Opinions

A System That Works: Turning Europe’s Savings Into Investments

Dinesh Khanna — Mon, 04 May 2026 14:11:26 +0000

A System That Works: Turning Europe’s Savings Into Investments Dinesh Khanna May 4, 2026

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Mon, 05/04/2026 - 10:11

(Originally published in IPE, May 4, 2026)

This week’s Parliament vote on securitisation, and the ECOFIN discussion on the Market Integration and Supervision Package (MISP), may appear to concern separate technical files. In reality, they are part of the same test: whether Europe can build capital markets capable of turning savings into productive investment.

That is the central ambition of the Savings and Investment Union (SIU). Europe does not lack savings. But savings do not become investments on their own. They require both a deeper supply of investable assets and a more integrated framework for cross-border investment.

Securitisation and MISP speak directly to those two needs. Securitisation will influence whether Europe can generate investable assets at scale. MISP will determine whether capital can move across borders with greater clarity, consistency, and efficiency.

Both are necessary. Neither is sufficient on its own.

Today, Europe falls short on both. Its securitisation market remains too limited, while supervisory fragmentation and operational complexity continue to make cross-border investment harder than it should be.

A well-functioning securitisation market is a critical component of capital formation. It supports bank lending, enables the redistribution of risk, and provides investors with diversified, income-generating assets. For long-term investors, including pension funds, it offers access to assets aligned with their investment objectives. Yet, Europe’s securitisation market remains underdeveloped.

While the current proposal recognises the need to strengthen the framework, the outcome will depend on calibration. Participation at scale requires three conditions: access to a sufficiently broad pool of assets, the ability to assess risk without disproportionate operational burden, and a regulatory environment that is proportionate and predictable.

On each of these dimensions, the EU still risks falling short. The framework remains largely inward-looking, with limited accommodation for non-EU exposures. Due diligence requirements, though well-intentioned, remain complex. Disclosure regimes continue to lean toward prescriptive approaches that may deter rather than enable participation.

If securitisation is to contribute meaningfully to the SIU, the framework must reflect how investors allocate capital in practice: globally, selectively, and with a focus on risk-adjusted returns. That requires reducing unnecessary frictions while maintaining robust safeguards.

If securitisation is about depth, MISP is about function.

Europe’s asset management industry operates within a single market that, in practice, remains fragmented. Differences in supervisory approaches, national discretions, and implementation practices create complexity that ultimately reduces the efficiency of cross-border investment.

MISP offers an opportunity to address these issues. The objective should be clear: to deliver greater supervisory convergence and more consistent outcomes across member states.

But convergence should not be conflated with centralisation. While more centralised supervision may be under discussion for some market participants, asset management is different. National competent authorities play a critical role and must remain central to supervision. The priority should be practical alignment: stronger cooperation, better use of data, and a clearer ability to address the sources of fragmentation: divergent interpretations, national gold-plating, and inconsistent supervisory expectations.

A more pan-European role for the European Securities and Markets Authority (ESMA) should support that work, not create an additional layer of oversight that adds complexity without delivering meaningful convergence.

Europe must address both sides of the equation: the creation of investable assets and the conditions that allow capital to move efficiently across borders.

Progress in securitisation without progress in supervisory convergence will limit scale. Progress in convergence without sufficient market depth will limit opportunity. The two are interdependent, and their effectiveness will be determined by how well they operate together.

The coming months offer a meaningful window to move from ambition to delivery. Well-calibrated securitisation reforms, combined with credible and practical supervisory convergence, can materially improve how Europe’s capital markets function.

The goal is not to replicate other jurisdictions. It is to ensure that Europe’s framework is coherent, competitive, and capable of supporting both investors and the real economy.

The decisions being taken over the coming months will send a clear signal to investors, the global financial markets, and European savers alike. They will determine whether Europe can build capital markets with the depth, integration, and efficiency needed to turn savings into investment at scale.

As securitisation enters trilogues, the focus should remain on whether the final framework removes barriers that continue to limit investor participation and market depth. A better securitisation outcome would expand the supply of investable assets and support deeper European capital markets.

But depth alone is not enough. MISP must also reduce cross-border frictions and deliver more consistent supervisory outcomes for asset management. Together, these reforms will help determine whether the SIU can deliver real investment opportunities for investors in Europe and across the globe.

