EU sets out first stress test for money market funds

[LONDON] The European Union's trillion euro money market funds sector must complete its first "stress test" to assess its ability to cope with market shocks by 2020 under new guidelines from the bloc's regulators published on Friday.

The European Securities and Markets Authority (ESMA) said money market funds (MMFs) and their managers are expected to measure the impact of a range of stress test scenarios.

"Money market funds offer high liquidity at lower risk than other funds, contributing to the funding of banks, governments and corporates," said Steven Maijoor, chair of ESMA.

"However, due to their important role in the money market, any disruption affecting MMFs may impact financial stability. Stress testing is an important tool to assessing and mitigating potential stability risks."

MMFs issue shares to investors to finance their activities and must be able to meet daily redemptions, or investors wanting their money back.

The sector accounts for about a third of short-term debt issued by banks and a fifth of short-term securities issued by companies and governments, according to European Commission figures.

The sector will be required to send the results of the test to their national supervisor in the first quarter of 2020, ESMA said.

It put out the guidelines to public consultation last year and respondents said they were too prescriptive and needed more flexibility.

"The guidelines have been revised to facilitate the implementation, improve the consistency and reduce the costs," ESMA said.

The test will look at how funds cope with heavy redemptions, major market shocks, and liquidity stresses.

MMFs include alternative investment funds or mutual funds that are managed by alternative investment fund managers, mutual fund management companies or investment companies. 

REUTERS