Bang for (breaking) the buck: Regulatory constraints and money market funds reforms

ESMA Working Paper No.2, 2023

57 Pages Posted: 9 Aug 2021 Last revised: 12 Sep 2023

See all articles by Michel Baes

Michel Baes

ETH Zürich - Department of Mathematics

Antoine Bouveret

European Securities and Markets Authority

Eric Schaanning

UBS AG

Date Written: September 4, 2023

Abstract

Despite substantial regulatory reforms, US and EU money market funds (MMFs) experienced severe stress in March 2020. Funds investing in private assets such as EU Low Volatility Net Asset Value (LVNAV) MMFs faced acute challenges to meet regulatory requirements while facing high
redemptions. Such funds must maintain their mark-to-market net asset value (NAV) within 20 basis points of a constant net asset value and must maintain a 30% share of assets that mature within one week.
We develop a stylized model to show that under certain conditions related to outflows and the market liquidity of their assets, LVNAVs may face difficulties in fulfilling both regulatory constraints at the same time. We calibrate our model to EU and US data and evaluate different regulatory reforms.
Removing the use of amortised cost has the largest positive effect in terms of resilience, while higher liquidity requirements have more limited effects, 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 when the assets eligible to meet liquidity requirements are more liquid than the rest of the portfolio, and the effect is larger than increasing liquidity requirements. Overall, we find that, based on our market impact estimates, the NAV constraint is generally the binding one.

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

JEL Classification: G01, G23, G28

Suggested Citation

Baes, Michel and Bouveret, Antoine and Schaanning, Eric, Bang for (breaking) the buck: Regulatory constraints and money market funds reforms (September 4, 2023). ESMA Working Paper No.2, 2023, 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

UBS AG ( email )

Bahnhofstrasse 45
Zurich, 8001
Switzerland

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