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Important to recognise is the fact that on such occasion there were also no recorded instances of public debt constant net asset value (CNAV) funds, or low volatility net asset value (LVNAV) funds, having to activate fees, gates or suspensions; and for LVNAV funds, none had to convert to temporary variable pricing.
Since the entry into application of the MMFR in 2018, European MMFs have provided a high-quality, well-diversified and liquid investment option at a time when markets underwent considerable stress, offering both investors and regulators complete transparency around funds’ portfolio holdings and liquidity levels. In this regard, EFAMA notes that any reform of the MMFR regime needs to be carefully assessed to preserve the intermediary role that MMFs play in short-term money markets, as they continue to offer a critical alternative to traditional bank financing. In this regard, it is critical that the (LVNAV) fund structure be preserved.
Worthy of the European Commission’s attention is nevertheless the clear regulatory link that exists for public debt CNAV and LVNAV funds between breaches of their liquidity ratio and the potential activation of liquidity management tools. We consider that the removal of such link in the Regulation could to a large extent mitigate the risk of a “first-mover advantage” and lessen redemption pressures for managers during times of stress.
Among the proposals to reform the MMFR recently tabled by European bodies, EFAMA opposes the ESRB’s recommendations to increase existing MMF liquidity requirements, as well as the notion of a mandatory additional public debt buffer. We also believe that the existing liquidity requirements should not be changed, considering the abundant evidence that these have never been breached.
Lastly, in terms of liquidity management tools, we emphasise that redemption fees remain the most appropriate to consider for all types of MMFs. Their activation, as well as of that of other liquidity management tools, should however not be prescribed ex ante through a delegated act (as per ESMA’s February 2022 Opinion). As the pandemic-induced market events have demonstrated, market shocks are often unforeseeable and prescriptive solutions will only make liquidity management more challenging. Moreover, a prescriptive definition of “stressed market circumstances” to be sanctioned by supervisors only risks re-introducing the likelihood of regulatory “threshold effects” the same MMFR reform is designed to remove.