REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the adequacy of Regulation (EU) 2017/1131 of the European Parliament and of the Council on money market funds from a prudential and economic point of view
Date: 2023-07-20
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: banking system, financial instrument, financial legislation, financial supervision, financing method, investment company, money market, short-term financing

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.7.2023  COM(2023) 452 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the adequacy of Regulation (EU) 2017/1131 of the European Parliament and of the Council on money market funds from a prudential and economic point of view           
 
 
TABLE OF CONTENTS 

1. 

INTRODUCTION ..................................................................................................................... 3 

1.1. 

Background .............................................................................................................................. 3 

1.2. 

Legal basis for the report......................................................................................................... 4 

1.3.  Methodology and consultation process .................................................................................. 4 

2. 

THE MMF SECTOR TODAY ................................................................................................. 5 

2.1. 

Key changes introduced by the MMF Regulation ................................................................... 5 

2.2.  Market structure today ........................................................................................................... 7 

2.3. 

Recent market developments and lessons learned .............................................................. 10 

ADEQUACY OF THE MMF REGULATION FROM A PRUDENTIAL AND 

3. 
ECONOMIC POINT OF VIEW ........................................................................................................ 13 

3.1.  MMFs and debt issued or guaranteed by EU Member States. ............................................. 14 

3.2.  Uniform definitions of high and of extremely high liquidity and credit quality of transferable 
assets  14 

3.3. 

Impact of the MMF Regulation on short-term financing markets ........................................ 15 

3.4. 

Regulatory developments at international level ................................................................... 16 

3.4.1.  Reducing the risk of runs ....................................................................................................... 17 

3.4.2.  Strengthen the liquidity of MMFs and their ability to absorb losses .................................... 18 

3.4.3.  Other measures ..................................................................................................................... 19 

3.5. 

Feasibility of establishing a minimum 80% EU-public debt quota ........................................ 20 

4. CONCLUSIONS .............................................................................................................................. 21 

1 

 
 
 
 
 
ABBREVIATIONS  

AIFMD                       Alternative Investment Fund Managers Directive 
Constant net asset value MMF 
CNAV 
ECB  
European Central bank 
ESMA                         European Securities and Markets Authority 
ESRB                          European Systemic Risk Board 
EUR                            Euro 
FSB 
GBP  
LVNAV 
MMF   
MMF Regulation 
NAV 
NCAs   
USD    
UCITS                        Undertakings for the collective investment in transferable securities 
VNAV  
WMA   

Financial Stability Board 
UK sterling 
Low volatility net asset value MMF 
Money Market Fund 
Regulation (EU) 2017/1131 on Money Market Funds  
Net asset value 
National competent authorities 
US dollar 

            Weekly Maturing Assets  

Variable net asset Value MMF 

2 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.  INTRODUCTION  

1.1. Background  

Regulation (EU) 2017/1131 on money market funds (the MMF Regulation) was proposed in 
the  aftermath  of  the  global  financial  crisis,  which  exposed  certain  weaknesses  of  financial 
markets  and  their  regulatory  regimes  around  the  globe.  Since  entering  into  application  in 
January 2019, this Regulation has significantly strengthened the regulatory regime for MMFs 
in  the  EU,  following  recommendations  by  the  Financial  Stability  Board  (FSB),  the 
International Organization of Securities Commissions (IOSCO)1 and the European Systemic 
Risk Board (ESRB).  

The new regulatory framework was put to the test by the market stress related to the COVID-
19  pandemic.  The  impact  of  this  stress  on  MMFs  differed  across  jurisdictions  due  to 
differences in the structures of MMF markets (e.g the predominant types of MMFs, investor 
profiles, and underlying investments) and residual differences in the regulatory framework for 
MMFs.  Major  central  banks  such  as  the  European  Central  Bank  (ECB)  and  the  US  Federal 
Reserve  took  various  measures  to  mitigate  the  effects,  including  outright  purchases  of 
commercial  papers2  on  the  primary  and  secondary  markets,  providing  lending  for  banks  to 
buy assets from MMFs (Federal Reserve), and extending the eligible collateral for refinancing 
operations  to  unsecured  banks  bonds  (ECB).  These  interventions  improved  liquidity  and 
confidence  in  short-term  debt  markets,  which  also  contributed  to  a  reduction  in  the  pace  of 
redemptions  from  MMFs.  Although  there  were  substantial  outflows  from  certain  types  of 
MMFs in March 2020 and other market stress periods, no EU MMFs were required to trigger 
redemption fees or gates3 or to suspend redemptions.  

Following the COVID-19 market stress, global and European prudential authorities started to 
work  on  policy  proposals  to  increase  the  resilience  of  MMFs.  In  particular,  the  FSB,4  the 
ESRB5 and the European Securities Markets Authority (ESMA)6 proposed various reforms to 
ensure MMFs do not amplify liquidity shocks in times of stress. One of these proposals is to 
remove  the  possibility  for  Low  volatily  net  asset  value  MMFs  (LVNAVs)  to  use  amortised 
cost  accounting.  However,  this  could  reduce  the  effectiveness  of  MMFs  as  liquidity 
management  alternatives  to  bank  deposits,  and  limit  the  cash-management  options  of 
corporates.7   

Commercial paper: an unsecured promise to pay a certain amount on a stated maturity date, issued in 

1  
The  International  Organization  of  Securities  Commissions  (IOSCO)  conducted  a  peer  review  of  the 
implementation  of  the  MMF  reforms  across  different  jurisdictions  and  published  a  Thematic  Review  on 
consistency in implementation of Money Market Funds reforms on 20 November 2020. The report confirms the 
high degree of compliance of the achieved regulatory objectives with its initial recommendations. 
2  
bearer form” (IMF, 2003) Commercial papers are mostly issued by Non-Financial Corporates, 
3  
Redemption fees as a liquidity management tool imposing usually a flat fee on investors selling shares 
of  a  fund  (typically  within  a  pre-determined  period).  Redemption  gates  are  a  liquidity  management  tool  to 
prevent investors in the fund from withdrawing a portion of their capital for a period of time. 
FSB, 11 October 2021, Policy Proposals to Enhance Money Market Fund Resilience 
4  
ESRB, 2 December 2021, Recommendation on reform of money market funds 
5  
6  
ESMA, 14 February 2022, ESMA opinion on the review of the Money Market Fund Regulation 
7  
Private-debt stable NAV MMFs have deposit-like characteristics, invest in bank-issued liabilities, and 
are used by non-financial corporates as an instrument to manage liquidity. 

3 

 
 
                                                           
1.2. Legal basis for the report 

This  report  is  prepared  in  accordance  with  Article  46(1)  of  the  MMF  Regulation,  which 
requires  the  Commission  to  assess  the  functioning  of  the  MMF  Regulation  based  on  an 
analysis  of  the  current  rules  from  a  prudential  and  economic  point  of  view,  and  following 
consultations with ESMA and, where appropriate, the ESRB, and in accordance with Article 
6(2) which specifies the conditions this report needs take into consideration. This article also 
requires the Commission to assess whether changes are to be made to the regime for public 
debt constant net asset value MMFs (CNAVs) and LVNAVs.  

1.3. Methodology and consultation process 

This  report draws on  a  number of studies carried out  by European and international  bodies. 
Both  the  FSB  report8  and  ESMA  opinion9  benefitted  from  stakeholder  feedback.  The  latter 
reports as well as the ESRB recommendations10 contain extensive sets of data and evidence 
from supervisory authorities. The ECB has published an assessment of the effectiveness of the 
EU’s regulatory framework from a financial stability perspective, based on the behaviour of 
MMFs during the COVID-19 crisis.11 Academic papers have further informed this report.  

