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Plenty of Players Provide Liquidity for ETFs

By Shelly Antoniewicz

December 2, 2014

A recent article in the Financial Times’ FT Alphaville blog (“Lies, Damned Lies, and Liquidity Expectations”) focused on a paper published by the Committee on the Global Financial System, an organization that monitors developments in global financial markets for central bank governors. The paper warns that “the liquidity of ETF bond funds…builds on the willingness and capacity of authorized participants—typically the same dealers that provide immediacy services in bond markets—to make markets for ETF shares.”

Unfortunately, the statement demonstrates a fundamental misunderstanding of the structure of exchange-traded funds (ETFs) and the role of authorized participants (APs), which are financial institutions that deal directly with ETFs in the process used to create and redeem ETF shares. Here are a few common misconceptions embedded in this statement that need to be cleared up.

Do investors have to interact with an AP to buy or sell ETF shares, including bond ETF shares?

No. Investors can buy and sell ETF shares on stock exchanges, dark pools, and other trading venues by trading with other investors through market makers or liquidity providers. Although APs do make markets for ETF shares in the secondary market, they are not the only market makers. There are many other market makers and liquidity providers that stand ready to buy or sell ETF shares in the secondary market on a continuous basis at publicly quoted prices. These entities are not APs, nor are they required to be APs to deal in ETF shares.

Is most of the trading activity in bond ETF shares conducted through an AP via the creation/redemption channel?

No. ICI’s recent primer, “Understanding Exchange-Traded Funds: How ETFs Work,” shows that, on average, only about one-fifth of total activity in bond ETFs is transacted in the primary market (i.e., through creations and redemptions with APs). The vast majority of the trading activity in bond ETFs occurs in the secondary market—and these trades can be accomplished without any intermediation by APs. Most of these secondary market transactions do not create transactions in the underlying bonds, because only the ETF shares are changing hands.

Will secondary market liquidity in bond ETFs evaporate in the aftermath of a shock?

Experience suggests that the answer is no. In the summer of 2013, bond prices moved sharply downward in response to indications that the Federal Reserve might begin to curtail its massive bond-buying program known as QE3. Over three months, from May to July 2013, the nominal interest rate on the 10-year Treasury bond rose 90 basis points. In a ranking of interest rate shocks to the financial system, this was a good-sized hit to the bond market—the largest since the three-month period ending August 2003, during which the interest rate on the 10-year Treasury rose 108 basis points. Here are two other points to consider about recent events.

  • Did secondary market liquidity in bond ETFs disappear in the 2013 episode?
    No. In fact, by one measure (dollar-value traded), there was more liquidity demanded (presumably by sellers) and more liquidity supplied (presumably by buyers). As shown in the table below, volume in the secondary market for all bond ETFs averaged close to $5 billion per day during the May to July period, up from a daily average of nearly $3.8 billion during the preceding four-month period. Even narrower bond-ETF asset classes, such as domestic high-yield and emerging markets, had ample liquidity in secondary market trading during the summer of 2013. 
  • Did primary market activity in bond ETFs increase proportionately more than secondary market trading?
    No. Though investors did make more use of the creation/redemption channel to access liquidity in bond ETFs, secondary market trading rose just as quickly. In fact, for all bond ETFs, the ratio didn’t budge: creations and redemptions amounted to 18 percent of total activity in the primary and secondary markets on a daily basis both preceding and during the summer of 2013. For domestic high-yield bond ETFs, creations and redemptions were 16 percent of total activity, slightly below their average earlier in the year. For emerging markets bond ETFs, they were 20 percent, just above their average.
Trading Activity in Bond ETFs, January–April 2013 and May–July 2013
All bond ETFs

Primary Market1

Millions of dollars

Secondary Market2

Millions of dollars

Primary Market 
Share of Total Trading3

Percent

    January–April 2013 $825 $3,772 18%
    May–July 2013 1,068 4,990 18
Domestic high-yield bond ETFs
    January–April 2013 133 628 17
    May–July 2013 196 1,020 16
Emerging markets bond ETFs
    January–April 2013 49 210 19
    May–July 2013 54 221 20

1Represented by average daily ETF share creations and redemptions, which are computed by averaging the sum of creations and the absolute value of redemptions across all ETFs in each investment objective each day.

