UK Proposes Bold Changes: In a bid to fortify the stability of money market funds (MMFs), the UK’s Financial Conduct Authority (FCA) has introduced new regulations, responding to a recommendation from the Bank of England. The proposed changes aim to enhance the sector’s resilience, particularly during financial market challenges.
The FCA’s key proposal involves a substantial increase in the minimum proportion of assets in MMFs that can be quickly sold in times of market stress. This move is designed to ensure MMFs maintain enough liquid assets to withstand significant withdrawals in severe yet plausible market conditions.
Specifically, the FCA suggests raising the minimum daily liquidity requirements from the current approximately 10% to 15%. Additionally, the weekly level is proposed to increase to 50%, up from the current 30%. These adjustments intend to prevent money market funds from facing difficulties in selling typically liquid assets, like government bonds, during periods of heightened investor withdrawals, as witnessed at the onset of the COVID-19 pandemic.
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Furthermore, the FCA is looking to revise rules that currently favor investors who are the first to withdraw funds from a money market fund. Both proposed measures are geared toward increasing usable liquidity, reducing the need for money market funds to resort to fire sales of assets to meet ongoing investor demands for withdrawals.
The FCA’s proposals will undergo a consultation period until March 8, 2024, allowing stakeholders to provide input on the potential impact and feasibility of these regulatory changes.
Separately, the UK government has published draft legislation aimed at streamlining rules for money market funds, inheriting them from the European Union before Brexit. These legislative adjustments complement the FCA’s regulatory proposals, collectively working towards creating a more resilient and efficient environment for money market funds in the UK.