“The world is all gates, all opportunities, strings of tension waiting to be struck.” – Ralph Waldo Emerson
This past week was inundated with a variety of financial and geopolitical events that had me scrambling to say abreast of the issues. However, there was one issue in particular that was obscured by the news flow of MH-17 and Israel, a ruling by the S.E.C. to put“gates” on mutual fund redemptions.Â
“This past Wednesday, the Securities and Exchange Commission voted 3-2 to require institutional money market mutual funds to adopt a floating net asset value. The SECÂ also imposed liquidity fees and redemption gates, changes that muni market groups have said will hurt the market as well as state and local governments. The redemption gates are discretionary and there are potential liquidity fees of up to 2% if a MMF’s level of weekly liquid assets falls below 30% of its total assets. It is up to each individual fund’s controlling board to impose a fee or restrict redemptions in times of stress, giving the board time to figure out a way to meet those redemptions.”
After mentioning this topic on “The Lance Roberts Show,” I was flooded with emails and questions about the potential unintended consequences of such a ruling.
I penned some brief thoughts on the issue in yesterday’s post “3 Things To Think About.” However, there were several articles worth reading on the issue to gain a more balanced viewpoint on the potential consequences and risks of the recent ruling.
1) The “Gates” Are Closing via ZeroHedge
“Redemption gates are the ‘wrong tool to address risk,’ said SEC Commissioner Kara Stein during open meeting.
Fear incentives will result in “greater chance of fire sales in times of stress and spread panic to other parts of the financial system while denying investors and issuers access to capital.
- ‘Money market funds are only one part of wholesale funding markets that need to be strengthened.’
- In the event the gate imposed increases, investors have a ‘strong incentive to redeem ahead of others.’
- While a gate may be good for one fund, ‘it can be very damaging to the financial system as a whole.’
- When the gate for a fund is used, it doesn’t mean the ‘impact on wholesale funding markets will be prevented.’â€
She is spot on. But forget about our opinion, or even that of the SEC, because while on the surface this now enacted proposal to establish withdrawal limits is spun as benign, it was the Fed itself who warned in April of 2014 that ‘
the possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that would not otherwise occur… Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs.'”