From  12  April  to  20  May  2022,  the  Commission  conducted  a  stakeholder  consultation  to 
collect  stakeholders’  views  about  the  functioning  of  the  MMF  Regulation.12  A  total  of  48 
respondents submitted a contribution. More than two thirds of respondents indicated that the 
MMF Regulation has been effective in delivering on its key objectives in terms of ensuring 
liquidity,  increasing  investor  protection,  preventing  the  risk  of  contagion,  and  improving 
transparency, supervision, and the financial stability of the single market. These respondents 
consider  that  the  MMF  Regulation  has  contributed  to  the  integration  of  capital  markets  and 
made  MMFs  more  resilient,  in  particular  through  its  rules  on  credit  quality13  and  asset 
composition.14 Feedback received from stakeholders also indicates the importance of ensuring 
consistency  of  the  rules  at  EU  level  and  of  strengthening    supervision.  In  addition,  cross-
border  investors  also  appreciate  that  the  MMF  Regulation  gives  them  the  possibility  to 
conduct cash management globally through a standard process from both an accounting and a 
risk management point of view. 

https://www.esrb.europa.eu/news/pr/date/2022/html/esrb.pr.220125~32ad91c140.en.html 
ECB,  October  2022,  “Is  the  EU  Money  Market  Fund  Regulation  fit  for  purpose?  Lessons  from  the 

FSB, 11 October 2021, Policy Proposals to Enhance Money Market Fund Resilience  
https://www.esma.europa.eu/sites/default/files/library/esma34-49-437_finalreportMMF 

8  
9  
Regulationeview.pdf  
10  
11  
COVID-19 turmoil”, Working Paper Series, No 2737 
12  
funds_en 
13  
14  

Articles 19 – 23 of Regulation (EU) 2017/1131 (MMF Regulation) 
Articles 8 – 18 of Regulation (EU) 2017/1131 (MMF Regulation) 

https://finance.ec.europa.eu/Regulation-and-supervision/consultations/finance-2022-money-market-

4 

 
 
                                                           
2.  THE MMF SECTOR TODAY  

2.1. Key changes introduced by the MMF Regulation  

Before  the  introduction  of  the  MMF  Regulation,  the  majority  of  MMFs  in  the  EU  operated 
under  the  rules  of  the  UCITS  Directive,15  its  implementing  acts  and  guidelines,  as  well  as 
industry  codes  of  conduct.  France,  Ireland  and  Luxembourg  are  the  major  domiciles  of  EU 
MMFs. Luxembourg and Ireland developed a MMF sector with CNAV in foreign currencies 
targeted at institutional investors from outside the EU.  

The  MMF  Regulation  introduced  a  dedicated  and  significantly  more  developed  regulatory 
regime  for  MMFs  in  the  EU.  In  particular,  it  aimed  to  address  credit  and  liquidity  risk 
challenges  experienced  by  MMFs  during  the  2008  crisis.  By  harmonising  the  essential 
product  features  that  constituted a MMF, the framework also  established a  uniform  level  of 
investor  protection  through  rules  on  liquidity  and  liquidity  risk  management,  including 
liquidity  buffers,  assets  in  which  MMFs  can  invest,  diversification,  valuation  and  internal 
credit  quality  assessment.  It  also  enhanced  transparency  towards  investors  and  supervision, 
including via comprehensive reporting to the National competent authorities (NCAs).  

In  addition,  the  MMF  Regulation  explicitly  bans  “external  support”  to  avoid  the  risk  of 
contagion  between  the  MMF  sector  and  the  rest  of  the  financial  sector.  The  ‘Know-Your-
Customer’ policy obliges managers of all types of MMFs to anticipate the effect of concurrent 
redemptions by several investors. All managers have to adjust the actual level of liquidity to 
the specific cash needs of their customers at any time of their accounting cycles. 

The MMF Regulation created a new type of MMF, the LVNAV, to replace CNAVs invested 
in non-public debt. Similarly to public debt CNAVs, LVNAVs are allowed to use amortised 
cost  accounting  to  offer  a  stable  redemption  price,  but  only  as  long  as  the  value  of  the 
underlying assets does not deviate by more than 20 basis points from the market value of the 
fund’s  net  assets.16  The  two  values  are  published  daily.  If  the  deviation  exceeds  20  basis 
points, the LVNAV fund has to switch from a constant NAV to a variable NAV.17 

Compliance with  the  MMF Regulation  generated  some legal  and  operational  costs for  asset 
managers,  who  had  to  migrate  existing  funds  into  the  new  regime,  increase  transparency, 
improve  their  risk  management  processes,  and  closely  monitor  their  investments  and  the 
related credit and liquidity risk, all this to ensure compliance with the liquidity requirements. 
There  were  also  cost  implications  for  third-party  distributors,  platforms  and  custodians. 
Further time and resources were required from  MMF  investors to build investment policies, 
controls and oversight around the framework, treasury systems and accounting processes, and 
to ensure auditors were comfortable with the new MMF fund structures from a cash and cash 
equivalence  perspective.  The  consultation  results  however  did  not  point  at  costs  being 
excessive and did not reveal sizeable simplification potential.    

15  
Directive  2009/65/EC  of  the  European  Parliament  and  of  the  Council  of  13  July  2009  on  the 
coordination  of  laws,  Regulations  and  administrative  provisions  relating  to  undertakings  for  collective 
investment in transferable securities (UCITS) 
16  
The  distinguishing  feature  of  Public  Debt  CNAV  and  LVNAV  is  NAV  rounding  to  the  2nd  decimal, 
which  is  however  only  possible  within  the  20bp  corridor  for  LVNAVs  (vs.  the  4th  decimal  for  VNAVs).  The 
rounding means that investors do not need to recognise the very small unrealised capital  gains and losses in the 
portfolio when they redeem shares. 
17  
protection and stability of financial market. 

The  MMF  Regulation  imposes  a  number  of  other  portfolio  and  valuation  rules  which  aim  at  investor 

5 

 
 
                                                           
In  its  October  2020  Market  Insights  study,  the  European  Fund  and  Asset  Management 
Association  noted  that  the  stringent  regulatory  requirements  introduced  by  the  MMF 
Regulation and the increased cost of regulatory compliance  resulted in a 16% decline in the 
number of UCITS MMFs in the first quarter of 2019, as a number of asset managers chose to 
close  down  their  MMFs,  particularly  small  MMFs,  or  converted  them  into  short-term  bond 
funds.  In  addition,  certain  funds no longer met the stricter regulatory  requirements  imposed 
under the MMF Regulation and hence no longer  qualified  as MMFs.  Despite the decline in 
the number of MMFs, European MMFs experienced strong net inflows in 2019 and 2020.  

Table 1: Key characteristics of and safeguards for EU MMFs  

Short-term MMF 

Standard MMF 

Stable NAV 

Name 

Public debt constant net asset 
value (Public Debt CNAV)18 

Lov-volatility net 
asset value 
(LVNAV)19 

Variable Net Asset Value 
(VNAV) 

Short-term 
VNAV20 

Standard 
VNAV21 

Public debt 

Weighted 
average 
maturity22 
Weighted 
average life23  

Maturity of 
assets 

Daily maturing 
assets 

Weekly 
maturing assets 

Min 99.5% in public debt, 
reverse repo secured with 
government debt and in cash 

Permitted 

Max 60 days 

Max 120 days 

Max 397 days  

Min 10% 

Min 30% 

(of which public debt limited to 17.5%) 

Max 6 months 

Max 12 Months 

Max 2 years 
with a 397-day 
reset 

Min 7,5% 

Min 15% 

18  
19  
20  
21  
22  
23  

Public Debt Constant Net Asset Value MMF, as per Article 2(11) of MMF Regulation 
Low Volatility Net Asset Value MMF, as per Article 2(12) of MMF Regulation 
VNAV MMF managed as Short Term MMF, as per Article 2(14) of MMF Regulation 
VNAV MMF managed as a Standard MMF, as per Article 2(15) of MMF Regulation 
As defined in Article 2(19) of the MMF Regulation. 
As predefined in Article 2(20) of the MMF Regulation. 

6 

 
 
 
 
 
 
 
                                                           
2.2. Market structure today 

Article 46(2)(a) of the MMF Regulation requires the Commission  to analyse the experience 
acquired  in  applying  this  the  Regulation,  and  the  impact  on  investors,  MMFs  and  the 
managers of MMFs in the Union.  

Euro area MMFs held about EUR 1.5 trillion in total assets at the end of 2021, split between 
public  debt  CNAV  (11%  of  total  assets  under  management),  LVNAV  (46%),  short-term 
VNAV  (12%)  and  standard  VNAV  (31%).  EU  MMFs  are  mainly  denominated  in  EUR 
(42%),  USD  (31%)  and  GBP  (22%)  and  are  concentrated  in  a  few  countries,  principally 
Ireland,  Luxembourg,  and  France,  accounting  respectively  for  42%,  26%  and  25%  of  total 
assets under management of EU MMFs.24 

Public debt CNAVs and LVNAVs are mostly denominated in USD and GBP and domiciled 
in  Ireland  and  Luxembourg.  EUR-denominated  MMFs  are  primarily  structured  as  standard 
VNAVs and are mostly domiciled in France (192 funds as of December 2021). 

Figure 1: Who invests in euro area MMFs, and where do those MMFs then invest?  
Source: ECB, Macro-prudential Bulletin, April 2021 

Corporate  and  institutional  investors  hold  the  majority  of  euro  area  MMF  shares/units,  as 
shown in Figure 2.25 Professional investors account for 95% of the NAV for CNAV and 99% 
for LVNAVs. For VNAVs, the share of retail investors is slightly higher, at 13% and 12% for 
short-term and standard VNAVs, respectively.26  

As  shown  in  Figure  3,  financial  institutions  are  the  main  investors  in  MMFs  across  types, 
accounting for 59% of NAV, while non-financial corporates account for 19% of NAV.        

24  
25  
26  
represents 12% of NAV due to the presence of employee saving schemes. 

See also ESMA and ESRB reports.  
ESMA, 8 February 2023: “EU MMF market 2023”  
This  is  to  a  large  extent  driven  by  French-domiciled  MMFs,  for  which  the  share  of  retail  investors 

7 

 
 
 
                                                           
Non-EU investors are dominant in Luxembourg and Ireland, as shown in Figure 4. Non-EU 
investors  account  for  more  than  77%  of  the  NAV  of  Irish  MMFs  and  close  to  63%  for 
Luxembourg.  In  the  case  of  Irish  MMFs,  these  are  primarily  UK-based  investors  (60%  of 
their investors based on amount owned). This reflects the importance of MMFs denominated 
in  non-EU  currencies  domiciled  in  these  Member  States.  In  contrast,  French  domestic 
investors account for close to 76% of NAV in France. 

Figure 2: Retail vs professional investors in MMFs (% of total NAV)  
Source: ESMA Market Report 2023 

Figure 3: Types of MMF investors by sector (% of total NAV)  
Source: MMF Regulation database, ESMA 

Figure 4: Share of NAV by investor domicile (in %)  
Source: MMF Regulation database, ESMA 

8 

 
 
 
 
 
 
 
 
 
Discussions  with  MMF  investors  and  responses  from  the  stakeholder  consultation  highlight 
that  the  following  criteria  are  most  important  in  the  investment  choice  of  investors:  intra-
day/daily  liquidity,  preservation  of  capital  and  diversification.  Other  characteristics  of  EU 
MMFs,  such  as  portfolio  quality  or  level  of  return  are  also  mentioned  by  investors  as 
important in their investment choice. MMFs are mainly used as a cash management tool.  

MMF  shares  are  considered  ‘cash  and  cash  equivalents’  under  the  accounting  standard 
IAS7.27  This  applies  to  CNAV  and  LVNAV  due  to  their  stable  value  and  the  possibility  of 
intra-day  redemptions.  In  certain  jurisdictions,  this  accounting  treatment  also  applies  to 
VNAVs.  Responses  to  the  Commission’s  consultation  indicate  that  forcing  corporates  to 
invest  into  other  instruments  with  different  characteristics  would  create  uncertainty  for  the 
accounting treatment of these products as ‘cash or cash equivalent’ and would also limit the 
cash-management options of corporates, as other instruments may not offer intraday liquidity.  

Public debt CNAV must invest 99,5% of their assets in public debt, in reverse repos secured 
with government debt and in cash. LVNAVs and VNAVs primarily invest in money market 
instruments  (67%  of  their  total  assets),  complemented  by  deposits,  repo-  and  reverse  repo 
agreements and other short-term assets.  

As shown in Figure 5, EU MMFs are mainly exposed to the financial sector including credit 
institutions, whose securities amount to more than 60% of total money market instruments  
held by EU MMFs. Exposures to non-financial corporates remain limited (10% of money 
market instruments) and  are mainly held by VNAVs.28 In aggregate, EU MMFs hold between 
50 and 70% of euro-denominated financial commercial papers and negotiable certificates of 
deposit29 (FSB, 2021).  

Figure 5: Money market instruments held by MMFs are mainly exposed to the financial sector 
(% of money market instrument holdings)  
Source : MMF Regulation database, Eikon, NCAs, ESMA 

27  
Regulation (EU) 1126/2008, International Accounting Standard 7, paragraph 6: “Cash equivalents are 
short-term,  highly  liquid  investments  that  are  readily  convertible  to  known  amounts  of  cash  and  which  are 
subject to an insignificant risk of changes in value.” 
28  
29  
specified period of time at a specified rate of interest” (IMF, 2003) 

ESMA, 8 February 2023: “EU MMF market 2023”  
Certificates  of  Deposits:  “a  certificate  issued  by  a  bank  acknowledging  a  deposit  in  that  bank  for  a 

9 

 
 
 
                                                           
As  shown  in  Figure  6,  most  of  the  public  debt  exposure  of  EU  MMFs  is  towards  non-EU 
sovereigns (74% of sovereign exposure at the end of 2021). Those exposures are mainly held 
by  CNAVs.  The  latter  significantly  reduced  their  government  bond  holdings  from  62%  of 
total  assets  in  June  2021  to  32%  in  June  2022.  Simultaneously,  they  increased  their  repo 
market  exposures,  driven  by  the  expectation  of  changing  interest  rates.  The  share  of 
government  bonds  in  the  portfolios  of  LVNAVs  has  increased  significantly  over  2020,  but 
was  readjusted  to  the  pre-COVID-19  composition  over  2021  and  the  first  half  of  2022. 
VNAVs normally have a lower share of government debt, on average 7% of their assets.30  

Figure 6: Exposure to government debt, end of 2021, in EUR bn.  
Source: MMF Regulation database, NCAs, ESMA

2.3. Recent market developments and lessons learned  

In the recent years, several stress events have taken place that have tested the framework for 
MMFs. In March 2020, the COVID-19 pandemic led to a sudden increase in demand for safe 
and liquid assets in both the financial and non-financial sectors. Market liquidity deteriorated 
considerably  across  a  broad  range  of  markets  and  prompted  unprecedented  interventions  by 
central  banks.  The  value  of  major  stock  market  indices  dropped  over  30%  within  several 
weeks  and  financial  markets  experienced  a  significant  increase  in  volatility  during  the  first 
months of the pandemic. Due to the general uncertainty, investors were hesitant to invest in 
financial markets, which led to vast valuation losses.  

