We set out next steps on issuing new rules and guidance on Money Market Funds (MMFs), following Government plans to replace the current rules.
On 15 May, the Government set out its expectation that it will lay legislation that will replace the UK Money Market Funds Regulation.
Read the Government statement.
Money Market Funds (MMFs) play an important role in the financial system. MMFs are widely used for cash management and provide an alternative or complement to bank deposits for a broad range of investors. However, recent periods of market stress have highlighted the need to strengthen the resilience of these funds.
Original consultation
We consulted on proposals to strengthen the resilience of UK‑domiciled MMFs in CP23/28, 'Updating the regime for Money Market Funds’.
The key proposals included:
- A significant increase in the minimum liquid asset requirement for all MMFs, raising daily liquid assets (DLA) and weekly liquid assets (WLA) levels to 15% and 50% of their assets respectively.
- The removal of the regulatory link between liquidity levels in MMFs that have the ability to offer subscriptions and redemptions at a constant net asset value (NAV) (so-called ‘stable NAV MMFs’) and the need for the manager to consider or impose tools such as liquidity fees or redemption gates. This is known as ‘delinking’ and was intended to make those MMFs’ liquidity levels more usable.
Responses to consultation
Respondents to CP23/28 broadly supported most of the proposals and there was almost universal support for delinking. However, a significant majority of responses raised questions over the proposed increase in MMF liquidity levels. Stakeholders provided helpful input on how firms manage liquidity risk in practice, including observed outflow behaviour in recent stress episodes and the assumptions underpinning the modelling that led to these levels.
Since the consultation, we and the Bank of England have undertaken further engagement, collected more data and updated the analysis to inform an updated judgement on appropriate levels of resilience for MMFs.
The updated analysis draws from the Bank of England’s system-wide exploratory scenario exercise, which explored how the UK financial system would respond to a market shock. The exercise indicates that, in some scenarios, outflows from MMFs may be somewhat lower than in previous stress episodes. This reflects changes in market structure and firms’ improved ability to meet liquidity needs through alternative channels. Given these findings, it is appropriate to adjust our previously proposed liquidity standards.
Updated proposals
We are planning to introduce, through a new rule, a requirement that all MMFs hold sufficient liquidity for adequate resilience. This is to support our objectives of maintaining financial stability and market integrity.
We intend to retain in rules the current minimum WLA requirements as set out in UK MMFR. However, we intend to set out in guidance our strong supervisory expectation that stable NAV MMFs will need to hold 40% WLA and variable NAV MMFs will need to hold 20% WLA in order to meet the new resilience requirement.
Given this modified approach to WLA compared to what had been proposed in the consultation, our expectation is that MMFs’ ability to be temporarily below the 40% / 20% WLA levels should be used only to meet redemptions or for reasons that are beyond the manager’s control (which we consider would arise very rarely). We would not expect MMFs to regularly hold lower levels of WLA at quarter and year-end.
However, we are planning to retain the current minimum DLA requirements and do not plan new guidance on DLA levels. DLA as well as WLA should be sufficient for adequate resilience.
We intend to introduce in large part the other measures set out in the CP, including delinking and enhanced Know Your Customer requirements on investor concentration and the risk of correlated withdrawal.
Our updated proposals will deliver a clear increase in the level of resilience expected of UK MMFs while making sure they can continue to meet the needs of investors. They are subject to final consideration and sign-off within the FCA.
Next steps
The Government has set out its expectation that legislation for the repeal of the MMFR will be introduced by the end of 2026. We plan to make our new MMF rules to this timescale.
Our policy statement will provide more detail on the updated proposals and the modelling on which they are based.
We also plan to publish interim final guidance on UK MMF WLA levels before this.
