Thursday, May 14, 2015

Fear of Bond market sell off: ETF companies boost bank credit lines amid liquidity concern

The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown.

Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show.

The measures come as the Federal Reserve and other U.S. regulators express concern about the ability of fund managers to withstand a wave of investor redemptions in the event of another financial crisis. They have pointed particularly to fixed-income ETFs, which tend to track less liquid markets such as high yield corporate bonds or bank loans.

"You want to have measures in place in case there are high volumes of redemption so you can meet those redemptions without severely impacting the liquidity of the underlying securities," said Ryan Issakainen, exchange-traded fund strategist at First Trust. The company has increased a credit line it has set up to $80 million at the end of last year, the most recent reporting period, from what was originally a $20 million line in early 2013. The line is shared by two of its ETFs and two mutual funds with a combined $645 million in assets.

Under the Wall Street reform act known as Dodd-Frank, banks have been shedding their bond inventories, resulting in less liquidity in fixed-income markets. Because there are fewer bonds available for trading, a huge selloff in the bond markets could worsen the effect of a liquidity mismatch in bond ETFs.


Full article at: http://www.reuters.com/article/2015/05/13/us-etfs-credit-expansion-insight-idUSKBN0NY0A720150513
 


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