On 6 December 2023, the FCA published consultation paper CP23/28: Updating the regime for Money Market Funds (MMFs).
CP23/28 sets out proposals to enhance the resilience of MMFs based in the UK, addressing vulnerabilities identified in the 2020 ‘dash for cash’ and other times of market stress. The FCA wants there to be an effective market in MMFs, noting that they play an important role in the economy and investors need to be able to rely on their ability to redeem cash at short notice. The proposals are intended to mitigate risks to wider financial stability and reduce the need for central bank support in the future, whilst maintaining cash management services that meet the needs of investors.
The FCA is proposing two significant changes to current MMF regulation that it has assessed as particularly important in reducing the vulnerability of MMFs. Both aim to increase the usable liquidity of MMFs, so that in severe but plausible market stresses, MMFs do not reach a point at which they are unable to meet continuing investor demands for their money back without fire-selling assets. The proposals are:
- A significant increase in the minimum proportion of highly liquid assets that all MMF types have to hold. This is intended to ensure that MMFs have enough liquid assets to withstand large amounts of withdrawals over a short period in severe but plausible market stresses. The FCA explains that this will significantly reduce the ‘first-mover advantage’ in MMFs, where investors that redeem first in a stress are more likely to be paid out without unanticipated delays or losses.
- 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.
In addition, the FCA is proposing a series of further changes aimed at further enhancing MMF resilience, as set out in CP23/28. Overall, the proposals seek to prioritise strengthening the existing regulatory regime for MMFs while maintaining the broad current MMF operating model.
The FCA is also consulting to bring MMF rules that were previously contained in retained EU law into its Handbook.
The deadline for feedback to this consultation is 8 March 2024.