CP23/28: Updating the regime for Money Market Funds

Read CP23/28 (PDF)[1]

What are Money Market Funds (MMF)

MMFs are a type of fund used routinely by investors to place money and have quick access to it when they need it. MMFs pool investors’ money and make low risk investments in high-quality short-term assets. MMFs are subject to regulation to ensure that they can redeem investors’ investment and return it to them as cash at short notice. Investments in MMFs are not guaranteed, however, usually MMF investors receive all or almost all of their investment back.

Who uses MMFs and why

MMFs are used widely by UK financial institutions such as pension funds, other investment funds and insurers, by larger non-financial corporations. They are also used by local authorities, charities and individual consumers.

They are an important means by which these investors can manage their short-term needs for cash, such as payments to pension holders and staff salaries or for meeting margin calls. In practice, there are few alternatives for larger corporate and financial institutions that meet their needs.

Why are we consulting

MMFs play an important role in the economy and investors need to be able to rely on their ability to redeem cash at short notice. However, 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. For example, in March 2020, financial markets reacted sharply to the pandemic and the public health measures introduced to contain its spread. This shock led to an extreme and sudden ‘dash for cash’. MMFs came under severe strain as investors withdrew money from MMFs to meet their often rising needs for cash, and out of fear of not being able to get their money back from their MMFs later. This in turn increased the pressure on MMFs, increasing the risk they would be unable to meet investors’ demands for their money back. If multiple MMFs used by UK investors had ‘suspended’ there could have been a significant threat to wider UK financial stability.

This UK MMF work 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. Our proposals reflect the UK’s support of the Financial Stability Board’s (FSB) ongoing work to address MMF vulnerabilities. International work in this space continues.

We are consulting to strengthen the regulatory framework applicable to MMFs and reduce their vulnerabilities.

Changes we are proposing

We are proposing 2 significant changes to current MMF regulation that we assess as particularly important in reducing the vulnerability of MMFs.

Both aim to increase the usable liquidity of MMFs, so that in severe but plausible market stresses, MMFs do not reach a point at which they are unable to meet continuing investor demands for their money back without fire-selling assets.

1. 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.
    
2. 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.

We are proposing a series of further changes that will further enhance MMF resilience, as set out in the CP. Overall, all of our proposals prioritise strengthening the existing regulatory regime for MMFs while maintaining the broad current MMF operating model.

In addition to increased financial stability, these measures also have the potential to strengthen the long-term competitiveness of the UK MMF sector, by increasing investor confidence in UK domiciled funds.

Smarter Regulatory Framework (SRF)

We are also consulting to bring MMF rules that were previously contained in retained EU law into our Handbook.

Next steps

This consultation has now closed.

We will publish feedback on responses and issue a Policy Statement subsequent to the Government laying its Statutory Instrument.