Corporate  bonds  and  MMFs  also  experienced  significant  stress.  Corporate  bond  yields  rose 
significantly  during  February  and  March  2020.  MMFs  exposed  to  private  markets,  i.e. 
LVNAVs and VNAVs in the EU and prime MMFs in the US31, recorded high outflows. EU-
domiciled  LVNAVs  experienced  outflows  of  EUR  51.4  bn  during  March  202032  and  faced 
challenges to sell their commercial papers and certificates of deposit as banks were unwilling 
or unable to buy back these papers, including their own papers.33  

Idem 
A  Prime  MMF  is  a  type  of  US  money  market  fund  which  principally  invests  in  non-government 

30  
31  
securities.  
32  
ESMA, September 2021, “Report on Trends, Risks and Vulnerabilities”, No. 2, 2021 
33  
Commercial papers and certificates of deposit are usually held to maturity and even if they have very 
short  maturity,  their  secondary  market  is  not  liquid,  even  in  normal  times.  Meanwhile,  MMFs  account  for  a 
significant proportion of demand for these instruments.  

10 

 
 
 
 
                                                           
The stress was particularly acute for USD-denominated LVNAVs, as shown in figure 7 and 
relevant  literature.34  As  their  weekly  maturing  assets  (WMA)  holdings  approached  the 
regulatory minimum of 30%, some investors may have been concerned about the increasing 
possibility that fund managers would make use of available liquidity management tools (i.e. 
liquidity  fees  or  redemption  gates).  Concerns  about  the  use  of  liquidity  management  tools 
were  particularly  acute  in  the  US  market,  which  may  be  explained  by  the  fact  that  EU 
investors  are  by  and  large  more  comfortable  with  fees  than  US  investors,  due  to  their 
familiarity with fees under UCITS. As shown in Figure 7, this resulted in a spill-over effect to 
EU-domiciled MMFs, with a combination of redemptions in USD LVNAVs and subscriptions 
in USD Public Debt CNAVs of a similar magnitude, reflecting a potential substitution effect 
(or flight-to-quality).  

Figure 7: Evolution of assets under management of different types of MMFs around March 2020 
Source: European Fund and Asset Management Association: data from Fitch Ratings, iMoneyNet 

The  data35  shows  that  MMFs  with  low  WMAs  recorded  higher  outflows  than  MMFs  with 
high WMAs. This analysis can be interpreted as evidence that institutional investors redeemed 
from MMFs to avoid being subject to fees and gates. Additionally, studies by Avalos and Xia 
(2021)36,  Darpeix  (2021)37  and  Dunne  and  Giuliana  (2021)38  show  that  the  liquidity  ratios 

34  
As  discussed  in  various  reports  including  the  FSB’s  Policy  proposals  to  enhance  money  market  fund 
resilience  from  October  2021,    ESRB’s  Issues  note  on  systemic  vulnerabilities  of  and  preliminary  policy 
considerations  to  reform  money  market  funds  (MMFs)  from  July  2021,  and  ECB’s  article  from  April  2021 
Macro-prudential bulletin, titled “How effective is  the EU  Money Market Fund Regulation? Lessons  from  the 
COVID‑19 turmoil”.  
35  
36  
Quarterly Review Special Feature, pages 17–29. 
37  
funds during the COVID-19 crisis in early 2020, AMF. 

ESMA, 2021, “Report on Trends Risks and Vulnerabilities”, No. 1 2021 
Avalos,  F.  and  Xia,  D.  (2021),  “Investor  size,  liquidity  and  prime  money  market  fund  stress”,  BIS 

Darpeix,  P.-E.  and  Mosson,  N.  (2021),  “Detailed  analysis  of  the  portfolios  of  French  money  market 

11 

 
 
 
                                                           
were key drivers of redemptions in the case of LVNAVs, but not in the case of VNAVs, thus 
pointing at possible undesirable threshold effects.39 Given the magnitude of the crisis and the 
global  economic  situation  triggered  by  the  pandemic,  major  central  banks  took  a  range  of 
actions to support capital markets. Such support took place through: 

-  outright  purchases  of  domestic-currency  denominated  certificates  of  deposit  and 
commercial papers (ECB,40 Bank of England41, Federal Reserve) on the primary or on 
the secondary market,  
extending the eligible collateral to unsecured bonds issued by banks (ECB)  
and lending facilities for banks to buy assets from MMFs (Federal Reserve).42  

- 
- 

As  a  result  of  the  intervention  of  central  banks,  redemption  requests  slowed  down  and 
liquidity improved in  underlying money markets. While these interventions primarily aimed 
at  restoring  confidence  in  the  depth  and  liquidity  of  short-term  funding  markets,  they  also 
indirectly benefitted EU MMFs.  

The market turmoil of March 2020 showed that some financial market segments were unable 
to absorb significant and sudden increases in selling pressures. This was perhaps also because 
the liquidity supply by dealers was more constrained and less responsive to sudden increases 
in demand than before the 2008 financial crisis. Nevertheless, no EU MMF had to introduce 
redemption  fees  or  gates  or  to  suspend  redemptions  in  March  2020.  Moreover,  no  LVNAV 
exceeded  the  thresholds  set  out  in  the  MMF  Regulation  to  be  converted  into  VNAV  (the 
deviation of the market NAV from the constant NAV came close to the 20 basis point collar 
for  some  USD  LVNAVs).  However,  these  results  should  be  interpreted  cautiously  and  put 
into context given the central bank interventions that supported the markets.  

Since February 2022, Russia’s invasion of Ukraine and the related geopolitical tensions have 
impacted financial  markets, most notably commodity prices and related  derivative products. 
Since EU MMFs invest in highly liquid, short maturity assets with minimal credit risk,  they 
did  not  experience  significant  losses  or  outflows.  MMFs  have  adapted  to  the  situation  by 
readjusting their holdings towards even shorter maturity instruments, which are less exposed 
to interest rate risk43 and by increasing their liquidity. There are some signs of indirect impact 
of  investors  selling  other  assets  or  facing  margin  calls  and  tapping  EU  MMFs  to  store  or 
access liquidity. However, inflows and outflows seemed rather balanced and no EU MMF had 
to introduce redemption fees or suspend redemptions in this situation.  

Dunne, P. and Raffaele, G. (2021), “Do liquidity limits amplify money market fund redemptions during 

38  
the COVID crisis?”, ESRB Working Paper No. 127. 
39  
ESMA, 14 February 2022,“ ESMA opinion on the review of the Money Market Fund Regulation” 
40  
In March 2020, the ECB announced further support for euro money markets by extending its existing 
corporate sector purchase program to include euro-denominated non-financial commercial paper with remaining 
maturities  of  as  few  as  28  days  (reduced  from  an  earlier  6  months  minimum).  The  ECB’s  corporate  purchase 
programme thus benefitted local-currency MMFs only indirectly by contributing to restoring confidence in the 
underlying EUR-denominated markets. 
41  
advanced economies”, BIS Bulletin No 21   
42  
MMLF  and they initially suffered outflows but have rapidly recovered after the central bank announcements.  
43  
Assets  with  a  lower  duration  face  a  smaller  change  in  price  following  a  shock  in  interest  rates.  On 
average, MMFs have significantly reduced their average  weighted maturity, down to a 10-year low of 19 days 
from previous levels close to 50 days in late 2020 and 2021. 

Paolo  Cavallino  and  Fiorella  De  Fiore,  5  June  2020,  “Central  banks’  response  to  COVID-19  in 

Nevertheless,  EU  USD  LVNAVs  were  not  eligible  for  the  ECB  facilities  and  the  Federal  Reserve’s 

12 

 
 
                                                                                                                                                                                     
In  September  2022,  the  market  stress  experience  in  the  UK  also  impacted  those  EU  MMFs 
with  a  sizeable  exposure  to  UK  assets  and/or  having  UK  investors  (notably  Irish  MMFs, 
which  have  approximately  60%  of  their  investor  base  by  amount  owned  from  the  UK). 
According to available evidence, there was  an indirect impact on GBP-denominated MMFs, 
linked  mainly  to  investors  needing  to  quickly  access  liquidity  following  increased  margin 
calls  and  forced  sales,  notably  by  funds  with  liability-driven  investment  strategies.44  Some 
GBP-denominated MMFs saw increased outflows (five funds experienced cumulative outflow 
of  more  than  10%)45  shortly  after  the  announcement  of  the  UK  “mini  budget”  on  23 
September 2022.  

