MMF stress test scenarios - ESMA publishes updated guidelines

What's been published?

On 19 December 2023, ESMA published a Final Report (the Report), which sets out guidelines on stress test scenarios under the Money Market Funds (MMF) Regulation.

Why has it been published?

Article 28 of the MMF Regulation requires ESMA to develop guidelines establishing common reference parameters of the scenarios to be included in the stress tests that MMFs or their managers must conduct.

The guidelines must be updated at least annually to take market developments into account. The previous guidelines for 2022 were formally published on 27 January 2023.

In January 2023, ESMA published a consultation paper, containing its proposals to amend the methodology set in section 4.8 of the guidelines.

The consultation ran to on 28 April 2023 and the feedback received has helped ESMA in finalising the revised guidelines.

What does it contain?

ESMA's final draft guidelines and the calibration of the scenarios for 2023 can be found at Annex II of the Report (with changes from the 2022 Guidelines highlighted in red) and include:

• updated guidelines on the methodology to implement the scenario related to the hypothetical changes in the level of liquidity of the assets held in the MMF's portfolio; and

• updated guidelines specifying the type of stress tests to be conducted and their calibration. (This enables MMF managers to fill in the corresponding fields in the reporting template under the MMF Regulation.)

Section 3 of the Report summarises ESMA's response to views received as part of the consultation process.

What happens next?

The draft guidelines contained in the Report will be translated into the official languages of the EU and, in due course, formally published on the ESMA website - they will take effect two months after publication.

Between now and the new guidelines starting to apply, managers should use the parameters set out in the 2022 Guidelines and report to the relevant NCA in accordance with Article 37 of the MMF Regulation.

However, once the updated guidelines are effective, managers must then use the new parameters in their quarterly reports.