Money market funds stress tests – overall resilience whilst LVNAVs exceed threshold in liquidity and credit risk scenarios

ESMA has published an article summarizing the results of stress tests conducted on MMFs and reported to ESMA. The stress tests aimed to assess the resilience of MMFs and their ability to meet redemption requests under adverse scenarios, particularly focusing on liquidity and credit risks.
The results of the stress tests indicate that liquidity and credit risks would have the most significant impact on MMFs in adverse scenarios. However, despite the intensity of the stress episode in March 2020, the tests demonstrated that MMFs have the capability to meet redemption requests even under adverse circumstances.
ESMA highlights a concern regarding LVNAV funds, as the stress tests indicate that they would exceed the 20 basis points threshold in liquidity and credit risk scenarios. While breaching the threshold is foreseen in the MMF Regulation, these findings support the expressed concerns about the consequences of funds exceeding the threshold.
The stress tests are conducted based on ESMA Guidelines, which provide risk parameters to fund managers and are updated annually. MMF managers in the EU are required to undertake stress tests according to these rules and report the results to their national authorities and ESMA as part of their regulatory reporting.
The stress test results are used by national authorities for ongoing supervision of MMFs. The evidence from these tests will inform future enhancements of the MMF stress testing framework, scheduled for 2023 and onwards.