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

I ran across this piece on and thought people here
might be interested:
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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."
"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."
"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."
Reply to
Rich Carreiro
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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:
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Reply to
Rich Carreiro

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