ESMA (European Securities and Markets Authority), the supervisor and regulator of the financial markets in the European Union, has published a new consultation paper and is waiting for industry opinions on the methodology on stress test scenarios for Money Market Funds (MMF).

ESMA Publishes Consultation Paper on Stress Test Scenarios

The revision proposal considers recent market developments and the stress caused by Covid-19 in March 2020 and focuses on changes to the current methodology that addresses the interaction between liquidity and redemption pressures in the MMF portfolio and the macroeconomic impact of hypothetical systemic shocks.

The Consultation Paper highlights two main changes to the current methodology: the first change shows the updated liquidity scenarios after the heightened stress event experienced due to the shock from Covid; and the second focuses on improving the macro strategy to more effectively capture its macroprudential impact, with assumptions about markets and market participants.

Additionally, ESMA's considerations on a potential climate risk scenario are presented, inviting stakeholders to provide feedback. Industry participants can send their comments until 28 April 2023, which the regulator assesses in order to prepare a final report by the end of 2023. The final guidelines for the MMF stress test are expected to include a calibration of the current testing scenarios.

"As for the proposed addition to the macro scenario, it intends to better capture the macroprudential impact of the scenario, by including assumptions on the underlying markets and other market participants. In addition, this Consultation Paper presents ESMA's considerations on a potential climate risk scenario," ESMA commented.

According to ESMA's press release on Tuesday, the document is aimed mainly at alternative investment funds, UCITS managers, MMF managers, institutional and retail investors, and their associations investing in MMFs.

Watch the recent FMLS22 regulation roundup.

ESMA to Issue Guidance on Market Outage

Last year, ESMA collected similar feedback and industry comments on the impact of ineffective communication on trading venues during power outages. Therefore, the regulator intends to publish a guidance report this quarter showing how trading venues should communicate with market participants in the event of any liquidity problems.

"In fact, data show that when the primary market is down, trading on alternative lit venues also drops in the same proportion as that on the primary market, even though these alternative venues could be used to ensure continuity of trading,” ESMA stated in September 2022.

Better communication with market participants would reduce their uncertainty and allow traders to be informed more efficiently when regular trading would resume. As a result, the fall-out on alternative venues should be less acute.

In late December, the entity published its final report on the guidelines and technical standards for reporting under the European Market Infrastructure Regulation (EMIR), which will take effect in April 2024.

ESMA Heralds New Logo and Website

The European Union regulator focuses on continuous improvement of the investment markets and on building better brand awareness. To reach the public more frequently, ESMA unveiled a new visual identity in early 2023 with a new logo to reflect its strategic plans for the next five years.