The European Securities and Markets Authority (Esma) has launched a public consultation on how money market funds (MMFs) across Europe should conduct internal stress tests, with responses set to be used to update the guidelines served up by the pan-European regulator to managers in the region.
The 2017 guidelines on stress tests were published in March 2018, but Esma is seeking further insight into the systemic risks posed by this type of collective investment, which often invest in highly liquid and low risk short term debt instruments.
The Money Market Funds Regulation (MMFR) require regular stress tests as part of risk management and regulatory disclosure.
Steven Maijoor, Esma chair, (pictured), said: “MMFs, by investing in short-term debt instruments, are important products for both professional and retail investors – they also play an important role for retirement schemes. To address risks to stability and investor protection, coherent and regular stress testing is an important tool to achieving sound risk management and supervision. The Esma guidelines will contribute to ensure the consistent, efficient and effective application of the MMF Regulation.”
Among the risk factors that Esma expects managers to consider when doing stress tests are:
- liquidity changes of the assets held in the portfolio of the MMF
- credit risk, including credit events and rating events
- changes in interest and exchange rates
- spread changes of indexes to which interest rates of portfolio securities are tied
- macroeconomic shocks.
The reason Esma is seeking to update its guidelines annually is to properly reflect latest market developments.
However, it is now seeking the consultation, including feedback from retail investors, to gauge views of the proposed methodology, risk factors, data and impact calculations. The consultation is open until 1 December 2018.