.

Funds that are designated as systemically important may have further regulations imposed, it said.

The European Parliament, Council and Commission reached agreement in November 2016 on regulations designed to make Europe's money market funds (MMFs) more robust.

In Europe, MMFs hold around 22% of short-term debt securities issued by companies and governments, and 38% of short-term debt issued by the banking sector.

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