The European Commission recently published, a "Report on the Adequacy of the Money Market Funds Regulation from a Prudential and Economic Point of View." The paper explains, "The Money Market Funds Regulation (the MMF Regulation) entered into force in 2018 and set out a comprehensive framework for EU money market funds (MMFs). It recognises their major role in financing the economy, in particular short-term funding to public authorities and corporates, and meeting investors' need. EU MMFs offer a liquid, well-regulated investment tool that contributes to meeting the objectives of the Savings and Investments Union." (See Friday's News, "European Money Fund Assets Inch Down to $1.67 Tril; MFI Intl Holdings," which comments, "The FCA, which regulates markets in the U.K., published a policy paper titled, 'Reforms to Money Market Fund Regulations.'"
The EC's Summary says, "The MMF Regulation includes safeguards that aim to strengthen MMF resilience, which is essential for investors' trust in the product. The Commission's 2023 MMF Report found that the framework is broadly effective in reducing liquidity risks and identified certain aspect of the liquidity risks requiring further assessment. This report presents the results of the complementary analytical work carried out on liquidity risks, and the conclusions on better MMF resilience."
It continues, "MMFs are diverse and experience varying levels of liquidity shocks based on their type (variable, low volatility or constant net asset value – VNAVs, LVNAVs and CNAVs, respectively), currency, investors and uses. Due to these differences, MMFs keep liquidity reserves above the required minima, considering the specific characteristics of each fund and their stress test outcomes. This cautious approach by MMF managers can be explained by investor scrutiny (enabled by transparency rules in the MMF Regulation), regulatory supervision and concern over reputational risks."
The EC states, "MMFs have demonstrated their capacity to reconstitute liquidity buffers even during periods of market stress, reflecting active liquidity risk management and effective supervisory oversight. This suggests that the different mechanisms set out in the MMF Regulation have been implemented consistently, under the coordination of the European Securities and Markets Authority (ESMA)."
They tell us, "This report has assessed the resilience of weekly liquid assets (WLAs), which is considered a useful WLA benchmarks for liquidity risk management and supervision. Based on extensive data analysis, this report concludes that the appropriate WLA benchmark levels ('market resilience levels') are 20% for VNAV MMFs and 40% for CNAV and LVNAV MMFs. The Commission therefore believes that these market resilience levels may serve as benchmarks for MMF managers, in particular in risk management roles, and national competent authorities, to help identify situations that may warrant closer monitoring and increased supervisory engagement."
The paper's Introduction says, "MMFs play a key role in the financial system as cash management tools for corporates and an opportunity for investors looking for low volatility investment with higher returns than bank deposits. The increase in EU MMF assets in the last five years (+45% from 2019 to 2024) demonstrates the success of the framework. In the EU, 455 MMFs held about EUR 1.95 trillion in total assets at the end of 2024. EU MMFs are mainly established in Ireland, Luxembourg and France. As a result, EU MMFs offer a regulated investment tool that contributes to diversify investment opportunities and risk management, in line with the objectives of the Savings and Investments Union (SIU). They also provide additional funding options for EU businesses, enabling them to grow, innovate and create jobs."
It continues, "In 2018, the MMF Regulation came into force and laid down a comprehensive regulatory and supervisory framework for EU MMFs that 'provide short-term finance to financial institutions, corporations and governments [and] contribute to the financing of the economy of the Union' (recital 1 of the MMF Regulation). The AIFMD and UCITS Directive have been revised to introduce a strengthened and more harmonised framework for liquidity risk management, notably through the requirement for managers to select and implement at least one liquidity management tool from a prescribed list. Applicable from 16 April 2026, this framework enhances consistency across funds and reinforces overall financial stability."
The report also tells us, "The MMF Regulation provides a harmonised framework to strengthen the sector's resilience and mitigate systemic risk, with provisions covering, among other things, eligible assets, portfolio composition, valuation, risk management, leverage prohibition, transparency and reporting. The portfolio composition requirements are a central pillar of the MMF Regulation. These include provisions aiming to ensure MMFs' liquidity, such as provisions on liquidity buffers and provisions describing the role and duties of the MMF manager (such as maturity limits and credit quality, see below). The different types of EU MMFs and their key characteristics and regulatory requirements are set out in Table 1. It shows the minimum regulatory thresholds for daily and weekly liquid assets (DLA and WLA) that MMFs must hold. The minimum thresholds in the MMF Regulation are intended to ensure, together with other safeguards, that MMFs can meet investor redemptions over time."
It adds, "In 2023, the Commission published a report (the 2023 MMF Report) showing that 'the MMF Regulation successfully passed the test of liquidity stress experienced by MMFs during the COVID-19 related market turmoil of March 2020, the recent interest rate increases, and related financial asset repricing.' Although the report concluded that the framework has been broadly able to ensure the sector's resilience, it highlighted certain aspects of liquidity risk management that needed further assessment to ensure that MMFs are resilient."
Finally, they write, "As a follow-up to the 2023 MMF Report, this report assesses the functioning of MMFs based on extensive analytical work and draws on multiple data sources and consultations to examine how liquidity risks are managed. It assesses how MMFs respond to liquidity shocks and how managers mitigate liquidity risk, particularly through liquidity buffers. This report presents key findings on the assessment of MMF liquidity management (Section 2) and an analysis of appropriate market resilience levels (Section 3). The annexes provide a more in-depth technical analysis of these topics."
