New guidance on the rules governing European money market funds should strengthen the market’s foundations and provide a firm footing for innovation and growth, argues Alastair Sewell.
Read this article to understand:
- The changes to Europe’s Money Market Fund rulebook
- Why regulators have made these amendments
- What it means for investors
European regulators have announced new guidance on the rules governing money market funds (MMFs)1 . UK authorities followed up promptly with a similar set of changes in store for UK MMFs.2
By reducing uncertainty and addressing known friction points, the new guidance provides investors and fund managers alike with increased clarity while supporting MMF’s core utility as a cash-management tool.
The need for reform has been debated for many years, with discussion shaped both by market events and international regulatory changes, particularly around the role of liquidity thresholds and redemption rules.
This has led market participants to operate in the expectation of regulatory change. Although some final details remain to be ironed out, with the overall direction of travel now clear last week’s announcements should allow investors and managers alike to move forward in a position of greater regulatory certainty.
Three elements of the guidance are particularly significant. The first is the fact that the European Commission has chosen to provide guidance, in the form of a ‘Commission Notice’, rather than re-opening and re-writing potentially large swathes of the regulation.
This is because, barring a few areas where guidance is needed, the commission believes its regulation continues to function largely as intended. We expect a number of further consultations which will refine the core operating detail of the guidance.
Second, the EU confirmed that liquidity fees and redemption gates should not be automatically triggered if ‘weekly liquid assets’ – highly liquid securities that mature within one week (plus certain specific eligible assets) – fall below the regulatory threshold.
This move addresses a central concern raised by both investors and regulators following previous stress episodes such as the 2020 ‘dash for cash’ and the 2022 gilt market dislocation.
In both cases some investors unnecessarily sold MMF shares on the assumption their funds would have to impose liquidity fees or prevent redemptions if weekly liquid assets fell below the 30 per cent threshold. Although the link was never in reality a mechanical one, some investors reacted as if it were.
A positive outcome
By clarifying that this linkage is not automatic, regulators are aiming to reduce the risk that investors preemptively redeem in anticipation of regulatory triggers. This is a change of critical importance because it moves unequivocally to the principle that liquidity buffers are there to be used when needed, rather than defended at all costs. This is an unambiguously positive outcome both for investors and financial markets more broadly.
The third important aspect of the new guidance is that minimum liquidity buffers should increase to enable funds to better withstand stressed market conditions. For low volatility net asset value (LVNAV) funds, weekly liquid assets should usually be above 40 per cent, compared with a previous minimum level of 30 per cent. Variable Net Asset Value funds should maintain a weekly liquidity requirement of 20 per cent, up from 15.
At face value, this might appear restrictive, given that existing requirements have proven adequate in periods of extreme market stress. However, the changes should be viewed in the context of prevailing industry practice.
The US moved to a minimum of 50 per cent for all ‘prime’ MMFs in 2023 and other regulators around the world, such as those in Hong Kong, have followed suit. Many European LVNAV funds already operate with liquidity buffers comfortably above regulatory minima, reflecting conservative portfolio construction and investor expectations.
Figure 1: Average liquidity levels for European LVNAV MMFs
| Requirement | EUR | GBP | USD |
| Daily liquidity | 30% | 30% | 31% |
| Weekly liquidity | 44% | 43% | 44% |
Source: Crane data, 30 January 2026.
As such, the change in minimum requirements, rather than forcing a change in behaviour, merely brings the rules into line with existing industry practice.
A pragmatic response
Overall, the new guidance represents a pragmatic regulatory response. Regulators recognise that MMFs performed broadly as intended through recent periods of volatility, including absorbing large and rapid flows while maintaining portfolio integrity.
Rather than signalling a lack of confidence in the market, the new guidance reflects trust in the regulation’s design, combined with a desire to fine‑tune incentives and reduce unintended consequences.
For investors, greater clarity should translate into greater confidence. Higher and more transparent liquidity standards reinforce the defensive characteristics that many investors expect from MMFs. The de-linking of fees and gates from liquidity levels is pragmatic and addresses an unintended consequence of the current regime.
For fund managers, the reforms provide a clearer operating framework and reduce the risk of being forced into sub‑optimal decisions by regulatory mechanics.
Marginal impact on yields
The downside of higher minimum liquidity requirements is the potential for a modestly negative impact on yields. Holding a larger proportion of assets in weekly maturing, or very short‑dated instruments, typically comes at a small opportunity cost, particularly when yield curves are upward‑sloping.
Based on current prices (and flat yield curves) we estimate a modest effect on yields of between one and two basis points, although the effect would be larger were yield curves to slope more steeply upwards.3
However, several factors should temper concerns. First, as noted above, many funds already hold liquidity at or above the proposed minima, suggesting that incremental adjustments may be limited. Second, the yield impact needs to be assessed in the context of the overall return profile and the value investors place on liquidity, stability and capital preservation.
Focus on the job at hand
The new guidance addresses the key issues in the current regulatory framework and should permit fund managers to focus on the job at hand: preserving capital, providing liquidity and delivering yield for investors.
The key message is that clarity itself has value. By reducing uncertainty and addressing known friction points, the new guidance strengthens the foundations of the European MMF market.
This increased certainty should allow the sector to shift its focus away from defensive contingency planning and back towards delivering client value and preparing for the next phase of market evolution. In particular, attention can turn to developments such as fund tokenisation, which may unlock new value in MMFs.
As explored in our recent report, tokenisation has the potential to enhance distribution, settlement efficiency and collateral mobility, extending the utility of MMFs without altering their underlying risk profile. In that sense, regulatory clarity on today’s framework is not an end point, but a platform from which the industry can innovate responsibly.
References
- 260511-money-market-funds-faqs_en.pdf
- Reforms to Money Market Fund Regulations - GOV.UK
- Our assessment is based on a hypothetical portfolio, constructed to a “worst case” basis, i.e. maximizing all possible regulatory limits, and assuming a newly constructed portfolio as of 23 February 2026 (i.e. no instruments purchased in the past at higher yields). In practical terms, such a portfolio would not be implemented – our scenario envisages a weighted average life (WAL) at the outer limit permitted under regulation (120 days), whereas the industry average for LVNAVs was in fact around 64 days on average at end-January 2026. Furthermore, the portfolio construction assumes a largely floating rate basis, to adhere to weighted average maturity requirements – again an unlikely portfolio to construct.
