On 27 August, the European Securities and Markets Authority (ESMA) published a statement announcing that it intends to update the 2019 Guidelines on stress test scenarios under the Money Market Funds Regulation (MMFR) to include a modification of the risk parameters to reflect recent market developments related to the COVID-19 crisis.
ESMA has assessed whether the scenarios envisaged in the 2019 Guidelines are still appropriate and finds that applying the 2019 scenarios (which include liquidity shock on money market instruments, large redemptions and an increase in credit spread for government and corporate bonds) in the current market environment generally leads to absolute levels of stress similar to the levels observed in March 2020. However, it explains that for some parameters, the 2019 scenarios have been exceeded by the extreme market movements observed during the COVID-19 crisis and the relevant factors will be updated accordingly.
ESMA will calibrate the risk parameters in collaboration with the European Systemic Risk Board (ESRB) and the European Central Bank (ECB), and expects to publish the 2020 update of the guidelines in Q4 2020. The updated guidelines will then be translated, and the changes will apply from two months after the publication of the translations.
ESMA confirmed that the 2019 guidelines will continue to apply pending the application date for the 2020 update. This includes the existing calibrated scenarios and the internal stress test exercise to be carried out by managers of Money Market Funds.