SEC鈥檚 proposed liquidity rules are not good enough
15 January 2016 Washington DC
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The 麻豆传媒 and Exchange Commission鈥檚 (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 麻豆传媒 Industry and Financial Markets Association (SIFMA).
SIFMA鈥檚 asset management group expressed support for the SEC鈥檚 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.
鈥淲hile this [classification system] may create the impression of precision and objectivity, these distinctions would, in reality, be subjective and often arbitrary,鈥� explained SIFMA it its recommendation letter to the SEC.
鈥淭he 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.鈥�
SIFMA also recommended that, instead of requiring funds to classify portfolio assets according to a six-category 鈥榙ays-to-cash鈥� system, which seeks to impose a level of precision and granularity that is not feasible in today鈥檚 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鈥檚 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 鈥榟ighly liquid鈥� assets that a fund should observe.
鈥淪IFMA鈥檚 asset management group shares the SEC鈥檚 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,鈥� said Kenneth Bentsen Jr, SIFMA鈥檚 president and CEO.
鈥淢utual 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.鈥�
Timothy Cameron, managing director and head of SIFMA鈥檚 asset management group, added: 鈥淟iquidity 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.鈥�
鈥淔unds will, by their nature, vary in their subjective approaches to liquidity classifications.鈥�
鈥淎s proposed, the SEC鈥檚 liquidity risk management program, which requires objectivity, would have a detrimental impact to funds and investors. The SIFMA asset management group鈥檚 letters offer constructive insight on how to move these initiatives forward in a manner that best accomplishes the SEC鈥檚 goals.鈥�
SIFMA鈥檚 asset management group expressed support for the SEC鈥檚 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.
鈥淲hile this [classification system] may create the impression of precision and objectivity, these distinctions would, in reality, be subjective and often arbitrary,鈥� explained SIFMA it its recommendation letter to the SEC.
鈥淭he 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.鈥�
SIFMA also recommended that, instead of requiring funds to classify portfolio assets according to a six-category 鈥榙ays-to-cash鈥� system, which seeks to impose a level of precision and granularity that is not feasible in today鈥檚 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鈥檚 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 鈥榟ighly liquid鈥� assets that a fund should observe.
鈥淪IFMA鈥檚 asset management group shares the SEC鈥檚 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,鈥� said Kenneth Bentsen Jr, SIFMA鈥檚 president and CEO.
鈥淢utual 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.鈥�
Timothy Cameron, managing director and head of SIFMA鈥檚 asset management group, added: 鈥淟iquidity 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.鈥�
鈥淔unds will, by their nature, vary in their subjective approaches to liquidity classifications.鈥�
鈥淎s proposed, the SEC鈥檚 liquidity risk management program, which requires objectivity, would have a detrimental impact to funds and investors. The SIFMA asset management group鈥檚 letters offer constructive insight on how to move these initiatives forward in a manner that best accomplishes the SEC鈥檚 goals.鈥�
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