SEC’s Division of Investment Management Issues Recommendations for Funds and Fund Advisers in Light of Reduced Market-Making Capacity in Fixed Income Markets

February 13, 2014

The Division of Investment Management (“Division”) of the U.S. Securities and Exchange Commission (“SEC”) recently published guidance (“Guidance”) addressing steps that funds and fund advisers should consider in light of changes in the markets for fixed income securities. The Guidance explains that recent fixed income market volatility and fund outflows – which the Guidance attributes to potential Federal Reserve Board policy changes and rising interest rates – are occurring in the context of a different environment as compared to previous periods of rising interest rates. Specifically, the Guidance observes that market-making capacity in the fixed income markets has declined as a result of reduced broker-dealer inventories relative to fund assets, reduced broker-dealer proprietary trading activity and increased regulatory capital requirements applicable to broker-dealer holding companies. As the Guidance explains, “[a] significant reduction in dealer market-making capacity has the potential to decrease liquidity and increase volatility in the fixed income markets.”

Read "SEC’s Division of Investment Management Issues Recommendations for Funds and Fund Advisers in Light of Reduced Market-Making Capacity in Fixed Income Markets."