U.K. regulators ponder post-pandemic reforms for money markets

In response to the vulnerabilities exposed by the onset of the pandemic, regulators in the U.K. are looking to enhance the resilience of money market funds.

The Financial Conduct Authority (FCA) and the Bank of England launched a consultation on possible reforms to money market funds to address the liquidity issues that were exposed by the market turmoil that struck in March 2020 with the onset of the pandemic.

“Financial markets reacted to the Covid pandemic with increased selling pressure, volatility and illiquidity,” the regulators said. As a result, money market funds “came under severe strain across major currencies, including in sterling, as investors quickly sought access to cash.”

In the wake of that episode, global policymakers at the Financial Stability Board remain concerned that underlying vulnerabilities in money market funds still exist.

“While the shock itself did not originate in the financial system, there is evidence that certain structural features of [money market funds] amplified and reinforced the initial liquidity shock,” the paper said.

To address those weaknesses, the paper proposed options including requiring funds to hold more liquid assets; restricting the type of assets that can be held to the most liquid (such as short-term, high-quality government debt); reforms to impose the cost of redemptions on investors; utilizing certain liquidity management tools; and measures to better align funds’ redemption terms with the liquidity of their assets.

The regulators are seeking feedback on the consultation by July 23.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.