The European Securities and Markets Authority (ESMA) has published new guidelines on stress testing and reporting on money market funds to national competent authorities.
It issued the new guidelines to make sure companies across the EU are compliant with the Money Market Fund (MMF) Regulation.
For instance, the guidelines establish common reference parameters of the stress test scenarios MMFs or managers of MMFs should include in their stress scenarios.
Essentially, this means they should explain how they would respond to hypothetical changes. These hypotheticals include things like evolving liquidity levels, credit and interest rate risks, redemptions levels, widening or narrowing of spreads among indexes to which interest rates of portfolio securities are tied and macro-economic shocks.
The guidelines also show how to fill in the reporting template on money market funds that managers of MMFs will transmit to competent authorities by Q1 2020.
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 corporates. However, due to their important role in the money market, any disruption affecting MMFs may impact financial stability. Stress testing is an important tool to 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.”
The guidelines will be updated once every year to make up for changes for how the market develops.
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