ESMA updates the parameters and methodology for MMF stress testing

19/12/2023

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has published the Final Report on the Guidelines on stress test scenarios under the Money Market Funds Regulation (MMFR).

The Final Report combines an update of the methodology to implement the scenario related to the hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF, with the annual calibration of the risk parameters. 

Based on feedback received from stakeholders, the revised methodology includes parameters reflecting the liquidity stress affecting the money market and a new risk factor to simulate the additional impact of asset sales under stress market conditions. This takes the form of a price impact representing the additional cost incurred by selling a large amount of securities in a market with few buyers.

The 2023 parameter update reflects the prevailing sources of systemic risk identified for the financial system, against the background of a prolonged period of low growth, elevated inflation and higher interest rates. The severity of the parameters of the stress test scenarios in relation to hypothetical movements of the interest rates materially increased compared to the 2022 Guidelines, while other scenarios have been updated with a degree of severity similar to the previous exercise.

In calibrating the new risk parameters ESMA has worked closely with the European Systemic Risk Board and the European Central Bank.

Next steps

The new 2023 parameters set out in the updated Guidelines and the revised methodology will have to be used for the purpose of the first reporting period following the start of the application of the updated Guidelines. 

The section of the Guidelines related to the common reference parameters of the stress test scenarios will keep being updated at least every year considering the latest market developments.