The proposals will improve the resilience of MMFs by addressing in particular liquidity issues and the threshold effects for constant net asset value (CNAV) MMFs.
The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, is issuing an Opinion
containing proposed reforms to the regulatory framework for EU Money
Market Funds (MMFs) under the Money Market Funds Regulation (MMFR).
These proposed reforms result from the lessons learnt
from the significant liquidity difficulties faced by MMFs during the
initial outbreak of the COVID-19 pandemic in March 2020. At the time
investor redemption rates rose on the liability side with a
corresponding deterioration in the liquidity of money market instruments
on the asset side.
Verena Ross, Chair, said:
“ESMA is today proposing a number of changes to the MMF regulation
intended to make MMFs more resilient. These reforms will help to
improve the overall stability of financial markets, by reducing the risk
of liquidity stress.
In March 2020 MMFs faced difficulties brought on by increases in
redemption demands while the assets they held became more difficult to
sell. Our proposals today, which are consistent with those of the ESRB,
aim to ensure that MMFs will be able to meet investors’ redemption
requests, and that this will continue to be the case also in the
future.”
The ESMA Opinion includes the following key policy measures aimed at improving the resilience of MMFs:
- Addressing the threshold effects for constant net asset value (CNAV) MMFs, by:
- Removing the possibility to use amortized costs for low volatility NAV (LVNAVs) MMFs; and
- Decoupling regulatory thresholds from suspensions, gates and redemption fees for LVNAV/CNAV MMFs.
- Addressing liquidity related issues by:
- Ensuring mandatory availability of at least one liquidity management tool for all MMFs;
- Amendments of the Daily liquid asset/ Weekly liquid assets ratios as
well as the pool of eligible assets, including public debt assets,
which can be used to satisfy these liquidity ratios; and
- Inclusion/Reinforcement of the possibility to temporarily use liquidity buffers in times of stress.
In addition, ESMA is proposing complementary reforms aimed at
enhancing MMFs’ preparedness for a crisis. These include enhancements
of reporting requirements and the stress testing framework, as well as
clarification of the requirements on external support and new disclosure
requirements linked to the rating of MMFs.
ESMA has also published the annual update of the Guidelines on MMF Stress tests.
Next steps
ESMA has sent its Opinion to the European Commission and will work
closely with the Commission throughout the Review of the MMF Regulation.
The Guidelines on MMF Stress tests will be further reviewed this year
to take in particular into account the interdependencies between the
different risk factors under certain market situations. ESMA will be
consulting on this review in 2022 and the outcome will be published by
the end of the year.
ESMA
© ESMA
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