The UK's Financial Conduct Authority (FCA) announced on Monday its intention to introduce new liquidity requirements for money market funds (MMFs), aiming to bolster their resilience during periods of market stress. The proposal targets stable net asset value (NAV) funds, which may need to hold 40% of assets in weekly liquid assets (WLA), while variable NAV funds would face a 20% WLA threshold.
Background and Rationale
Money market funds are a critical component of the financial system, widely used for cash management by a broad range of investors as an alternative to traditional bank deposits. However, recent stress events have exposed vulnerabilities, prompting the FCA to act. The regulator stated that the new rule is designed to support financial stability and market integrity, following a consultation that began earlier this year.
Revised Liquidity Proposals
The original consultation proposed raising daily liquid assets (DLA) to 15% and weekly liquid assets to 50% for all MMFs. After feedback from stakeholders and further analysis with the Bank of England, the FCA revised its approach. The regulator now plans to retain current minimum WLA requirements under the UK Money Market Funds Regulation (MMFR) but will issue guidance setting supervisory expectations. Stable NAV funds are expected to hold 40% WLA, and variable NAV funds 20% WLA, with the understanding that such levels should be maintained except in rare circumstances.
The FCA noted that the updated assessment, which included findings from the Bank of England's system-wide exploratory exercise, suggested that outflows in some scenarios could be lower than in past crises due to improved market structure and alternative liquidity channels.
Additional Measures
Beyond liquidity, the FCA intends to implement most other measures from the consultation, including delinking liquidity levels from the requirement for stable NAV funds to impose liquidity fees or redemption gates. Enhanced Know Your Customer (KYC) requirements will focus on investor concentration and correlated withdrawal risks. These changes aim to make liquidity buffers more usable during stress while ensuring funds continue to meet investor needs.
The proposals remain subject to final approval within the FCA. The UK government expects legislation to repeal the current MMFR framework by the end of 2026, and the FCA plans to align its new rules with that timeline. Interim guidance on WLA levels will be published before then.
For context, recent market dynamics have seen investors pivot to alternative liquidity sources, as highlighted in our coverage of crypto investors turning to Spreadefi liquidity pools amid volatility. Meanwhile, broader fund flows have shown signs of strain, with US stock funds experiencing $17.2 billion in weekly outflows, the largest since March.
This article is for informational purposes only and does not constitute financial advice.
