Guidelines must be updated at least every year per latest market developments.
ESMA published first set of these guidelines in Mar. 2018 and first update in 2019.
Update included principle-based guidelines on stress testing MMF or manager of MMF shall regularly conduct (sections 4.1 to 4.7).
Specifications on type of stress tests (section 4.8 of the Guidelines); 2019 calibration (section 5), the common reference parameters in section 5 updated annually since.
New paper aims to update methodology specified in section 4.8 and sets out proposals on which ESMA is seeking the views of external stakeholders.
Scope
Revision covers liquidity and macro scenarios: proposed liquidity scenario aims at better taking into account interaction between liquidity and redemption pressures.
That, in light of the stress event experienced in Mar. 2020; complements update 2020, with significant tightening of the parameters of the liquidity and redemption scenarios.
As for proposed addition to macro scenario, intends to better capture macroprudential impact of scenario by including assumptions on underlying markets, other participants.
In addition, paper presents ESMA’s considerations on potential climate risk scenario.
Out of Scope
Stress test scenarios calibration is not part of the consultation as per art 28(7) MMFR stress test guidelines must be updated at least every year per market development.
Latest update of the calibration is included in Final Report-Guidelines on stress test scenario under MMFR (Gd ESMA50-164-6583) that was published on Nov. 30, 2022.
Structure
Section 2 explains proposals background, Sections 3 and 4 give detailed explanations on content of the proposals and seek stakeholders’ input through specific questions.
Annex I sets out list of questions contained in paper while Annex II covers legislative reference in MMFR in relation to the update of the guidelines on stress tests scenarios.
Annex III sets out cost-benefit analysis related to the draft updated guidelines and Annex IV contains the full text of the draft updated guidelines.
Responses will help ESMA finalize guidelines for publication in Q4 2023, final guidelines will also include the calibration of the 2023 stress testing scenario for implementation.
Effectiveness
ESMA will consider comments received by Apr. 28, submitted using form provided.
Stakeholder’s views are sought on methodology, including data and impact calculation.
Post public consultation, ESMA will publish Final Report in 2023 which will include both revised methodology on stress test scenarios and annual calibration Art 27 (8) MMFR.
In May 2023 EFAMA responded on ESMA's review of stress test scenario, see #171418.
In Jun. 2023, ESMA issued money market funds stress tests results, see #175044.
Dec. 19, 2023 Final Report
On Dec. 19, 2023, EU ESMA issued final report updating parameters, methodology for MMF stress testing, includes parameters reflecting liquidity stress on money market.
And a new risk factor to simulate additional impact of asset sales under stress market conditions, this new factor takes the form of a price impact representing the additional cost incurred by selling a large amount of securities in a market with few buyers.
2023 parameter update reflects prevailing sources of systemic risk identified for the financial system against backdrop of low growth, higher inflation, higher interest rates.
Severity of parameters of stress test scenarios re hypothetical movements of interest rates increased compared to 2022 Guidelines, other updates similar to 2022 severity.
2023 Guidelines will be translated into official EU languages, issued on ESMA website, then national competent authorities will have 2 months to notify ESMA of compliance.
Guidelines will apply 2 months after publication of translations, after this application managers will have to report results of new parameters with quarterly reports.
On same day EU ESRB issued its adverse scenario for ESMA 2023 Guidelines, which was approved by its Board on Dec. 4, 2023, accompanied by a letter to ESMA.
ESRB updated the calibration of stress parameters for use with ESMA 2023 Guidelines.
Mar. 6, 2024 Translations Published
On Mar. 6, 2024, EU ESMA published translations of guidelines on stress test scenarios under MMF Regulation, which establish common reference parameters for scenarios.
The guidelines apply from 2 months after publication of translations, i.e. May 6, 2024.
After then, managers must report results of new parameters with quarterly reports.
