Board room discussion

After a policy review found that the European money market successfully weathered a series of market stresses, the industry is unlikely to face major regulatory reforms, says Moody’s Investors Service.

Last week, the European Commission published a report detailing the results of its review of money market fund regulation. It found that the sector proved resilient in the face of various market shocks and several episodes of market volatility over the past few years, including the pandemic, Russia’s invasion of Ukraine, and the recent liquidity crisis in the U.K.’s treasury market.

In the wake of these episodes, regulators — including the European Securities and Markets Authority (ESMA), the Financial Stability Board (FSB) and the European Systemic Risk Board (ESRB) — contemplated further reforms designed to guard against liquidity risks.

However, the prospect of major reform has been curtailed by the outcome of the European Commission’s review, which found that the industry’s “existing safeguards functioned as intended during the periods of stress.”

While many funds suffered significant outflows during market stress, they were also generally able to meet redemption demands and maintain stable net asset values, the report said. Additionally, funds avoided having to use ing tools like gating or redemption suspensions.

“These episodes of market volatility were real tests of funds’ ability to withstand liquidity stresses and proved the adequacy of the existing regulatory framework,” Moody’s said.

The sector’s latest round of regulatory reforms in 2019, “which introduced minimum overnight and weekly liquidity cash levels and know-your-client requirements, improved the industry’s capacity to absorb external shocks,” it noted.

Now, the unlikely prospect of more fundamental reform represents a positive for Europe’s €1.5 trillion money market fund sector, and removes uncertainty for both asset managers and investors, Moody’s concluded.