Financial reform is a lengthy process. The US money market fund regulation, proposed in response to the 2008 crisis, was finalised two years ago and will only be implemented in October this year. Its counterpart in Europe will take even longer. Although it has entered its final stage, it is not expected to come into effect until 2019.
With such a long development, participants in the US market have had plenty of time to adjust.
Money market funds themselves have made their own preparations. Many have made the switch from prime assets to government-only funds, allowing them to maintain their constant net asset value. The shifts mean that, as of April 2016, for the first time ever, there was more money invested in government funds than in prime funds.
Those funds that remain in the prime sector have been steadily shortening the average maturity of their portfolios to ensure they will have the liquidity to meet a potential wave of redemptions as investors switch over to government funds at the last moment.
Accordingly, throughout 2016, it has become increasingly expensive for banks to gain money market funding with a maturity after the implementation date for the new regulation.
The turmoil has driven up the interbank lending rate to its highest level in seven years, which has, incidentally, proved a boon to European SSA borrowers.
The US Treasury was prepared for the switch. It chose to capitalise on the arrival of hundreds of billions of dollars, newly restricted to government investments rather than the broader prime sector, by scheduling an extra $250bn of T-bills to be printed this year.
But despite the long gestation period, banks still appear to have been caught behind the curve.
Banks exposed to the European market would do well to watch how their counterparts in the US market are faring. Their options appear to be: pay up for short term money, source dollars on the cross-currency swap market, or rely on central bank currency reserves.
None of these options is a clear-cut long term solution. Cross-currency swap markets are volatile and unreliable. Some institutions feel there is a stigma surrounding central bank funding, but this quickly evaporated for the European TLTRO scheme, so perhaps the Japanese banks (which will feel the dollar shortage most acutely) may swallow their pride and turn to the BOJ when dollar costs climb.
It will help, a little, that the European regulation is a watered-down version of the US rule, thanks to enthusiastic lobbying by constant net asset value funds. Rather than being forced to float their net asset values, funds will convert to a "Limited Volatility NAV".
Given the proportion of negative yielding government assets in Europe, money market investors may be less willing than their US cousins to switch over to government only funds as this will mean forgoing a positive return on investment.
Given the lobbying so far, the regulation in Europe is still a moving target. But the funding landscape for banks will certainly shift sharply when the new rules come into force — so one can only hope Europe's banks learn something from the turmoil in the US money market, and next time around they are better prepared.