The UK's Investment Management Association has welcomed the new definitions of money market funds published by the European Fund and Asset Management Association and the Institutional Money Market Funds Association.

The definition of “money market funds” rests on a revised single category composed of two types – short-term and regular – defined in a way that is hoped to limit risks to which money market funds are exposed, such as those associated with interest rates, credit spreads and liquidity.

EFAMA and IMMFA also agreed on a three-year transitional period in which all existing money market funds that fall outside the definition should be allowed to keep the money market fund label.

"The financial crisis has generated investor nervousness about the risks taken by some money market funds. By proposing to reserve the money market fund label to funds designed to generate money market-like returns, while aiming at preserving capital and maintaining strong liquidity, our objective is to enhance investor information about the exact nature of money market funds, thereby enhancing investor protection and securing the long-term attractiveness of money market funds,” said Jean-Baptiste de Franssu, president of EFAMA.

IMA said in a statement that it is currently consulting its members about adopting the new short-term money market funds definition. A decision is expected by the end of August, and once agreed the new sector will be effective from 1 January 2010.

At the moment, funds investing at least 95 per cent of their assets in money market instruments fall within the money market sector definition of the IMA.

The IMA is the trade body for the UK's £3.4 trillion ($5.5 trillion) asset management industry.