A press release entitled, "ESMA Proposes Reforms to Improve Resilience of Money Market Funds" explains, "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." See ESMA's "Final Report - ESMA Opinion on the Review of the Money Market Fund Regulation and their "Final Report - Guidelines on Stress Test Scenarios Under the MMF Regulation 2021."
ESMA explains, "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."
Chair Verena Ross comments, "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 release states, "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."
Additional "key policy measures include: "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."
It continues, "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."
The statement adds, "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."
The Executive Summary of the "Final Report - ESMA Opinion" says of the "Reasons for publication," "The Money Market Fund Regulation (2017/1131) (MMF Regulation) provides that 'by 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."
It continues, "At international level, several workstreams have assessed 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 MMF Regulation and its implementing measures."
The report tells us, "Following the publication of a consultation document, this final report contains in annex I the ESMA opinion2 which outlines proposals on the review of the MMF Regulation, as well as in annex IV the quantitative input to the Commission for the purpose of its review.... Section I explains the background to the ESMA proposals on the review of the MMF Regulation. Annex I contains the ESMA Opinion on the review of the MMF Regulation. Annex II contains the Feedback statement from the consultation document on the review of the MMF Regulation, that ESMA published while developing the present Final report. Annex III contains the advice of the Securities and Markets Stakeholder Group. Annex IV contains the ESMA quantitative input on the MMF sector."
It adds, "Following the receipt of the ESMA Opinion, the European Commission will review the adequacy of the MMF Regulation as foreseen in its review clause." (For more on European Money Fund Regulations, see these Crane Data News articles: "IMMFA's Veronica Iommi Talks Regulations at European MF Symposium" (10/25/21), "Sept. MFI Profile: BlackRock's Beccy Milchem on European MMF Issues" (9/21/21), "JPMAM, HSBC, Invesco Comment to ESMA On European MMF Regulations" (7/29/21), "ESMA Posts Consultation Report on Potential Reform of European MMFs" (3/30/21).)
Finally, ESMA opinion explains, "Based on the abovementioned categorization of the vulnerabilities of MMFs, and corresponding corrective measures proposed to be taken, ESMA suggests the following package of reforms, and corresponding amendments of the MMF Regulation, which will be detailed in the next sections of the present Opinion.... Major reforms aimed at addressing threshold effects for constant NAV MMFs: Removing the possibility to use amortized costs for LVNAVs; Decoupling regulatory thresholds from suspensions/gates/redemption fees for LVNAV/CNAV; [and] Major reforms aimed at addressing liquidity related issues.... Mandatory availability of at least one LMT (liquidity management tool) for all MMFs; activation of these LMTs by the manager of the MMF." ("Such LMTs could be, in particular, anti-dilution levies (ADL), liquidity fees, and could also include swing pricing.")
The measures also include: "Amendments of the Daily liquidity assets ratios (DLA)/ Weekly liquidity assets ratios (WLA) of VNAV (and LVNAV) MMFs, as well as the pool of eligible assets, including public debt assets, which can be used to satisfy these liquidity ratios.... Inclusion/Reinforcement of the possibility to temporarily use liquidity buffers in times of stress.... Complementary/crisis preparedness reforms, aimed at enhancing the MMF resilience as a whole, in view of any future crisis events they might have to face.... Enhancement of MMF reporting requirements.... Enhancement of the MMF stress testing framework.... Clarification of the requirements on external support.... New disclosure requirements on ratings of MMFs."
