Friday September 28 2018
News Source: Fund Regulation
Focus: Money Market Funds
Country: European Union
On 28th September 2018, the European Securities and Markets Authority (ESMA) opened a public consultation on how European money market funds (MMFs) should conduct their internal stress testing. While MMFs invest in highly liquid and low risk short-term debt instruments, they play an important role in the financial system and are interconnected with other key market participants.
The Money Market Funds Regulation (MMFR) requires managers of MMFs to conduct regular stress tests as part of their risk management and regulatory disclosure. Funds must put in place sound stress testing processes, including identifing stress events, or future changes in economic conditions, and assess the impacts these different scenarios may have on (the net-asset-value and/or liquidity of) the MMF.
ESMA, to capture coherently MMFs’ risks, has developed draft guidelines for their stress testing. The consultation paper is the first step in developing detailed specifications for these stress tests by proposing common parameters and scenarios which take into account the following hyphothetical risk factors:
- liquidity changes of the assets held in the portfolio of the MMF;
- credit risk, including credit events and rating events;
- changes in interest and exchange rates;
- spread changes of indexes to which interest rates of portfolio securities are tied; and
- macro-economic shocks.
In March 2018, ESMA published its 2017 Guidelines on stress tests for MMFs, which will be updated following the consultation so that managers of MMFs have the information needed to fill-in the required fields in the reporting template. The guidelines need to be updated at least every year taking into account the latest market developments.