Liquidity Risk Management and N-Port: What to Expect Ahead of the April 2019 Deadline

The SEC is at long last signaling the final landing approach for Form N-Port. After pushback from the Mutual Fund industry, the SEC opened a Commentary period that ended in May 2018. Many of those comments sought to rescind any liquidity bucketing, and the SEC met somewhat halfway in eliminating the public disclosure of any liquidity evaluations, instead relying more heavily on the Liquidity Risk Management program (LRM).

The LRM will be a principles-based narrative regarding an organizational approach to maintaining sufficient liquidity and an ongoing approach to managing redemptions and best practices. Following one year, the LRM is to be prominently featured in a fund’s annual or semi-annual shareholder report where it will assess the effectiveness of the program during that period.

This compromise allows funds to better convey their liquidity strategies without a constrictive bucketing that could potentially be misleading to investors. Funds will still be required to assign a liquidity bucket for each of its holdings, but the data will remain internal at the SEC for examination.

Additionally, funds will now be afforded the flexibility to split their holdings into more than one classification. This came about primarily due to sub-advised portfolios, and the complexities of dealing with more than one approach to liquidity. This flexibility will enhance funds’ ability to convey to the SEC their most accurate liquidity snapshot. The ability to split a holding’s classification must be made according to three SEC-provided criteria:

  1. differences in liquidity characteristics,
  2. differences in sub-advisor classifications, and
  3. full liquidation.

 

The SEC has signaled its desire to learn from funds’ liquidity splits and programs, and to use this data to accomplish their initial goals of Mutual Fund liquidity analysis.

Now that the dust has finally settled, the fund industry can appropriately focus its energy on delivering N-Port and its most sticky component: liquidity. The next few months will be focused on finalizing the LRM, along with more attuned attention to the fast arriving N-Port XML submissions in April 2019.

Denis Tarpey

As part of the Reporting Solutions team, Denis works with new and existing Axioma clients to ensure they are up-to-date with the rapidly evolving regulatory environment. Denis began in the RegTech space in 2012, with the advent of the Dodd-Frank driven Form PF. Prior to Axioma, Denis was at ConceptOne, where he helped develop, implement and advise clients on the ...