Fixed Income  

UK urged to follow SEC’s lead on bond fund liquidity

UK urged to follow SEC’s lead on bond fund liquidity

Fund buyers have called for UK regulators to adopt the bond liquidity safeguards proposed in the US, despite a recent Bank of England study finding few problems with funds’ redemption practices.

Last week the US Securities and Exchange Commission (SEC) voted unanimously to develop rules to help ensure funds have a plan to manage liquidity risks.

Gavin Haynes, managing director at Whitechurch Securities, said he thought UK regulators should consider taking similar action.

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In recent years policymakers have become increasingly worried about the potential implications of a reversal in bond fund flows, particularly given the gradual decline in the number of investment banks able to provide liquidity to the market.

Mr Haynes said: “I think increasing disclosure regarding liquidity of bond portfolios would be useful. In particular, the proposal of the SEC for funds to classify assets into liquidity buckets based on how long it would take to convert [the assets] to cash is an interesting practice.”

The SEC’s six “buckets” relate to how long it would take to convert an asset to cash without materially moving its price.

Jason Hollands, managing director at Tilney Bestinvest, said: “Regulators are absolutely right to consider what might happen in the event of a large-scale exit from bond markets – for example, ahead of a US rate-hiking cycle.”

But Jim Wood-Smith said the plans are likely to prove fruitless. The head of research at Hawksmoor Investment Management said: “It is like a tsunami defence: you can make all the best plans, but if it is the big one, then they are going to get washed away anyway. So what they are doing is all sensible stuff, but ultimately it is likely to fail.”

One alternative measure, which Investment Adviser understands has begun to be discussed openly by some bond managers, is a move away from daily dealing requirements.

The manager of a UK-domiciled high-yield bond fund, speaking at a conference in London last week, is understood to have suggested that a move to less frequent dealing times would help the sector.

These changes, however, would not sit easily with the requirements of the retail fund management industry.

Ryan Hughes, multi-manager at Apollo Multi Asset Management, said the biweekly dealing offered by high-yield funds run by specialist house Muzinich “worked better” on some occasions. But he admitted the implementation of such standards would prove problematic.

“I’d have to limit my exposure to these funds as it would throw up difficulties for me. These funds would also have difficulties with platforms, [because] if they were not daily dealing [the platforms] would have structural issues in selling them,” he said.

Mr Hollands agreed that a suspension of daily dealing may be the right thing to do in the event of a liquidity crunch, but he was unsure who would be willing to make the first move.

“I very much doubt any asset manager would want to be the first to put their head over that parapet, as such a move would be very unpopular with investors, even though it would lower systemic risks and ultimately protect investors’ interests,” he said.