SEC Chair Gensler Describes Agency Efforts to Enhance Liquidity Risk Management
Commentary by Steven Lofchie
SEC Chair Gary Gensler addressed risks associated with liquidity mismatches. He described SEC initiatives to enhance liquidity risk management.
In remarks before the Investment Company Institute, Mr. Gensler explained that open-end funds, including money market funds, are subject to runs where their investors may seek to redeem at a faster rate than the funds can liquidate their assets. He said that this presents a problem not only for funds regulated by the SEC, but also for short-term investment funds and collective investment funds managed by bank trust departments.
Mr. Gensler highlighted SEC initiatives aimed at enhancing liquidity risk management for:
- open-end funds, by proposing amendments that would (i) establish minimum liquidity classification standards to avoid overestimates with respect to fund liquidity and (ii) reduce the timing gap between when investors’ orders are placed and when the fund receives the orders in order to address plumbing issues; and
- market funds, by proposing amendments that would (i) prevent limits on redemptions during periods of market stress, (ii) enhance liquidity requirements and (iii) impose a swing pricing requirement on certain types of money market funds.
He said that the SEC is also considering various pricing-related alternatives aimed at ensuring that redeeming investors are allocated an appropriate share of redemption costs.
Commentary
Liquidity mismatches are a very real problem for the financial regulators.
The implications of the government response to the recent bank failures may be far more serious than current public perception. Many banks have large undisclosed losses as a result of the impact of inflation on their lending books. The only thing that is keeping these banks afloat is the general acknowledgement that the U.S. government is, at least for now, guaranteeing all depositors at all banks. This is a fairly remarkable event, more so because it effectively occurred without legislation or discussion. As a practical matter, the U.S. government has made itself (and the taxpayers) the guarantor of the entire U.S. bank deposit system. Banking regulators are now seeking legislation that will prospectively ratify and expand what has already occurred in fact. See FDIC Offers Options for Reforming the Deposit Insurance System.
Much has been said about the politicization of the regulators. Climate change is an issue, but it is not a financial regulatory issue. The SEC's rules on the execution of retail orders and the clearing of government securities are at best solutions in search of a problem, and at worst, solutions creating a problem. The SEC's proposed custody rule is definitely a solution creating a problem. But the problem of liquidity mismatches is real, and If the SEC and the banking regulators wish to demonstrate that they are, in fact, acting as financial regulators, and not as politicians, this is the issue that deserves the bulk of their attention.