FCA sets out proposals to enhance resilience of Money Market Funds
The UK Financial Conduct Authority (FCA) has published a consultation paper setting out proposals to enhance the resilience of Money Market Funds (MMFs) based in the UK. It has been developed in close consultation with the Treasury and the Bank of England.
MMFs are a type of fund used routinely by investors to place money and have quick access to it when they need it. MMFs pool investors’ money and make low risk investments in high-quality short-term assets. MMFs are subject to regulation to ensure that they can redeem investors’ investment and return it to them as cash at short notice. Investments in MMFs are not guaranteed, however, usually MMF investors receive all or almost all of their investment back.
MMFs play an important role in the economy and investors need to be able to rely on their ability to redeem cash at short notice. However, in a severe market stress, investors may not be able to get their money back from an MMF quickly, or not without a noticeable and unanticipated loss.
MMFs typically use liquid assets (essentially ready cash) to return money to redeeming investors. If an MMF runs out of liquid assets and investors are still demanding the return of their investment, it would either need to ‘fire sale’ assets in stressed markets and pass the resulting losses on to investors or be ‘suspended’ (temporarily stop returning investors’ money).
Investors who redeem first in a stress are more likely to get paid out without unanticipated delays or losses, so there is a ‘first-mover advantage’ in MMFs which can itself also drive additional investor demands for their money back.
The FCA is consulting to strengthen the regulatory framework applicable to MMFs and reduce their vulnerabilities.
The regulator is proposing two significant changes to current MMF regulation:
- A significant increase in the minimum proportion of highly liquid assets that all MMF types have to hold. This will ensure that MMFs have enough liquid assets to withstand large amounts of withdrawals over a short period in severe but plausible market stresses. This will significantly reduce the first-mover advantage in MMFs.
- The removal of an existing regulatory requirement for important types of MMF which ‘links’ the levels of liquid assets in those MMFs with the need for the MMF manager to impose or consider imposing tools that, if used, would reduce the ability of investors to get their money back without unanticipated delays or losses. 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 anticipates your comments by 8 March 2024.