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Private Credit Funds Are Working Precisely As Designed To

Dinesh Khanna — Mon, 27 Apr 2026 13:48:05 +0000

Private Credit Funds Are Working Precisely As Designed To Dinesh Khanna April 27, 2026

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Authors:

Eric J. Pan

Mon, 04/27/2026 - 09:48

(Originally published in RealClearMarkets, April 2026)

Recent headlines have raised questions about whether regulated private credit funds are adequately prepared to manage liquidity during periods of market stress. In particular, decisions by fund managers to enforce redemption caps—limiting investors’ ability to withdraw money—are being portrayed as a sign of broader concerns. In conflating shifting sentiment about the value of certain assets with the absence of unlimited and immediate liquidity, some commentators suggest that maintaining repurchase limits calls into question the safety and soundness of private credit funds, and private market vehicles more broadly. This has taken on greater significance as the Trump Administration moves to expand retail access to private market assets.

The fact is that these funds are doing exactly what they are designed to do, and the careful management of how much investors can withdraw is an intentional and necessary part of how they function. These funds are meant for long-term investing, and they limit redemptions accordingly. Those limits are not a sign of stress—they are a tool to protect investors and were disclosed to investors when they first purchased such funds.

Regulated private credit funds—in particular interval funds, tender offer funds, and business development companies (BDCs) utilizing a tender offer structure—come with built-in protections, including independent boards, Securities and Exchange Commission (SEC) reporting, leverage limits, and SEC rules that keep fund managers accountable to investors. For private credit, which trades less frequently, this structure is especially important. Effective governance includes clear documentation, defined escalation protocols, regular board reporting, oversight of third-party pricing providers, and periodic testing of valuation methodologies per regulation.

When withdrawal requests exceed pre-determined limits, the fund doesn’t pay out on a first-come, first-served basis. Instead, requests are handled evenly, so no investor is rewarded simply for moving first. Further, a wave of redemptions exceeding pre-determined limits are paid out in an orderly way to avoid forced sales of assets. This is to protect remaining shareholders and prevent potential dilution. This system may also incentivize some exiting investors to over-adjust their redemption requests to maximize their share of the final redemption proceeds if they expect the fund to impose a limit.

Consider a private credit fund holding long-term loans to mid-sized companies. Private credit, by its nature, is not liquid and not intended to be traded frequently. If a fund were structured to offer broad, on-demand liquidity, it would need to hold a much larger share of liquid, publicly-traded securities to meet potential withdrawals, reducing its allocation to private credit and altering its return profile.

In other words, it would be a different kind of fund with a different objective. The industry already offers a range of vehicles to meet different investor liquidity needs, such as intraday liquidity in ETFs to daily liquidity in mutual funds. Private credit funds that have an interval or tender offer structure are designed to serve investors with longer time horizons and to hold less liquid assets, and they have periodic liquidity terms that reflect those characteristics. The objective is to align the fund’s redemption structure with the nature of its long-term assets and ensure all investors are treated fairly.

What’s happening in private credit funds reflects how these funds are designed to operate. As with all active management strategies, there may be winners and losers based on investment decisions made by the adviser. However, what we are not seeing is a “run” where a liquidity crisis forms and then turns into a credit crisis, as with Silicon Valley Bank in 2023. This is because the interval and tender offer structure is working as designed – granting fund managers a long-term horizon to manage redemptions and source liquidity throughout periods of market volatility.

Private credit—and private market assets more broadly—have a clear role in a well-constructed portfolio where they sit alongside investments in other assets with different liquidity and redemption profiles. Investors rely on a mix of assets designed to serve different purposes: some provide liquidity and stability, while others offer the potential for higher long-term returns in exchange for less immediate access to cash. Private credit fits into that second category, providing income, diversification, and access to opportunities not available in public markets.

That tradeoff is not new. Many long-term investments work this way. A certificate of deposit, for example, offers a fixed return in exchange for committing capital for a set period. A rental property cannot be sold overnight. And an ownership stake in a private business requires time to realize its value. Long-term investing itself is built on the idea that better outcomes come from patience and discipline. Private credit and other private assets are typically a modest allocation within a broader diversified portfolio and should not be considered a source of near-term liquidity.

All investors should choose investments in consideration of their circumstances, needs, and risk appetites. It would be a mistake to assess the merits of private credit based on the structure of funds and decisions to handle redemption requests in accordance with their well-publicized repurchase limits.

