FCA updates MMF resilience rules after government plans
The Financial Conduct Authority (FCA) has outlined its next steps for new rules and guidance on Money Market Funds (MMFs). This follows government plans to replace the current UK Money Market Funds Regulation.
New rules, updated guidance
The Financial Conduct Authority (FCA) plans new rules for Money Market Funds (MMFs) to ensure sufficient liquidity and bolster financial stability.
Current minimum weekly liquid asset (WLA) requirements will remain in rules, but the FCA will issue guidance.
This guidance sets a strong supervisory expectation: stable NAV MMFs should hold 40% WLA, and variable NAV MMFs 20% WLA.
Temporary deviations from these WLA levels are allowed only for redemptions or reasons beyond a manager's control, not for routine lower holdings.
Daily liquid asset (DLA) requirements will be retained without new guidance; both DLA and WLA must ensure adequate resilience.
Other measures from the original consultation, including 'delinking' the regulatory link between liquidity levels and the use of tools, plus enhanced Know Your Customer (KYC) requirements on investor concentration, are also slated for introduction.
These proposals aim to increase UK MMF resilience while meeting investor needs, pending final FCA approval.
From consultation to revised standards
Money Market Funds (MMFs) are vital for cash management, but recent market stresses highlighted the need for greater resilience.
The FCA's initial consultation, CP23/28, proposed significantly increasing minimum liquid asset requirements (15% DLA, 50% WLA) and 'delinking' liquidity levels from tool imposition.
While delinking was widely supported, many respondents questioned the proposed higher liquidity levels.
Subsequent analysis by the FCA and Bank of England, including a system-wide exploratory scenario, suggested MMF outflows in some scenarios could be lower than in past stress episodes due to market structure changes.
This evidence led the FCA to adjust its initially proposed liquidity standards.
Pragmatic shift or diluted resilience?
The FCA's revised MMF liquidity requirements represent a pragmatic adjustment to new market data, avoiding an overly stringent approach.
However, the reliance on supervisory guidance rather than hard rules for WLA levels introduces a degree of flexibility that could be tested in future stress events.
This nuanced approach aims to balance resilience with market functionality, but its effectiveness will depend on consistent enforcement.