ESMA consults on reforms to the Money Market Funds Regulation

On 26 March 2021, ESMA published a consultation paper (the CP) on the review of the Money Market Funds Regulation (the MMF Review).

The MMF Regulation was published in the Official Journal in June 2017 and has applied since July 2018 (although it was amended by a Commission Delegated Regulation before it had come into effect).

Why is there a review? And what will it cover?

Article 46 of the MMF Regulation requires the Commission to review, by 21 July 2022, the Regulation's adequacy from a prudential and economic point of view. Among other things, the review is expected to

• analyse the Regulation's impact on investors, MMFs and managers of MMFs in the EU

• assess the role that MMFs play in purchasing debt issued or guaranteed by Member States

• take into account the specific characteristics of the debt issued or guaranteed by Member States and the role that the debt plays in financing Member States

• take into account the Regulation's impact on short-term financing markets

• take into account other international regulatory developments.

What does ESMA's CP put forward?

The CP is ESMA's first step in its work to assist the Commission with the MMF Review.

It notes the challenges confronting MMFs as a result of the COVID-19 pandemic and that a number of EU MMFs have faced significant liquidity issues (especially in the period of acute stress in March 2020) as they had to deal with a large scale redemptions combined with a severe deterioration of liquidity of money market instruments.

In this context, the CP discusses potential reforms of the EU MMF regulatory framework that could be envisaged, bearing in mind the lessons learnt from such difficulties.

ESMA's view is that a number of amendments to the MMF Regulation should be considered, including reforms which

• target the liability side of MMFs - for example, decoupling regulatory thresholds from suspensions/gates or requiring MMFs to use swing pricing and/or anti-dilution levies / redemption fees

• target the asset side of MMFs - for example, increasing liquidity buffers and/or reviewing their calibration and/or making them usable/countercyclical

• target both the liability and asset sides of MMFs - for example, reviewing the status of certain types of MMFs, with the following possible outcomes being mentioned:

  • elimination of stable net asset value (NAV) MMFs
  • conversion of public debt constant net asset value (CNAV) and low volatility net asset value (LVNAV) MMFs to Public Debt VNAVs
  • conversion of only LVNAV MMFs to VNAV

• are external to MMFs - for example, assessing whether the role of sponsor support should be modified (e.g. by amending the current prohibition of sponsor support under Article 35 of the MMF Regulation) or enhancing MMF reporting to and stress testing by authorities.

The CP also invites feedback on other proposals, such as ratings of MMFs and the possible establishment of a liquidity exchange facility which would serve as a centralised source of liquidity and credit during periods of stress.

What happens next?

The consultation period closes on 30 June 2021. ESMA will then consider the feedback it has received and intends to publish an opinion on the MMF Review during the second half of 2021.