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.
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