Israel's Securities Authority Explores New Tools for Mutual Fund Liquidity Management
Israel's Securities Authority is considering changes to how open-ended mutual funds manage investor withdrawals, particularly during periods of high redemption requests. The authority has issued a public call for feedback from the market and the public on potential new liquidity management tools for fund managers.
The core issue stems from the structure of open-ended funds, where investors can typically buy or redeem units daily, while some fund assets may not be easily or quickly sellable. When a wave of redemptions occurs, fund managers must generate cash to pay exiting investors. Selling securities to do this incurs trading costs and can lead to selling assets at unfavorable prices, with some of these costs potentially remaining within the fund and reducing the value for remaining investors.
This problem is significant given the size of Israel's mutual fund industry, which manages approximately 853 billion shekels. The authority aims to reduce situations where departing investors impose costs on those who stay in the fund. The less liquid an asset and the larger the redemption, the more significant the cost of selling assets can become. For instance, if a fund must quickly sell bonds to meet redemptions and the sale price is lower than the previously assessed value, the fund's portfolio is impacted. The departing investor might receive their money at a unit price that doesn't fully reflect the cost incurred by their redemption, while remaining unit holders absorb part of it.
The authority is examining mechanisms, used internationally, to allow for a more precise allocation of costs among investors and to strengthen fund managers' ability to handle such events. These tools are intended to help funds better attribute buying and selling costs to the investors whose activities generate them. The goal is not to eliminate daily redemptions but to reduce the implicit subsidy between different investors within a fund, especially in funds holding less liquid assets.
Currently, this is a preliminary process, and the authority is gathering opinions before deciding whether to advance regulations and which tools to include. The chairman of the Securities Authority, Spira Singer, stated that mutual funds are a key investment vehicle for the public and that the authority seeks to improve fund managers' tools and align the local market with global standards. Following the feedback, the authority will decide on potential new rules, the mechanisms involved, and their operational conditions.
