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

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  • Rishabh Kumar

    (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.

Suggested Citation

  • Rishabh Kumar, 2026. "A simulation framework for sterling money market funds: estimating redemption capacity and evaluating liquidity requirements," Bank of England Staff Working Paper series 1177, Bank of England.
    • Handle: RePEc:boe:boeewp:023299
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2026/a-simulation-framework-for-sterling-money-market-funds.pdf
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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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