ESMA aims to inoculate funds against liquidity issues

In response to the liquidity issues experienced by money market funds when the pandemic hit, sparking financial market turmoil, European regulators are proposing a series of reforms.

The European Securities and Markets Authority (ESMA) issued an opinion, setting out proposed reforms to the rules for money market funds, designed to enhance the sector’s resilience by addressing liquidity issues and the “threshold effects” for funds that have fixed net asset values.

Among other things, the proposals would decouple regulatory requirements from funds’ suspension, gate and redemption fee features; mandate that funds have at least one liquidity management tool available; revise liquidity ratio requirements, including the pool of eligible assets that can be used to satisfy these requirements; and, reinforce funds’ ability to temporarily use liquidity buffers in times of stress.

They also seek to bolster the sector’s capacity to withstand a crisis, including measures to enhance reporting requirements and stress testing, while also clarifying external support requirements, and introducing new disclosure requirements.

The regulator said that the proposed reforms aim to address the “significant liquidity difficulties” that arose among money markets, “during the initial outbreak of the Covid-19 pandemic in March 2020.”

At the time, funds came under liquidity pressure as assets became tougher to sell, while investor redemption demands also spiked.

Commenting on the proposals, ESMA chair, Verena Ross, said that they are designed to, “ensure that [funds] will be able to meet investors’ redemption requests, and that this will continue to be the case also in the future.”

“These reforms will help to improve the overall stability of financial markets, by reducing the risk of liquidity stress,” she said.

The ESMA delivered its proposals to the European Commission, and said that it will work closely with the commission on its reforms.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.