CP23/28: Updating the regime for Money Market Funds

The Financial Conduct Authority (FCA) has launched a new consultation on proposed revisions to its Handbook to implement the firm-facing provisions of the EU Retained Money Market Funds Regulation (UK MMFR) and to enhance the resilience of money market funds operating in the UK. The consultation follows the launch of a consultation by the HM Treasury on a proposed framework regulation to set the stage for the replacement of the currently retained EU MMFR (eventid=24215) in an effort to replace all retained EU legislation (REUL) and make the regulation more suitable for the UK financial market.
In its consultation now, the FCA proposes numerous revisions to its Handbook (beginning on page 128) with most provisions being implemented as is from the retained EU MMFR – with minor redactional modifications („transfer table“ on page 91 – 125). However, there will be some changes to the European framework based on the experience gained from the volatility in the financial market at the onset of the COVID-19 pandemic and the subsequent liquidity issues MMFs faced thereafter. Specifically, the FCA proposes
(1) modifications to the liquidity requirements of MMFs: The FCA suggests to mandate all MMFs to hold a higher level of liquid assets. In detail, the FCA would increase the liquidity buffer requirements of all MMFs to minimum weekly liquid assets (WLA) of 50% and minimum daily liquid assets (DLA) of 15%. This would apply equally to both stable NAV MMFs and variable NAV MMFs (VNAV MMFs). Furthermore, the FCA suggests to permit certain highly liquid government debt securities with maturity of >1 week to be included in the calculation of WLA (e.g. repo-agreements), as these are considered highly liquid. On the other hand, to strengthen the resilience of MMFs, the FCA proposes to remove the permission of VNAV funds to include other money market instruments or units of other MMFs in their WLA (up to 7.5%).
(2) delinking of the required application of liquidity management tools (LMTs) from the liquidity thresholds in stable NAV MMFs: The FCA proposes to remove the requirement of stable NAV MMFs to apply LMTs such as liquidity fees or redemption gates once certain thresholds are met. The aim of this proposed change is to mitigate the advantages that early investors might have when these „links“ between liquid asset levels and management tools are present. When such links exist, investors who redeem their shares early, particularly during times of rapidly declining liquid asset levels, may receive more favorable terms compared to investors seeking later redemption (the first-mover advantage).
(3) the consideration of investor concentration in liquidity assessments: The FCA proposes to require MMF managers to consider concentrations of investors and correlation factors in investor behavior that may cause a large number of investors to sell their shares abruptly at the same time, in their assessment of liquid asset requirements. In this context, the FCA proposes to enhance its KYC requirements to collect and monitor data on investors. Corresponding guidance will be issued for fund managers as to the assessment process and the consideration in the liquidity assessment.
(4) the application of liquidity management tools: The FCA proposes to require MMFs to have at least one LMT option at hand while the fund is operational and offered to investors. This LMT must be specified in a fund’s prospectus. This requirement would empower MMF managers to use the tool or tools as they see fit to manage liquidity concerns particularly during financial stress. Furthermore, the FCA proposes to empower MMF managers, including those UNauthorized under the Financial Services and Markets Act 2000 (FSMA 2000), to suspend fund trading, if deemed necessary.
(5) addressing additional risks of stable NAV funds: In an effort to strengthen the resilience of stable NAV funds and to ensure that the „collar“ for maintaining a stable value is not breached, the FCA proposes to enhance the stress testing requirements of such funds. Specifically, factors such as the investor base (see the KYC requirements noted above) and potential contagion effects among stable NAV funds would have to be considered in stress tests, just like potential redemption of investors resulting from (perceived) differences in the stable versus a floatable unit price. Additionally, the FCA proposes to require stable NAV fund managers to have policies and procedures in place to facilitate a shift from a stable NAV model to a floating NAV model, if and when necessary. Also, the FCA would mandate corresponding communication policies to inform investors of a possible change in the MMF model.
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The consultation paper also outlines those issues that the FCA will NOT take forward from its corresponding discussion paper (DP22/1) (EventID 15677).
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Please note that the above summary only presents the key proposed changes to the MMF regulation in the process of transferring corresponding requirements to the FCA Handbook. For more detailed, comprehensive information, please refer to the original consultation paper.