BNP Paribas

Navigating the money market landscape Investors often view money market funds as boring, cash-like repositories. This perspective misses the critical structural differences that dictate how these funds behave during market turmoil. UK investors typically choose between physical funds and synthetic structures. While both aim to track the Sterling Overnight Index Average (SONIA), their methods of delivery create distinct risk profiles. Understanding these mechanisms is the difference between liquidity and findng your capital gated during a crisis. The FSCS protection gap A dangerous myth persists that the Financial Services Compensation Scheme (FSCS) provides a £85,000 safety net for money market fund value. It does not. The FSCS only covers the insolvency of the investment platform or the loss of assets due to administrative failure. It offers zero protection against a drop in the fund's net asset value (NAV). Real protection comes from UCITS law, which requires assets to be held by an independent depository, ring-fencing them from the fund manager’s balance sheet. Physical vs synthetic mechanics Physical funds, such as those from Vanguard or Royal London, hold short-dated debt like certificates of deposit and commercial paper. Most operate as Low Volatility Net Asset Value (LVNAV) funds, aiming for a stable £1 price. However, if the market value of their holdings deviates by more than 20 basis points, the fund must switch to variable pricing. In contrast, synthetic funds like Lyxor Smart Overnight Cash (CSH2) hold baskets of equities as collateral and use swaps with major banks—including JP Morgan and BNP Paribas—to deliver interest. During the March 2026 energy shock, this synthetic structure proved remarkably resilient. While corporate credit spreads widened and pressured physical funds, synthetic NAVs continued their upward climb, insulated by the solvency of their banking counterparties. Managing access risk The greatest threat isn't default; it is access risk. In March 2020, sterling funds saw £25 billion in outflows over eight days. When everyone exits at once, funds may "gate," preventing withdrawals for weeks. To mitigate this, investors should check for gating provisions in the prospectus and maintain a secondary liquidity reserve outside the fund. Splitting holdings across two different structures—one physical, one synthetic—further reduces concentration risk.