The situation quickly reversed following the intervention of the Bank of England to support 
the gilt market. In October 2022, GBP-denominated EU MMFs experienced inflows of nearly 
30%. Moreover, during the last week of September 2022, GBP-denominated EU MMFs took 
steps  to  strengthen  their  resilience,  having  increased  the  proportion  of  liquid  assets  in  their 
portfolios, with both daily and weekly liquidity levels rising significantly.46  

While one LVNAV fund came close to breaching the regulatory limit for NAV deviation, it 
seems  that  the  sector  overall  held  well  and  delivered  on  its  role  of  providing  short-term 
liquidity  storage.  The  liability-driven  investment  episode  highlights  the  role  of  MMFs  as 
liquidity  management  vehicles  for  institutional  investors.  It  also  shows  the  importance  of 
preserving the resilience of the MMF sector to different types of economic shocks. 

In March 2023, no significant impact on EU MMFs was observed following the turmoil in the 
banking sector. In the US, the collapse of Silicon Valley Bank led some depositors to question 
the safety of bank deposits, notably those above the regulatory protection limit. This triggered 
a shift  towards US  MMFs,  which offered higher  yields and better flexibility. Moreover, the 
banking turmoil resulted  in  increased inflows in  the Federal  Reserve overnight  reverse repo 
(ON  RRP)  facility  during  the  last  weeks  of  March  2023.  Following  the  takeover  of  Credit 
Suisse by UBS, EU MMFs have also seen sizeable inflows, including EUR 17.7 bn into euro-
denominated  MMFs  during  March  2023,  which  could  be  seen  as  an  indication  that  market 
participants perceive the EU MMF sector as resilient.  

3.  ADEQUACY  OF  THE  MMF  REGULATION  FROM  A  PRUDENTIAL  AND 

ECONOMIC POINT OF VIEW  

The  following  section  reviews  the  adequacy  of  the  MMF  Regulation  from  a  prudential  and 
economic point of view, according to the requirements of Article 46(2) of that Regulation.  

MMFs are a distinct category of investment funds, closely intertwined on the one hand with 
firms active in the real economy and the banking sector and on the other with key parts of the 
financial  markets.  They  have  an  important  dual  economic  function  as  a  liquidity-  and  cash 
management  tool  and  as  a  short-term  funding  instrument  for  financial  and  non-financial 
entities. They  are not  homogeneous,  and their structure and risk characteristics differ across 
jurisdictions.47  

These strategies have been notably used by defined-benefit pension funds, which have used leverage to 

44  
be able to match their assets and liabilities in a low interest rate environment.  
45   
46  
47  

ESMA, February 2023, Report on Trends, Risks and Vulnerabilities, No. 1, 2023 
ESMA, February 2023, Report on Trends, Risks and Vulnerabilities, No. 1, 2023 
FSB, 11 October 2021, Policy Proposals to Enhance Money Market Fund Resilience  

13 

 
 
                                                           
3.1. MMFs and debt issued or guaranteed by EU Member States. 

Article 46(2)(b) and  (c)  of the MMF Regulation  requires  the Commission to  assess the role 
that  MMFs  play  in  purchasing  debt  issued  or  guaranteed  by  the  Member  States  and  to  take 
into account the characteristics of such debt and the role that it plays in financing the Member 
States.  

Because of the comparatively low liquidity and long maturities of debt instruments issued or 
guaranteed  by  EU  Member  States,  EU  MMFs  do  not  invest  significantly  in  such  securities. 
Instead, most of the government debt exposure of EU MMFs is towards non-EU sovereigns 
(EUR  119  bn  at  the  end  of  2021,  74%  of  total  sovereign  exposure).  In  particular,  US 
government debt accounts almost entirely for the sovereign debt holdings of CNAVs (EUR 88 
bn  at  the  end  of  2021).  For  LVNAVs,  EU  government  debt  accounted  for  36%  of  their 
exposure to government bonds at the end of 2021, while UK and US sovereigns accounted for 
around  60%.  In  contrast  to  other  MMF  types,  the  majority  of  government  debt  holdings  of 
VNAVs are EU instruments, representing more than 75% of their government debt exposure 
at  the  end  of  2021.48  However,  VNAVs  generally  have  a  lower  share  of  government  debt 
compared with other types of MMFs (only 7% of their assets).  

Under  the  MMF  Regulation,  government  debt  with  a  longer  residual  maturity49  may  still 
count  for  up  to  17.5  percentage  points  of  the  30%  required  weekly  maturing  assets  for 
LVNAV  or  public  debt  CNAV.  Respondents  to  the  consultation  indicate  that  the  cap  of 
17.5%  appears  inconsistent  with  the  treatment  of  sovereign  debt  in  other  legislative 
frameworks (section 3.2). However, the MMF Regulation allows MMFs to invest up to 100% 
of  their  assets  in  sovereign  debt  and  the  limitations  focus  solely  on  liquidity  buffers  of 
LVNAV  and  public  debt  CNAVs  due  to  the  longer  maturity  and  higher  volatility  of  those 
assets compared  with weekly  maturing  assets. Respondents  to  the consultation  also  indicate 
that many investors use public debt CNAVs due to an unwillingness or inability to invest in 
credit  portfolios.  This  is  commonly  due  to  specific  collateral,  capital  or  regulatory 
requirements,  e.g.  requirements  that  cash  positions  be  collateralised  only  with  government 
debt,  or regulatory  requirements like  high-quality  liquid  assets.  Other investors indicate that 
while  investments  in  public  debt  CNAV  are  done  for  diversification  purposes,  the  size  of 
these markets is not big enough to meet the cash management needs of some investors. 

3.2. Uniform definitions of high and of extremely high liquidity and credit quality of 

transferable assets 

Article  46(2)(d)  of  the  MMF  Regulation  requires  the  Commission  to  take  into  account  the 
report referred to in Article 509(3) of Regulation (EU) No 575/2013.  

Article 509(3) of Regulation (EU) No 575/2013 tasked the EBA to report to the Commission 
on appropriate uniform definitions of high and of extremely high liquidity and credit quality 
of  transferable  assets.  Banks  invest  in  these  assets  to  comply  with  the  regulatory  liquidity 
requirements under rules defined by the Basel Committee on Banking Supervision.  

48  
49  
can be counted towards weekly maturing assets with residual maturity of up to 190 days.  

ESMA, 8 February 2023: “EU MMF market 2023” 
As long as they are highly liquid and can be redeemed and settled within one working day, such assets 

14 

 
 
 
 
 
                                                           
The EBA issued this Report on 20 December 2013,50 while recommending that its empirical 
conclusions  should  be  supplemented  by  a  qualitative/expert  judgment,  also  building  on 
supervisory advice. Based on the empirical analysis of a wide range of financial assets traded 
in the EU, the EBA distinguished between assets of high liquidity and quality and assets of 
extremely  high  liquidity  and  quality.  In  line  with  international  standards,  the  EBA 
recommended  to  consider  all  bonds  issued  or  guaranteed  by  European  Economic  Area 
sovereigns and central banks in the domestic currency and also those issued or guaranteed by 
supranational institutions as transferable assets of extremely high liquidity and credit quality.   

