Funds Target Liquidity Risk


Although the US Securities and Exchange Commission’s investment-company modernization rules went into effect on January 17, only now are open-end funds working to develop their mandated liquidity risk platforms.

Most funds are developing their programs from scratch, and it is a considerable effort for most of them, according, to Ian Domowitz, CEO of ITG Solutions Networks.

Ian Domowitz, ITG

Ian Domowitz, ITG

“The nature of the regulations will require a whole new set of reporting requirements.  These, in turn, must be consistent with which a set of quantitative requirements, which funds must figure out how to do themselves or outsource to a provider,” said Domowitz. “Funds must develop a  process to determine on a regular basis whether they exceed the 15% limit on illiquid investments, and determine a floor with respect to highly liquid investments.”

According to the 459-page rule’s cost analysis, the SEC estimated that development and maintenance of the liquidity risk programs should cost the individual funds approximately $10,000 annually.

Domowitz declined to comment on how accurate he believes the SEC’s estimate is. However, he noted that it likely would be easier for those funds that invest in equities rather than fixed income.

“I think most of the debates will circle around fixed income,” he said. “The notion of designing and implementing what would be to call something highly liquid or call something illiquid has not been attacked by anyone at this stage.”

After looking at the portfolio of some of the largest funds on the Street and experimenting with the data, Domowitz firmly believes that the mandated liquidity-risk programs will improve the performance of the individual fund and reduce its net transaction costs as well as bring together many of a fund’s internal stakeholders, he added.

“If I was talking about liquidity risk, relative liquidity of a portfolio or just a cost of implementing a portfolio, the cost reduction and enhanced portfolio liquidity are not only the responsibility of a trading desk,” said Domowitz. “They also are the responsibility of the fund management and the portfolio manager in particular. To me, the SEC ruling is an emphasis and moves in a favorable direction for portfolio performance and liquidity risk.”

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