ESMA updates the parameters and methodology for MMF stress testing

ESMA has released a Final Report on Guidelines on stress test scenarios under the MMF Regulation. The update includes changes in methodology to simulate hypothetical liquidity changes in MMF portfolios and an annual calibration of risk parameters. The adjustments are based on stakeholder feedback and introduce parameters reflecting liquidity stress in the money market and a new risk factor representing the additional cost of selling securities in stressed market conditions.
The 2023 update reflects prevailing systemic risks in the financial system amid low growth, elevated inflation, and higher interest rates. Parameters related to hypothetical interest rate movements have significantly increased compared to the 2022 Guidelines. ESMA collaborated with the ESRB and the ECB in calibrating new risk parameters.
The revised guidelines, effective two months after translation and publication, mandate the use of the updated parameters for the first reporting period following the application. The section related to stress test scenarios will be updated annually based on market developments.
The report also discusses feedback received during a consultation, addressing issues such as the challenges of implementing current guidelines, the introduction of a price impact in stress testing, and the assessment of systemic risk. ESMA acknowledges concerns over data gaps and challenges in calibration but decides to proceed with a simple methodology that can be reviewed as new data becomes available. The report also outlines the process for NCAs‘ compliance notification and the application timeline for the updated guidelines.