Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. REGULATION AND LEGISLATION
December 28, 2015 12:00 AM

Regulatory changes impacting high-yield liquidity

Rick Baert
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    High-yield fixed income, while stung by the decline in energy and mining holdings, also is being seen as the first asset class hurt by regulatory changes that have cut liquidity in the fixed-income marketplace.

    “There’s a new normal in terms of liquidity with the new regulations,” said Gregory Moore, vice president, head of traditional investment managers, Segal Rogerscasey, Norwalk, Conn. “This high-yield decline will go down as an important example of the effects of regulations on liquidity for years to come.”

    The culprit, sources said, is regulations like the Volcker rule.

    The Volcker rule, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that went into effect July 21, bans proprietary trading by banks and also makes holding inventory more expensive. It, along with other regulations under Dodd-Frank and European banking rules under Basel III, led banks’ trading desks to reduce fixed-income inventory, a traditional source of liquidity in the market, because of the added capital costs required to hold debt — particularly in high yield.

    That cutback has hit high-yield debt harder because it can be harder to find buyers for the securities in those portfolios, particularly in energy, said Jas Thandi, associate partner, global asset allocation, Aon Hewitt Investment Consulting Inc., Chicago. “It’s not so much that you can’t sell a bond. It’s just price discovery. It’s more difficult to sell because it’s tougher to find liquidity.”

    “Certain regulatory issues have led to lower broker-dealer and bank participation in certain credit markets, including high yield,” said Scott Malpass, chief investment officer of the $10.5 billion University of Notre Dame endowment, South Bend, Ind. “This lack of liquidity under the new regulatory rules has not been tested yet.”

    But some think history may regard as the first test the closings earlier this month of the $788.5 million Third Avenue Focused Credit Fund and the $400 million credit hedge fund managed by Stone Lion Capital Partners, respectively, along with the liquidation of Lucidus Capital Partners, a $900 million high-yield credit fund.

    David Long, senior vice president and chief investment officer, asset-liability modeling and derivatives and fixed income, at the C$60.8 billion ($44.2 billion) Healthcare of Ontario Pension Plan, Toronto, agreed the shutdowns and liquidation could be seen as the first examples of what could happen when liquidity in the fixed-income market declines.

    “There is less liquidity out there,” Mr. Long said. “Intermediaries don’t offer the same amount of high yield as in years past. Because of that, pricing will be exaggerated, with large blocks having a disproportionate impact on pricing. Liquidity is something you pay for. It’s now more expensive to transfer something to someone else. The collective risk appetite is down. Regulations are a part of that.”

    While liquidity issues throughout fixed income affected the troubled funds, Segal Rogerscasey’s Mr. Moore also said Third Avenue was in “a much deeper value-oriented strategy than most high-yield managers use, going into distressed debt and even some private equity. The more mainstream high-yield managers are down 7% to 10% year-to-date (Dec. 15) vs. Third Avenue, which was down 30%. Most mainstream high-yield managers are maybe holding 10% to 15% CCCs (rated bonds), the rest is 50/50 between BB and B. Those aren’t as liquid as investment grade.”

    Dan Lomelino, director and head of North American fixed-income manager research, Towers Watson & Co., Chicago, said the Third Avenue problem raised the probability that a Securities and Exchange Commission proposal to expand required liquidity for mutual funds will be approved in 2016. According to the SEC proposal, mutual funds will be required to determine a minimum percentage of its net assets that must be invested in cash and assets that are convertible to cash within three business days “at a price that does not materially affect the value of the assets immediately prior to sale.” The proposal is up for public comment.

    Mr. Lomelino said the regulation, if approved, “will have a far-reaching impact on bond mutual funds, on what they can hold … Anyone arguing that added mutual fund liquidity wasn’t needed, this Third Avenue situation strengthens the case for regulators.”

    Related Articles
    Some see recent high-yield turmoil as buying opportunity
    Hedge fund managers seeing increased costs under Basel III — survey
    Liquidity crunch endangers strategies focused on credit
    Recommended for You
    Standards-of-conduct rules approved along party lines
    Standards-of-conduct rules approved along party lines
    Investors hail SEC guidelines on exchanges
    Investors hail SEC guidelines on exchanges
    U.K. regulator watching manager over Woodford fund freeze
    U.K. regulator watching manager over Woodford fund freeze
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing