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UK regulators plan tougher rules for money market funds
Global Banking & Finance Review®
Company
By Huw Jones
LONDON (Reuters) -Britain’s financial regulators aim to toughen-up rules for money market funds (MMF) after central banks had to intervene when economies went into lockdown during the COVID-19 pandemic.
The $8.8 trillion global MMF sector is widely used by companies for managing cash balances and typically offers daily redemptions even though it may not be easy to quickly sell some assets to raise cash in stressed markets.
The Financial Conduct Authority (FCA) and the Bank of England published a discussion on potential reforms of the sector, saying there is concern that threats to financial stability remain.
Central banks piled into markets in March 2020 when economies went into lockdown to ease heavy redemption pressure on MMFs. The sector itself has argued there were stresses in other parts of the market as well in 2020.
The paper published on Monday builds on a global push by the Financial Stability Board to ensure the funds have enough “tools” to cope with extreme stresses.
Based on feedback to the public consultation that ends on July 23, the FCA and BoE said they aim to adopt measures to strengthen the resilience of MMFs.
These could include forcing the funds to hold more liquid assets such as high-quality government bonds while capping holdings of less liquid assets such as private sector commercial paper.
“Some combination of increases in liquidity requirements and making liquidity resources more usable would strengthen MMFs’ ability to meet redemptions in stressed times,” the paper said.
There could also be levies on investors to meet the cost of redemptions and minimise “first mover advantage”, it added.
About 90% of the 280 billion pounds ($352.3 billion) of sterling-denominated MMFs are listed in the European Union, which Britain has left, though the bloc is also reviewing its own MMF rules.
($1 = 0.7948 pounds)
(Reporting by Huw JonesEditing by Edmund Blair and David Goodman)
A money market fund is a type of mutual fund that invests in short-term, low-risk securities, providing investors with liquidity and a safe place to park cash.
Liquidity refers to how easily an asset can be converted into cash without affecting its market price. High liquidity means assets can be quickly sold.
Financial regulations are laws and rules that govern financial institutions and markets to ensure stability, protect consumers, and maintain confidence in the financial system.
Financial stability is a condition where the financial system operates effectively, with institutions able to withstand shocks and continue to provide essential services.
The Financial Conduct Authority (FCA) is a regulatory body in the UK that oversees financial markets and firms to protect consumers and ensure market integrity.
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