September 28, 2018

ESMA launched a consultation on the draft guidelines on stress test scenarios under the Regulation on Money Market Funds (MMFs). Stakeholder views are sought, especially on the draft methodology, risks factors, data, and the impact calculation. The consultation is open for comments until December 01, 2018. ESMA will use the feedback received to finalize its guidelines in the first quarter of 2019.

The MMF Regulation requires managers of MMFs to conduct regular stress tests as part of their risk management and regulatory disclosure. Funds must put in place sound stress testing processes, including identifying stress events, or future changes in economic conditions, and assess the impact these different scenarios may have on (the net-asset-value and/or liquidity of) the MMF. To coherently capture the risks of MMFs, ESMA has developed these draft guidelines for stress testing. This consultation paper is the first step in developing detailed specifications for these stress tests by proposing common parameters and scenarios that take into account the following hypothetical risk factors:

  • 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
  • Redemptions and spread changes of indexes to which interest rates of portfolio securities are tied
  • Macro-economic shocks

The final guidelines will include the calibration of the stress testing scenario for implementation. The guidelines are to be updated annually, based on the latest market developments. In March 2018, ESMA had published its 2017 guidelines on stress tests for MMFs, which will be updated following this consultation so that managers of MMFs have the information needed to fill-in the required fields in the reporting template. .

 

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Comment Due Date: December 01, 2018

 

Keywords: Europe, EU, Banking, Asset Management, MMF Regulation, Money Market Funds, Stress Testing, Guidelines, ESMA 

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