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The FCA and ESMA Spotlight Resilience of MMFs


MMFs are a type of open-ended investment fund. They are considered to be a low-risk investment giving investors credit risk diversification and a place to hold, rather than grow, their assets. Over the past two years MMFs have come under severe strain across major currencies, as investors sought access to cash.


There is concern amongst authorities that underlying vulnerabilities within MMFs and threats to financial stability remain. Financial Stability Board (FSB) members have agreed to assess and address the vulnerabilities that MMFs pose in their country.Today, 23/05/2022, the FCA have released a joint Discussion Paper (DP) aiming to gather views to inform the UK’s authorities’ development of MMF reform proposals. The FCA are inviting feedback on the reform options discussed in the DP by 23 July 2022 and will consider this in deciding whether to consult on MMF reform proposals. The FCA has also issued new non-handbook guidance on the UK MMF Regulation.

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, is issuing an Opinion containing proposed reforms to the regulatory framework for EU Money Market Funds (MMFs) under the Money Market Funds Regulation (MMFR). The proposals will improve the resilience of MMFs by addressing in particular liquidity issues and the threshold effects for constant net asset value (CNAV) MMFs.This follows from ESMA’s February 2022 change proposals to the MMF regulation, also intended to make MMFs more resilient. ESMA’s proposals are consistent with those of the ESRB, and aim to ensure that MMFs will be able to meet investors’ redemption requests. The ESMA Opinion included the following key policy measures aimed at improving the resilience of MMFs:

  1. Addressing the threshold effects for constant net asset value (CNAV) MMFs, by:
  2. Removing the possibility to use amortized costs for low volatility NAV (LVNAVs) MMFs; and
  3. Decoupling regulatory thresholds from suspensions, gates and redemption fees for LVNAV/CNAV MMFs.
  4. Addressing liquidity related issues by:
  5. Ensuring mandatory availability of at least one liquidity management tool for all MMFs;
  6. Amendments of the Daily liquid asset/ Weekly liquid assets ratios as well as the pool of eligible assets, including public debt assets, which can be used to satisfy these liquidity ratios; and
  7. Inclusion/Reinforcement of the possibility to temporarily use liquidity buffers in times of stress.

In addition, ESMA proposed complementary reforms aimed at enhancing MMFs’ preparedness for a crisis. These include enhancements of reporting requirements and the stress testing framework, as well as clarification of the requirements on external support and new disclosure requirements linked to the rating of MMFs.In February 2022 ESMA also published the annual update of the Guidelines on MMF Stress tests.