A press release entitled, "IIF Comments on ESMA Consultation Report on EU MMF Regulation," tells us, "The Institute of International Finance (IIF) submitted a response to the European Securities and Markets Authority (ESMA) request for comment on the topic of EU Money Market Fund Regulation – legislative review on June 25." The IIF is a "global association of the financial industry" focused on risk management and comprised of mainly multinational banks. On March 26, 2021, the European Securities and Market Authority published a press release entitled, "ESMA Consults on the Framework for EU Money Market Funds," which requested feedback on potential European money market fund reforms. (Comments to ESMA are due by June 30. See our March 30 News, "ESMA Posts Consultation Report on Potential Reform of European MMFs," and our March 19 News, "ESMA Report Examines Vulnerabilities in European Money Market Funds.")

The release explains, "The IIF recognizes that the European Union has advanced considerable legislative efforts to promote the smooth functioning and resilience of MMFs in the region. However, the unprecedented COVID-19 crisis has revealed some further structural vulnerabilities in MMF and short-term funding markets that should be addressed through a holistic review of the impact of market structure on the resilience of the short-term funding markets."

It comments, "The IIF believes that a holistic review of market structure impacts can produce targeted and proportionate measures for the specific segments of the MMF sector and short-term funding markets that experienced significant stress in the March 2020 market turmoil. We also strongly encourage ESMA to coordinate its initiatives with respect to the NBFI sector, short-term funding markets and MMFs with other standard-setting bodies and regulators and supervisors in key jurisdictions."

The release adds, "The response letter reiterates the IIF's frequent calls to seek globally harmonized regulation and the application of the principle of 'same activity, same risk, same regulation' to the greatest extent possible, taking into account local specificities, and jurisdictional differences in market and product structures. The letter also includes IIF’s response to the 12 questions raised in the consultation report."

The full comment letter, addressed to Anneli Tuominen and Natasha Cazenave of ESMA, says, "The Institute of International Finance (IIF) and its member firms welcome the opportunity to contribute to the work of the European Securities and Markets Authority (ESMA) on potential reform measures for Money Market Funds (MMFs), as highlighted in the Consultation Report: EU Money Market Fund Regulation – legislative review (Consultation Report). This effort is a significant contribution to the initiatives being undertaken at the global level by the G20, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) to enhance the resilience of the non-bank financial intermediation (NBFI) sector while preserving its benefits."

It states, "We would like to highlight some of the work programs and initiatives currently underway among the global financial services standard-setting bodies. As the Report acknowledges, the FSB has announced in its 2021 Work Programme that one of the key deliverables this year would be 'policy proposals to enhance MMF resilience and a report on progress in the work programme for strengthening NBFI resilience'. IOSCO has also stated that it will further contribute 'to FSB policy work relating to MMFs and the underlying short-term funding-markets. We welcome these initiatives, as they are focused holistically at the NBFI sector and at the short-term funding markets, rather than narrowly at MMFs."

The IIF continues, "We encourage ESMA to take a similar holistic approach that focuses on the root causes of the March 2020 market dislocations in order to propose a comprehensive set of reforms that would improve market functioning and increase market resilience to a range of possible future disruptions arising from different sources or catalysts. We also encourage ESMA to engage in dialogue with IOSCO to collaborate and exchange views on appropriate measures to enhance the resilience of MMFs and short-term funding markets, again taking into account important market and product structures and market specificities across jurisdictions."

They write, "We appreciate the attention that is being given at the global, regional and jurisdictional levels to these important issues. However, we are concerned about the potential for these initiatives to lead to regulatory fragmentation, conflicting or duplicative regulation or supervision, or potential barriers to market access or to a level playing field for all market participants given the global nature of financial markets and participants."

IIF MD Andres Portilla comments, "ESMA's active engagement in global efforts among industry standard setters and coordination with regulators in other key markets could help reduce regulatory and market fragmentation by carefully aligning measures to address the need for greater resilience in MMFs and short-term funding markets. We reiterate the IIF's frequent calls to seek globally harmonized regulation and the application of the principle of 'same activity, same risk, same regulation' to the greatest extent possible, taking into account local specificities, and jurisdictional differences in market and product structures."

He explains, "We encourage ESMA and other standard setters, regulators and supervisors to coordinate their review of the need for reforms with the central banks that supported the money markets in some jurisdictions during the March 2020 period of stress. Coordination with central banks could help to devise holistic solutions that minimize the risk of moral hazard by addressing the root causes of the March 2020 market dislocations and by improving short-term funding market functioning."

The letter adds, "We understand that various national and regional authorities are issuing different surveys to market participants in an effort to better design regulatory or supervisory reforms for the MMF sector. While we appreciate the need for additional information in order to construct an appropriate official sector response, these requests for information or data should be coordinated through a central global standard setter or authority such as IOSCO. This coordination could also facilitate a better exchange of information among regulators and supervisors which, in turn, could lead to collaborative solutions."

Finally, it says, "We also encourage ESMA to consider a greater focus on market participants' own stress tests and scenario analyses in lieu of standardized market-wide scenarios. Bespoke tests and scenarios can be useful techniques to field test different liquidity risk management tools and business continuity plans designed to respond to stressed market conditions. The IIF appreciates ESMA’s openness to seek public comment on the Consultation Report. We remain committed to active participation and engagement in the discussion of potential reforms to MMF Regulation."

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