In a consultation published today (6 December), the regulator unveiled plans to significantly increase the minimum proportion of highly liquid assets that UK money market funds (MMFs) must hold, in an effort to enhance their resilience.
The proposals seek to require money market funds’ daily and weekly liquid assets levels to rise to 15% and 50% of their assets, respectively.
These are increases from a daily level of 7.5% for variable NAV MMFs and 10% for other MMFs, and a weekly level of 15% for variable NAV MMFs and 30% for other MMFs.
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This is meant to ensure that MMFs have enough liquid assets to withstand large amounts of withdrawals over a short period in severe but plausible market stresses.
In October, the Bank of England’s Financial Policy Committee called for money market funds to have their liquidity requirements raised, identifying them as a “significant threat” to financial stability.
The FCA said this change will “significantly reduce the first-mover advantage” that investors in MMFs have, enabling them to withdraw as soon as possible when market stress begins.
Secondly, the FCA proposed removing a rule that links the liquidity levels of MMFs and the need for the manager to consider or impose tools such as liquidity fees or redemption gates.
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These changes will only apply to MMFs that can offer subscriptions and redemptions at a constant net asset value, known as stable NAV MMFs.
“This proposed policy change is known as ‘delinking’ and works to reduce the additional first-mover advantage the ‘links’ can cause for these types of MMF as their liquid asset levels decrease,” the FCA said.
Other changes proposed by the FCA include enhanced ‘know your customer’ requirements, as well as enhanced stress testing and operational resilience for stress testing for stable NAV MMFs.
In addition to increased financial stability, these measures also have the potential to “strengthen the long-term competitiveness of the UK MMF sector by increasing investor confidence in UK domiciled funds”, the regulator said.
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Following the 2020 ‘dash for cash’ and the 2022 crisis surrounding the Mini Budget, the FCA published a discussion paper in May aiming to increase money market fund resilience.
Some policy measures included in the discussion paper earlier this year have been scrapped, such as removing stable NAV MMFs and making changes to how MMFs currently operate.
“However, we are consulting on a requirement for all MMFs to have at least one liquidity management tool available for use when the fund is still trading if needed, and for all managers to have the ability to suspend their MMFs, with such tools to be deployed at the manager’s discretion,” the consultation paper said.
Policy paper
New government rules meant to replace previous EU regulations will be introduced to parliament next year.
The policy paper from the government, which it said was a near-final version of the bill, will mean that unauthorised Alternative Investment Funds will no longer be authorised to become MMFs.
“This route is very rarely used and adds considerable complexity to the MMF regime,” the policy note said. “Existing funds that have used this route in the past will continue to be treated as authorised MMFs and will be subject to the FCA’s rules for authorised MMFs.”
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Passporting provisions for MMFs will also be removed, which offered these funds a route to become established in the UK, but the legislation includes a transitional provision to ensure this route remains operational until the end of 2027.
Other proposal include changing the process of approving overseas MMFs to be marketed in the UK, which would include a provision that allows the government to impose conditions on incoming funds as part of the approval process.
