EU watchdog proposes strengthening money market defences

FILE PHOTO: George Washington is seen with printed medical masks on the one Dollar near Euro banknotes in this illustration
FILE PHOTO: George Washington is seen with printed medical masks on the one Dollar near Euro banknotes in this illustration taken, March 31, 2020. REUTERS/Dado Ruvic/Illustration

March 26, 2021

By Huw Jones

LONDON (Reuters) – The European Union’s securities watchdog has proposed reforms to bolster the resilience of the bloc’s 1.44 trillion euro ($1.70 trillion) money market funds after stresses emerged during the turmoil that followed coronavirus economic lockdowns a year ago.

The funds are critical to oiling the economy’s wheels, used by companies for day-to-day short-term cash management by offering investments in highly liquid assets.

Most of the funds are denominated in euros, dollars and sterling and based largely in France, Ireland and Luxembourg.

“A number of EU money market funds faced significant liquidity issues during March 2020, a period of acute stress, with large redemptions from investors and a severe deterioration in the liquidity of money market instruments,” Steven Maijoor, chair of the European Securities and Markets Authority, said in a statement on Friday.

ESMA set out proposals in a public consultation, the findings of which will be used by the European Commission for a review of money market fund rules by July 2022.

Options include forcing MMFs to increase their liquidity buffers, tougher stress testing of the sector, and a requirement to use “swing pricing” or imposing a charge on investors who ask for their money back in stressed times, ESMA said.

Changes to rules on redemption “gates” or curbs could also reduce the likelihood that these are imposed.

“For example, funds could be required to obtain permission from regulatory authorities or notify regulatory authorities prior to imposing gates,” ESMA said.

Regulators at the global level are also expected to make proposals for reform of the sector in coming weeks after central banks had to inject liquidity into markets last year to avoid funds freezing up during a “dash for cash” by investors.

The funds industry has cautioned that regulators should take a broader view of events last March, saying that many parts of the financial system came under stress.

Graphic: ESMA Money Market Funds – https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjwxomvr/ESMA%20Money%20Market%20Funds.PNG

($1 = 0.8488 euros)

(Reporting by Huw Jones. Editing by Mark Potter, Kirsten Donovan)