New SEC liquidity rules for funds, ETFs could have interesting effects

I ran across this piece on etf.com and thought people here might be interested:
http://www.etf.com/sections/blog/secs-liquidity-bomb-funds?nopaging=1
Some snippets:
"funds would have to report an estimate of how long it would take to liquidate their entire position for every security held, and would be limited to having no more than 15 percent of the fund in securities that would take longer than seven days to liquidate. Fund boards would also be required to analyze their patterns of redemptions and the funds’ portfolios to maintain a minimum percent of assets that could be dumped within three days."
[snip]
"The key provisions of the rule are about unloading the entire position a fund holds. That means small funds will be disproportionately better off than large ones. The math here is really simple: Right now, the iShares Emerging Markets ETF (EEM | B-100) has a 4.1 million share position in the National Bank of Abu Dhabi, making up about 0.05 percent of its portfolio. Based on FactSet’s Portfolio Analysis tool, that would take roughly eight days to unload. For a fund that was half EEM’s size, it would take four days. So for EEM, the bank is an “illiquid asset,” but for an upstart, it’s not. This increases the likelihood that funds will have to either close for new money (leading to premiums) or pollute their portfolios with off-index-weight positions."
[snip]
"My initial analysis of EEM—using the incredibly bad method of just average volume—suggests it’s sitting on about 8 percent of assets that would take longer than seven days to unload. As I said above, the real number is probably off by more than half. But let’s assume for a moment that BlackRock figured out a way to keep EEM running and tracking its index well. How about junk bonds? Or bank loans? The whole premise of these ETFs has been that they provide liquid access to illiquid assets. iShares published an excellent paper a few years ago pointing out that in the corporate bond space, ETFs now hold more in bond assets under management than the entire corporate dealer market held in inventory."
--
Rich Carreiro snipped-for-privacy@rlcarr.com


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And a commenter on that post notes:
"I bring your attention to the list of items on page 404 noted above, and in particular the last item on that list, item I. In the spirit of this article's title, that item is a rather large bomb. Specifically, a fund must take into account, "Relationship of the asset to another portfolio asset." In other words, the SEC wants a fund to measure cross-asset impact on liquidity - how does liquidation of any one asset affect cost of liquidation of other assets. Just think for a moment about what might be required to get a reasonable handle on that. Here is the link to the proposed rule: http://1.usa.gov/1iV1Mkf "
--
Rich Carreiro snipped-for-privacy@rlcarr.com


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