Fitch on UK MMF Reform Proposal
A press release from Fitch Ratings entitled, "UK MMF Reforms Would Reduce Rating Risks from Redemption Restrictions comments, "Proposals to increase liquidity requirements for UK money market funds (MMFs) and remove regulatory thresholds that can trigger redemption restrictions would reduce downside rating risk for funds, Fitch Ratings says. We expect the new rules would be phased in gradually, and many funds are already well-placed to meet the requirements given their strong liquidity. Still, standard variable net asset value (VNAV) MMFs will need more portfolio reallocation than others given their lower liquidity. This could lead to lower returns and outflows into vehicles with less stringent regulatory requirements, such as ultra-short duration bond funds." They write, "During the pandemic, regulatory liquidity thresholds for stable net asset value (NAV) MMFs had the unintended consequence of sparking a surge in redemption requests when a decrease in liquid assets prompted many investors to access their funds, driven by the prospect of imminent restrictions. Higher liquidity requirements would reduce the likelihood of needing to suspend redemptions. Also, removing regulatory liquidity thresholds that can trigger liquidity management tools (LMTs), such as liquidity fees, redemption gates and suspensions, would enable greater use of funds' liquid assets in times of stress, which could prevent the need to impose restrictions. The suspension of redemptions is typically a materially negative rating event." The release continues, "The proposals, issued by the Financial Conduct Authority (FCA) in a consultation paper on 6 December 2023, contain several measures. These include decoupling regulatory liquid asset thresholds from redemption restriction triggers; increasing daily and weekly liquidity requirements; enhancing stress testing and operational resilience for stable NAV MMFs; and strengthening know-your-customer requirements, with a focus on addressing investor concentration risk. The proposals would make MMFs more resilient to market volatility. They are focused on UK-domiciled MMFs, which account for about 10% of sterling MMF assets under management (AUM; source: Lipper), but will also affect non-UK funds marketed in the UK, which are predominantly EU-domiciled." Fitch writes, "Daily liquidity requirements would increase to 15% of total assets from 10%, and weekly liquidity requirements to 50% from 30%. This should not significantly disrupt the market. Fitch-rated UK-domiciled short-term MMFs averaged 35% in overnight assets and 39% in weekly maturing assets (excluding eligible assets under derogation) at end-September 2023. Fitch-rated EU-domiciled short-term sterling MMFs averaged 34% and 43%, respectively." They add, "The consultation follows a related discussion paper published by the FCA and the Bank of England in May 2022. While several proposals from the earlier paper were taken forward, some were dropped, including proposals to eliminate stable NAV MMFs and to impose the true cost of redemptions on investors, through swing pricing, for example.... The FCA's consultation period on the MMF proposals ends on 8 March 2024. The full implications for MMFs will depend on the resulting regulations to be finalised, but we expect the implementation period to be long enough to give fund managers time to adjust. Implementation of the most recent EU MMF reforms was concluded in March 2019, 20 months after the regulation's signature date." For more, see Crane Data's News, "U.K. Financial Conduct Authority's Consultation Paper on MMF Reforms" (12/20/23) and "FCA Posts U.K. MMF Consultation" (12/7/23).
