• New SEC liquidity rules for funds, ETFs could have interesting effects

    From Rich Carreiro@21:1/5 to All on Wed Sep 30 09:44:14 2015
    I ran across this piece on etf.com and thought people here
    might be interested:


    Some snippets:

    "funds would have to report an estimate of how long it would take to
    liquidate their entire position for every security held, and would be
    limited to having no more than 15 percent of the fund in securities that
    would take longer than seven days to liquidate. Fund boards would also
    be required to analyze their patterns of redemptions and the funds’ portfolios to maintain a minimum percent of assets that could be dumped
    within three days."


    "The key provisions of the rule are about unloading the entire position
    a fund holds. That means small funds will be disproportionately better
    off than large ones. The math here is really simple: Right now, the
    iShares Emerging Markets ETF (EEM | B-100) has a 4.1 million share
    position in the National Bank of Abu Dhabi, making up about 0.05 percent
    of its portfolio.
    Based on FactSet’s Portfolio Analysis tool, that would take roughly
    eight days to unload. For a fund that was half EEM’s size, it would take
    four days. So for EEM, the bank is an “illiquid asset,” but for an
    upstart, it’s not. This increases the likelihood that funds will have to either close for new money (leading to premiums) or pollute their
    portfolios with off-index-weight positions."


    "My initial analysis of EEM—using the incredibly bad method of just
    average volume—suggests it’s sitting on about 8 percent of assets that would take longer than seven days to unload. As I said above, the real
    number is probably off by more than half. But let’s assume for a moment
    that BlackRock figured out a way to keep EEM running and tracking its
    index well.
    How about junk bonds? Or bank loans? The whole premise of these ETFs has
    been that they provide liquid access to illiquid assets. iShares
    published an excellent paper a few years ago pointing out that in the
    corporate bond space, ETFs now hold more in bond assets under management
    than the entire corporate dealer market held in inventory."

    Rich Carreiro rlc-news@rlcarr.com

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