ESMA updates guidelines on stress tests for money market funds


The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, is publishing the 2020 update of guidelines on MMF stress tests under the Money Market Funds Regulation (MMFR). The updates take account of MMFs recent experience during March 2020, particularly in relation to redemption scenarios.

The COVID-19 crisis has been challenging for MMFs. Risks have increased for MMFs and the money market instruments in which they invest. Several EU MMFs faced significant liquidity issues during the period of acute stress in March 2020.  

In this context, ESMA assessed whether the scenarios envisaged in the existing guidelines, published in 2019, are still appropriate in the current environment. Applying the 2019 scenarios in the current market environment generally leads to absolute levels of stress, similar to the levels observed in March.

However, for some parameters, the 2019 scenarios have been exceeded by the extreme market movements observed during the COVID-19 crisis and the relevant factors will be updated accordingly. This is notably the case of the redemption scenario, as some funds exceeded the 25% redemption rate for professional investors specified in the guidelines. 

Therefore the risk parameters will be modified in light of recent market developments. ESMA, in calibrating the new risk parameters, has worked closely with the European Systemic Risk Board and the European Central Bank.

Next steps

The Guidelines will now be translated into the official EU languages and subsequently published on ESMA’s website. They will become applicable two months after the publication of the translations.

The new 2020 parameters set out in the updated guidelines will have to be used for the purpose of the first reporting period following the start of the application of the updated guidelines. These guidelines shall be updated at least every year considering the latest market developments.

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