Liquidity risk management  for asset managers incorporates a range of safeguards: staggered 
maturities in particular for less liquid assets, daily and weekly liquidity buckets depending on 
the maturity of the assets in the portfolio, rules on the credit quality of assets, knowledge of 
the  MMF  investors  base,  and  rules  on  the  behaviour  and  liquidity  of  the  assets  and  their 
correlation. Since 2017, increased attention has been paid to strengthening the management of 
liquidity risk, including by working on MMF stress testing, transparency and supervision, the 
definition of liquid assets, and the eligibility of assets for liquidity requirements.  

Under  EU  asset  management  rules,  the  liquidity  of  an  asset  cannot  be  automatically 
presumed,  and  an  appropriate  liquidity  test  must  be  performed.  For  this  purpose,  asset 
managers  have  to  put  in  place  an  appropriate  risk  management  process,  which  is 
systematically reviewed and adapted to their investment strategies and to the type of investors 
(‘know  your  costumer‘  policy).  The  liquidity  and  credit  quality  are  measured  on  a  case-by-
case basis at the level of the financial instruments and of the overall portfolio.  

Therefore, while some assets may be considered of high or extremely high liquidity under the 
EU  banking  framework,  this  may  not  automatically  be  the  case  in  an  MMF  context,  and  a 
case-by-case  analysis  would  be  required  to  determine  the  liquidity  and  credit  quality  of  a 
fund’s assets.  

3.3. Impact of the MMF Regulation on short-term financing markets 

Article  46(2)(e)  of  the  MMF  Regulation  requires  the  Commission  to  take  into  account  the 
impact of this Regulation on short-term financing markets.  

MMFs are part of the broader  ecosystem of short-term  finance. The  turmoil in  March 2020 
revealed certain structural vulnerabilities, data gaps, and regulatory uncertainties on European 
short-term funding markets. While these are beyond the scope of the MMF Regulation, they 
remain important for the sound functioning of EU MMFs.  

The  short-term  funding  market  is  an  over-the-counter  dealer  intermediated  market.  There  is 
evidence  that  this  short-term  funding  market  is  fragmented  and  opaque.51  Relevant 
information  is  spread  over  multiple  trading  venues,  neither  of  which  is  able  to  provide  a 
comprehensive  picture  of  the  market  due  to  partial  reporting,  unclear  scope  of  action, 
inconsistent terminologies, etc. 

50  
51  
what we do not know” , Authorité des Marchés Financiers, Risk and Trend Mappings. 

Workstream 5 (WS 5): Report on the LCR pursuant to Art 481 (1) CRR (europa.eu). 
Darpeix, P., March 2022, “The market of short-term debt securities in Europe: what do we know and 

15 

 
 
  
 
 
 
                                                           
 
The study also shows that secondary market activity (bid, offer, price, volumes, etc.) is almost 
entirely  opaque.  This  makes  price  discovery  challenging,  creates  inefficiencies  in  these 
markets, and leads to difficulties for MMFs to appropriately monitor risks in a stress situation. 
It  also  prevents  regulators  from  accurately  assessing  structural  market  liquidity.  Increased 
transparency could contribute to making short-term funding markets more dynamic and more 
resilient, thereby also reducing the risk associated with MMFs in case of severe stress.  

Most respondents to the consultation, including financial sector respondents and supervisors, 
pointed  to  the  need  to  increase  transparency  and  to  help  price  discovery  in  the  short-term 
securities markets, by requiring more disclosures on what is being traded and on outstanding 
amounts.  

Furthermore, given the lower liquidity and opacity of this market, there is a risk that a market 
stress  can be transmitted to  other MMFs in  what  is  called a  contagion  dynamic.  In order to 
satisfy  redemption  requests,  MMFs  need  to  invest  in  sufficiently  liquid  assets.  Such  liquid 
instruments include reverse repos (often overnight), Treasury bills, and bank deposits. Other 
instruments (certificates of deposit, commercial papers) cannot always be sold off quickly (as 
they  are  normally  held  until  maturity  and  secondary  markets  are  not  sufficiently  deep, 
heightening  the  price  impact  if  they  are  sold),  but  they  have  a  very  short  maturity.  If  a  run 
occurs, MMFs would first use the proceeds of maturing assets or terminate their reverse repo 
transactions to meet redemption requests. If the run continues, MMFs would sell their liquid 
assets  without  further  investing  in  short-term  instruments  leading  to  a  sudden  drying  of 
sources of funding for companies.  

In  principle,  this  contagion  dynamic  would  be  avoided  if  MMFs  could  invest  their  cash  in 
instruments for which a rapid withdrawal would not lead to market contagion. One instrument 
that  satisfies  this  requirement  would  be  a  deposit  at  the  central  bank  itself.  A  case  study  of 
such an arrangement can be found in the US, where MMFs may place their excess cash with 
the US Federal Reserve’s overnight reserve repo (ON RRP) facility. In addition to preventing 
contagion  dynamics  in  situations  of  liquidity  crunch,  this  facility  also  puts  the  US  MMF 
sector  at  an  advantage  compared  to  EU  MMFs  in  terms  of  flexibility  in  managing  their 
liquidity  inflows.52  This  was  exemplified  by  the  banking  crisis  sparked  by  the  collapse  of 
Silicon  Valley  Bank  which  lead  to  an  increase  of  inflows  to  US  MMFs,  resulting  in  a 
subsequent  growth  in  the  usage  of  the  Federal  Reserve’s  facility  during  the  last  weeks  of 
March 2023. By March 2023, MMFs and other eligible participants held more than USD 2.3 
trillion in that facility.53  

3.4. Regulatory developments at international level 

Article  46(2)(f)  of  the  MMF  Regulation  requires  the  Commission  to  take  into  account  the 
regulatory developments at international level.  

Pandemic  related  events  triggered  a  strong  push  to  further  strengthen  the  regulatory 
framework for MMFs. This  has  resulted in  several  proposals  by ESMA,  the ESRB, and the 
FSB to reform the regulatory framework for MMFs, to limit systemic risks and to ensure that 
the MMF sector can withstand a potential future liquidity or market stress. The policy options 

The decision about opening such a liquidity facility to MMFs however is beyond the competencies of 

52  
the European Commission and lies in the ECB remit.  
53  

Reverse Repo Operations - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org) 

16 

 
 
 
 
 
 
                                                           
proposed by the different authorities and institutions can be grouped as follows: (1) reduce the 
risk of runs (notably by removing the deposit-like features of certain MMFs), (2) strengthen 
the liquidity of MMFs and their ability to absorb losses, and (3) measures to prepare for future 
crises. These proposals are listed in Table 2 and further detailed below.  

Table 2 – Main policy proposals 

Policy objectives 

Policy proposals 

1) ESMA 

2) ESRB 

3) FSB 

Reduce the risk of 
runs  

Strengthen liquidity 
of MMFs and their 
ability to absolrb 
losses  

from 

Removing the possibility to use amortised 
cost for LVNAVs 
Decoupling  the  activation  of  liquidity 
management 
regulatory 
tools 
thresholds for LVNAVs and CNAVs 
Impose  on  redeeming  investors  the  cost 
of their redemptions 
Rules on the use of liquidity management 
tools 
Changes to the daily and weekly liquidity 
ratio 

Impose  minimum  ratio  of  investment  in 
public debt   
Increase usability of the liquidity holdings 
in times of stress 
Introduce minimum balance at risk 

Capital buffer 

Yes 

Yes 

Yes 

Yes 

Voluntary 
holding 
Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Enhancement of stress testing framework  Yes 

Yes 

Other measures 

External  support  (incorporating  ESMA 
statement in the law) 
Rules on disclosure of MMFs’ ratings 

More advanced reporting requirements 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

  ESMA opinion to reform MMF Regulation, 14 February 2022 
  Recommendation of the ESRB on reform of MMF, 25 January 2022 
  FSB recommendations to the G20 on MMFs reforms, 11 October 2021 (Policy proposals to enhance money market 

fund resilience). 