2Average daily value traded of ETF shares on exchanges, in dark pools, and on other venues across all ETFs in each investment objective.

3Primary market activity in ETF shares as a percentage of total ETF share activity in both the primary market and secondary market, calculated as: primary/(primary+secondary).

Source: Investment Company Institute and Bloomberg

Even in times of stress, recent experience demonstrates that most of the trading activity in ETF shares remains in the secondary market, where APs are just a subset of the many market makers available to help match sellers of ETF shares with willing buyers. During the summer of 2013, when prices of bonds and bond ETF shares were declining sharply, buyers for bond ETF shares stepped up and secondary market liquidity in bond ETF shares did not depend on the willingness and capacity of APs.

Shelly Antoniewicz is senior economist for industry and financial analysis in ICI Research.

TOPICS: Exchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityInternationalTrading

What’s Driving Retirement Plan Access?

By Peter Brady

October 17, 2014

Most workers who are likely to have the ability to save and who are focused primarily on saving for retirement have access to an employer-sponsored retirement plan—and nearly all of these workers choose to participate.

Read more…

TOPICS: Government AffairsInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchSavings

The IMF Makes All of OFR’s Mistakes—And More

By Sean Collins and Chris Plantier

October 10, 2014

The International Monetary Fund (IMF) just released its latest Global Financial Stability Report. In the immortal words of Yogi Berra, it is déjà vu all over again.

The IMF report bears more than a passing resemblance to Asset Management and Financial Stability, published by the U.S. Treasury Department’s Office of Financial Research (OFR) in September 2013. The OFR report was met with widespread criticism for its misinformed discussion of hypothetical “vulnerabilities” posed by mutual funds and other asset managers.

Read more…

TOPICS: EuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury

Bloomberg Ignores the Evidence on Bond ETFs

By Mike McNamee

September 26, 2014

In response to “Pimco ETF Probe Spotlighting $270 Billion Market Vexing FSB,” we posted the following comment on Bloomberg News’ website:

Read more…

TOPICS: Bond FundBondsExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityFund RegulationInterest RateInternationalTrading

Why Regulated Funds Are a Relatively Stable Source of Foreign Investment for Emerging Economies

By Chris Plantier

September 26, 2014

The press and policymakers focus a great deal of attention on flows to U.S. and European regulated mutual funds and exchange-traded funds (ETFs), in part because these funds are perhaps the most easily observed and readily measured players in capital markets.

Read more…

TOPICS: EuropeFinancial MarketsFinancial StabilityFund RegulationICI GlobalInternationalMutual Fund

A Look Inside ETFs and ETF Trading

By Rochelle Antoniewicz and Jane Heinrichs

September 23, 2014

Investors in exchange-traded funds (ETFs) are trading shares with each other far more than they are turning to authorized participants to create or redeem shares.

Read more…

TOPICS: Exchange-Traded FundsFinancial MarketsFinancial StabilityMutual FundTrading

Securities Lending by Mutual Funds, ETFs, and Closed-End Funds: Are the Risks Systemic?

By Bob Grohowski

September 18, 2014

The Financial Stability Oversight Council (FSOC), the U.S. Treasury’s Office of Financial Research (OFR), and the Financial Stability Board (FSB) are charged with identifying systemic risks.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundTreasury

Securities Lending by Mutual Funds, ETFs, and Closed-End Funds: Regulators’ Concerns

By Bob Grohowski

September 17, 2014

This post is the third in a series that focuses on securities lending by U.S. regulated funds—mutual funds, exchange traded funds (ETFs), and closed-end funds that are registered under the Investment Company Act of 1940.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundTreasury

Statement of the Investment Company Institute at Senate Finance Committee Hearing on “Retirement Savings 2.0: Updating Savings Policy for the Modern Economy”

By Brian Reid

September 16, 2014

This statement was given on behalf of ICI by Brian Reid, chief economist, at the Senate Finance Committee’s hearing on “Retirement Savings 2.0: Updating Savings Policy for the Modern Economy.” For more information, see ICI’s full written testimony.

