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Liquidity funds: Prime time for Prime Rate

Straightforward, vanilla money market funds have suddenly become topical.

Described by one participant as "the bit of the business that used to be boring but isn’t any more", the funds, also known as liquidity funds, have benefited from many recent events, contrived and otherwise. Consequently, they could now be poised for quite a substantial acceleration in growth.

"The size of the European liquidity fund market has gone up 500 times in a decade," says Chris Oulton, chief executive of Prime Rate, a new venture that is offering the first UK registered triple-A-rated liquidity fund. "With the levels of cash out there, it hasn’t even started."

Oulton has had a front-row seat for the various developments of the past 10 years, having started in money market funds in 1998. At that time, there were several barriers to the growth of money market funds. In the UK, the Permitted Investment Act of 1990 prevented local authorities from investing in anything classed as equity, as shares in a money market fund were. Banks and other financial institutions were likewise impeded by the 100% risk weighting attached to equities.

Times change

In 2001, Oulton and others founded the Institutional Money Markets Funds Association, for the purpose of providing consistency, transparency and standardization to the liquidity fund market.

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