Deregulation to hit market funds

Money market funds are expected to be deregulated after the draft Trust Enterprise Law (信託業法) completes its third reading either today or tomorrow. The change is expected to be extremely beneficial to the nation's banking industry, analysts said.

After negotiating with legislators, the Ministry of Finance (財政部) has agreed that the trust industry will be able to run mutual trust funds (共同信託基金) after the Trust Enterprise Law is passed, possibly by tomorrow. But the investment targets of trust funds will be expanded just to foreign exchange, short-term notes, real estate and gold; investments in securities such as stocks and bonds could be left off the list.

In order to prevent sector overlap with securities investment trust companies (SITC, 證券信託投資公司), finance ministry officials insist that the trust and banking industry should not be involved in negotiable securities as defined by Article 6 of the Securities Exchange Law (證券交易法). Negotiable securities under this article include government bonds, corporate stocks and bonds and other securities. Commodity futures and other futures would also be excluded, as many futures are derivative instruments from securities -- such as index futures -- finance ministry officials said.

Originally, the Finance Committee of the Legislative Yuan banned the trust and banking industry from running any mutual trust funds while they reviewed the draft of the Trust Enterprise Law. But negotiations between the KMT and other parties' legislators caused it to alter its original stance, possible due to lobbying by the banking industry.

Although the trust and banking industry will not be able to issue equities or bonds, the change is expected to be highly beneficial to the banking industry, finance ministry officials said.

Because SITCs have been running mutual funds that include stocks and bonds, the finance ministry would like to segregate the business between SITCs and the trust and banking industry.

Therefore, the finance ministry insists that mutual trust funds run by the trust and banking industry will not be allowed to invest in stocks and bonds.

After the Trust Enterprise Law deregulates the trust and banking industry, money market funds will be the most important business for trusts in the future, executives of domestic commercial banks say.

Presently, total assets managed by the 32 SITCs is roughly NT$1.1 trillion, and the total assets in bond funds is more than NT$600 billion, according to the Association of Securities Investment Trust Companies (投信公會).

After the trust and banking industry steps into the money market fund business, it could attract significant funds from the market -- including bank depositors and bond fund investors. It means that the securities investment trust industry will face strong competition from the trust and banking industry in the future, analysts said.

Another impact would be closer scrutiny of the effectiveness of monetary policies conducted by the Central Bank of China (央行), bank executives said.

Money market funds may attract huge deposits and become another form of money supply. That would create quite a challenge to the CBC's monetary policy.

Total assets managed by all money market funds in the US have already topped US$1 trillion, according to bank executives, and have generated billions in revenue for the banking industry.