The UK’s financial regulator has announced new proposals which would mean “significant” changes to regulation around money market funds (MMFs).

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.

The Financial Conduct Authority (FCA) is calling for a significant increase in the minimum proportion of highly liquid assets that all MMF types have to hold.

It said that this would make sure these funds have enough liquid assets to withstand large amounts of withdrawals over a short period in "severe but plausible" market stresses.

The move comes after the Covid-19 pandemic and other global events highlighted how MMF vulnerabilities can threaten financial stability.

In March 2020, financial markets reacted sharply to the pandemic and the public health measures introduced to contain its spread.

This lead to a sudden "dash for cash", where MMFs came under severe strain as investors withdrew money from the funds to meet their rising need for cash and out of fear of not being able to get their money back at a later stage.

In turn, this increased the pressure on MMFs, upping the risk they would be unable to meet investors’ demands for their money back.

The FCA warned that if at the time multiple MMFs used by UK investors had ‘suspended’, there could have been a significant threat to wider UK financial stability.

The watchdog has also proposed 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," it said.










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