* Funds with 100 bln euros assets may lose money market tag
* Funds grouped as short-term and regular funds
* New rules would cut interest rate, liquidity risks
By Raji Menon
LONDON, July 9 (Reuters) - European money market funds are seeking to repair the reputational damage from the credit crisis by ousting some funds and restricting the exposure of others to risky investments.
Europe's money market funds - usually seen as safe havens offering an alternative to bank deposits - were hit during the credit crisis as investors pulled their money out in the scramble for cash.
The European Fund and Asset Management Association (Efama) and the Institutional Money Market Funds Association (IMMFA) plan to re-classify mainstream European money market funds into short-term and regular funds which will reduce the main interest rate, credit and liquidity risks facing the funds.
The measures would shift funds with around 100 billion euros ($139.2 billion) in assets out of the money market funds classification, Efama said on Thursday.
Clients have been put off by instances of money market funds struggling after investing in riskier instruments. The most high profile victim came as U.S. giant the Reserve Primary Fund "broke the buck" as net asset value fell below one dollar on exposure to Lehmans - meaning investors withdrawing their money got less than they had initially put in.
Money market fund investments are designed to deliver regular income, while protecting the initial investment.
At the end of 2008, European money market funds had 1.35 trillion euros ($1,879 billion) under management. The figure represented an increase from 1.18 trillion at end-2007, but the sector would ordinarily have expected a far higher boost from the flight to quality that accompanied the credit crisis.
NERVOUSNESS
"The financial crisis has generated investor nervousness about the risks taken by some money market funds," said Jean-Baptiste de Franssu, President of Efama in a statement.
"...Our objective is to enhance investor information about the exact nature of money market funds, thereby enhancing investor protection and securing the long-term attractiveness of money market funds."
To minimise interest rate risks, Efama and IMMFA are proposing that the overall portfolio limit for a short term money market fund should not exceed 60 days. For a regular money market fund, this limit has been set for up to one year.
Short-term funds should also hold a minimum of 5 percent of their assets in cash that would be accessible within one day and at least 20 percent within seven days.
Regular money market funds should set an internal standard to be able to meet "reasonable" liquidity demands from clients.
Efama and IMMFA said existing money market funds outside the new definitions will be allowed to keep the money market fund label for a transitional period of three years.
By June 30 2012, funds that fall outside the proposed definition will no longer be classified as money market funds.
The proposal for the guidelines is being presented for immediate adoption by Efama and IMMFA members. IMMFA represents money market funds in Europe with more than 400 billion euros in assets while Efama members account for about 11 trillion euros.
Peter de Proft, director general of EFAMA estimated that riskier money market funds with some 100 billion euros under management would currently fall outside the classification. ($1=.7184 Euro) (Editing by Elaine Hardcastle)