European money market reforms to have global impact: Morgan Stanley

NEW YORK (Reuters) - Proposed money market reforms in Europe could raise short-term borrowing costs for banks around the world if some funds shun bank debt in favor of owning only government securities, according to Morgan Stanley analysts.

This move has already occurred in the United States, where a number of U.S. prime money funds have been converting to government-only portfolios since late last year, ahead of new regulations on the $2.7 trillion industry which go into effect on Oct. 14.

Government-only funds are exempt from some provisions, including floating per-share price and fees imposed during times of market volatility, which some corporate treasurers and institutional investors dislike.

Reduced demand from U.S. prime funds for commercial paper and certificates of deposit issued by banks has raised a benchmark on interbank borrowing costs to its highest in over seven years.

Morgan Stanley analysts Mikhail Levin and Jesper Rooth said in a report late Thursday that European money funds may respond similarly to their U.S. counterparts as European Union regulators seek to finalize rules to safeguard a sector that was roiled following the collapse of Lehman Brothers during the global financial crisis in September 2008.

"EU reform effort is likely to impact money markets globally as it is implemented over the next few years," Levin and Rooth wrote.

The European money fund market is roughly a third smaller than that of the U.S. It is worth about 1 trillion euros with a majority of assets denominated in dollars and sterling, they said.

"Any move could be further exacerbated by the continued shrinking buyer base for short-term financial paper," the Morgan Stanley analysts said about possible conversion of some European prime money funds to government-only funds.

They noted there were differences between the final phase of U.S. money market reform and the proposed changes considered in Europe over the issues of floating share prices and certain fees, which may not spur the level of fund conversion currently seen in the U.S.

(Reporting by Richard Leong; Editing by Bernadette Baum)

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