What's the difference between prime and government money market funds?

Many UK treasury teams use more than one money market fund. On paper, the names prime and government MMF often don’t make their differences clear. The main distinction is between funds that lend only to governments and those that also lend to banks and companies. 

This guide shows how prime and government money market funds differ in what they hold and how they act under stress. It also looks at the changes HM Treasury and the Financial Conduct Authority are making, and what these choices mean for your investment policy.

Prime and government funds at a glance

A money market fund pools investor cash into short-term debt, as our guide to money market funds explains. Prime and government funds share that structure, but each takes on a different kind of credit exposure.

What a government money market fund holds

A government money market fund invests mainly in short-term government debt and repo backed by that debt. For sterling funds, this usually means UK Treasury bills, short-term gilts, and reverse repo secured by gilts. A fund’s credit exposure is to the government or to repo counterparties whose obligations are backed by government collateral.

What a prime money market fund holds

A prime fund can also buy short-term debt from banks and companies, like certificates of deposit and commercial paper. These must meet minimum credit standards, and most mature in weeks or months. The fund often holds some government debt too, but most of its credit exposure is with banks and other financial institutions.

How UK regulation classifies prime and government funds

The terms prime and government come from the US, where they are official fund categories under Securities and Exchange Commission rules. In the UK, funds follow the UK Money Market Funds Regulation, which was kept from EU law after Brexit. The UK labels describe how a fund prices its units, and the rules on what it can hold depend on that.

Public debt CNAV funds

A public debt constant net asset value (CNAV) fund is the closest UK version of what would be called a government fund in the US. It must keep at least 99.5% of its assets in government debt, reverse repo secured by government debt, and cash.  Its assets can be valued at amortised cost, a method that uses the purchase price and the interest it’s set to earn, offering investors a stable price per unit.

Low volatility NAV funds

Low volatility net asset value (LVNAV) funds are the main way to follow a prime strategy in the UK. They can hold bank and corporate paper as well as government debt, and they can also offer a constant unit price. This stable price is only allowed if it stays within 20 basis points of the fund’s market value.

Most sterling liquidity funds used by UK corporate treasurers use the LVNAV model. This means many treasurers have prime exposure even if they don’t use that term.

Variable NAV funds

Variable net asset value (VNAV) funds price their units at market value each day, so the price changes with the value of the holdings. A VNAV fund can use either a government or a prime strategy, so the label alone doesn’t show its credit exposure. Treasurers should check the fund’s investment objective and list of eligible assets to determine the fund type.

How prime and government funds compare

Credit risk and diversification

A government fund’s risk is closely linked to one country’s finances. A prime fund spreads its risk across many banks, but those banks commonly face trouble at the same time during a financial crisis. Our article on why diversification matters for corporate cash explains how these linked risks can affect a portfolio.

Yield

Prime funds usually pay a higher yield than government funds, because of the credit spread over government benchmark yields on bank and corporate paper. Both types follow the Bank Rate closely, since their holdings are short-term and reprice as they mature. The difference between them changes with bank funding market conditions, so treasurers should compare net yields after fees.

Liquidity rules and redemption pressure

Public debt CNAV and LVNAV funds must keep at least 10% of their assets in daily maturing assets and 30% in weekly maturing assets. If weekly liquid assets drop below certain levels during large outflows, the manager must consider employing tools like liquidity fees or redemption gates.

Both fund types follow the same rules, but their assets act differently under stress. Government debt is usually easy to sell in a crisis, while certificates of deposit and commercial paper can be hard to trade. Our guide to managing liquidity risk explains how treasurers can plan for this difference.

How sterling funds behaved in March 2020

The rush for cash in March 2020 showed how the two fund types behave when markets freeze. Sterling money market funds had outflows of about £25 billion, or 10% of their assets, between 12 and 20 March, according to the Bank of England. Funds used up their cash first, then found that the market for certificates of deposit and commercial paper had effectively closed.

The Bank of England later warned that linking liquidity thresholds to fees and gates can prompt investors to pull out early, before a gate closes. This concern has influenced the UK's current reform programme.

UK money market fund reform in 2026

In May 2026, the Government confirmed it will replace the UK Money Market Funds Regulation with FCA rules, expected by the end of 2026. The FCA’s June 2026 proposals would remove the link between liquidity levels and fees or gates in stable NAV funds. They would also set an expectation of 40% weekly liquid assets for those funds, subject to final FCA approval.

Choosing between prime and government funds

The best mix depends on what each pool of cash is for and the limits in your investment policy. Many treasurers keep operational cash that needs to be available during a crisis in government funds. Others accept bank credit risk in prime funds for balances they hold as a longer-term buffer.

Treasury policies at large companies and multinationals, and reserves policies at charities and NGOs, often set separate limits for government and bank exposure.

Direct government and bank exposure without pooling

Both prime and government funds aggregate investor cash and use some maturity transformation, giving daily access even though holdings mature over weeks. This setup means each investor is affected by others' redemption decisions in the fund.

TreasurySpring’s cash investments give separate exposure to a single issuer for a set term. Treasurers can choose government exposure, like UK Treasury bills, or exposure to investment-grade banks, either unsecured or secured through tri-party or centrally cleared repo. Each investment corresponds to the maturity of its underlying instrument, so there’s no maturity transformation and no mixing with other investors.

The trade-off is that cash is locked in for the chosen term instead of being available on demand. Many treasurers use these cash investments along with money market funds, keeping daily liquidity in funds and placing core balances directly. Our platform has a range of counterparties spanning governments, SSAs, banks, and corporates.

Pairing the fund to the purpose of the cash

Government and prime money market funds share the same structure but carry different credit exposure. UK rules show this split through public debt CNAV and LVNAV funds. Prime funds pay more because of bank credit risk and less-liquid assets, while government funds accept lower yields for greater robustness during stress.

With the UK regime due to change, now is a good time to review which funds your policy allows and why. If you would like to compare your fund allocation with direct, segregated exposure to governments and banks, contact our team. We can talk you through the options and how they fit alongside your existing holdings.

For anyone who can't tell the difference between their COP and their CCP, we've introduced our Treasury & Cash Investment Glossary.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.