EFAMA, the European Fund and Asset Management Association, is the latest organization to weigh in on March's market madness with a press release entitled, "EFAMA report invalidates notion that central bank interventions 'bailed-out' MMFs," and a paper entitled, "European MMFs in the Covid-19 market turmoil: Evidence, experience and tentative considerations around eventual future reforms." The release explains, "The report covers all three Money Market Fund categories and suggest that MMFs in Europe have fared well under the March 2020 stress test. The pandemic-induced market events experienced in March 2020 have marked the first true 'stress-test' for European MMFs, following the introduction of the EU Money Market Fund Regulation (MMFR) in 2017. Despite the severity of the liquidity stress in the secondary market for short-term instruments and the significant outflows experienced by European MMFs across all three of the MMFR-identified categories (public debt CNAV, LVNAV and VNAV), funds proved resilient."
It tells us, "EFAMA's findings suggest that European MMF funds entered the volatile month of March with liquidity levels (expressed in terms of weekly maturing assets) well above their regulatory minima, helped also by a better understanding of their investor base as per MMFR requirements. Moreover, the ECB's Pandemic Emergency Purchase Programme (PEPP), announced on 18 March, only had a limited impact on European MMFs, due to the programme's strict eligibility requirements that excluded purchases of financial commercial paper (i.e. the large bulk of MMF asset holdings by definition), as well as assets denominated in non-Euro currencies."
The release adds, "In light of this evidence and from the resulting arguments, the report highlights a number of possible policy courses that global standard-setters (notably IOSCO and the FSB) could consider when attempting to review existing standards. Among these, EFAMA highlights the option of further facilitating liquidity provision by dealer banks and other financial intermediaries in the secondary market by mitigating these institutions' balance sheet constraints at times of heightened market stress. These and other evidence-drawn conclusions will feed into the policy debate going forward, while also confuting the notion that central bank interventions were largely responsible for 'bailing-out' non-bank financial institutions like MMFs."
In its "Executive Summary," the report says, "The Covid-19 pandemic and the consequent market reactions of March 2020 induced by the economic lock-down measures taken across Europe and elsewhere have recast money market funds (MMFs) in the regulatory spotlight. Following the extensive post-Global Financial Crisis regulatory reforms -- as implemented in the EU with the Money Market Fund Regulation (MMFR) of 2017 -- the pandemic-induced market events have marked the first true 'stress test' for European MMFs. This report intends to inform the global policy-making community, as well as the broader public, on the experience of European MMF managers during and after the March turmoil by drawing evidence from a number of key indicators, as well as from managers' direct experience, all in light of the MMFR's robust overarching regulatory framework."
EFAMA comments, "Whereas liquidity management proved challenging for all market participants, European MMFs -- whether short-term or standard and irrespective of their base currency denominations -- have continued to meet redemptions throughout the initial months of the pandemic and until the time of writing (November 2020). Moreover, they have continued to provide a high-quality, well-diversified and liquid investment option at a time when markets underwent considerable stress, while offering both investors and regulators complete transparency around funds' portfolio holdings and liquidity levels."
They explain, "Provisions in the MMFR mandating high levels of daily and weekly liquidity for each type of EU MMF, prudently supplemented in practice with even higher amounts of liquidity based on investor profiling and in light of gradually deteriorating market conditions at the start of 2020, ensured that European managers entered the pandemic with fund liquidity levels well above their regulatory minima."
The summary also tells us, "For EU Low Volatility NAV (LVNAV) and Public Debt Constant NAV (PDCNAV) MMFs, the MMFR includes a critically important 'two-part test', before fund boards are notified to assess any required actions. This mechanism effectively ensures that the MMF, in the event of a significant weekly liquid asset drawdown, is not automatically compelled to notify its board, thereby avoiding the market's perception that further emergency measures may be forthcoming."
It adds, "In light of the 'lessons learnt', but cognisant of the likelihood for further market stresses as the uncertainty effects of the pandemic endures, we formulate a series of recommendations for policy-markets and global standard setters to prudently consider. Besides the need to convene a dedicated forum for the ECB to consult with industry representatives active in European money markets, as well as improving the coordination between central banks and transparency around future intervention programmes, we consider additional options aimed at improving and increasing the resilience of underlying money market conditions during episodes of stress."
The paper's "Conclusion," states, "The Covid-19 March 2020 market shock was fundamentally different from the 2008 Global Financial Crisis in that the former has been a liquidity-driven event during an unprecedented public health crisis and not a solvency-driven one as in 2008. It has been amplified by combination of factors, including, investors' exceptional need for cash, increased risk aversion, higher funding costs for banks due to widening bid-ask spreads, difficulties for financial issuers to find buyers for their CP, as well as an elevated demand for bank dealer intermediation in the context of already constrained capital and risk limits. With these conditions prevailing in European money markets, MMF redemption pressures only rose, as managers struggled to meet both contingent financing needs from corporate clients and financial counterparties' confronting increased margin calls."
It continues, "Yet, in such context, the regulatory reforms introduced under EU MMFR regime in 2017 have proven their value in the ways described in this report. The result of the MMFR's combined liquidity requirements and 'know your customer' provisions explains why the combined net outflows experienced in March where, although sharp, manageable. No individual MMF was obliged to introduce redemption fees or suspend redemptions, and there were no instances of LVNAV funds converting temporarily to variable pricing for their units upon breaching the bounds of their 20 basis point 'collar'."
Finally, EFAMA writes, "In light of these key 'lessons learnt' from the initial outbreak of the Covid-19 pandemic and at a time when its effects are still apparent, EFAMA believes European policy-makers and global standard-setters could prudently consider a range of policy options, beginning with those affecting the functioning of money markets more intimately, i.e. improving the resilience of bank intermediation, along with broadening the present definitions of eligible liquid assets. As the economic and financial challenges from this pandemic endure, a shorter-term priority, for the European industry would be to guarantee better coordination between the ECB and other central banks, as well as greater transparency around the details of their operations. This should be coupled with the creation of a dedicated forum where the ECB can consult a diverse representation of money market participants with the aim to improve information and the efficiency of any future emergency asset purchase programme."
For more Crane Data News on possible pending European and U.S. regulations, see these articles: "IOSCO Weighs in on March-April MMF Episode, Suggests Further Analysis" (11/30/20); "FSB Reviews March Market Turmoil, Targets Short-Term Funding Markets" (11/18/20); "SEC Publishes CP, MMFs in Crisis Primer; Bloomberg Cites Rosengren" (11/13/20); "ICI: Prime Didn't Cause Crisis; N-MFP Holdings: Treasuries Still Half" (11/10/20); "ICI's Impact of Covid on Fin. Markets Report Examines Crisis, Support" (10/19/20); "SEC Covid Shock Study: Frozen CP Market, MMFs & Short-Term Funding" (10/14/20); and, "ICI's Stevens Says Reviewing Crisis and Money Markets; August Trends" (9/30/20).
