EU says changes needed to bolster money market funds post-COVID

Chair of European Securities and Markets Steven Maijoor speaks at a European Financial Forum event in Dublin
FILE PHOTO: Chair of European Securities and Markets Steven Maijoor speaks at a European Financial Forum event in Dublin, Ireland February 13, 2019. REUTERS/Clodagh Kilcoyne

November 13, 2020

By Huw Jones

LONDON (Reuters) – Fund managers must improve readiness for shocks after the fallout from COVID-19 on markets in March and changes are needed to make money market funds more resilient, the European Union’s securities watchdog said on Friday.

Markets suffered bouts of extreme volatility in March as countries went into lockdown to fight the pandemic, tipping economies into steep recession.

Funds exposed to real estate and corporate debt showed they were able to respond adequately to redemption pressures with only a limited number of temporary suspensions, the European Securities and Markets Authority (ESMA) said following its review of the sector.

It said that 0.4% of assets under management in corporate debt and real estate funds were temporarily suspended at the end of March, double the figure for all funds.

But echoing concerns from regulators in Britain and the United States, ESMA singled out money market funds (MMF) that only avoided suspension in March because central banks injected billions of euros and dollars to avoid markets freezing up.

“I think further reforms of MMFs are needed. However, at this stage, there is no common view on which changes should be contemplated, and we need to assess various policy options very carefully,” ESMA Chair Steven Maijoor said.

Regulators from the Group of 20 Economies (G20) will set out potential reforms next week for “non-banks” like money market funds in light of the March turmoil in markets.

ESMA’s review found “shortcomings that must be addressed” to enhance real estate and corporate debt funds’ preparedness to future shocks.

“We have identified a number of priority areas that funds and supervisors should focus on to address potential liquidity risks in the fund sector,” Maijoor said.

“We also encourage swift proposals to amend the EU legislative framework to ensure that liquidity management tools are widely available to asset managers across the EU,” Maijoor said.

Macroprudential rules, like banks already have, to take sector-wide action in the asset management sector during market shocks, were also needed, he added.

(Reporting by Huw Jones; Editing by Rachel Armstrong, William Maclean and Emelia Sithole-Matarise)