The Financial Conduct Authority said on Monday it will soften elements of earlier proposals that aimed to require money market funds to keep larger holdings of liquid assets. The change follows a consultation on measures intended to bolster the sector's resilience to sudden strains.
The government had indicated in May that it would press for tougher rules on money market funds, which came under scrutiny after heavy redemptions during a COVID-19-era "dash for cash". Those events and ongoing regulatory attention formed the backdrop for the FCA's review.
After evaluating responses to its consultation, the FCA issued an update to its initial package of proposals. The regulator said it will leave the current minimum weekly liquid asset thresholds unchanged, rather than raising them as originally proposed.
Instead of legally increasing the minimums, the FCA will articulate a "strong supervisory expectation" regarding typical holdings. Under that expectation, funds that maintain a stable net asset value would be expected to hold 40% of their assets as weekly liquid assets, while funds with a variable net asset value would be expected to hold 20% as weekly liquid assets.
The regulator made clear these supervisory expectations are not absolute barriers. Funds will be permitted to fall below the 40% and 20% expectation levels to satisfy investor redemptions or in situations described as being outside of a fund's control, but the FCA said such instances should occur "very rarely."
The update leaves the formal minimums intact while signalling the level of liquidity the FCA believes is appropriate under normal conditions for each fund type. The regulator's framing distinguishes between legally enforceable minima and supervisory expectations, and it sets out how firms should treat short-term pressures that might push liquidity below the expected levels.
Summary
The FCA has moderated its approach to increasing mandatory weekly liquid assets for money market funds following consultation feedback. Current minimums remain unchanged, but the regulator will express a strong expectation that stable NAV funds hold 40% in weekly liquid assets and variable NAV funds hold 20%, with limited scope to dip below those levels to meet redemptions or for other uncontrollable reasons.