  US  Securities  and  Exchange  Commission  (SEC)  draft  amendments  to  MMF  rules,  15  December  2021  (MMF 

Reforms) for public consultations.  

  Financial Conduct Authority (FCA) and Bank of England joined discussion paper on MMF, May 2022 (Resilience 

of Money Market Funds) for consultation until 23 July 2022. 

(*) proposal to require a minimum holding in highly liquid assets including public debt and maximum holding of assets 
with lower liquidity under stressed market (e.g. 40% in private sector certificates of deposit and commercial paper).  
(**)  The  Bank  of  England  and  the  Financial  Conduct  Authority  are  contemplating  launching  a  consultation  on  the 
removal  of  the  stable  NAV  from  LVNAVs.  LVNAVs  would  have  similar  rules  as  short  term  VNAVs.  They  also 
consider limiting the size of the public debt CNAV market. 

3.4.1.  Reducing the risk of runs 

International  organisations  and  supervisory  bodies  such  as  the  ESRB  and  ESMA  have 
recommended that LVNAVs become variable NAV funds, following the example of the US.54 
Such a change would aim at reducing the risk of runs caused by threshold effects by limiting 

54  
The US SEC made this move in 2016. The  SEC reform required all institutional prime MMFs (that is 
non-government MMFs used by institutional investors) to convert to variable NAV. The result of this reform is 
that assets invested in these US MMFs contracted substantially in the years leading up to the implementation of 
these reforms, to the benefit of US government MMFs (which have a stable NAV feature). 

17 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
opportunities  for  investors  to  redeem  from  the  MMF  at  constant  prices  which  in  periods  of 
market stress do not necessarily reflect current market valuations of underlying assets. To this 
end,  they  propose  to  prohibit  the  use  of  amortised  cost  accounting  and  the  associated  2nd 
decimal rounding which allows LVNAVs to offer a stable redemption price.  

However,  this  policy  option  would  imply  a  radical  change  for  the  EU  MMF  market  and 
notably the disappearance of the LVNAV market. The switch from a stable to a variable NAV 
would remove the deposit-like features of these products, which is one of the main purposes 
that investors cite for using these MMFs. The majority of the respondents to the consultation 
were rather critical about removing LVNAVs. Most respondents saw the risk that in this case, 
some investors would exit the MMF market. The limited availability of economically viabile 
alternatives and substitutes to LVNAVs could lead investors to turn to less regulated products. 

As an alternative, current investors in LVNAVs could invest in public debt CNAV (currently 
11% of the market), in  floating NAV MMFs (in particular short-term VNAV) or directly in 
the  short-term  market.  However,  responses  to  the  stakeholder  consultation  indicate  that  the 
public  debt  CNAV  segment  is  too  small  to  accommodate  the  cash  management  needs  of 
investors  and  that  it  does  not  meet  their  liquidity  requirements.  Moreover,  respondents 
indicate  that  the  elimination  of  LVNAVs  would  result  in  an  increase  in  competition  for 
government  assets,  which  are  used  by  banks  as  High  Quality  Liquid  Assets,  as  well  as  by 
many other investors for liquidity management purposes.  

Some  respondents  indicate  that  short-term  VNAV  could  be  an  alternative,  but  point  to 
uncertainties  about  their  accounting  treatment  as  ‘cash  and  cash-equivalent’  in  different 
jurisdictions. Moreover, such changes would also have tax implications. Most respondents to 
the consultation indicate that they would use bank deposits as alternative instruments in case 
LVNAVs were no longer available, even though bank deposits would result in an increase of 
counterparty  credit  risk  and  significantly  reduce  risk  diversification  compared  with  the 
diversified portfolios provided by MMFs.  

Overall,  the  respondents  to  the  consultation  appreciated  the  utility  of  LVNAVs  and 
particularly the operational ease of use for investors because of the ability to round the share 
price  within  the  20  basis  points  collar.  Should  LVNAVs  not  be  available  anymore, 
respondents  feared  a  lack  of  alternative  investment  and  risk  diversification  options.  The 
resilience of LVNAVs during the March 2020 turmoil should also be taken into consideration, 
as no LVNAVs activated liquidity management tools nor did they convert into VNAVs during 
this period.  

3.4.2.  Strengthen the liquidity of MMFs and their ability to absorb losses 

Prudential  and  supervisory  bodies  have  put  forward  a  range  of  policy  options  aiming  at 
further strengthening the ability of MMFs to face high redemption requests and protect public 
interest and financial stability. 

While  the  connection  between  the  use  of  LMTs  and  liquidity  levels  is  not  automatic  in  the 
MMF  Regulation,  a  breach  of  minimum  WMA  holdings  of  30%  can  potentially  trigger  the 
imposition of redemption gates or fees. This seems to have compelled fund managers not to 
use their WMA holdings to finance increased redemption requests in March 2020, fearing that 
a breach of the minimum WMA level would induce further redemption requests as investors 
anticipated  the  imposition  of  liquidity  management  tools.  Fully  disconnecting  the  potential 
use of LMTs from breaches of minimum liquidity holdings could thus increase the ability of 

18 

 
 
fund  managers  to  finance  increased  redemptions  in  stress  periods.  This  proposal  finds  the 
largest support so far among stakeholders. 

The proposal to relax existing limits on eligible public debt assets as part of liquidity buckets 
is  strongly  supported  by  the  ECB,  which  wants  investments  in  these  assets  to  be  made 
compulsory. Views of stakeholders are split when it comes to the binding character and levels 
of investments in such assets. This is related to the variable impact of such investments on the 
profitability of MMFs and the availability  of  eligible public debt.  Stakeholders also  express 
some concerns about shifting liquidity risk to the sovereign market. Although public debt can 
serve as a crucial tool to manage liquidity for MMFs, the recent UK crisis has shown that it is 
not immune to episodes of price volatility. In addition, there is a risk that an increase in the 
existing  limits  on  eligible  public  debt  assets  would  result  in  MMF  investments  becoming 
overly concentrated in these securities, whereas the diversification of investments in different 
asset classes is an important safeguard.  

More  generally,  the  proposals  to  increase  minimum  holdings  of  liquid  assets,  while  not 
controversial in substance, are difficult to implement and may have unintended consequences. 
Indeed,  while  the  rules  on  liquidity  coverage  ratio  provide  for  a  definition  of  high  quality 
liquid  assets,  in  the  asset  management  sector  it  is  difficult  to  define  liquid  assets  (e.g. 
government  bonds  may  also  face  stressed  market  conditions).  In  addition,  MMF  managers 
manage liquidity with a holistic approach including staggered maturities, use of reverse repo 
transactions  and  the  characteristics  of  their  investor  base  (including  investor  concentration). 
Moreover, additional hard thresholds would introduce rigidity in the implementation of asset 
managers’ liquidity risk management policies, including stress tests, with potential unintended 
effects. 

There are split views among stakeholders, based on the role and function of MMFs, about the 
actual  impact  of  recommendations  to  give  fund  managers  the  possibility  to  shift  the  cost  of 
redemptions  to  investors  (by  imposing  different  kinds  of  price-based  liquidity  management 
tools,  also  known  as  swing  pricing),  as  recommended  by  the  FSB  and  the  ESRB  and  put 
forward  by  the  US  Securities  and  Exchange  Commission.  Following  the  FSB  and  ESRB 
recommendations,  the  proposal  to  revise  the  directives  on  Alternative  Investment  Fund 
Managers (AIFMD) and UCITS aims to expand the range of liquidity management tools for 
funds in  the EU  and to  harmonise the  ways they are used. EU MMFs will  benefit from the 
AIFMD/UCITS  review,  whereby  asset  managers  would  be  allowed  to  select  the  most 
appropriate liquidity management tools from a dedicated list. 

