EU watchdog calls for urgent reform of money market funds

By Huw Jones

LONDON (Reuters) – Reforms to tackle vulnerabilities in money market funds are urgently needed for the sector to cope better with economic shocks, a top European Union securities regulator said on Tuesday.

Money market funds or MMFs are widely used by companies for day-to-day financing purposes.

But MMFs in Europe and the United States struggled with redemptions in some cases when economies went into lockdown to fight COVID-19 in March 2020, forcing central banks to inject liquidity into markets to avoid them freezing up.

Funds industry officials say that many parts of the market were facing challenges at that unprecedented time.

Verena Ross, chair of the EU‘s European Securities and Markets Authority (ESMA), said ESMA had already made several concrete proposals to the EU’s executive European Commission to reform MMFs.

“The vulnerabilities that surfaced during the pandemic have demonstrated that legislative changes to enhance the resilience of the money market fund sector are needed sooner rather than later,” Ross told an Alfi funds industry conference in Luxembourg.

The Bank of England is also keen to see a more resilient MMF sector, but many of the funds used by UK companies are listed in the EU and therefore action by the bloc is needed.

Ross said it was more important than ever that investment funds in general, including open ended funds, were resilient to economic shocks so they had enough liquidity to cope with investors asking for their cash back.

“In that context, liquidity and excessive leverage are the two main risks we are actively monitoring,” she said.

Funds are expected to monitor the alignment of their funds investment strategy, their liquidity profile and their redemption policy, Ross said.

“In addition, managers should put in place accurate assessment and strong controls around the management of liquidity risk,” she added.

(Reporting by Huw Jones; Editing by Mark Potter)