EUROPEAN UNION: ESMA Keynote Address Relating to Money Market Funds

Wednesday December 6 2017

On 5^th December 2017, the European Securities and Markets Authority (ESMA) addressed Money Market Funds in a keynote speech.

The European Commission published its proposal for a Regulation on MMF more than four years ago. That proposal followed extensive work at EU and international level in this area, including the ESRB Recommendation of 2012 and the IOSCO document of the same year.

There were three main deliverables for in the final MMF Regulation: technical advice on Level 2 measures, implementing technical standards on the reporting requirements and guidelines on stress testing.

Turning to the technical advice first of all, this concerned two key aspects: eligibility of assets for reverse repurchase agreements and the assessment of credit quality. For the advice on reverse repo , it important to recognise the extensive requirements that were already in the Regulation itself, particularly on credit quality, so decided to focus on developing the liquidity requirements further. The approach that ESMA finally adopted, and on which stakeholders provided generally positive feedback, set out a number of quantitative and qualitative factors for MMF managers to take into account. These included the time to maturity of the assets and their price volatility. ESMA also specified that, depending on the outcome of the assessment of the liquidity factors, appropriate haircuts should be applied. In this context, it is important to note that some minimum haircuts should be in place.

The second aspect of the technical advice dealt with the assessment of credit quality. Here ESMA were able to take inspiration from a range of existing rules and requirements, including ESMA’s own work. For example, for the advice on the validation of the credit quality assessment methodology, ESMA benefited from similar work that had already been done in the context of credit rating agencies and the related ESMA guidelines on the validation and review of Credit

Rating Agencies’ methodologies. It was nevertheless important not simply to copy and paste those provisions but to adapt them to the specific circumstances of the MMF sector.

Moving on now to the implementing technical standards (ITS) on reporting. Some stakeholders felt that ESMA had gone too far and that they were imposing unnecessary burdens. However, as ESMA pointed out at the time, the idea was to test views of market participants on as broad a set of information as possible so that we would get precise feedback on each aspect. In developing proposals ESMA also tried to ensure that there was as much consistency with the AIFMD reporting requirements as possible. That is not to say that ESMA simply assumed that information that was relevant in the AIFMD context would also be appropriate for MMF. Rather, for data that ESMA felt MMF managers should report, we tried to ensure that it would be reported in the same way and in the same format as under the AIFMD.

The last deliverable to mention are the guidelines on stress testing. The MMF Regulation obliges each MMF to have in place sound stress testing processes that allow the identification of possible events or future changes in economic conditions which could have unfavourable effects on the MMF. The manager of the fund has to assess the potential impact that those events or changes could have, and must conduct regular stress tests in order to do so. The Regulation obliges ESMA to issue guidelines with a view to establishing common reference parameters of the scenarios to be used in the stress tests. The Level 1 text is already quite specific about the factors that need to be taken into account but it is not exhaustive, so ESMA have been able to develop useful guidance on each of these factors. Stakeholders broadly welcomed the approach set out for consultation but noted the difficulties in giving precise figures on the calibration of the different criteria given the constant changes in market conditions and the diversity of participants in the sector.

Therefore, in the final guidelines ESMA decided not to specify the reference parameters at this stage but will aim to make progress on this in the issue the next iteration of the guidelines. Indeed, the Regulation specifies that the guidelines have to be updated every year taking into account the latest market developments, so ESMA have already started work with the objective of issuing updated guidelines by the end of next year.

The final point to mention in relation to MMF is share cancellation. As ESMA set out in the final report, they are liaising with the European Commission on this issue since the practice raises issues of interpretation of the MMF Regulation itself. In light of the output of the Commission’s assessment, they will decide what action we should take.

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