Proposals  to  increase  the  loss-absorption  capacity  of  MMFs  have  been  put  forward  by  the 
FSB, including by imposing constraints on the shares that can be redeemed immediately (this 
is known as ‘minimum balance at risk’) and by requiring MMFs to maintain capital buffers, 
for example outside the MMF in an escrow account financed by fund managers. These types 
of solutions would reduce the first mover advantage for investors, as they would mitigate the 
risk  of  losses  being  imposed  on  remaining  investors.  However,  such  solutions  are  either 
untested  and  contingent  on  significant  operational  adjustments  (for  ‘minimum  balance  at 
risk’), or they would make it more expensive to operate MMFs and thus likely lead to closures 
of some funds (for capital buffers) and lower returns for investors.  

3.4.3.  Other measures 

A number of additional measures, which are not directly linked to the operations of MMFs, 
have also been put forward by ESMA and the FSB, and merit further assessment. Those are 

19 

 
 
mainly  related  to  reporting  and  stress  testing.  Similarly,  other  proposals  from  stakeholders 
such as strengthening supervision could be further assessed.  

3.5. Feasibility of establishing a minimum 80% EU-public debt quota 

Article  46(2)  of  the  MMF  Regulation  requires  the  Commission  to  assess  the  feasibility  of 
establishing an 80 % EU public debt quota.  

This  report  takes  account  of  the  availability  of  short-term  EU  public  debt  instruments  and 
assesses  whether  LVNAVs  might  be  an  appropriate  alternative  to  public  debt  CNAVs 
targeting instruments in other currencies.  

Recital  56  of  the  MMF  Regulation  argues  that  such  a  quota  may  be  “justified  from  a 
prudential supervisory point of view”, given that “the issuance of EU short-term public debt 
instrument is governed by Union law”. However, there are two main difficulties that render 
such a quota unfeasible in practice. 

The  first  difficulty  is  the  mismatch  between,  on  the  one  hand,  the  public  debt  CNAVs 
currently available in the EU (which are mostly denominated in USD or GBP, with only one 
relatively small EUR-denominated public debt CNAV in existence55), and on the other hand, 
the denomination of public debt in the EU. Data from Darpeix56 shows that the vast majority 
(around  90%)  of  short-term  debt  securities  issued  by  EU  countries  (whether  or  not  they 
belong to the euro area) is labelled in EUR, with only around 5% denominated in USD. The 
mismatch  between the denominations of the funds themselves  and the available public debt 
instruments  implies  that  EU  public  debt  CNAVs  mainly  invest  in  US-  and  UK-issued 
instruments.57 

The results of the public consultation indicate that even with the imposition of an EU public 
debt quota investors in USD and GBP denominated CNAVs would likely  not shift to EUR-
denominated public debt MMFs, for two main reasons.  

-  First,  because  clients  mainly  take  into  account  sovereign  and  currency  risk  aspects 
together.  For  instance,  clients  investing  in  USD-denominated  MMFs  want  to  have 
exposure  to  US  debt  and  currency  rather  than  to  EU  debt  and  currency.  This  is  also 
closely  related  to  the  economic  function  of  MMFs  as  a  store  of  liquidity  in  a  given 
currency.   

-  And  second,  because  there  are  risks  related  to  low  diversification  and  relatively  low 
liquidity  of  EUR-denominated  short-term  public  debt.  Feedback  from  stakeholders 
indicates  that  MMFs  prefer  to  invest  in  assets  with  maturity  lower  than  3  months, 
which  is  difficult  to  achieve  with  the  current  market  for  EUR-denominated  public 
debt.   

The second difficulty is that such a quota could have negative financial stability implications. 
Banks need exposure to government debt to comply with the Basel II liquidity requirements. 

Based on ESMA data, 8 February 2023: “EU MMF market 2023 
Darpeix, P., March 2022, “The market of short-term debt securities in Europe: what do we know and 

55  
56  
what we do not know” , Authorité des Marchés Financiers, Risk and Trend Mappings. 
57  

For various reasons, MMFs tend not to mix currencies. While they could do so to some extent by 
hedging currency risk exposures via foreign-exchange derivatives, it would become too costly on a 
substential basis. 

20 

 
 
                                                           
A  minimum  80%  EU-public  debt  quota  would  mean  that  MMFs  would  target  the  same 
instruments  as  banks.  As  a  result,  there  would  be  a  multitude  of  investors  investing  in  the 
same asset class, thus increasing risks of contagion and financial instability in crisis situations 
due  to  common  underlying  exposures  amplifying  a  feedback  loop  between  financial  and 
sovereign risk. 

In light of the preceding analysis, the merits of establishing a minimum 80% EU-public debt 
quota for EU MMFs remain questionable. However, even without the imposition of a quota, 
more  EUR-focused  public  debt  CNAVs  might  appear  in  the  market  following  the  recent 
increase in interest rates in the euro area, which could help place more short-term sovereign 
debt in EUR with EU public debt CNAVs. 

4. CONCLUSIONS 
This  report  delivers  on  the  legal  mandate  under  Article  46(1)  and  46(2)  of  the  MMF 
Regulation  for  the  Commission  to  submit  a  report  to  the  European  Parliament  and  to  the 
Council,  reviewing  the  adequacy  of  the  MMF  Regulation  from  a  prudential  and  economic 
point of view.  

The  report  shows  that  the  MMF  Regulation  successfully  passed  the  test  of  liquidity  stress 
experienced  by  MMFs  during  the  COVID-19  related  market  turmoil  of  March  2020,  the 
recent interest rate increases, and related financial asset re-pricing. No EU-based MMF had to 
introduce  redemption  fees  or  gates  or  to  suspend  redemptions  during  these  stress  events. 
Similarly, EU MMFs focused on GBP assets withstood the redemption pressure linked to the 
September 2022 gilt market stress. 

These experiences indicate that the the safeguards in the MMF Regulation have been working 
as  intended.  This  includes  the  safeguards  that  were  conceived  to  allow  stable  NAV  MMFs 
(CNAVs  and  LVNAVs)  to  continue  using,  under  certain  conditions,  the  amortized  cost 
method without creating systemic risks and harming investors.  

By  introducing  a  dedicated  regime,  the  MMF  Regulation  has  significantly  strengthened  the 
regulatory framework for MMFs in the EU, which had before been subject to different rules. 
However,  after  5  years  of  application  of  the  MMF  Regulation,  this  report  identifies 
shortcomings  which  should  be  further  assessed.  In  particular,  the  results  of  the  stakeholder 
consultation  and  the  recent  market  developments  show  that  there  could  be  scope  to  further 
increase  the  resilience  of  EU  MMFs,  notably  by  decoupling  the  potential  activation  of 
liquidity  management  tools  from  regulatory  liquidity  thresholds.  In  addition,  this  report 
highlights  structural  problems  that  are  external  to  MMFs,  and  therefore  also  to  the  MMF 
Regulation,  including  those  linked  to  the  underlying  short-term  markets.  These  structural 
problems  would  merit  a further assessment, and are also  currently the subject  of a more in-
depth analysis at the level of FSB. 

Finally,  EU  MMFs  will  benefit  from  the  ongoing  review  of  the  AIFM  and  UCITS 
Directives58,  which  aims  to  introduce  new  harmonised  rules  to  increase  the  availability  of 
LMTs for open-ended funds. This new LMT framework will further strengthen the resilience 
of EU MMF’s liquidity management in cases of stress. 

As MMFs operating in the EU have to be established and comply with either AIFMD or UCITSD. The 

58  
Commission proposal can be seen at: https://ec.europa.eu/info/law/better-regulation/have-your-
say/initiatives/12648-Financial-services-review-of-EU-rules-on-alternative-investment-fund-managers_en.  

21