LONDON, Oct 20 (Reuters) - The European Union's national securities regulators unveiled proposals to better protect consumers who invest in money market funds.
"The key purpose behind a harmonised definition of money market fund is improved investor protection," the Committee of European Securities Regulators (CESR) said in a statement.
"This reflects the fact that investors in money market funds expect the capital value of their investment to be maintained while retaining the ability to withdraw their capital on a daily basis," CESR said.
Money market funds are used by investors as an alternative to parking cash in a bank account. The funds invest in commercial and other paper.
But some of the funds held highly-rated asset-backed securities as the credit crunch began unfolding in 2007.
These securities were later downgraded, showing poor levels of liquidity, particularly after the crash of Lehman Brothers bank in September 2008, making it hard for investors to withdraw the funds.
The U.S. Securities and Exchange Commission is also looking to make them less risky, such as by prohibiting illiquid assets.
The U.S. Reserve Primary Fund was forced to "break the buck" in September 2008 as asset prices dwindled and redemption requests escalated. A money market fund is said to have broken the buck when its net asset value falls below $1, 1 euro or 1 pound.
CESR has proposed a two-tiered approach to a definition -- on for short-term funds, the other for longer term funds. They would apply to European money market funds that are sold under the EU legal framework known as UCITS.
It should be pointed out to investors that there is a difference between the money market fund and a bank deposit.
A public consultation on the CESR definitions will close on 31 Dec. CESR members from the 27 EU states have agreed to enforce the definitions on money market funds sold after the guidelines take effect, with existing funds required to comply within a year.
(Reporting by Huw Jones, editing by Ron Askew)