Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Mutual fund liquidity, valuation and gates

Last month, the US Securities and Exchange Commission (SEC) adopted rules allowing money market funds (MMFs) to restrict (or “gate”) redemptions when there is a liquidity problem. These proposals have been severely criticized on the ground that they could lead to pre-emptive runs as investor rush to the exit before the gates are imposed.

I think the criticism is valid though I was among those who recommended the imposition of gates in Indian mutual funds during the crisis of 2008. The difference is that I see gates as a solution not to a liquidity problem, but to a valuation problem. The purpose of the gate in my view is to protect remaining investors from the risk that redeeming investors exit the fund at a valuation greater than the true value of the assets. An even better solution to this valuation problem is the minimum balance at risk proposal that I blogged about two years ago.

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One response to “Mutual fund liquidity, valuation and gates

  1. PaulJosaph September 18, 2014 at 4:23 pm

    only open ended funds are liquid, close ended are not.

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