FCA Is Pushing for Enhanced Liquidity in Money Market Funds

<p>The UK's
Financial Conduct Authority (FCA) has proposed a set of reforms aimed at
strengthening the resilience of money market funds (MMFs) operating in the
country. The watchdog wants to increase the minimum proportion of highly liquid
assets in MMFs’ hands and remove some of the existing regulatory requirements.</p><p>FCA Proposes Reforms to
Strengthen Money Market Funds</p><p>In a <a href="https://www.fca.org.uk/publications/consultation-papers/cp23-28-updating-regime-money-market-funds" target="_blank" rel="nofollow">consultation
paper</a> published today (Wednesday), the FCA has outlined several measures to reduce
vulnerabilities in <a href="https://www.financemagnates.com/tag/money-market/" target="_blank" rel="follow">MMFs </a>and bring regulations more in line with international
standards. The proposed changes reflect the FCA's support for ongoing work by
the Financial Stability Board to address issues with MMFs globally.</p><p>The FCA
noted these proposals “will further enhance MMF resilience, as set out in the consultation
paper. Overall, all of our proposals prioritize strengthening the existing
regulatory regime for MMFs.”</p><p>The first change
suggests a considerable enhancement in the minimum quota of highly liquid
assets that all types of MMFs are required to maintain. This measure is
designed to ensure that MMFs possess sufficient liquid assets to manage
substantial withdrawals over a brief duration during severe but plausible
market stress.</p><p>The second proposal
involves removing existing requirements that tie liquid asset minimums to
imposing controls on investor redemptions for important MMF types. Delinking
these policies will reduce the incentive for preemptive runs driven by concerns
over the future ability to access funds.</p><p>The
consultation is open to response until March 2024. Based on feedback, the FCA
will finalize rules strengthening protections for investors in MMFs. The
reforms would apply to UK-authorized MMFs, including those domiciled overseas
but sold into the UK market.</p><p>ESMA Presented Its Own
Changes</p><p>The FCA’s
recent measures are a response to the <a href="https://www.financemagnates.com/institutional-forex/esma-proposes-changes-to-money-market-funds-stress-test-scenarios/" target="_blank" rel="follow">early-year proposals</a> by the European
Securities and Markets Authority (ESMA) regarding MMFs. <a href="https://www.financemagnates.com/terms/e/esma/">ESMA</a>'s consultation
paper underscored two primary revisions to the existing approach. Firstly, it
introduced updated <a href="https://www.financemagnates.com/terms/l/liquidity/">liquidity</a> scenarios reflecting the intense stress
experienced during the Covid-induced market shock. Secondly, it focused on
refining the macro strategy to more accurately assess its macroprudential
impact, taking into account market dynamics and participant behavior.</p><p>ESMA, in
its first comprehensive market report on European Union MMFs, revealed that the
total assets under European managers’ control in MMFs <a href="https://www.financemagnates.com/institutional-forex/europes-money-market-fund-assets-stood-at-144tn-in-2021-says-esma/" target="_blank" rel="follow">amounted to €1.44
trillion in 2021</a>. The report highlighted that a significant majority, about
89%, of these funds are based in France, Luxembourg, and Ireland.</p><p>ESMA's report further indicated that over 90% of the investors in these money market
funds across Europe are professional investors, pointing to a high level of
expertise and understanding among the fund's clientele.</p><p>As shown in
the chart below, this data is also confirmed by the latest consultation paper
from the FCA:</p><p>“Among UK
investors, MMFs are predominantly used by financial services firms – investment
funds, pension funds and other non-bank financial institutions,” the FCA
commented.</p>

This article was written by Damian Chmiel at www.financemagnates.com.