Read more…

TOPICS: 401(k)Government AffairsInvestor ResearchMutual FundRetirement PolicyRetirement ResearchSavingsTaxes

Securities Lending by Mutual Funds, ETFs, and Closed-End Funds: The Market

By Bob Grohowski and Sean Collins

September 16, 2014

As the potential risks of securities lending are discussed and debated by the Financial Stability Oversight Council (FSOC), the U.S. Treasury’s Office of Financial Research (OFR), and the Financial Stability Board (FSB), it is important to try to understand both the overall size of the securities lending market and the share of it attributable to different participants.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundTreasury

Securities Lending by Mutual Funds, ETFs, and Closed-End Funds: The Basics

By Bob Grohowski

September 15, 2014

The Financial Stability Oversight Council (FSOC) recently announced that it has directed its staff to “undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry.”

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundTreasury

Happy Birthday ERISA! Congratulations on 40 Years

By Sarah Holden and Elena Barone Chism

September 2, 2014

Today marks the 40th birthday of the Employee Retirement Income Security Act (ERISA). Signed into law on September 2, 1974, ERISA introduced bold steps to safeguard Americans’ employer-sponsored pensions and created the individual retirement account (IRA). Assets earmarked for retirement totaled $0.4 trillion at year-end 1974 (see the figure below). At this modest start, private-sector defined benefit (DB) plans accounted for 35 percent of the total; federal, state, and local plans for 34 percent; private-sector defined contribution (DC) plans for 17 percent; annuities for 13 percent; and there was a mere glimmer of IRA assets by year-end. Currently, total U.S. retirement assets are $23.0 trillion, and their composition has shifted considerably over the past 40 years.

Read more…

TOPICS: 401(k)Fixed IncomeGovernment AffairsInvestment EducationInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchSavingsTaxesTreasury

“Preemptive Runs” and Money Market Fund Gates and Fees: Theory Meets Practice

By Sean Collins and Chris Plantier

August 20, 2014

A recent post on the blog of the Federal Reserve Bank of New York discusses the possibility that new rules by the Securities and Exchange Commission (SEC) allowing money market funds to temporarily impose fees or gates during times of market instability could increase the risk of preemptive runs on such funds during times of stress, rather than helping to limit destabilizing withdrawals, as the SEC intended.

Read more…

TOPICS: EuropeFederal ReserveFinancial StabilityFund GovernanceFund RegulationGovernment AffairsInternationalMoney Market FundsTreasury

Sizing Up Mutual Fund and ETF Investment in Emerging Markets

By Chris Plantier

August 18, 2014

In coming decades, emerging market (EM) economies will need substantial new capital to accompany and sustain their rapid growth.

Read more…

TOPICS: Bond FundBondsEquity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationICI GlobalInternationalMutual Fund

Living Wills and an Orderly Resolution Mechanism? A Poor Fit for Mutual Funds and Their Managers

By Frances Stadler and Rachel Graham

August 12, 2014

During the global financial crisis, the distress or disorderly failure of some large, complex, highly leveraged financial institutions (banks, insurance companies, and investment banks) required direct intervention by governments—including a number of bailouts—to stem the damage and prevent it from spreading. One focus of postcrisis reform efforts has been to ensure that regulators are better equipped to “resolve” a failing institution in a way that minimizes risks to the broader financial system, as well as costs to taxpayers. The new tools provided under the Dodd-Frank Act include requirements for the largest bank holding companies and nonbank systemically important financial institutions (SIFIs) to prepare comprehensive resolution plans in advance (known as “living wills”), and creation of a new “orderly resolution” mechanism for financial institutions whose default could threaten financial stability.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundShareholderTreasury

Unconventional Wisdom on Retirement Preparedness

By Peter Brady

August 4, 2014

How well are Americans planning and saving for retirement? This is an important question to answer—but also vexingly difficult.

