The SEC is expected to vote next week on new proposed rules to allow the use of “swing pricing” for mutual funds during times of market stress, according to Bloomberg. The article suggests that the proposal would allow funds “to pass on some of the trading costs they incur to meet redemptions to investors who exit.” When a fund uses swing pricing, investors exiting a fund on a day of heavy redemptions could receive less than the Net Asset Value to account for the higher than normal trading costs caused by the outflow. The article notes that it is unclear whether the decision of when to use swing pricing would be left up to a fund’s board and/or adviser or whether the rules will set an industry-wide trigger, such as when withdrawals reach a certain percentage.
According to the article, Blackrock already uses the mechanism in its European funds. A 2011 paper by the firm found that shifting the costs of trading to investors exiting the fund increased returns by as much as 2.5 percentage points.
The proposal would also require board-approved liquidity management plans, according to the article. SEC Chair Mary Jo White had originally highlighted plans to address risk management with regard to fund liquidity in a speech this past December. She said then that the SEC staff was “considering whether broad risk management programs should be required for mutual funds and ETFs to address the risks related to their liquidity and derivatives use.”