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The Costly Voting Structure for US Funds Needs an Overhaul

Dinesh Khanna — Fri, 17 Apr 2026 13:52:20 +0000

The Costly Voting Structure for US Funds Needs an Overhaul Dinesh Khanna April 17, 2026

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Authors:

Paul Cellupica

Thu, 04/16/2026 - 10:00

(Originally published in the Financial Times April 14,2026)

Millions of Americans rely on mutual funds and exchange traded funds to save for retirement, college and other long-term goals, and so the shareholders of these funds are largely everyday Americans.

Few realise that funds have to spend hundreds of millions of dollars chasing shareholder votes on non-controversial matters that most investors would view as technical, time-consuming and a nuisance, when they have entrusted professionals to make those decisions on their behalf.

The culprit is an outdated proxy voting system designed for a very different era of fund ownership. What was created in the 1940s to be a safeguard for investors has become an expensive exercise in pleading for votes from investors who find the outreach irritating and disconnected from their investing goals.

The Investment Company Institute found that between 2020 and 2025, total fund proxy campaign costs were as much as $1bn. Numerous campaigns cost tens of millions of dollars each, with a few in the hundreds of millions. Because these funds sit at the centre of America’s retirement system, the costs are ultimately borne by millions of US households in the form of higher fees or lower returns.

The problem is not disagreement among investors. It is the structure of the voting system itself. Under the law that governs registered funds such as mutual funds and exchange trade funds, many decisions require a quorum of more than 50 per cent of all outstanding shares to participate. When this quorum requirement was adopted during the second world war, funds had far fewer shareholders and investors often held shares directly. Further, funds then usually communicated with their investors by paper mail.

Today’s reality looks very different. Many funds have millions of investors, most of whom hold their shares through brokerage accounts or retirement plans. Retail investors vote proxies in low numbers not because they oppose the matter being proposed, but because they don’t view the issues as central to their investment decisions. Often, these votes involve non-controversial matters such as electing new directors to replace those who have retired, approving advisory contracts, merging similar funds (usually to reduce costs), or making technical updates to a fund’s investment policies.

As a result, when shareholders do vote, approval rates often exceed 80 per cent — overwhelming support. The main challenge is reaching quorum.

To do so, funds must hire proxy solicitors and send repeated mailings, email reminders and phone calls to shareholders. Meetings are frequently adjourned and reconvened multiple times while funds attempt to collect enough votes for the meeting to proceed.

The financial cost is significant. But the operational burden is just as real. Running a proxy campaign can take months of preparation, co-ordination with intermediaries and repeated shareholder outreach. Fund boards and management teams must devote substantial time and resources to the effort, which could otherwise be spent improving fund operations and investment outcomes.

In some cases, the expense and uncertainty of running a proxy campaign can also discourage changes that would benefit investors — for example, the merger of two funds with a similar investment strategy to lower costs.

So we must modernise the system while preserving meaningful shareholder oversight. One solution is to allow funds to use an alternative voting structure that would permit a lower participation threshold to establish quorum, such as one-third, while requiring a higher level of approval — such as 75 per cent — among the votes actually cast. All shareholders still would have the right to vote, but shareholders would be subject to fewer unwelcome solicitations.

Other modernisation steps could help as well, including improving the ability of funds to communicate with their shareholders directly and streamlining voting requirements for certain matters where board approval and advance shareholder notice would suffice.

Mutual funds and ETFs were designed to make investing simpler and more cost-effective for ordinary Americans. The regulatory framework governing them should do the same. Modernising the system would restore balance, preserving shareholder oversight while eliminating the worst parts of a costly ritual that benefits no one.

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Capital Formation Is Elemental To Economic Growth

Dinesh Khanna — Fri, 27 Feb 2026 19:29:47 +0000

Capital Formation Is Elemental To Economic Growth Dinesh Khanna February 27, 2026

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Authors:

Erica Richardson

Fri, 02/27/2026 - 14:29

Across the country, families are still feeling squeezed after the pandemic-era inflation. Prices remain high, mortgage rates are elevated, and many communities struggle to attract the investment they need to grow. Congress and the administration are right to focus on cost-of-living concerns. The best way to achieve lasting relief is by strengthening the long-term economic engine that keeps costs down: capital formation.

When businesses invest in new equipment, cities modernize infrastructure, and entrepreneurs bring new products to market, the economy grows in ways that benefit everyone. Productivity rises, which is one of the most reliable ways to ease costs for households over time. In addition, thriving local businesses create jobs and opportunities, directly supporting household well-being. That is why the bipartisan capital formation package—the INVEST Act—deserves attention. Approved by the House, the INVEST Act would help companies raise capital, expand opportunities for savers and retirees, and support growth across the economy.

