ESMA - Pour en avoir pour son argent : contraintes réglementaires et réformes des fonds du marché monétaire

Abstract

Despite substantial regulatory reforms, US and EU money market funds (MMFs) experienced severe stress in March 2020. Funds investing in private assets such as EU Low Volatility Net Asset Value (LVNAV) MMFs faced acute challenges to meet regulatory requirements while facing high redemptions. Such funds must maintain their mark-to-market net asset value (NAV) within 20 basis points of a constant net asset value and must maintain a 30% share of assets that mature within one week. We develop a stylized model to show that under certain conditions related to outflows and the market liquidity of their assets, LVNAVs may face difficulties in fulfilling both regulatory constraints at the same time. We calibrate our model to EU and US data and evaluate different regulatory reforms. Removing the use of amortised cost has the largest positive effect in terms of resilience, while higher liquidity requirements have more limited effects, Improving the market liquidity of the assets MMFs invest in would substantially improve the resilience of MMFs. Introducing countercyclical liquidity buffers would also enhance their resilience, especially when the assets eligible to meet liquidity requirements are more liquid than the rest of the portfolio, and the effect is larger than increasing liquidity requirements. Overall, we find that, based on our market impact estimates, the NAV constraint is generally the binding one.