COVID-19 highlights the limitations of Money Market Funds

The pandemic emergency outbreak, in March 2020, shed a light on some vulnerabilities of money market funds, which have experienced huge outflows and problems in selling their assets to meet investors’ demands. Fortunately, the measures put in place by the Central Banks, in order to support market liquidity, were efficient in controlling possible damage to the system and to investors.

For this reason, ESMA, The European Securities and Markets Authority, has organized a consultation on the matter, looking to assess three main points:

1. The liquidity of money markets underlying investment funds
2. The role of regulatory obligations
3. The role of credit rating agencies in valuing MMFs

Point 1: Liquidity
Money Market Funds (MMFs) have a prime role in private monetary markets. They hold a large share of the outstanding monetary instruments. It is estimated that MMFs account for 50% of all Commercial Papers issued in Euros or Pounds. In February 2020, the sum of the exposures of the biggest MMFs of the United States, the Low Volatility NAV MMFs denominated in Dollars and Variable NAV MMFs, was one third of the whole Commercial Papers Market, a digit that reaches 80% if we consider Commercial Papers issued by financial institutions. This gives an idea of the market concentration...

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