SEC Eases Liquidity Rules in Case of a Run on Bond ETFs

U.S. regulators have lightened rules on liquidity requirements that swept up exchange traded funds with the broader open-end mutual fund market meant to ensure money managers could redemptions in case of a mass exodus.

The Securities and Exchange Commission unanimously agreed to adopt new rules that softened regulation on ETFs initially designed to assure that funds are able to liquidate assets quickly enough to meet redemptions in case investors rush toward the exits when yields rise, reports Joe Rennison for the Financial Times.

The SEC originally lumped ETFs with mutual funds last year when proposing the rules. However, ETF providers like BlackRock and Vanguard, argued that unlike traditional open-end funds, the structure of many ETFs makes them more liquid than mutual funds, reports Benjamin Bain for Bloomberg.

Consequently, after taking the ETF industry’s comments under advisement, regulators approved a revised rule to exempt ETFs that redeem in-kind, or provide securities rather than cash as redemptions, and provide daily portfolio information.

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On the other hand, mutual funds are required to classify the liquidity of investments and maintain a set amount of highly liquid reserves. Mutual funds will need to “assess, manage, and periodically review their liquidity risk, based on specified factors,” according to the SEC. Funds will have to classify each underlying investment based on how many days asset managers believe they would need to convert them to cash, with the SEC outlining four classifications, defined as highly liquid, moderately liquid, less liquid and illiquid investments.