Money Market Funds Regulation


Money Market Funds Regulation - ESMA issues a consultation paper for its guidelines on stress tests

8 October 2018

Regulatory News Alert


On 28 September, ESMA released a consultation paper that proposes additional guidelines and instructions for MM Funds to perform the required stress tests, and gather industry feedback on the proposed methodologies.

One of the requirements of the MMF Regulation lies in the obligation to monitor the fund’s response under various stressed conditions both at asset and liability levels. To this end, ESMA published initial guidelines in March 2018 providing a general framework.

The consultation paper proposes a common reference for MMF managers to produce the stress tests, by specifying the methodologies and scenarios to be applied for each required stress. Questions are addressed to the industry actors, who are looking to provide feedback on feasibility and relevance of the proposed scenarios, as well as providing suggestions on calibration methods.

PDF - 44kb

Towards a common reference of stressed scenarios

The paper proposes further guidance regarding the general framework of the stress tests, which are to be performed following methodologies and parameters provided by ESMA. For each stressed scenario, ESMA exposes the rationale, the methodology, as well as a cost and benefits analysis.

  • For liquidity stress test, the options are applying:


A discount factor to the bid price of each instrument in the fund


A shock to the observed bid-ask spread of each instrument

  • For credit stress, ESMA proposes either a multiplicative or an additive shock to the credit spread of the instruments in the portfolio. An additional scenario is proposed where the top two exposures of the funds experience a default event
  • For interest and FX rates, ESMA proposes a direct shock on interest rate curves, government bond rates and FX rates
  • For redemption stress, ESMA proposes reverse stress tests that evaluate:


The maximum outflows that the fund can generate to face stressed redemption scenarios without distorting portfolio allocation


The coverage ratio of weekly outflows by weekly liquid assets


An additional reverse stress test scenario is also proposed, where the MMF faces redemption of its two largest investors.

  • ESMA did not outline a specific methodology to achieve macrosystemic stress test, but points towards the application of a combination of part or all the other stressed scenarios

All parameters and stress magnitudes would be provided by ESMA to achieve consistency across all MMFs. With regards to calibration methodologies, while ESMA hints towards inspiration from the banking industry, market actors are invited to provide insight on the matter.

The results of such calibration are not in the scope of this consultation.

Next steps

These proposed guidelines and methodologies should be of use to MMF managers to better evaluate the effort and cost to implement the required stress-testing framework.

Additionally, the consultation also provides the opportunity for market actors to provide further insight and feedback on the methodologies and scope of the stress tests.

Actors that wish provide to feedback should do so before the 1st December 2018. The final technical guidelines are expected to be published by the end of Q1 2019.

How Deloitte can help

Deloitte can help you in preparing for the foreseen changes, and evaluate the feasibility and costs of the implementation of the stress testing framework.

We can also help you in producing the stress tests as per the final guidelines.

Did you find this useful?