CHAPTER IIIObligations concerning the risk management of MMFs
Article 28Stress testing
1
Each MMF shall have in place sound stress testing processes that identify possible events or future changes in economic conditions which could have unfavourable effects on the MMF. The MMF or the manager of an MMF shall assess the possible impact that those events or changes could have on the MMF. The MMF or the manager of an MMF shall regularly conduct stress testing for different possible scenarios.
The stress tests shall be based on objective criteria and consider the effects of severe plausible scenarios. The stress test scenarios shall at least take into consideration reference parameters that include the following factors:
a
hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF;
b
hypothetical changes in the level of credit risk of the assets held in the portfolio of the MMF, including credit events and rating events;
c
hypothetical movements of the interest rates and exchange rates;
d
hypothetical levels of redemption;
e
hypothetical widening or narrowing of spreads among indices to which interest rates of portfolio securities are tied;
f
hypothetical macro systemic shocks affecting the economy as a whole.
2
In addition, in the case of public debt CNAV MMFs and LVNAV MMFs, the stress tests shall estimate for different scenarios the difference between the constant NAV per unit or share and the NAV per unit or share.
3
Stress tests shall be conducted at a frequency determined by the board of directors of the MMF, where applicable, or the board of directors of the manager of an MMF, after considering what an appropriate and reasonable interval in light of the market conditions is and after considering any envisaged changes in the portfolio of the MMF. Such frequency shall be at least bi-annual.
4
Where the stress test reveals any vulnerability of the MMF, the manager of an MMF shall draw up an extensive report with the results of the stress testing and a proposed action plan.
Where necessary, the manager of an MMF shall take action to strengthen the robustness of the MMF, including actions that reinforce the liquidity or the quality of the assets of the MMF and shall immediately inform the competent authority of the MMF of the measures taken.
5
The extensive report with the results of the stress testing and proposed action plan shall be submitted for examination to the board of directors of the MMF, where applicable, or the board of directors of the manager of an MMF. The board of directors shall amend the proposed action plan if necessary and approve the final action plan. The extensive report and the action plan shall be kept for a period of at least 5 years.
The extensive report and the action plan shall be submitted to the competent authority of the MMF for review.
6
The competent authority of the MMF shall send the extensive report referred to in paragraph 5 to ESMA.
7
ESMA shall issue guidelines with a view to establishing common reference parameters of the stress test scenarios to be included in the stress tests taking into account the factors specified in paragraph 1. The guidelines shall be updated at least every year taking into account the latest market developments.