UK regulator proposes stronger resilience requirements for money market funds

The UK's Financial Conduct Authority (FCA) said on Monday that it plans to introduce a new rule requiring all money market funds (MMFs) to hold sufficient liquidity to ensure adequate resilience during periods of market stress.

In a statement, the regulator said the proposal is intended to support its objectives of maintaining financial stability and market integrity.

“This is to support our objectives of maintaining financial stability and market integrity,” the FCA said.

The announcement follows the UK government's statement on May 15 that it expects to introduce legislation to replace the existing UK Money Market Funds Regulation.

Money market funds play a key role in financial system

According to the FCA, money market funds are an important component of the financial system.

They are widely used for cash management and serve as either an alternative or a complement to traditional bank deposits for a broad range of investors.

However, the regulator noted that recent periods of market stress have highlighted the need to strengthen the resilience of these funds.

Consultation proposed higher liquidity levels

The original consultation proposed a significant increase in minimum liquid asset requirements for all money market funds.

Under those proposals, daily liquid assets (DLA) would have been increased to 15% of assets, while weekly liquid assets (WLA) would have been raised to 50%.

The consultation also proposed removing the regulatory link between liquidity levels and the requirement for stable net asset value (NAV) money market funds to consider or impose measures such as liquidity fees or redemption gates.

The FCA referred to this change as “delinking,” which was intended to make liquidity levels more usable during periods of stress.

Industry feedback prompted reassessment

The FCA said respondents broadly supported most of the proposals, with nearly universal support for delinking.

However, a significant majority of stakeholders raised concerns and questions about the proposed increase in liquidity requirements.

Respondents provided input on liquidity risk management practices, observed investor outflows during previous stress events, and the assumptions used in the FCA's modelling.

Following the consultation, the FCA and the Bank of England conducted further engagement with stakeholders, gathered additional data, and updated their analysis to determine appropriate resilience levels for money market funds.

The updated assessment drew on findings from the Bank of England’s system-wide exploratory scenario exercise, which examined how the UK financial system might respond to a market shock.

According to the FCA, the exercise suggested that in some scenarios, outflows from money market funds could be lower than those seen in previous stress episodes.

The regulator said this reflected changes in market structure and firms' improved ability to meet liquidity needs through alternative channels.

FCA outlines updated liquidity expectations

As part of its revised approach, the FCA said it intends to introduce a new rule requiring all money market funds to maintain sufficient liquidity for resilience.

The regulator plans to retain the current minimum weekly liquid asset requirements contained in the UK MMFR.

However, it also intends to issue guidance setting out its supervisory expectations.

“We intend to set out in guidance our strong supervisory expectation that stable NAV MMFs will need to hold 40% WLA (weekly liquid assets) and variable NAV MMFs will need to hold 20% WLA to meet the new resilience requirement.”

It added that such situations would be expected to occur only rarely and that funds should not routinely operate below those levels at quarter-end or year-end.

The regulator said it does not plan to change current minimum daily liquid asset requirements and will not introduce new guidance on DLA levels.

It noted that both DLA and WLA should be sufficient to ensure adequate resilience.

Additional measures and next steps

Beyond liquidity requirements, the FCA said it intends to implement most of the other measures outlined in the consultation.

These include delinking and enhanced Know Your Customer requirements focused on investor concentration and the risk of correlated withdrawals.

The regulator said the updated proposals are designed to deliver a clear increase in the resilience expected of UK money market funds while ensuring they can continue to meet investor needs.

The proposals remain subject to final consideration and approval within the FCA.

Looking ahead, the FCA said the government expects legislation repealing the current MMFR framework to be introduced by the end of 2026.

The regulator plans to align its new money market fund rules with that timetable.

The forthcoming policy statement will provide additional details on the revised proposals and the modelling used to support them.

The FCA also said it plans to publish interim final guidance on weekly liquid asset levels before then.