Read more…

TOPICS: EventsGovernment AffairsInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchSavings

Across the Universe: Seeing the Whole Picture in the Systemic Risk Debate

By Paul Schott Stevens

July 30, 2014

Astrophysicists have discovered that they can’t account for the composition and behavior of the universe without including “dark matter”—matter that can’t be observed directly.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundShareholderTreasury

The Real Lessons to Be Learned from 1994’s Bond Market

By Brian Reid

July 29, 2014

A recent “Heard on the Street” column in the Wall Street Journal (“Heeding 1994's Bond-Market Lesson,” July 27, 2014) is correct in saying that there’s a lesson to be learned from the 1994 bond market—but it draws the wrong lesson.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateMutual FundRetirement ResearchSavingsTradingTreasury

“The Age of Asset Management”—Less Risk, Not More

By Brian Reid

July 24, 2014

The following was written by ICI’s chief economist, Brian Reid, and published on FT Alphaville on July 23. For more information on ICI’s views and research on financial stability, please visit our Financial Stability Resource Center.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June

By Chris Plantier

July 18, 2014

As we discussed in March and April, European banks have generally become less willing to borrow from U.S. money market funds due to regulatory pressures, especially at the end of the quarter. Specifically, the new Basel III requirements seek to increase capital ratios of banks and explicitly limit how much banks fund their operations through short-term borrowing (which includes short-term securities banks issue that money market funds invest in). This quarter-end effect was particularly strong at the end of June as European bank regulators continued to monitor bank progress toward meeting the new Basel III requirements, which will be fully phased in over the next few years.

Read more…

TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

Some Facts About Roth IRAs and the Investors Who Use Them

By Todd Bernhardt

July 17, 2014

Since the individual retirement account (IRA) was created as part of the Employee Retirement Income Security Act of 1974 (ERISA), it has become a resounding success, accounting for the largest pool of assets in the U.S. retirement market. By the end of 2013, Americans held $6.5 trillion in IRAs, with 45 percent of that total—$3.0 trillion—invested in mutual funds. 

Read more…

TOPICS: Bond FundEquity InvestingFixed IncomeInvestment EducationInvestor ResearchMutual FundRetirement ResearchSavings

Industry Leaders Address Evolving Industry Challenges and Opportunities

By Miriam Bridges

June 9, 2014

In conversations exploring outcome-oriented investing, the globalization of the fund industry, and the next generation of retirement plans, industry leaders offered their perspectives on serving investors in an evolving world during several insightful sessions at ICI’s annual General Membership Meeting, held in Washington May 20–22.

Read more…

TOPICS: 401(k)EventsGMMInternationalMutual FundRetirement PolicySavingsShareholder

Adapting to the Rapidly Evolving Cybersecurity Environment

By Todd Bernhardt

June 6, 2014

Because external hackers typically try to “look like an insider” when attempting to penetrate IT systems, “every cyberattack is likely an ‘internal’ attack,” according to Mark Clancy, managing director of technology risk management at the Depository Trust & Clearing Corporation (DTCC).

Read more…

TOPICS: CybersecurityEventsGMMMutual FundOperations and Technology

Now Off the Hill, Senator Snowe Still Brimming with Ideas, Advice

By Rob Elson

June 5, 2014

U.S. policy is ripe for reform in a number of key areas, but changes to ease the polarized political environment must come first, former U.S. senator Olympia Snowe (R-ME) told the crowd during the final session of ICI’s 56th annual General Membership Meeting (GMM), held May 20–22 in Washington, DC.

Read more…

TOPICS: CybersecurityEventsFederal ReserveFinancial MarketsFinancial StabilityFund RegulationGMMGovernment AffairsMutual FundRetirement PolicyShareholderTreasury

Industry Leaders Reflect on Serving Investors in an Evolving World

By Christina Kilroy

June 4, 2014

Speaking on the Leadership Panel held Wednesday, May 21, at ICI’s General Membership Meeting (GMM), fund industry leaders agreed that challenges as well as opportunities abound for their businesses in today’s complex world.

