Fixed Income Liquidity: The new SEC proposals and Federated

10-27-2015

The subject of bond market liquidity continues to get a lot of attention through press articles and proposed Securities and Exchange Commission (SEC) reforms. At Federated, there are two key points we would like to stress regarding this topic:

  • First, portfolio liquidity and the underlying liquidity of securities in the portfolios are everyday functions of Federated investment management and portfolio construction. Our fixed-income investment professionals have longstanding tenure and have managed inflow and outflows without disruption through a number of challenging market environments, including multiple recessions, the 2008 financial crisis, the 2011 debt crisis, the 2013 taper tantrum, and the most recent market volatility associated with China and commodity weakness.
  • Second, to further ensure appropriate attention to liquidity management, we have established liquidity committees in place in each fixed-income sub-asset class. Each committee evaluates the liquidity of each security in every portfolio based on parameters established by the portfolio team in conjunction with the chief investment officer (CIO) and the chief risk officer (CRO), ensuring the percentage of illiquid securities is well below 15% of a fund’s net assets, as required by SEC Guidelines to Form N1-A registering open-end funds. The committees, which include the CIO, CRO, investment group heads, portfolio managers, traders, analysts and compliance department members, evaluate how various factors such as market stress, size of potential withdrawals and portfolio composition may impact redemption scenarios, and then review corresponding contingency plans. There also is an expanded quarterly liquidity meeting with leaders of each sub-asset class to discuss overall liquidity in the fixed-income market.

This oversight was put in place well before the SEC’s new Liquidity Rule Proposal, a comprehensive package of proposed reforms designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds. Federated believes the framework used by the liquidity committees is consistent with the “principles-based” approach outlined by the SEC. Federated, along with the industry, is evaluating useful elements in the SEC proposal and looks forward to providing comments during the 90-day review period.