Regulatory Constraints for Money Market Funds: The Impossible Trinity?

27 Pages Posted: 9 Aug 2021

See all articles by Michel Baes

Michel Baes

ETH Zürich - Department of Mathematics

Antoine Bouveret

European Securities and Markets Authority

Eric Schaanning

European Systemic Risk Board - EUROPEAN SYSTEMIC RISK BOARD; Norges Bank

Date Written: July 19, 2021

Abstract

Despite substantial regulatory reforms, MMFs exposed to private assets experienced severe stress in March 2020. In the EU, Low Volatility Net Asset Value (LVNAVs) MMFs faced acute challenges to meet regulatory requirements while facing high redemptions. Such funds have to maintain their mark-to-market net asset value within 20 basis points of a constant net asset value, and their weekly liquidity asset above the 30% requirement. We provide a stylized model to show that under certain conditions related to outflows and market liquidity of their assets, LVNAVs may face difficulties in fulfilling both regulatory constraints at the same time.

We calibrate the model to EU data to assess possible reforms to MMFs. Increasing the NAV deviation and improving the market liquidity of the assets MMFs invest in would substantially improve the resilience of MMFs. Introducing countercyclical liquidity buffers would also enhance their resilience especially in times of stress, and the effect is larger than increasing liquidity requirements.

Keywords: Money Market Funds, Regulation, Runs, Systemic risk

JEL Classification: G01, G23, G28

Suggested Citation

Baes, Michel and Bouveret, Antoine and Schaanning, Eric, Regulatory Constraints for Money Market Funds: The Impossible Trinity? (July 19, 2021). Available at SSRN: https://ssrn.com/abstract=3884890 or http://dx.doi.org/10.2139/ssrn.3884890

Michel Baes

ETH Zürich - Department of Mathematics ( email )

R¨amistrasse 101
Raemistr. 101
Z¨urich, 8092
Switzerland

Antoine Bouveret (Contact Author)

European Securities and Markets Authority ( email )

201-203 rue de Bercy
Paris, IDF 75012
France

HOME PAGE: http://www.esma.europa.eu

Eric Schaanning

European Systemic Risk Board - EUROPEAN SYSTEMIC RISK BOARD ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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