The INVEST Act would double down on one of the United States’ unique advantages: the strength of our capital markets. A large share of household savings flows into these markets through regulated funds, including mutual funds, ETFs, closed-end funds, and money market funds. More than half of U.S. households—about 76 million—own these investment vehicles. Their savings finance business expansion, municipal improvements, and innovation nationwide.

Regulated funds now manage more than $45 trillion on behalf of these investors. That scale is not simply a statistic—it helps shape the real economy. Funds hold about one-third of U.S. corporate equities, one-quarter of corporate bonds, and more than a quarter of municipal securities. When a manufacturer adds a production line or a city builds a school, affordable financing often depends on the stability and depth of these investment vehicles.

The effects are tangible. Bond funds have attracted more than $1.4 trillion in inflows over the past five years, helping keep borrowing costs manageable for businesses and governments. Money market funds, with more than $7.7 trillion in assets, support a liquid and reliable short-term debt market, allowing institutions to manage cash efficiently. These funding sources support economic outcomes for households by helping businesses grow and create jobs.

Other regulated funds also play an important role. Unlisted closed-end funds and business development companies have grown rapidly, directing money toward private credit markets once dominated by large institutions. These vehicles have more than tripled in size since 2020, channeling capital to small and mid-sized businesses that often face greater challenges in accessing financing.

Capital formation helps American families by turning their household savings into productive investment. When that connection is strong, businesses expand, jobs are created, wages strengthen, and communities become better places to live.

The INVEST Act builds on bipartisan efforts to expand investment opportunities, improve retirement plan options for nonprofits, and modernize disclosure practices so investors receive more relevant and timely information. These reforms strengthen a regulatory framework that prioritizes transparency, accountability, and investor protection.

Global competition for capital is intensifying, and the United States must continue to lead. Capital formation is one of our greatest strengths, but it requires ongoing attention to remain effective, efficient, and accessible. Markets function best when investors are protected and laws evolve to keep pace with economic conditions. Congress has a responsibility to update those laws when needed, which is exactly what the INVEST Act would do.

The challenges facing American families are real. Strengthening the flow of capital to businesses and communities is one of the most effective tools policymakers have to address them. The Senate should act quickly to send the bipartisan INVEST Act to the President’s desk, delivering stronger growth, greater resilience, and a more secure future for American families. That is a goal both parties can support.

(Originally published in RealClear Markets, February 26, 2026)

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ICI CEO: Washington Should Stop Penalizing Middle-Class Savers

Kevin Coroneos — Fri, 03 Oct 2025 11:12:58 +0000

ICI CEO: Washington Should Stop Penalizing Middle-Class Savers Kevin Coroneos October 3, 2025

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Authors:

Eric J. Pan

Fri, 10/03/2025 - 07:12

(Originally published in Barron's October 2, 2025)

Mutual funds have long been the investment vehicle of choice for middle-class Americans saving for retirement, college, or homeownership. They are stable, diversified, and well regulated—making them ideal for long-term investment horizons.

Yet these investors face an outdated and unfair tax burden that penalizes their efforts to save. A recently introduced piece of bipartisan legislation, the Generating Retirement Ownership Through Long-Term Holding, or Growth Act, would fix the quirk in the tax code that hits savers with surprise tax bills.

Investors in mutual funds can be taxed on capital gains even if they don’t sell a single share. Funds must distribute realized gains each year, and those distributions are taxable—even when they are automatically reinvested.

A shareholder who bought shares late in the year is taxed on capital gain dividends even if those gains were realized before that shareholder’s entrance. In other words, investors can owe taxes on income they never received and on gains they never realized.

This isn’t how we treat other types of investments: If you buy and hold a stock, real estate, or another asset, you pay capital-gains tax only when you sell. But mutual fund investors can be taxed simply because the fund’s manager bought or sold securities in the normal course of running the fund. We are imposing a tax on professional portfolio management—on buying and selling certain securities based on an investment strategy, which is a key benefit of owning a fund for retail investors.

The resulting “phantom tax” blindsides middle-income households that think they are doing everything right: saving diligently, reinvesting earnings, and sticking to a long-term investment plan.

Nearly 40 million Americans own mutual funds in taxable accounts, according to the Investment Company Institute’s Annual Mutual Fund Shareholder Tracking Survey. More than half of those 23 million households earn less than $150,000 a year. It is middle-class families, not the wealthy, who bear much of the burden of this absurd piece of the tax code.

