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.
“In the 75-year history of U.S. mutual funds, through numerous interest-rate and market cycles, one thing is clear: investors in stock and bond funds have never ’run’ from those funds,” ICI chief economist Brian Reid said in a statement. “Today’s bond fund investors are stable and focused on long-term financial goals, such as retirement, and there is no evidence to support the notion that they will redeem en masse when interest rates change.”
The SEC has already proposed a rule to boost data the agency collects from asset managers. Future rules could include curbing fund use of leverage and derivatives and implementing stress tests similar to those in the financial industry.
Additional provisions could include guidelines or caps on the amount of illiquid assets that funds can hold. The SEC and some market observers have voiced concerns that funds with illiquid assets could find it difficult to meet redemption requests in periods of high volatility.
Furthermore, funds may be required to anticipate meeting shareholding redemptions within three days, compared to seven days currently required. Funds may also be allowed to charge fees to investors to discourage quick trading activity in periods of market stress.
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Max Chen contributed to this article.