Read more…

TOPICS: 401(k)EventsFederal ReserveFinancial MarketsFinancial StabilityFund GovernanceFund RegulationGMMGovernment AffairsInvestment EducationMutual FundRetirement PolicyShareholder

Former ICI President Matt Fink Decries FSOC’s “Revisionist History”

By Mike McNamee

May 30, 2014

Arguments that large stock and bond mutual funds are prone to “runs” that can destabilize markets go back many decades, and are as misguided now as they were then, argues Matt Fink, ICI president from 1991 to 2004, and author of The Rise of Mutual Funds: An Insider's View.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundTreasury

Errors of the Times: Getting the FSOC Debate All Wrong

By Mike McNamee

May 23, 2014

New York Times columnist Floyd Norris makes a number of fundamental errors in his Friday column about the House Financial Services Committee hearing and the broader debate about the Financial Stability Oversight Council (FSOC) and its review of asset management.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

SEC Chair White Stresses Need for FSOC to Consult Sources for Necessary Expertise

By Rachel McTague

May 22, 2014

Securities and Exchange Commission (SEC) Chair Mary Jo White today called for the U.S. Financial Stability Oversight Council (FSOC) to use outside expertise to the degree necessary in its process of designating systemically important financial institutions (SIFIs).  She asserted that it is “enormously important for FSOC, before it makes any decision of any kind, to make sure it has the necessary expertise on any of those issues.”

Read more…

TOPICS: EventsFederal ReserveFinancial MarketsFinancial StabilityFund GovernanceFund RegulationGMMGovernment AffairsMoney Market FundsMutual FundOperations and TechnologyShareholderTradingTreasury

Headlining ICI’s GMM, Blair Talks of Tough Challenges, Vast Opportunities

By Rob Elson

May 21, 2014

Challenges abound in our increasingly global world, said Tony Blair, former prime minister of the United Kingdom. Yet our future could be brighter than ever, he insisted.

Blair’s stirring words came during a keynote speech at ICI’s 56th General Membership Meeting (GMM). After his opening remarks, Blair sat down with ICI Chairman Bill McNabb, Chairman and CEO of The Vanguard Group, to discuss a range of issues. The session headlined the three-day meeting, which began yesterday in Washington, DC.

Read more…

TOPICS: 401(k)EventsFinancial MarketsFund RegulationGMMInternationalMutual Fund

GMM Policy Forum: BlackRock’s Larry Fink Speaks with ICI’s Paul Stevens

By Todd Bernhardt

May 21, 2014

The fund industry needs to stop focusing on the moment and start focusing on outcomes when advising investors on their resources, said Laurence D. Fink, chairman and CEO of BlackRock, at ICI’s Annual Policy Forum, part of the Institute’s 56th General Membership Meeting (GMM).

Read more…

TOPICS: 401(k)BondsEventsFinancial MarketsFund RegulationGMMInternationalInvestment EducationMutual FundRetirement PolicySavingsShareholderTreasury

“Market Tantrums” and Mutual Funds: A Second Look

By Sean Collins and Chris Plantier

May 19, 2014

Over the past year, policymakers who are focused on financial stability have pursued a theory that mutual fund investors can destabilize financial markets by redeeming from funds when markets decline. According to this theory, redemptions by fund investors lead fund managers to sell securities; those sales drive asset prices down further and, in turn, spur more investor flight, redemptions, and price declines.

Read more…

TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateInvestor ResearchMutual FundTradingTreasury

For Concerns About Risk, a Better Way Forward

By Mike McNamee

May 16, 2014

Since the financial crisis, regulators in the United States and abroad have been looking for ways to prevent a repeat. But recently it seems they’ve gone off course.

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

Overseas Overreach

By Mike McNamee

May 15, 2014

The Financial Stability Board (FSB)—composed of financial regulators and central bankers from around the globe—is proposing a flawed methodology that inappropriately puts regulated U.S. funds under scrutiny for possible designation as global systemically important financial institutions—or G-SIFIs.

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

How SIFI Designation Could Lead to a New Taxpayer Bailout

By Mike McNamee

May 14, 2014

We have spent the past several days discussing why efforts by international and domestic regulators to examine mutual funds as sources of systemic risk are unnecessary and inappropriate.

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundTreasury

Who Are the FSB 14?

By Mike McNamee

May 13, 2014

In their search for ways that investment funds can pose risks to the financial system, regulators and central bankers from around the globe have proposed an arbitrary threshold: any investment fund with assets of more than $100 billion should automatically be subjected to further examination and consideration as a possible “global systemically important financial institution,” or G-SIFI.

