On January 13, 2016, the Systemic Risk Council issued a letter to the US Securities and Exchange Commission (SEC) in response to proposed rulemaking regarding how open-end mutual funds manage liquidity risk.
In its letter, the Systemic Risk Council cites the proposed rules as an important initiative and recognition of the potential adverse effects on capital markets when open-end funds fail to adequately manage liquidity.
The letter cautions against allowing too much subjectivity in the processes for deeming which portfolio assets are liquid under the proposed rules, and recommends that the SEC determine asset classes reasonably expected to be liquid in stressed conditions, noting “The need for a reasonable standard, instead of individual decision-making, arises because of the risk of market confusion arising from a proliferation of idiosyncratic liquidity assessments and because, by definition, individual asset managers cannot be expected to internalize the wider economic costs of a liquidity breakdown.”
The letter also recommends that the SEC consider applying “the new asset-based liquidity requirements with varying intensity according to a fund’s liquidity and leverage-based risk, while providing reasonable assurance that every fund can withstand liquidity risk” and notes that with appropriate disclosures, investors would be afforded opportunity to make investment decisions based on their investment objectives, risk tolerances, and understanding of those disclosures.
Read the full letter here: