European Commission report finds MMFs remained resilient during recent market stresses
On 20 July 2023, the European Commission (EC) published its report to the Council and the European Parliament on the adequacy of the European Union (EU) Money Market Fund Regulation (MMFR). A complete copy of the report can be found here.
The 2017 MMFR included an obligation on the part of the EC to review the adequacy of the Regulation, by 21 July 2022. However, the publication of the report was delayed and comes almost exactly 12 months after it was expected. The EC has attributed the delay to wanting to ensure its assessment of the MMFR was as holistic as possible, including analysing the performance of the sector during recent periods of market stress.
- MMFs have proven to be resilient: The EC notes that the MMFR has successfully passed multiple market stress events over the last few years, including the market turmoil related to Covid-19, the recent central bank interest rate increases and related financial asset re-pricing, and the Gilt market stress of September 2022. The EC has also recognised that no EU-based MMF had to introduce redemption fees or gates or suspend redemptions during these stress events. These experiences indicate that the safeguards in the MMFR have been working as intended.
- Use of amortised cost accounting and rounding: The EC believes the existing safeguards in the MMFR would permit the continued use of amortised cost without raising concerns about investor protection or financial stability.
- Minimum 80% public-debt quota: Under the MMFR, the EC report was also required to assess the feasibility of introducing a minimum 80% EU public debt quota. The report notes that the merits of establishing such a quota remain questionable. The report specifically highlights two practical challenges that would render a minimum quota “unfeasible in practice”:
- The availability of EU-denominated public debt.
- The possibility of negative financial stability implications, by potentially increasing the contagion risk.
- Potential areas of reform: The report noted scope to further increase the resilience of EU MMFs, notably by decoupling the potential activation of liquidity management tools from previously established regulatory liquidity thresholds.
The EC report is now with both the Council and European Parliament for further consideration. The EC can decide if and when to publish any targeted amendments to the Regulation. However, no specific time frame or requirement exists for the EC to take any further action on the report.
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