SEC’s proposed liquidity rules are not good enough
15 January 2016 Washington DC
Image: Shutterstock
The Securities and Exchange Commission’s (SEC) proposed liquidity management rules for mutual funds and exchange-traded funds (ETFs) risk impeding understanding of fund liquidity and undermining effective liquidity management practices, according to the Securities Industry and Financial Markets Association (SIFMA).
SIFMA’s asset management group expressed support for the SEC’s overarching goal to enhance liquidity risk management practices but also highlighted several areas where the current proposal would actually have the opposite effect on the market to what was intended.
The proposed classification system requires funds to make finely tuned distinctions about the liquidity of specific holdings, or portions of holdings, at a given point in time.
“While this [classification system] may create the impression of precision and objectivity, these distinctions would, in reality, be subjective and often arbitrary,” explained SIFMA it its recommendation letter to the SEC.
“The SEC would be better served by undertaking a more flexible approach that enables funds to establish liquidity risk management programs based on sound principles, in a manner that reflects and takes into account their specific circumstances.”
SIFMA also recommended that, instead of requiring funds to classify portfolio assets according to a six-category ‘days-to-cash’ system, which seeks to impose a level of precision and granularity that is not feasible in today’s marketplace.
Funds should classify the liquidity of portfolio assets using a spectrum-based approach, which is relative in nature across four different liquidity categories, according to SIFMA.
Going further, SIFMA argued that, instead of the three-day liquid asset minimum, which would effectively function as a cash buffer requirement that unnecessarily constrains a fund’s ability to employ its investment strategy, and in some cases would increase liquidity risk, fund managers should be asked to evaluate whether it would be prudent to identify a target percentage of ‘highly liquid’ assets that a fund should observe.
“SIFMA’s asset management group shares the SEC’s goal of promoting a resilient marketplace that works in the best interests of investors, and we commend the SEC for its leadership in assessing new tools that promote this objective,” said Kenneth Bentsen Jr, SIFMA’s president and CEO.
“Mutual funds, ETFs and other products are vitally important tools that help investors achieve their financial goals. As such, it is crucial that any new rules strike the right balance of promoting stability while preserving the benefits these funds bring to investors.”
Timothy Cameron, managing director and head of SIFMA’s asset management group, added: “Liquidity is a fluid and dynamic concept which cannot be measured with the exactness proposed in this rulemaking, especially for fixed income instruments and other instruments traded over the counter.”
“Funds will, by their nature, vary in their subjective approaches to liquidity classifications.”
“As proposed, the SEC’s liquidity risk management program, which requires objectivity, would have a detrimental impact to funds and investors. The SIFMA asset management group’s letters offer constructive insight on how to move these initiatives forward in a manner that best accomplishes the SEC’s goals.”
SIFMA’s asset management group expressed support for the SEC’s overarching goal to enhance liquidity risk management practices but also highlighted several areas where the current proposal would actually have the opposite effect on the market to what was intended.
The proposed classification system requires funds to make finely tuned distinctions about the liquidity of specific holdings, or portions of holdings, at a given point in time.
“While this [classification system] may create the impression of precision and objectivity, these distinctions would, in reality, be subjective and often arbitrary,” explained SIFMA it its recommendation letter to the SEC.
“The SEC would be better served by undertaking a more flexible approach that enables funds to establish liquidity risk management programs based on sound principles, in a manner that reflects and takes into account their specific circumstances.”
SIFMA also recommended that, instead of requiring funds to classify portfolio assets according to a six-category ‘days-to-cash’ system, which seeks to impose a level of precision and granularity that is not feasible in today’s marketplace.
Funds should classify the liquidity of portfolio assets using a spectrum-based approach, which is relative in nature across four different liquidity categories, according to SIFMA.
Going further, SIFMA argued that, instead of the three-day liquid asset minimum, which would effectively function as a cash buffer requirement that unnecessarily constrains a fund’s ability to employ its investment strategy, and in some cases would increase liquidity risk, fund managers should be asked to evaluate whether it would be prudent to identify a target percentage of ‘highly liquid’ assets that a fund should observe.
“SIFMA’s asset management group shares the SEC’s goal of promoting a resilient marketplace that works in the best interests of investors, and we commend the SEC for its leadership in assessing new tools that promote this objective,” said Kenneth Bentsen Jr, SIFMA’s president and CEO.
“Mutual funds, ETFs and other products are vitally important tools that help investors achieve their financial goals. As such, it is crucial that any new rules strike the right balance of promoting stability while preserving the benefits these funds bring to investors.”
Timothy Cameron, managing director and head of SIFMA’s asset management group, added: “Liquidity is a fluid and dynamic concept which cannot be measured with the exactness proposed in this rulemaking, especially for fixed income instruments and other instruments traded over the counter.”
“Funds will, by their nature, vary in their subjective approaches to liquidity classifications.”
“As proposed, the SEC’s liquidity risk management program, which requires objectivity, would have a detrimental impact to funds and investors. The SIFMA asset management group’s letters offer constructive insight on how to move these initiatives forward in a manner that best accomplishes the SEC’s goals.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
