ESMA issues guidelines for money market funds
22 July 2019 Paris
Image: Shutterstock
The European Securities Markets Authority (ESMA) has issued guidelines on the stress testing of money market funds and reporting on money market funds to national competent authorities (NCAs).
This is with the aim to ensure a coherent application of the Money Market Fund (MMF) Regulation.
The guidelines include stress test scenarios in relation to hypothetical changes in MMFs’ liquidity levels, credit and interest rate risks and redemptions levels.
Additionally, this includes the widening/narrowing of spreads among indexes to which interest rates of portfolio securities are tied; and macro-economic shocks.
The stress testing guidelines establish common reference parameters of stress test scenarios MMFs or managers of MMFs should include in their stress scenarios.
Meanwhile, the guidelines on reporting provide guidance on how to fill their reporting template on money market funds that managers of MMFs will transmit to competent authorities as of Q1 2020.
According to ESMA, MMFs and managers of MMFs are expected to measure the impact of the common reference stress test scenarios specified in the guidelines.
The results should be shared with regulators through the reporting template with their Q1 2020 reports.
MMFs need to report their stress test results by 2020. The guidelines will be updated at least every year and will take into account the latest market developments.
Steven Maijoor, chair of ESMA, said: “Money market funds offer high liquidity at lower risk than other funds, contributing to the funding of banks, governments and corporations. However, due to their important role in the money market, any disruption affecting MMFs may impact financial stability. Stress testing is an important tool for assessing and mitigating potential stability risks.”
“Our guidance will ensure that the same level of care, risk management, and stress testing is applied across the European MMF sector—allowing investors to benefit from similar safeguards across different countries.”
This is with the aim to ensure a coherent application of the Money Market Fund (MMF) Regulation.
The guidelines include stress test scenarios in relation to hypothetical changes in MMFs’ liquidity levels, credit and interest rate risks and redemptions levels.
Additionally, this includes the widening/narrowing of spreads among indexes to which interest rates of portfolio securities are tied; and macro-economic shocks.
The stress testing guidelines establish common reference parameters of stress test scenarios MMFs or managers of MMFs should include in their stress scenarios.
Meanwhile, the guidelines on reporting provide guidance on how to fill their reporting template on money market funds that managers of MMFs will transmit to competent authorities as of Q1 2020.
According to ESMA, MMFs and managers of MMFs are expected to measure the impact of the common reference stress test scenarios specified in the guidelines.
The results should be shared with regulators through the reporting template with their Q1 2020 reports.
MMFs need to report their stress test results by 2020. The guidelines will be updated at least every year and will take into account the latest market developments.
Steven Maijoor, chair of ESMA, said: “Money market funds offer high liquidity at lower risk than other funds, contributing to the funding of banks, governments and corporations. However, due to their important role in the money market, any disruption affecting MMFs may impact financial stability. Stress testing is an important tool for assessing and mitigating potential stability risks.”
“Our guidance will ensure that the same level of care, risk management, and stress testing is applied across the European MMF sector—allowing investors to benefit from similar safeguards across different countries.”
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