In the wake of the mini flash crash during the height of the recent market volatility, the Securities and Exchange Commission is taking a closer look at safeguards to help obviate another wild swing in exchange traded funds.
The SEC will vote on proposed rules requiring mutual funds and ETFs to better handle periods of extreme volatility when investors execute heavy redemptions, the Wall Street Journal reports. [The ETF ‘Mini Flash Crash’ Examined]
The proposal will force funds to formally determine how they manage liquidity, or ability to buy or sell fund assets, with the fund boards to have written plans.
After the Tuesday vote, the SEC will open the proposal to public comment and then vote on it a second time before its provisions go into effect.
The plan is being put forth as Washington debates whether or not the asset-management industry is vulnerable to systemic stresses, especially as the Federal Reserve looks to hike interest rates. A growing number of investors and regulators are concerned that funds could exacerbate market volatility if the products are unable to efficiently meet excessive redemptions on illiquid underlying assets.
Some industry observers, though, are less worried of potential systemic risks.