LPC: Loan market preparing for SEC liquidity rules

Blackrock Capital Investment

15/09/2016 15:13

By Kristen Haunss 
    NEW YORK, Sept 15 (Reuters) - 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 
Lipper.  
    "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.  ID:nL2N1561JY  
    An SEC spokesperson declined to comment. 
    RISKY PACE 
    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) 
 
Keywords: LOAN SECRULES/