The Financial Conduct Authority (FCA) released proposals for changes to boost resilience of UK-based Money Market Funds (MMFs). It has been developed in close consultation with the Treasury and the Bank of England.
In a severe market stress, investors may not be able to get their money back from a 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 a 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 COVID-19 pandemic and other events both globally and in the UK have highlighted how these MMF vulnerabilities can threaten investor outcomes and financial stability, and this consultation should be considered part of broader international efforts to address vulnerabilities and increase the resilience of MMFs, ensuring consistently high standards in the international financial system.
Among the changes, there are two significant changes the FCA is proposing:
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 explained above.
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.