Displaying items by tag: liquidity

(Washington)

The financial industry just won a big concession from regulators. In a piece of Obama era legislation, mutual funds were set to have to make disclosures to investors whenever they hard large piles of hard-to-sell assets. However, the SEC has just pulled away from the measure, saying mutual funds will not need to do so. The measure was set to take effect in 2019, but has now been delayed because of disagreement on the total scope of the disclosures.

FINSUM: The big sticking point with this rule is that it would force asset managers to make judgments about liquidity even when they have little insight into it.

(New York)

The last two weeks could hardly have been worse for investors. Stocks plunged and bonds are falling, with the former led by obsession over the VIX. However, according to Bloomberg there is a ticket timing much bigger than the VIX, and one you probably aren’t paying much attention too—ETF loan funds. The market is much bigger than the $8 bn of volatility linked ETFs that got wiped out over the last couple of weeks, try $156 billion between loan ETFs and mutual funds. The big worry is that since these kind of illiquid underlying investments—actual loans—cannot be sold so quickly as the ETFs, that it could cause huge losses as ETFs stampede out but fund managers cannot liquidate the underlying quickly enough.

FINSUM: So this is a provocative spin on a common argument. Our counter, however, is that credit worthiness is pretty good overall, so it doesn’t seem like an exodus will occur.

(New York)

Morgan Stanley went on the record yesterday arguing that market liquidity will likely vanish in the event of turmoil. The bank says that the reduction in bank participation in trading, brought on by post-Crisis regulation, has led to “shadow banks” taking up the burden of liquidity. Such shadow banks including entities like professional trading firms, hedge funds etc. However, Morgan Stanley points out that this type of liquidity provider has never been tested in a tumultuous market, and that liquidity is likely to vanish.

FINSUM: While there may be some truth to it, banks love to over play the amount of liquidity they provide in periods of turmoil. When the market gets ugly, they tighten up just like everyone else.