ALFI response to ESMA’s consultation on the review of the methodology included in the Guidelines on stress test scenarios under the MMF Regulation

ALFI has responded to the the ESMA consultation on the review of the methodology included in the Guidelines on stress test scenarios under the MMF Regulation.
ESMA’s consultation period ended on 28 April 2023 and is related to a proposed update of the stress-testing methodologies applicable in the context of Article 28 of the MMF Regulation. ALFI generally supports the use of data by authorities for information and monitoring purposes in the context of systemic risk assessment. However, the response also highlights the need for further clarifications and guidance to ensure that the current Guidelines are being implemented correctly. ALFI also agrees with ESMA’s approach of not including a climate scenario in the stress test methodology, given the short-term nature of instruments and relatively small exposure to high climate risk industries.
More specifically, ALFI’s response to the consultation highlights the industry’s experience concerning the current Guidelines, including credit, FX, interest rate, and redemption scenarios. The response notes that since the introduction of the Guidelines in 2019, MMF managers have devoted significant resources to the implementation of the stress scenarios. The industry and supervisors are currently yielding the benefits from this initial investment, allowing for efficient, timely, and accurate generation of stress-testing results while ensuring smooth adjustments to yearly calibration updates.
The response also highlights some challenges and difficulties encountered in understanding the requirements of the different stress tests in the current Guidelines. One exception lies in the scenario of reverse liquidity stress test, which requires estimating the maximum weekly tradable amount that can be liquidated with the portfolio allocation still being in line with all regulatory requirements of the MMF without distorting the portfolio allocation.
ALFI’s response also provides views on the different options proposed by ESMA, including the price impact of asset sales, the calculation of the size and market depth of the money markets MMFs invest in, and the threshold in option 2 above which the cost of liquidating positions may increase.