| NEW YORK, Sept 15
NEW YORK, Sept 15 Managers of loan mutual funds
are preparing for the release of final rules from the US
Securities and Exchange Commission (SEC) that seek to improve
the liquidity risk management of mutual funds and
exchange-traded funds (ETF).
In September 2015, the SEC announced the proposal for the
funds, which are typical investments of retirement and college
savings plans. The regulator criticized long settlement times
citing concerns that funds may not be able to meet redemption
requests during volatile market conditions. In its 2016
Examination Priorities, the SEC said protecting retail investors
is a priority.
Under the proposal, funds would be required to include a
liquidity classification of the portfolio based on the time
needed for an asset to be converted to cash, a review of the
fund's liquidity risk and establish a three-day liquid asset
minimum, requiring a set percentage of assets be held in cash or
invested in holdings that can be converted to cash within three
business days. It is unclear what the final requirements of the
rule will be.
There were US$116.81bn of assets in US loan mutual funds and
ETFs in August, according to data compiled by Thomson Reuters
LPC. The funds hold about 13% of the US$880bn leveraged loan
market. There has been six weeks of inflows into loan mutual
funds and ETFs through the week ending September 7, according to
"Loans have performed very well over the years," said Elliot
Ganz, general counsel at the Loan Syndications and Trading
Association (LSTA). "Loan mutual funds have always been able to
meet redemptions, even during some of the most stressful times,
and we are hopeful the SEC will recognize that."
In January, firms including Credit Suisse Asset Management
and BlackRock, as well as the LSTA, asked the SEC to reconsider
parts of the proposal.
An SEC spokesperson declined to comment.
It took 17.7 days to complete a loan trade in the second
quarter, according to Markit. Bond and equity markets currently
settle trades in three days and efforts are underway to cut that
time frame to two days.
And while the loan market is working on initiatives to
improve settlement times, it still takes more than twice the
seven days recommended by the LSTA to complete a trade.
The fundamental problem with liquidity mismatches - the
difference between the time it takes to settle a loan and the
timeframe required to meet redemptions - remains a year after
the SEC released proposals for improving risk management of
mutual funds and ETFs, according to Steve Tu, an analyst at
Moody's Investors Service.
"Funds have this mismatch and it poses a risk for
investors," he said.
In a September 2015 statement about the proposal, SEC
Commissioner Kara Stein, who has criticized long settlement
times in the loan market, stressed the importance of funds being
able to meet redemptions.
"Every investor in a mutual fund or ETF expects that they
will be able to get their money out of the fund quickly, if need
be," she said.
(Reporting by Kristen Huanss; Editing By Michelle Sierra)