Public Financing Responds to Propose Liquidity Management Rules For Mutual Funds and ETFs

Today the Financial Commission voted to propose a comprehensive package of rule reforms designed to enhance effective liquidity risk management

Online PR News – 13-October-2015 – Hong Kong – Sun Cheng, Chief Financial Regulator for Public Financing, said "Promoting stronger liquidity risk management is essential to protecting the interests of the millions of clients who invest in mutual funds and exchange-traded funds,” “These significant reforms would require funds to better manage their liquidity risks, give them new tools to meet that requirement, and enhance the Commission’s oversight.”

Under the proposed reforms, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. The proposal is designed to better ensure investors can redeem their shares and receive their assets in a timely manner.

A fund’s liquidity risk management program would be required to contain multiple elements, including: classification of the liquidity of fund portfolio assets based on the amount of time an asset would be able to be converted to cash without a market impact; assessment, periodic review and management of a fund’s liquidity risk; establishment of a fund’s three-day liquid asset minimum; and board approval and review.

The proposed reforms also would provide a framework under which mutual funds could elect to use “swing pricing” to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity. It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be an additional tool to help funds manage liquidity risks.

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