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

The Market Crash That Never Came

By Mike McNamee

May 12, 2014

U.S. and international banking regulators, in their search for ways that mutual funds and their managers could threaten financial stability, have come up with a simple story: fund investors and asset managers “crowd or ‘herd’ into popular asset classes or securities” and thus “magnify market volatility.”

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

Size by Itself Doesn’t Matter—Leverage Does

By Mike McNamee

May 9, 2014

Second in a series of Viewpoints postings on funds and financial stability.

The threshold set by the Financial Stability Board (FSB) for examining whether a regulated fund could pose risk to the financial system should be redrawn—or better yet, withdrawn.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

SIFI Designation for Funds: Unnecessary and Harmful

By Mike McNamee

May 8, 2014

U.S. and international regulators are examining whether asset managers or the investment funds that they offer could be sources of risk to the overall financial system and should thus be designated as systemically important financial institutions (SIFIs).

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

ICYMI: "The Feds Target Money Managers"

By Mike McNamee

May 7, 2014

Yesterday’s editorial in the Wall Street Journal, “The Feds Target Money Managers,” neatly summed up the case against treating asset managers as systemically important financial institutions (SIFIs) and subjecting them to bank-style regulation.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

ICYMI: Congress Asks Questions About SIFI Designation and Asset Managers; SEC Chair White Provides Telling Answers

By Mike McNamee

April 30, 2014

DC scene setter, 2013–2014: The Financial Stability Oversight Council (FSOC) is examining asset managers for possible “systemically important financial institution” (SIFI) designation, which would bring with it enhanced prudential regulation from the Federal Reserve. Such “bank-style” regulation is foreign to U.S. capital markets.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

ICI Statement: FSOC Seeking “Pretexts” to Designate Funds

By Mike McNamee

April 24, 2014

ICI President and CEO Paul Schott Stevens today made the following statement in response to media reports that the Financial Stability Oversight Council (FSOC) has stepped up its review of major asset managers—which could lead to their designation as “systemically important financial institutions,” or SIFIs—based on boilerplate metrics.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

Seasonality, U.S. Money Market Funds, and the Borrower of Last Resort

By Chris Plantier

April 16, 2014

The March money market fund holdings data indicate a large drop in the share of fund assets allocated to European counterparties and a large increase in the share of fund assets allocated to U.S. counterparties. This shift is likely temporary and reflects reduced willingness of European banks to borrow from money market funds at the end of the quarter, rather than reduced demand from money market funds. Also, the increase in lending to U.S. counterparties is almost entirely due to the large increase in money market fund lending to the Federal Reserve via its overnight reverse-repo (repurchase agreement) facility.

Read more…

TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

ICI Responds to the FSB Consultation on Systemic Risk and Investment Funds

April 8, 2014

In early January, the Financial Stability Board (FSB)—an international group of financial authorities—published a consultation paper on the issue of systemic risk and investment funds.

Read more…

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

ICI Response to Bank of England Haldane Speech on Asset Management and Potential Risk

By Mike McNamee

April 4, 2014

Today, ICI President and CEO Paul Schott Stevens made the following comment in response to a speech by Andy Haldane, currently executive director of the Bank of England and slated to become its chief economist in June.

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TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

U.S. Prime Money Market Funds and European Borrowing

By Chris Plantier

March 18, 2014

European holdings by U.S. prime money market funds have fluctuated significantly since early 2011.

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TOPICS: BondsFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

Why Asset Management Is Not a Source of Systemic Risk

By Paul Schott Stevens

March 17, 2014

This Viewpoints post is a summary of a speech given by ICI President and CEO Paul Schott Stevens at the Mutual Funds and Investment Management Conference. The entire speech is now available.

Since September, U.S. and international regulators have released reports suggesting that asset managers or the funds that they offer may be sources of risk to the overall financial system. ICI does not agree that the asset management sector poses systemic risk. Nonetheless, these reports could be the predicate for new, bank-style prudential regulation of the asset management industry—which could significantly harm funds and the investors who use them.

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TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

ETFs Don’t Move the Market—Information Does

By Shelly Antoniewicz

March 11, 2014

There they go again.

