16 February 2022
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). 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.
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.