Taiwan's money market fund industry will be deregulated later this year, allowing trust companies to join the market, according to the Ministry of Finance (
Finance ministry officials are currently working on the Rules for Mutual Trust Funds to supplement the Trust Enterprise Law, which is expected to pass its third reading during the next session of the Legislative Yuan that opens this Friday.
If the Trust Enterprise Law can be enacted before the presidential election next month, trust companies will be able to launch money market funds before the end of June.
Because the Trust Enterprise Law is a prerequisite for the entrusting of KMT property, it is one of the drafts with the highest priority. Market watchers expect it to be passed in the near future.
The draft, including the enclosed Article for Mutual Trust Fund Practice, completed its first reading during the last session. The KMT has promised to complete the legislation before the March election.
The Article for Mutual Trust Fund Practice allows the trust industry to operate mutual trust funds. Such funds will issue beneficial certificates to raise money from the general public. These funds will be limited to money market funds, which can invest capital in short-term notes, foreign exchange instruments, real estate and gold.
A number of bond funds currently operate in Taiwan, investing mostly in financial instruments with terms of a year or longer, such as government and corporate bonds. Money market funds, on the other hand, invest in instruments shorter than one year, such as commercial paper and short-term notes.
Government regulations have so far prevented securities companies from stepping into banking operations such as money market fund management.
However, since most bond funds invest considerable amounts in Repurchase Agreements -- or "repos" -- which are short-term instruments, such bond funds act as de-facto money market funds. Money market funds run by the trust industry will in the future be able to invest in a wider range of money market instruments, including commercial paper, banker's acceptances and repos.
Bond funds run by securities investment trust companies (SITCs), and money market funds run by trust companies are expected to compete for capital in the future, however, the finance ministry intends to keep the two sectors segregated.
Only SITCs will be able to operate funds investing in negotiable securities, which according to Article 6 of the Securities Exchange Law (泮晷蝕), includes stocks, corporate bonds and government bonds. The funds run by trust companies will not be able to invest in such negotiable securities, putting them at a disadvantage.
"The money market fund might not be able to compete with the existing bond funds," said Norman Yin, professor at Cheng-chi University. "The major problem is that Central Bank of China (CBC,
"Part of the reason that SITCs are not allowed to operate money market funds has been that the CBC treats money market funds as bank deposits and part of the money supply. Since the CBC is unwilling to lower the reserve requirement ratio for the banking industry, the money market fund will be required to do the same," Yin explained
.
The effective reserve requirement ratio is currently 8 percent for time deposits and 19 percent for demand deposits.
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