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TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFixed IncomeInterest RateTrading

Washington: Put Your (Retirement) Money Where Your Mouth Is

By Mike McNamee

March 4, 2014

When President Obama announced a new effort to expand access to retirement savings opportunities, ICI was among the first to applaud. The Administration’s “myRA” looks to provide a new option for Americans who want to put money aside for retirement, but who might not have access to a retirement plan through their workplace. These accounts would complement the wide array of investment options already available to these workers.

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TOPICS: 401(k)Government AffairsInvestment EducationRetirement PolicySavingsTaxes

A Growing Urgency: FATCA Agreements in the Asia-Pacific Region

By Keith Lawson

February 21, 2014

Questions are swirling as the 1 July 2014 effective date for the US Foreign Account Tax Compliance Act (FATCA) draws closer.

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TOPICS: Government AffairsICI GlobalInternationalTaxes

Money Market Funds and Liquidity Ratios: Why So High and Stable?

By Chris Plantier

February 19, 2014

Second in a series of posts about ICI’s new data release, a monthly compilation and summary of portfolio data from taxable money market funds. To find out more, read the first post about the new data summary or this list of answers to frequently asked questions.

The SEC’s 2010 money market fund reforms require taxable funds to hold at least 30 percent of their assets in securities that are deemed to be liquid within five business days (known as weekly liquidity) and at least 10 percent of their assets in securities that are deemed to be liquid in one business day (known as daily liquidity). In practice, money market funds—especially government money market funds—hold liquidity well above these minimum standards, and these ratios change very little in any given month.

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TOPICS: BondsFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

Creating a Globally Workable Compliance Framework for Financial Account Tax Information

By Keith Lawson

February 13, 2014

By developing a global standard for collecting customer information from financial institutions and exchanging that information between governmental taxing authorities worldwide, the Organisation for Economic Co-operation and Development (OECD) has taken an important step to enhance tax compliance. This common reporting standard (CRS) for the automatic exchange of information (AEOI), which was announced by the OECD on 13 February 2014, will be presented to the G20 at their 22–23 February 2014 meeting in Sydney.

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TOPICS: Government AffairsICI GlobalInternationalTaxes

Updated FICCA Framework Makes Auditing Omnibus Accounts Easier, More Efficient

By Kathy Joaquin

January 27, 2014

Many financial intermediaries—such as broker-dealers, financial advisers, and retirement plan recordkeepers—provide services to fund shareholders and maintain customer account information on their own recordkeeping systems. Fund sponsors, in turn, want to ensure that intermediaries are meeting their obligations in servicing fund shareholders, and so, have been seeking oversight tools that allow them to do this efficiently and effectively. ICI recently took steps to improve one of the critical oversight tools available to the industry, through a major update of the Financial Intermediary Controls and Compliance Assessment (FICCA) engagement framework.

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TOPICS: Fund GovernanceFund RegulationMutual FundOperations and Technology

ICI’s New Data Release: Further Enhancing the Transparency of Money Market Funds

By Chris Plantier

January 21, 2014

The 2010 reforms to money market mutual funds greatly enhanced the transparency of these funds, giving regulators, analysts, and investors greater insight into important elements of funds’ holdings and operations.

The reforms required funds to disclose their entire portfolio holdings to the public on their company websites five business days after the end of each month. Money market funds also are required to file a more detailed disclosure—SEC Form N-MFP—with the Securities and Exchange Commission directly. The SEC releases this more detailed data to the public 60 days after it’s filed. The SEC does not, however, summarize the data, leaving the public with no non-commercial access to a broad look at holdings across the industry.

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TOPICS: BondsFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury

Column Makes the Same Mistakes as OFR

By Paul Schott Stevens

January 20, 2014

In recent months, both the U.S. Treasury Department's Office of Financial Research (OFR) and international regulators such as the Financial Stability Board (FSB) have examined whether asset managers pose risks to financial stability. One report is deeply flawed; the other offers a more informed view. Unfortunately, Gretchen Morgenson’s New York Times column (“Bailout Risk, Far Beyond the Banks,” January 12) veers toward the flawed report.

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TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalTreasury

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