In a recent Link of the Day, we mentioned a release entitled, "ESMA Publishes Final Report On Money Market Funds Rules." The report from the European Security Markets Authority reviews, "Technical advice, draft implementing technical standards and guidelines under the MMF Regulation." We review the full report in more detail below. (See too our `Nov. 15 News, "ESMA Readies Opinions on EU Money Fund Regs; New MFI Intl Holdings.")

ESMA's release says, "The European Securities and Markets Authority (ESMA) has published a final report on the Money Market Funds Regulation (MMFR). The final report contains final versions of the technical advice, draft implementing technical standards (ITS), and guidelines on stress test scenarios carried out by MMF managers under the MMFR. The key requirements relate to asset liquidity and credit quality, the establishment of a reporting template and stress test scenarios carried out by MMF managers."

It explains, "These represent the detailed rules required for the implementation of the new European Union regulatory framework aimed at ensuring the stability and integrity of money market funds. The key requirements under the different policy tools include: Technical Advice - the liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement [and] the criteria for the validation of the credit quality assessment methodologies and the criteria for quantification of the credit risk and the relative risk of default of an issuer and of the instrument in which the MMF invests, as well as the criteria to establish qualitative indicators on the issuer of the instrument."

The requirements also include: "The development of a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF, including on the characteristics, portfolio indicators, assets, and liabilities of the MMF. This information will be submitted to national competent authorities (NCAs) and then transmitted to ESMA [and] Guidelines on common reference parameters of the scenarios to be included in the stress tests that managers of MMFs are required to conduct. This takes into account such factors as hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF, movements of interest rates and exchange rates or levels of redemption."

The report summary explains, "Article 15(7) of Regulation (EU) 2017/1131 on money market funds ("MMF Regulation") empowers the Commission to adopt delegated acts specifying liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement. In a letter dated 20 January 2017 (see Annex II to this paper), ESMA was asked to provide technical advice to the European Commission."

It also states, "Article 22 of the MMF Regulation empowers the Commission to adopt a delegated act specifying ... the criteria for the validation of the credit quality assessment methodologies referred to in Article 17 of the MMF Regulation ... the meaning of the 'material change' that could have an impact on the existing assessment of the instrument and that would trigger a new credit quality assessment for a money market instrument ... the criteria for quantification of the credit risk and the relative risk of default of an issuer and of the instrument in which the MMF invests [and] the criteria to establish qualitative indicators on the issuer of the instrument. In its aforementioned letter of 20 January 2017, the Commission asked ESMA to provide technical advice on these topics."

The report also tells us, "Article 37 of the MMF Regulation (see Annex II to this paper for the full text of the relevant Articles) provides that ESMA shall develop draft implementing technical standards to establish a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF."

The summary concludes, "Article 28 of the MMF Regulation provides that ESMA shall develop guidelines with a view to establishing common reference parameters of the stress test scenarios to be included in the stress tests managers of MMFs are required to conduct. This final report contains the technical advice, implementing technical standards and guidelines on stress tests that ESMA has developed."

According to the report, "The technical advice and implementing technical standards (ITS) have been submitted to the European Commission – in the case of the technical standards, for endorsement. With respect to the ITS on the establishment of a reporting template and the timing of implementation of the corresponding database, ESMA confirms that managers would need to send their first quarterly reports mentioned in Article 37 to NCAs in October/November 2019 (and not in July 2018). In addition, there will be no requirement to retroactively provide historical data for any period prior to this starting date of the reporting. In terms of next steps, ESMA will now start working on the Guidelines and information technology (IT) guidance that will complement the information included in the ITS so that managers of MMFs have all the necessary information to fill in the reporting template they will send to the competent authority of their MMF, as specified in Article 37 of the MMF Regulation."

They note, "With respect to the Guidelines on stress tests, ESMA determined that in addition to those stress tests managers of MMFs will conduct ... managers of MMFs should also conduct common reference stress test scenarios. The results of these will need to be included in the abovementioned reporting template according to Article 37(4) of the MMF Regulation. The corresponding calibrations of these common reference stress test scenarios will be specified when ESMA first updates the Guidelines in a sufficiently timely manner that managers of MMFs receive the appropriate information on these fields in order to fill in the reporting template mentioned in Article 37 of the MMFR. The timing of publication of the update of the Guidelines on stress tests will be the same as the abovementioned Guidelines and IT guidance that will complement the information included in the ITS."

Finally, the report adds, "ESMA received 18 responses to the consultation paper (CP) on ESMA's draft technical advice, ITS and guidelines on stress tests under the MMF Regulation. Responses were received from asset managers (and their associations), investor representatives, a public authority and an association of professionals investors. ESMA received significant feedback from stakeholders on the issue of share destruction (share cancellation). ESMA has sought the views of the legal services of the Commission on this issue, given that the practice raises issues of interpretation of the MMF Regulation. In light of the output of this legal assessment, ESMA will take appropriate follow-up actions, having regard to the nature of this issue and current market practices. The precise tool that ESMA will use will depend on the outcome of the Commission's legal assessment. However, these follow-up actions are likely to include, in particular, input to the Commission on the extent to which additional fields related to share cancellation would potentially need to be included in the reporting template under Article 37 of the MMF Regulation."

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