IM Guidance Update on Fixed Income Securities Risk Management Posted

January 15, 2014

The SEC’s Division of Investment Management posted IM Guidance Update No. 2014-1, which addresses fixed income securities risk management. The guidance noted the volatility in fixed income markets in June 2013, which was caused by speculation about interest rates. The staff, focusing on mutual funds and ETFs, emphasized the importance of proper risk management and disclosure that takes into account the possibility of such volatility.
The staff presented statistics and graphs in the memorandum showing an increase in assets invested by mutual funds and ETFs in fixed income securities over the years, but noted that the number of primary dealers in such securities has basically remained the same. In its view, this has the potential to decrease liquidity and increase volatility in fixed income securities markets.
The staff recommends that fund advisers:
• Assess and stress test liquidity;
• Conduct more general stress tests under a variety of scenarios;
• Focus more on evaluating ways to manage the risks of potential volatility;
• Educate and inform the boards of investment companies on how advisers are evaluating risk; and
• Add specific risk disclosure to prospectuses about the risks of volatility in fixed income securities markets, including the potential impact of tapering quantitative easing and/or rising interest rates.
Click here to access the IM Guidance Update.


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Investment Advisers, Investment Companies