Regulatory Update

FCA update on reforms to the UK Money Market Fund Regulation

The Financial Conduct Authority (FCA) has updated its proposals for reforms to the UK Money Market Fund Regulation, following government plans to replace the current rules. The FCA aims to strengthen the resilience of these funds, which play a crucial role in the financial system and are widely used for cash management. Recent market stress episodes have highlighted the need for enhanced liquidity standards.

The updated proposals retain the minimum weekly liquid asset requirement (WLA) levels, but increase daily WLA levels to 15% of assets, with stable NAV MMFs required to hold at least 40% WLA and variable NAV MMFs at 20%. The FCA also plans to introduce delinking from liquidity fees or redemption gates for stable NAV MMFs. Additionally, enhanced Know Your Customer requirements on investor concentration and the risk of correlated withdrawals will be introduced.

The FCA's updated proposals are subject to final consideration and sign-off within the expected timeframe of end-2026, when legislation for the repeal of the Money Market Fund Regulation is set to be introduced. The regulator plans to publish an interim policy statement and final guidance on UK MMF WLA levels before this date.

Why it matters

Why it matters The FCA's proposed reforms to the UK Money Market Fund Regulation aim to strengthen the resilience of these funds, which play a crucial role in the financial system as an alternative or complement to bank deposits for investors. The updated proposals build on the consultation responses and further engagement with stakeholders, including the Bank of England.

Key changes include a modification to the minimum weekly liquid asset requirement (WLA) levels, increasing them to 40% for stable NAV MMFs and 20% for variable NAV MMFs, in an effort to enhance liquidity resilience while allowing for more flexibility. The introduction of new guidance on WLA requirements is intended to support supervisors' objectives of maintaining financial stability and market integrity.

The reforms also include measures to address concerns raised by stakeholders regarding the proposed increase in MMF liquidity levels, such as delinking stable NAV MMFs from liquidity fees or redemption gates. These changes are subject to final consideration and sign-off within the FCA and are expected to be introduced through a new rule by the end of 2026.

Key points

The FCA is updating its regulations for Money Market Funds (MMFs) in response to Government plans to replace the current rules, with a focus on strengthening their resilience.
Proposed changes include increasing minimum liquid asset requirements and removing regulatory links between liquidity levels in certain MMF types, known as 'delinking'.
Stakeholders have raised concerns about proposed increases in MMF liquidity levels, but further data collection and analysis has informed an updated judgement on appropriate levels of resilience.
The FCA is planning to introduce a new rule requiring all MMFs to hold sufficient liquidity for adequate resilience, with minimum weekly liquid asset requirements set at 40% for stable NAV MMFs and 20% for variable NAV MMFs.
The updated proposals aim to balance the need for increased resilience with the need for MMFs to continue meeting investor needs, while making other measures such as delinking and enhanced Know Your Customer requirements.
The FCA plans to make its new rules and guidance available in time for the repeal of the current Money Market Funds Regulation by the end of 2026.

Institutional context

The institutional context for reforms in the UK Money Market Fund Regulation is marked by government plans to replace the current rules with new legislation. This move aims to strengthen the resilience of Money Market Funds (MMFs), which play a crucial role in the financial system, particularly for cash management and providing an alternative to bank deposits.

Recent market stress periods have highlighted the need for MMFs to be more resilient, leading to a consultation on proposals to strengthen their liquidity levels. The consultation received broad support for most of the proposed changes, with stakeholders providing valuable input on how firms manage liquidity risk in practice. However, concerns over the proposed increase in MMF liquidity levels led to further engagement and data collection.

The Financial Conduct Authority (FCA) and the Bank of England have since updated their analysis, taking into account new information and findings from a system-wide exploratory scenario exercise. This has resulted in revised proposals that aim to balance the need for increased resilience with the ability of MMFs to meet investor needs. The FCA's updated approach includes retaining current minimum weekly liquid asset requirements while introducing guidance on stable NAV and variable NAV MMFs holding higher liquidity levels to ensure adequate resilience.

Practical considerations

Practical considerations To implement these changes, institutions will need to review their current Money Market Fund (MMF) policies and procedures to ensure they meet the updated liquidity requirements. This may involve revising investment strategies, liquidity management practices, and investor communication protocols. For example, stable NAV MMFs with a 40% weekly liquid asset requirement will need to implement measures to maintain this level of liquidity in most circumstances, except for rare exceptions such as redemptions or events beyond the manager's control.

Institutions should also prepare for the introduction of enhanced Know Your Customer requirements on investor concentration and the risk of correlated withdrawals. This may involve updating customer due diligence procedures, monitoring investor activity more closely, and implementing new controls to prevent correlated redemptions. Furthermore, institutions will need to ensure that their systems and processes can accommodate the delinking of stable NAV MMFs from liquidity levels, which is expected to be implemented in conjunction with the updated rules.

To support these changes, the FCA plans to publish interim final guidance on UK MMF weekly liquid asset requirements before the end of 2026. This will provide institutions with additional clarity and direction on how to implement the updated proposals. Institutions should also engage closely with the FCA and other regulators to ensure they are fully informed about the implications of these changes for their business operations.

Source: FCA News