The UK Financial Conduct Authority (FCA) published a consultation document setting out proposals to strengthen the resilience of UK domiciled Money Market Mutual Funds (MMFs). It has been developed in close consultation with the Treasury and the Bank of England.
MMFs are a type of fund commonly used 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 regulated to ensure that they can redeem investors’ investment and return it to cash within a short period of time. Investing in MMFs is not guaranteed, however, MMF investors usually get all or nearly all of their investment back.
MMFs play an important role in the economy and investors must be able to rely on their ability to cash out in a short period of time. However, in a severe market stress, investors may not be able to get their money back from an MMF quickly or at all without a noticeable and unpredictable loss.
MMFs typically use liquid assets (essentially ready cash) to return money to the investors they redeem. If an MMF runs out of liquid assets and investors still demand a return on their investment, it must either “sell” assets in stressed markets and pass the resulting losses on to investors, or “suspend” (temporarily stop return of investors money).
Investors who cash out first in stressed conditions are more likely to be paid without unforeseen delays or losses, so there is a “first mover advantage” in MMFs that can also lead to additional demands by investors for their money back.
The FCA is consulting on strengthening the regulatory framework applicable to MMFs and reducing their vulnerabilities.
The regulator is proposing two major changes to the current MMF regulation:
- Significant increase in the minimum percentage of highly liquid assets that all types of MMFs must hold. This will ensure that MMFs have enough liquid assets to withstand large amounts of withdrawals in a short period of time in severe but reasonable market pressures. This will significantly reduce the first mover advantage in MMFs.
- The removal of an existing regulatory requirement for significant types of MMFs that “ties” the levels of liquid assets in those MMFs to 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 unforeseen delays or losses. This proposed policy change is known as “uncoupling” and works to reduce the additional first-mover advantage that “couplings” can create for these types of MMFs as their liquid asset levels decline.
The FCA welcomes your comments until 8 March 2024.