UK to tighten money market fund rules by end of year
New Regulatory Measures for Money Market Funds
By Phoebe Seers and David Milliken
Background: Market Turmoil and Regulatory Focus
LONDON, May 14 (Reuters) - Britain will impose tougher rules later this year on money market funds, which have been a focus of regulators since market turmoil in March 2020, when they were hit by heavy redemptions during a COVID-19-induced "dash for cash".
Legislative Framework and Sector Expectations
Legislation will establish a new regulatory framework with the expectation that the 300 billion pound ($405 billion) sterling money market fund sector will hold more liquid assets, the government said in a statement on Thursday.
"These reforms mark an important step forward in enhancing the resilience of the wider non-bank financial sector," it said.
Consultations and Recommendations
Britain's financial regulator consulted on reforms in 2023 that aimed to make it easier for funds to sell assets in periods of stress, following a recommendation from the Bank of England that the sector needed to be more resilient.
Risks Identified by the Bank of England
In its latest Financial Stability Report, the BoE said money market funds are vulnerable in periods of stress because investors can withdraw cash faster than some of the funds’ less liquid assets can be sold, leaving them exposed to sudden waves of redemptions.
Potential Impact on the Economy
It warned this could trigger runs that amplify market shocks, and ultimately tighten financial conditions for the wider economy.
Next Steps and International Context
The government on Thursday said that the Financial Conduct Authority would issue a statement shortly with further details of the plans, which are subject to parliamentary approval and aim to take into account the cross-border nature of the sector.
European Commission Guidance
The European Commission on Monday published new guidance for money market funds, setting out how liquidity buffers should be used to meet redemption requests during times of market stress.
Temporary Permissions for EU Funds
Britain's government also said it intends to extend a temporary permission that allows EU funds to market to British investors, which was due to expire at the end of this year.
($1 = 0.7399 pounds)
(Reporting by Phoebe Seers and David Milliken; Editing by Kirsten Donovan)
