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

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.

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1. Introduction

2. Vulnerabilities in funds investing in non-public debt

3. Liquidity risk in the LVNAV framework

4. MMFs’ use of liquidity buffers

5. Conclusion

Box 1 Investors’ role in the outflows experienced by euro area MMFs in the March 2020 turmoil

References

Authors:

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

Compliments of the European Central Bank.