How effective is the EU Money Market Fund Regulation? Lessons from the COVID 19 turmoil

Laura-Dona Capotă, Michael Grill, Luis Molestina Vivar, Niklas Schmitz and Christian Weistroffer

Macroprudential Bulletin, 2021, vol. 12

Abstract: The turmoil seen in March 2020 highlighted key vulnerabilities in the money market fund (MMF) sector. This article assesses the effectiveness of the EU’s regulatory framework from a financial stability perspective and identifies three important lessons. First, investment in non-public debt assets exposes MMFs to liquidity risk, highlighting the need to limit investment in illiquid assets. Second, low-volatility net asset value (LVNAV) funds are particularly vulnerable to liquidity shocks, given that they invest in non-public debt assets while offering a stable net asset value (NAV). Enhanced portfolio requirements could strengthen their liquidity profile. And third, MMFs seem reluctant to draw down on their liquidity buffers during periods of stress, suggesting a need to make buffers more usable. JEL Classification: G23, G28, G01

Keywords: Financial stability; Liquidity risk; Money market funds; Regulation (search for similar items in EconPapers)
Date: 2021-04
Note: 1280809
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