Commission publishes report on the adequacy of the EU MMF Regulation

On 20 July 2023, the European Commission (the Commission) published a Report on the adequacy of the EU’s Money Market Funds (MMF) Regulation.

The MMF Regulation came into effect at the start of 2019 in the aftermath of the global financial crisis.

Its aim was to introduce a harmonised regime for MMFs across the EU and included requirement on (among other things) portfolio composition, eligible assets, maturity, liquidity and diversification.

Why has the Commission published the Report?

Article 46 of the MMF Regulation requires the Commission to assess (and report to the Council of the EU and the European Parliament on)

• how the Regulation is functioning from a prudential and economic point of view and
• whether changes need to be made to the regime for public debt constant net asset value (CNAV) MMFs and low volatility net asset value (LVNAV) MMFs.

The Commission’s Report was preceded by a consultation by ESMA which ran from 26 March to 30 June 2021 – see our summary here.

What does the Report say?

The Commission concludes that

(a) on the plus side

• the introduction of a dedicated regime has “significantly strengthened the regulatory framework for MMFs in the EU”
• the safeguards in the MMF Regulation have been working as intended
  • the fact that no EU-based MMF needed to introduce redemption fees or gates or suspend redemptions during the COVID-19 related market turmoil of March 2020, recent interest rate increases or related financial asset re-pricing shows that MMF Regulation successfully passed the test of liquidity stress
  • EU MMFs with a focus on GBP assets also withstood the redemption pressure linked to the September 2022 gilt market stress
• the Commission believes that EU MMFs will benefit from the introduction of new harmonised rules on Liquidity Management Tools (LMTs) for open-ended funds, which are part of the deal on revising the AIFMD and UCITS Directive (see our report here) – these provisions will “further strengthen the resilience of EU MMF’s liquidity management in cases of stress”

(b) shortcomings identified

• the results of ESMA’s 2021 consultation, along with recent market developments, show that there may be scope to further increase the resilience of EU MMFs – in particular, by decoupling the potential activation of LMTs from regulatory liquidity thresholds
• certain structural problems, external to MMFs and the MMF Regulation, exist - including those linked to the underlying short-term markets.
• these problems are currently the subject of an in-depth analysis by the FSB and, in the view of the Commission, “would merit a further assessment”.