The 25-year-old Argentina international is set to undergo a medical before signing a long-term contract with City. Personal terms are not expected to present any difficulties.
The fee matches the £125 million Liverpool paid for Alexander Isak on transfer deadline day last summer. Fernandez previously joined Chelsea from Benfica in 2023 for £107 million, which was a British transfer record at the time.
City and Chelsea have been in negotiations over the past 24 hours and have now reached an agreement for the midfielder's move.
Fernandez is familiar with City manager Enzo Maresca, having worked with the Italian during Maresca's time at Chelsea. The City boss is reportedly eager to reunite with the Argentine after losing several midfielders during the summer transfer window.
Fernandez was absent from Chelsea's recent 4-3 Premier League victory over Brighton and their 2-0 Carabao Cup win against Luton. Reports in Argentina suggested that the midfielder had asked to be left out of the squad.
Chelsea had previously set a deadline of 14 August for clubs to submit offers worth at least £120 million, hoping to resolve uncertainty surrounding Fernandez before the new season progressed.
The signing marks the second time Manchester City have broken their own transfer record this summer. Earlier in the window, the club spent £116 million to sign Elliot Anderson from Nottingham Forest.
Fernandez also becomes the fourth player to join a Premier League club for at least £100 million this summer, following Morgan Rogers' £117 million move to Chelsea, Bradley Barcola's £123 million transfer to Liverpool and Anderson's arrival at City.
Manchester City's major midfield departures have driven their heavy spending. Tijjani Reijnders, Rodri, Nico Gonzalez and Bernardo Silva have all left the Etihad Stadium, creating a significant need for reinforcements.
City have also completed deals for Ayoub Bouaddi, Brazilian winger Allan Elias, Jeremy Monga and goalkeeper Geronimo Rulli. Everton winger Iliman Ndiaye could also join in a deal worth up to £65 million.
For Chelsea, Fernandez's departure represents one of the biggest sales in the club's history. His move, combined with Nicolas Jackson's £65 million transfer to Aston Villa and Liam Delap's £50 million move to Nottingham Forest, is expected to push Chelsea's player sales beyond £400 million this summer.
The figure would set a new Premier League record for income generated from player sales in a single transfer window.
