Amid concerns about liquidity risks in the money market fund sector, the U.K.’s Financial Conduct Authority (FCA) is proposing reforms designed to enhance the resilience of money market funds in the face of liquidity stress.
Last month, the U.K. government said that it’s planning to introduce legislation to repeal and replace the existing law governing money market funds with a new regulatory framework. Now, the FCA is also proposing new rules and guidance for the sector — noting the recent periods of market stress have highlighted the need to enhance the resilience of money market funds.
Earlier, the FCA consulted on proposals to significantly boost the minimum liquid asset requirements for money markets, raising both daily and weekly liquidity requirements — along with proposals to remove the link between funds’ liquidity levels and requirements for managers to use tools, such as liquidity fees and redemption gates.
The regulator said that, while there was near-unanimous support for the “delinking” proposal, many respondents raised concerns about the proposed increase in minimum liquidity requirements.
Now, following additional analysis, which was carried out along with the Bank of England, to explore how the financial system was likely to respond to a market shock — the FCA is revising its plans for liquidity standards.
Among other things, it’s introducing a new rule that will require funds to have “sufficient liquidity for adequate resilience.”
And, without mandating new weekly liquidity requirements, the regulator is proposing added guidance that calls for funds with variable net asset values (NAVs) to hold 20% liquid assets, and funds with stable NAVs to hold 40% liquid assets, to meet the new resilience requirement. The daily liquidity requirements, and guidance, would not be changed.
Most of the other proposed reforms, including the “delinking” proposal, and enhanced know your customer (KYC) requirements will also be adopted.
“Our updated proposals will deliver a clear increase in the level of resilience expected of [MMFs] while making sure they can continue to meet the needs of investors,” the regulator said.
The updated proposals are subject to final approval within the FCA.
The legislation to repeal the existing law in this area, and launch a new framework, is expected to be introduced by the end of the year.
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