ESMA’S consultation paper on the review of the methodology included in the guidelines on stress test scenarios under the MMF regulation (MMFR)

In its response to the ESMA’s review of the guidelines on stress-testing parameters for MMF, EFAMA has warned against using overly simplistic assumptions in stress testing.
EFAMA has cautioned against modelling unrealistic weekly portfolio outflows from retail investors that historically have never materialized. The assumption that MMF redemptions must and can always be met by selling assets has also been questioned by EFAMA. EFAMA has suggested that asset managers‘ experience over recent market events suggests otherwise.
EFAMA has reiterated that, in the course of the March 2020 and over recent episodes of market stress, liquidity management proved challenging for all short-term funding market participants. Throughout these episodes of market turmoil, European MMFs have continued to meet redemption demands without breaching key EU MMFR requirements, including all of the liquidity-related ones. Moreover, they have continued to provide a high-quality, well-diversified, and liquid investment option at a time when markets underwent considerable stress, while offering both investors and regulators complete transparency around funds‘ portfolio holdings and liquidity levels.
EFAMA has raised concerns about some of the proposed amendments to the existing calibration, as well as questioned the overall rationale and feasibility of conducting „macro-systemic shock“ scenarios, which could yield „false positives“, particularly in the absence of sufficient and reliable market data on money market instruments.
EFAMA has suggested that stress-test parameters could benefit from a more holistic calibration that considers MMFs‘ interactions with other key intermediaries active in short-term funding markets. EFAMA has also highlighted that the volume of asset sales is often only a fraction of an MMF’s outflows, given that the latter can be honoured by managers without necessarily dipping into the underlying markets.