Late last week, the European Securities and Market Authority published a press release entitled, "ESMA Consults on the Framework for EU Money Market Funds," which requests feedback on potential European money market fund reforms. (See our "Link of the Day.") Today, we quote from the full, "Consultation Report: EU Money Market Fund Regulation." The "Executive Summary" explains, "This consultation document is developed in the context of Article 46 of the MMF Regulation, which provides that '[b]y 21 July 2022, the Commission shall review the adequacy of this Regulation from a prudential and economic point of view, following consultations with ESMA'. The COVID-19 crisis has been challenging for MMFs. A number of EU MMFs faced significant liquidity issues during the period of acute stress in March 2020 with large redemptions from investors on the liability side, and a severe deterioration of liquidity of money market instruments on the asset side. In this context, this consultation document discusses the potential reforms of the EU MMF regulatory framework that could be envisaged, in light of the lessons learnt from the difficulties faced by MMFs during the COVID-19 crisis in March 2020."

It continues, "At [the] international level, several workstreams have started to assess the situation faced by MMFs during this crisis, and which policy options should be considered in order to address the issues which have been observed, and potentially enhance further the reforms on MMFs adopted following the 2008 financial crisis. In the EU context, the ESMA work takes the form of an assessment of the functioning and potential need for amendment of the regulatory framework applicable to MMFs in the EU, which is the Money Market Fund Regulation (MMF Regulation) and its implementing measures."

The summary tells us, "The input received through this consultation will therefore be of relevance in the context of the review of the MMF Regulation. This consultation document represents the first step in the development of an ESMA opinion under Article 16a of the ESMA Regulation on the issues described above and sets out proposals on which ESMA is seeking the views of external stakeholders.... ESMA will consider the feedback it received to this consultation in Q2 2021 and expects to publish its opinion on the review of the MMF Regulation in the second half of 2021."

Under a "Review of the MMF Regulation" section, the report says, "The COVID-19 crisis has been challenging for MMFs.... This was particularly the case for some of the Low Volatility Net Asset Value (LVNAV) MMFs in USD and some Variable Net Asset Value (VNAV) MMFs in EUR, which are both mainly exposed to money market instruments issued by financial institutions (Commercial Paper and Certificate of Deposits). Although no EU MMFs suspended redemptions or used liquidity fees on redemptions and redemption gates, the crisis calls for further work on the resilience of the EU MMF industry as well as money markets, following previous regulatory reforms."

An "Overview of the EU MMF sector" section explains, "At the end of 2020, according to ECB data total assets of EA MMFs amounted to EUR 1,445bn. EA MMFs were mainly exposed to non-EA banks (33% of assets), EA banks (31%), other non-EA issuers (18%), EA sovereigns (18%) and EA non-financial corporates (4%). Overall, MMFs are equally exposed to EA issuers (EUR 711bn, 49% of total assets) and non-EA issuers (EUR 734bn, 51%)."

It states, "The market footprint of MMFs is very high globally: US and EU USD MMFs are estimated to hold more than half of the USD CP market, and EU MMFs are estimated to hold around half or EUR and GBP financial CP markets. It is however not possible to provide more statistics and analysis on the size of global money markets and the role MMFs are playing there, because of the significant data gap."

ESMA comments, "EU MMFs are mainly held by institutional investors as there is a negligible share of retail investors in EU MMFs. Around 53% of MMF shares are held by foreign investors, while EA residents hold around 47% of the Net Asset Value (NAV). Within the EU, insurers, pension funds and investment funds are the main investors among financial institutions, while corporate treasurers also account for a significant share of the market."

Discussing "Potential areas of reform of the MMF Regulation," they write, "In light of i) the above assessment in section 2.3 on the ongoing work at international level on the need for MMF reforms and ii) the assessment of certain key features of the difficulties faced by MMF during the COVID-19 crisis in March 2020 included in section 2.2 of this consultation document, ESMA is of the view that a number of proposals of amendments to the MMF Regulation could be considered, in view of its review to be completed in 2022, according to Article 46 of the MMF Regulation."

The section says, "Article 46 of the MMF Regulation specifies that '[b]y 21 July 2022, the Commission shall review the adequacy of this Regulation from a prudential and economic point of view, following consultations with ESMA and, where appropriate, the ESRB, including whether changes are to be made to the regime for public debt CNAV MMFs and LVNAV MMFs'. Given that this review clause includes the need for consultation with ESMA, the corresponding input should presumably be provided to the Commission in the course of 2021, or in early 2022. It is therefore appropriate to consult at this stage on the areas of reforms that ESMA will need to consider."

The report explains, "This section intends to set out the potential different policy options that could be envisaged to address the issues highlighted in section 2.2, focusing on those issues that may be addressed through a modification of the requirements of the MMF Regulation. It is important to specify that these potential policy options are, at this stage, preliminary and no decision has been taken yet on the advice that ESMA would give to the Commission in the context of the above mentioned article 46 of the MMF Regulation."

It tells us, "It is also important to specify that for the sake of the assessment of the potential policy options that are described in the next paragraphs, it has been assumed at this stage that the assessment of the role and economic function played by MMFs in the EU, as conducted by the Commission when the MMF Regulation was first issued, is still relevant. ESMA is of the view that the main objective of the review of the MMF Regulation should be to make MMFs more resilient to stressed market conditions without the need of (implicit) central bank support and to reduce their contribution to the building up of risk in the financial system.... In addition, this will allow to preserve the current economic functions played by MMFs, in particular cash management, and short-term funding to issuers."

Finally, ESMA adds, "It should be highlighted that the analysis and assessment of investor behaviour during the March/April episode is key when drawing conclusions on the policy options. However, while there are ongoing exchanges on this issue at international level, data is scarce and information limited, due in particular to the status of the current reporting framework for MMFs. ESMA would therefore welcome any feedback, based on accurate data, on the behavior of investors during the MMF March 2020 crisis, and how this behavior has affected the shape of the MMF crisis."

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