The UK's financial watchdog, the Financial Conduct Authority (FCA), has signaled it will soon require Money Market Funds (MMFs) to hold significantly more cash on hand.
At its core, this is about preventing a repeat of past crises. MMFs are popular because they feel as safe as a bank account but offer slightly better returns. However, they lack the same government guarantees. In a panic, investors have an incentive to withdraw their money first before the fund is forced to sell assets at a loss—a classic 'first-mover advantage' that can trigger a devastating run.
This isn't just a theoretical risk. We saw it happen in March 2020 during the COVID-19 'dash for cash' and again during the UK's gilt market turmoil in 2022. In both cases, MMFs faced huge, sudden redemption requests. This forced central banks, including the Bank of England, to step in and provide emergency support to prevent a wider market collapse. Regulators want to ensure MMFs can stand on their own feet next time.
So, what's changing? First, the rules will raise the minimum Weekly Liquid Assets (WLA)—assets that can be converted to cash within a week—from 30% to a much higher 50%. Second, Daily Liquid Assets (DLA) will rise from 10% to 15%. Crucially, the FCA also plans to 'delink' these liquidity buffers from triggering automatic fees or gates that could stop withdrawals. This is a key change, as the old rules perversely made fund managers afraid to use their buffers for fear of spooking investors even more.
This reform isn't happening in a vacuum. It's part of a global trend to make the non-bank financial sector more resilient. The US Securities and Exchange Commission (SEC) already implemented similar, even stricter, rules in 2023. With the EU also tightening its standards, the UK is ensuring its financial system remains aligned and robust.
The immediate effect will be to shift MMF portfolios toward the safest, most liquid assets like short-term government bills and overnight loans. This makes the funds more stable and less reliant on central bank backstops, which is the ultimate goal.
- Money Market Fund (MMF): A type of mutual fund that invests in high-quality, short-term debt. It's seen as a low-risk cash alternative.
- Liquidity: How easily an asset can be turned into cash without losing value. Cash is the most liquid asset.
- Fire Sale: When assets are sold off urgently at heavily discounted prices, usually due to financial distress.