A simulation framework for sterling money market funds: estimating redemption capacity and evaluating liquidity requirements

Rishabh Kumar
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Rishabh Kumar: Bank of England

No 1177, Bank of England Staff Working Paper series from Bank of England

Abstract: Money market funds (MMFs) aim to provide near-on-demand liquidity yet often hold assets that become hard to sell under stress, leaving them vulnerable to run-like redemptions. I build a simulation framework for sterling MMFs to estimate redemption capacity and failure probability across alternative redemption profiles and market-liquidity scenarios. Resilience of funds depends on both the timing of outflows and the effective liquidity of weekly liquid assets (WLA): front-loaded redemptions are most destabilising, and the benefit of asset sales shrinks as market depth thins. Removing the 30% WLA threshold effect – under which managers must consider measures to deter further redemptions – yields sizeable resilience gains by reducing cliff-edge behaviour. Under historically extreme shocks and without threshold effects, most resilience improvements come from holding WLA above the 30% regulatory minimum; in my simulations, gains concentrate around 40% WLA, with diminishing returns beyond.

Keywords: Money market funds; liquidity; simulations (search for similar items in EconPapers)
JEL-codes: C63 G23 G28 (search for similar items in EconPapers)
Pages: 29
Date: 2026-03-27
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