The Financial Conduct Authority has dropped its rigid 50% weekly liquidity mandate for UK money market funds. Backed by new Bank of England stress data and corporate treasury insights, the regulator has opted for a flexible, supervisory track that protects fund yields while preserving market resilience.
Money market funds (MMFs) have long been the bedrock of short-term liquidity management. They bridge the gap between bank deposits and direct instruments, offering security, diversification, and rapid access to cash. Yet, ever since the pandemic-induced dash for cash and the 2022 gilt market crisis, the shadow of regulatory overhaul has loomed heavily over the sector.
The UK Financial Conduct Authority (FCA) has finally broken its silence on the future of UK money market fund regulation, and the result is a surprising and highly welcome pragmatic shift.
Following intense industry pushback and fresh systemic data modelling, the regulator has dramatically softened its original liquidity proposals. For treasury teams managing corporate cash buffers, this represents a major victory for market efficiency over blunt regulatory instruments.
To understand why the FCA’s latest update is causing a sigh of relief in corporate treasuries, it helps to look at where the regulator started.
In its initial consultation paper (CP23/28), the FCA proposed a draconian hike to mandatory liquidity buffers. It suggested raising daily liquid assets (DLA) to 15% and weekly liquid assets (WLA) to a staggering 50% for all MMFs.
While designed to bulletproof funds against sudden, massive redemption waves, the treasury community warned of severe unintended consequences. Forcing fund managers to hold half their portfolios in ultra-short, ultra-liquid assets would inevitably crush fund yields. In a world where every basis point matters for corporate cash optimisation, such a move threatened to destroy the economic viability of stable Net Asset Value (NAV) funds, pushing corporate cash into less regulated, riskier alternatives.
Instead of plowing ahead, the FCA listened. Backed by data from the Bank of England’s system-wide exploratory scenario exercises, which simulated how the financial system would react to severe market shocks, the regulator concluded that potential fund outflows might actually be lower than previously feared. This was attributed to structural improvements in how corporate treasury departments manage liquidity stress today.
Consequently, the FCA is abandoning the rigid 50% weekly liquidity mandate. Instead, the regulator is introducing a more flexible, dual-track approach:
The Baseline Rule: The regulator will retain the existing statutory minimum liquidity requirements currently enshrined in the UK MMFR. Daily liquid asset expectations will also remain unchanged.
The New Supervisory Guidance: Rather than hard rules, the FCA will implement a strong supervisory expectation tied to fund type. To meet the broader requirement of holding sufficient liquidity for adequate resilience, Stable NAV MMFs will be expected to maintain a 40% WLA buffer, while Variable NAV MMFs will need to hold 20% WLA.
By utilising supervisory guidance rather than a hard regulatory ceiling, the FCA is giving fund managers the operational flexibility to navigate market conditions dynamically without triggering arbitrary compliance breaches.
While the liquidity thresholds received a major haircut, one crucial structural change remains intact: the universal decoupling of liquidity levels from administrative penalties.
Under the old framework, if a stable NAV fund’s weekly liquidity fell below regulatory minimums, fund managers were legally forced to consider imposing liquidity fees or redemption gates. Paradoxically, this rule created a cliff-edge effect. Corporate treasurers, terrified of being locked out of their cash, would rush to redeem funds before the threshold was breached, accelerating the exact run the rule was meant to prevent.
The FCA has confirmed it will officially delink these mechanisms. Fund managers will no longer face an automatic regulatory trigger to lock gates or impose fees solely because liquidity dips. This makes the 40% and 20% liquidity cushions genuinely usable during a market crunch, providing a smoother runway for funds to absorb stress without panicking corporate investors.
The FCA’s pragmatism yields three immediate takeaways:
Preservation of Yield: By avoiding the heavy-handed 50% liquidity mandate, MMFs will not be forced to abandon slightly longer-term yield-generating commercial paper. While resilience remains the priority, the earning potential of corporate cash balances won’t be artificially degraded.
Diminishing Cliff-Edge Risks: The removal of the fee-and-gate link fundamentally changes the psychology of a crisis. Treasurers can take comfort in knowing that a temporary dip in a fund’s liquidity pool will not automatically freeze their operational cash.
The Shift to Qualitative Due Diligence: Because the new 40% and 20% targets operate under supervisory expectations rather than rigid statutory limits, corporate treasury teams will need to update their investment policies. Assessing an MMF will require looking beyond basic compliance checkboxes and deeply evaluating a fund manager’s internal liquidity modelling and stress-testing protocols.
The legislative machinery is already moving to transition the market to the new framework.
Interim Period: The FCA plans to publish interim final guidance regarding these updated WLA expectations to give fund managers and treasury teams ample time to adjust.
End of 2026: The UK Government has stated its intention to introduce legislation to formally repeal the old retained EU MMFR framework, enabling the FCA to seamlessly establish its new rules on the same timeline.
Ultimately, the FCA’s updated stance proves that regulatory bodies are starting to understand the delicate ecosystem of short-term markets. By balancing systemic safety with market utility, the UK’s post-Brexit money market framework looks set to deliver a stabler environment without costing treasurers the performance they rely on.