UK advances money market fund reforms to improve sector resilience

The British government on Thursday confirmed plans to reform rules governing money market funds, a sector that has remained under close regulatory scrutiny since the market turmoil of March 2020.

The reforms come after money market funds faced heavy redemptions and liquidity pressures during the COVID-19-induced dash for cash, which exposed vulnerabilities in short-term funding markets.

The government also confirmed that new guidance would require money market funds to hold higher levels of liquidity.

The revised framework is expected to be implemented by the end of the year, subject to approval by lawmakers.

Reforms aimed at strengthening market resilience

Britain’s financial regulator had previously consulted on proposed reforms in 2023.

The measures were designed to make it easier for funds to sell assets during periods of market stress.

The consultation followed recommendations from the Bank of England, which said the sterling money market funds sector needed to become more resilient.

Sterling money market funds are widely used by companies for day-to-day funding operations and for parking cash overnight.

Regulators have increasingly focused on the sector after the severe market disruptions seen in March 2020.

At the time, investors rapidly withdrew cash from money market funds as financial markets reacted to the growing impact of the COVID-19 pandemic.

The sharp outflows created liquidity strains across the sector and prompted concerns among policymakers about broader risks to financial stability.

The latest reforms are intended to reduce the likelihood of similar stress events in the future and strengthen the sector’s ability to cope with sudden redemption pressures.

Higher liquidity requirements planned

Under the proposed changes, money market funds will be required to maintain higher liquidity buffers.

The government did not specify the exact liquidity thresholds in its statement.

However, it confirmed that the updated regime would be introduced before the end of the year if approved by lawmakers.

The move reflects broader efforts by regulators to ensure funds can meet investor withdrawals during periods of heightened volatility without triggering disorderly asset sales.

The government said the Financial Conduct Authority would release a statement shortly providing additional details on the planned reforms.

Focus remains on stability after 2020 market stress

Regulators globally have continued to examine the resilience of money market funds since the events of March 2020.

In Britain, authorities have focused particularly on the sterling money market funds sector because of its importance in short-term corporate funding and cash management activities.

The Bank of England previously recommended reforms aimed at improving the sector’s ability to withstand periods of financial stress.

The proposed measures formed part of a broader effort to strengthen safeguards within the financial system after the pandemic-era market disruption.

With the government now formally confirming the reforms, Britain is moving ahead with plans to tighten oversight of the sector and improve liquidity standards for money market funds operating in the country.