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

Author

Listed:
  • Capotă, Laura-Dona
  • Grill, Michael
  • Molestina Vivar, Luis
  • Schmitz, Niklas
  • Weistroffer, Christian

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

Suggested Citation

  • Capotă, Laura-Dona & Grill, Michael & Molestina Vivar, Luis & Schmitz, Niklas & Weistroffer, Christian, 2021. "How effective is the EU Money Market Fund Regulation? Lessons from the COVID 19 turmoil," Macroprudential Bulletin, European Central Bank, vol. 12.
    • Handle: RePEc:ecb:ecbmbu:2021:0012:2
    Note: 1280809
    as

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    File URL: https://www.ecb.europa.eu//pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202104_2~a205b46756.en.html
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    Citations

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    Cited by:

    1. Dunne, Peter G. & Giuliana, Raffaele, 2022. "Did Public Debt Assets Improve the Resilience of Money Market Funds during the COVID-19 Crisis?," Financial Stability Notes 5/FS/22, Central Bank of Ireland.

    More about this item

    Keywords

    Financial stability; Liquidity risk; Money market funds; Regulation;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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