On Thursday, the British government confirmed it will reform the rules that govern money market funds, a segment of the financial system that came under intense regulatory scrutiny after the market upheaval of March 2020. That episode - when funds faced heavy redemptions and acute liquidity strains amid a COVID-19-related "dash for cash" - prompted authorities to consider measures to strengthen resilience.
The forthcoming changes will include new guidance requiring money market funds to hold larger buffers of liquidity, according to the government. The stated aim is to improve the ability of funds to withstand sudden outflows and to make it easier for them to sell assets in periods of stress.
Regulators have already taken steps in this direction. In 2023, Britain’s financial regulator ran a consultation on reforms designed to facilitate the orderly sale of assets by funds during stressed market conditions, following a recommendation from the Bank of England that the sterling money market funds sector - widely used by companies for day-to-day funding and for parking cash overnight - should be more resilient.
The government said the Financial Conduct Authority will issue a statement shortly with additional detail on the proposed measures. While the broad contours of the plan have been announced, the specific mechanics and operational guidance remain to be published by the FCA.
Officials said the new regulatory regime is expected to be implemented by the end of the year, but that timing is conditional on approval by lawmakers. That means the final shape and the schedule of the reforms will depend on the parliamentary process.
Policy makers are framing these steps as a response to lessons learned from the stress experienced by money market funds in 2020. The government's announcement reiterates a regulatory focus on ensuring funds used by businesses for short-term liquidity needs are better equipped to manage sudden runs and liquidity pressure.
Further information and technical detail are anticipated in the FCA's forthcoming statement, which will clarify how the higher liquidity requirements and asset-sale facilitation will be implemented operationally and enforced.