SEC new liquidity rule

This week, commissioners of the Securities and Exchange Commission decided to create a new rule in order to strengthen disclosure and so that funds can manage liquidity risk effectively.

The US has been under stress recently due to the imminent interest rate rise and investors are expected to get rid of the bond funds they have been holding on to when and if this happens, the Financial Times reports. The FT explained that the reasoning behind this is to minimise the risk that financial institutions may not return money to investors, especially in times of market stress. During this period, funds may sell assets quickly to compensate but these illiquid asset sales take longer to complete.

One of the commissioners, Kara Stein, highlighted that investors in mutual funds or exchange-traded funds will be able to get their money back quickly if necessary. “The heart of today’s proposal is updating the commission’s regulatory regime to ensure that this expectation continues to be met,” Stein said.

Chair of the SEC, Mary Jo White, said that mutual funds and other open-end funds hold more than $15 trillion in assets. “Among these strategies are ones that rely on securities that tend to be less liquid, such as high-yield bond funds, emerging market equity and debt funds, and funds with alternative strategies,” White mentioned.

The FT comments upon the circumstances under which investors can redeem their investment:

  • “Investors can redeem their investment in so called “open-end” funds on any business day and must receive their assets within seven days, although there is an expectation that the turnaround will be faster.”
  • “Under the proposal, funds will be required to classify assets into one of six liquidity buckets, depending on how long it would take to convert the asset to cash, ranging from two to three business days up to more than 30 calendar days.”
  • “Funds will also have to establish a minimum amount of assets that can be converted into cash within three days without materially affecting the assets price. The public will have 90 days to comment on the proposed rule.”

In order to eradicate these fears, asset management company BlackRock published research on liquidity risk earlier this year. “BlackRock is supportive of the SEC’s efforts to enhance liquidity risk management practices across the industry and we look forward to reviewing the proposal in more detail,” BlackRock announced.


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