FCA and HMT proposals for a UK MMF regime

6 December 2023 saw two related developments on money market funds (MMFs), as

• the FCA published CP23/28, "Updating the regime for Money Market Funds" (the CP) and

• HM Treasury (HMT) published a policy note, "Money Market Funds Framework" (the Policy Note) and a near final draft MMF Regulations 2024 (the Draft MMF Regulations).

As the FCA notes, these documents should be read in conjunction with each other.

Looking at these documents in turn

The FCA's CP23/28

Background

The CP has been prepared "in close cooperation with the Bank of England and HMT" as part of the UK's response to the FSB's policy options set out in its October 2021 Final Report. It takes forward the process started in DP 22/1, "Resilience of Money Market Funds", which the FCA published jointly with the Bank of England.

The CP (which also forms part of the Smarter Regulatory Framework) arises out of concerns about how MMF vulnerabilities can threaten investor outcomes and financial stability and addresses vulnerabilities identified in the 2020 'dash for cash' and other times of market stress.

Next steps

The consultation period for CP23/28 closes on 8 March 2024.

The FCA will look to publish a final policy statement and final Handbook rules in line with HM Treasury's finalised MMF Regulations 2024 (see below).

What does the CP contain?

The CP proposes significant changes to how MMFs are currently regulated, with the aim of increasing MMF resilience by ensuring MMFs have usable liquidity sufficient to endure severe but plausible redemption stresses. The proposals include

• significantly increasing the minimum liquid asset requirement for all MMFs. Daily liquid assets (DLA) levels would be raised to 15% of their assets respectively, weekly liquid assets (WLA) levels to 50% of theirs assets. Furthermore, there would be changes to the assets eligible for WLA for Variable NAV (VNAV) MMFs and

• removing the regulatory link between (a) liquidity levels in MMFs that have the ability to offer subscriptions and redemptions at a constant Net Asset Value (NAV) - so-called 'stable NAV MMFs' - and (b) the need for the manager to consider or impose tools such as liquidity fees or redemption gates. This 'delinking' is intended to make those MMFs' liquidity buffers more usable.

In addition, the CP puts forward enhancements to

• existing 'know your customer' (KYC) requirements

• strengthen and broaden KYC requirements on MMF investor concentration

• stress testing for stable NAV MMFs and

• operational resilience provisions for stable NAV MMFs.

It also includes proposals to require all MMFs to have at least one Liquidity Management Tool (LMT) available for use when the fund is still trading if needed, and for all managers to have the ability to suspend their MMFs, with such tools being deployed at the manager's discretion.

Not all policy measures which the FCA considered in DP 22/3, however, are being taken forward. Those not adopted include:

• changing or removing stable NAV operation for the current stable NAV MMFs, so these MMFs would be no longer permitted to deal at a constant NAV and

• changing how MMFs currently operate in order to impose on redeeming investors the true cost of their redemptions in the absence of MMFs selling assets and crystallising losses.

The provisions put forward by the FCA would be included as a new Money Market Funds sourcebook (MMFS) in the FCA Handbook -- the draft text is set out in Appendix 1 of the CP. The FCA's Finalised Guidance (FG22/3) on parts of the UK MMF Regulation would be revoked.

HMT's Draft MMF Regulations and Policy Note

Background

HM Treasury has published a near final version of its Draft MMF Regulations, which it intends to lay before Parliament and which would replace the UK Money Market Fund Regulation (UK MMFR). The new Regulations would establish a framework for MMF regulation which HMT considers is better suited to the needs of the UK market.

FSMA 2023 repeals retained EU law (REUL) relating to financial services - REUL will be repealed and replaced with rules set by the UK's regulators, operating within a framework set by government and Parliament.

The Draft MMF Regulations would replace the UK MMF Regulation, which is the REUL version of the EU's MMF Regulation.

Next steps

HMT invites technical comments on the near final Draft MMF Regulations by 24 January 2024.Once it has considered feedback, HMT will set out a timeline for laying the Regulation before Parliament -- the legislation would commence at the same time as the FCA makes new rules (see above).

What do the Draft MMF Regulations contain?

As the Policy Note makes clear, in most areas, the Draft MMF Regulations make no changes to the existing legislative framework. As a result

• the definition of an MMF and the scope of the regime remain the same

• so do the three permitted forms an MMF may take (namely, a low volatility net asset value (LVNAV) MMF, a public debt constant net asset value (PD CNAV) MMF or a variable net asset value (VNAV) MMF)

• MMFs will still be required to be authorised or approved under the overseas MMF regime, with some changes to the scope of which funds can be deemed authorised and

• MMF managers will continue to be liable for breaches of MMF requirements.

Of note, though:

• to establish, market or manage an MMF in the UK, an MMF will need to be either  

• a fund authorised by the FCA as an MMF -- this is limited to funds which are an Authorised Unit Trust (AUT), an Authorised Contractual Scheme (ACS) or an Open Ended Investment Companies (OEIC) or

• an approved MMF within the overseas regime

• there will be a transitional provision for EU funds which are currently, or were previously, marketing under the Temporary Marketing Permissions Regime -- this will allow such funds to continue to be established, managed or marketed in the UK until the end of 2027

• the Draft MMF Regulations set out a regime for approving overseas MMFs - determinations will be made by the Government which will enable MMFs from overseas jurisdictions to market into the UK, provided they register with the FCA under either section 271A FSMA (where applicable), section 272 of FSMA, or the UK's National Private Placement Regime

• an existing fund which is not an AUT, an ACS or an OEIC but which is UK authorised specifically as an MMF will be able to continue to be permitted to be established, managed, and marketed in the UK. (The FCA is also provided with powers to extend the rules which apply to other UK authorised MMFs to these funds.)

• the FCA would also be given powers to require reporting from UK and approved overseas MMFs, in line with current requirements.