Managers of money market funds (MMFs) have been told to increase their cash buffers to insulate them better from the chaos seen after COVID-19 and former prime minister Liz Truss’s mini-budget in 2022.
"This will ensure that MMFs have enough liquid assets to withstand large amounts of withdrawals over a short period in severe but plausible market stresses," the Financial Conduct Authority (FCA) said in a statement.
In March 2020, financial markets reacted sharply to the pandemic and the public health measures introduced to contain its spread, said the FCA.
"This shock led to an extreme and sudden ‘dash for cash’. MMFs came under severe strain as investors withdrew money from MMFs to meet their often rising needs for cash, and out of fear of not being able to get their money back from their MMFs later."
In October, the Bank of England said the sterling money market funds sector, widely used for day-to-day funding and parking cash overnight, needed to be more robust.
Minimum daily liquidity requirements for money market funds should rise to 15% from about 10% at present, and the weekly level should increase to 50% from about 30% currently, the FCA said.
Rules that give an advantage to investors who are first to withdraw money from a fund are also to change to stop fire sales of assets to meet redemption requests, said the FCA.
The FCA proposals will be open for consultation until 8 March 2024.