liquidity risk management

Comments on the SEC’s proposed money market fund reforms were due April 11, so it is time to wrap up my series on the swing pricing proposal included in the reform package. In this final post, I want to consider some baffling references to “liquidity externalities that money market fund liquidity management practices may impose on market participants transacting in the same asset classes.” I cannot find an interpretation of these references that comport with my understanding of “externalities.”
Continue Reading Market Externalities and Money Market Funds

This continues my series of posts on the SEC’s proposal to require money market funds with floating net asset values (“institutional money funds”) to implement swing pricing during any pricing period in which the fund has net redemptions. Having surveyed how institutional money funds are supposed to determine swing prices under the proposal, I am turning to when swing pricing would be required. First, I want to consider a unique feature of institutional money funds, namely that many funds calculate a floating net asset value per share (“NAV”) more than once a day. The proposed amendments would define the time from the calculation of one NAV to the next as a “pricing period.” Pricing periods pose two conflicting problems for swing pricing.
Continue Reading Swing Pricing and the Problem of Pricing Periods

This continues my series of posts on the SEC’s proposal to require money market funds with floating net asset values (“institutional money funds”) to implement swing pricing during any pricing period in which the fund has net redemptions. Having address the estimated costs that institutional money funds must always include in their swing price, this post considers the “market impact factor” to be included when net redemptions exceed the market impact threshold. I suspect the SEC underestimated the difficulty of estimating market impact factors.
Continue Reading Money Fund Liquidity and Market Impacts

This eleventh installment of our review of the compliance requirements of new Rule 18f‑4 as it applies to business development companies, closed-end funds and open-end funds other than money market funds (“Funds”) completes our discussion of unfunded commitment agreements. Here we consider what changes may be required for a Fund to comply with paragraph (e) of Rule 18f‑4. We suspect this may prove relatively easy for an open-end Fund.
Continue Reading Compliance Checklist for Unfunded Commitment Agreements

In our previous post, we reviewed how the financial markets’ reaction to the COVID-19 pandemic requires mutual funds to review, and possibly reclassify, the liquidity of their investments. As liquidity and valuation are often two sides of the same coin, factors that may lead to reclassifying a security’s liquidity may also raise questions concerning how to value the security for purposes of calculating a mutual fund’s net asset value (“NAV”). This post discusses when this may be the case.
Continue Reading Navigating Mutual Funds in Rough Markets—Valuation

During a recent webinar, Steve explained that the market and trading conditions caused by the COVID-19 pandemic might be “reasonably expected to materially affect one or more of [a mutual fund’s] investments’ classifications” for purposes of the fund’s liquidity risk management program (its “LRM Program”). In this circumstance, Rule 22e-4 under the Investment Company Act of 1940 requires more frequent review of these classifications. This post describes how a rough market may require a mutual fund (other than a money market fund or in-kind exchange traded fund) to reclassify an investment’s liquidity classification.
Continue Reading Navigating Mutual Funds in Rough Markets—Liquidity

I. DERIVATIVES ISSUES

1. Inventory “relationship level” considerations in legal documentation that governs your derivatives trading relationships (ISDA Master Agreements, Futures Customer Agreements, Master Securities Forward Transaction Agreements, etc.)

a. Example: Decline in Net Asset Value Provisions (Common in ISDAs)

i. Identify the trigger decline levels and time frames at which transactions under the agreement can be terminated (25% over a 1-month period – is that measured on a rolling basis or by reference to the prior month’s end?)

ii. Confirm whether all or only some transactions can be terminated (typically, it is all transactions)

iii. Identify the notice requirements that apply when a threshold is crossed

iv. Identify whether the agreement includes a “fish or cut bait clause” that restricts the ability of the other party to designate the termination of the transactions under the trading agreement

Continue Reading Market Volatility Regulatory Outline for Asset Managers