Research shows just how costly these phantom taxes can be. For a mutual fund tracking the value of the S&P 500 index, taxation of capital-gain distributions effectively reduced the rate of return by as much as 0.5% per year over the past 20 years. Our research at the ICI indicates that Americans investing in 2005 would have 8.4% less accumulated returns today based on annual capital gains distributions of equity mutual funds over the past two decades.

Middle-class investors can even be hit with tax bills when their holdings decline in value. Consider an investor who puts $10,000 into a mutual fund. During the year, the fund realizes $1,000 in long-term capital gains per shareholder, which the holder reinvests in the fund. After broader market declines, the account is worth $8,500 at year’s end. Even though the investor ended up with less than at the start, he or she still owes about $150 in taxes, if he or she falls within the 15% capital-gains tax bracket. Out $1,500 on paper and still writing a check to the Internal Revenue Service.

The Growth Act would fix this problem.

The bill would allow mutual fund shareholders to defer taxes on capital-gain distributions that are reinvested. Instead of taxing investors every time the fund distributes a gain, even if they reinvested those distributions and never actually sold their shares, the tax would be deferred until the investor actually sells shares. This means that mutual fund shares would be taxed the same as other buy-and-hold, long-term investments.

This is a common-sense reform. And, equally important, the government still gets the capital-gains tax revenue when investors actually realize their investment appreciation, making the change revenue-neutral in the long run. Meanwhile, the billions of dollars currently diverted to phantom taxes could instead remain invested in the economy.

By modernizing an outdated provision of the tax code, the Growth Act would restore fairness for millions of middle-class investors who rely on mutual funds in their taxable accounts. These Americans are doing exactly what policymakers say they should: saving for the future in well-regulated, diversified investment vehicles.

Congress should seize the opportunity to support them—not with a handout but by ending a tax penalty that never made sense in the first place.

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Under Donald Trump, the SEC Should Open up Private Markets to Retail Investors

admin — Tue, 01 Apr 2025 17:13:42 +0000

Under Donald Trump, the SEC Should Open up Private Markets to Retail Investors admin April 1, 2025

Regulated funds are the natural bridge to allow individuals greater access

By Eric J. Pan

(Originally published in the Financial Times on April 1, 2025)

The challenge ahead for Donald Trump’s nominee for chair of the Securities and Exchange Commission is to show how the securities regulator can do its part in fulfilling the president’s promise to revive the American middle class. To do this, an SEC run by Paul Atkins should focus on innovation, efficiency and the needs of Main Street investors.

One of the best ways to deliver on this promise is by expanding access to private markets for retail investors. By modernising SEC regulations, the administration can level the playing field, ensuring that attractive investment opportunities are not the exclusive domain of the wealthy.

Private markets have seen explosive growth over the past decade, growing from under $10tn in 2012 to nearly $25tn today. Institutional investors, including public pension funds and insurers, have taken advantage of this trend and its offer of potentially higher returns compared to public markets. In fact, industry reports note that institutional investors have historically held higher average allocations to alternatives than individual investors — 25 per cent compared to 5 per cent.

The decline in publicly traded companies has further exacerbated this disparity between those with access to private markets and those without. In 1996, there were more than 7,300 publicly listed companies in the US. By 2024, that number had dropped to about 4,300. As more companies choose to remain private longer, the wealth-generating potential of these investments has become increasingly concentrated in the hands of institutional and high net-worth investors.

Critics argue that expanding private market access to retail investors would expose them to excessive risk. Without a doubt, investor protection and suitability should be paramount considerations. Given that, regulated funds are the natural bridge to allow retail investors greater access to private markets. Regulated funds must follow strict legal requirements that include robust oversight from an independent board, limitations on leverage and transactions with affiliates, and other protections, including shareholder disclosure requirements.

Atkins said at his confirmation hearing last week that the rules ensuring funds have to diversify investment portfolios were “a key investor protection”. But the SEC can still provide flexibility by lifting staff guidance that restricts retail-facing funds from investing more than 15 per cent of their assets in private funds. Fund managers, who already invest in private markets on behalf on institutions like pension funds serving firefighters, police officers and teachers, show that it is possible to tailor products that align with investors’ financial goals while maintaining transparency and strong oversight.

The SEC can also remove barriers to offering listed closed-end funds, vehicles that issue a fixed number of shares that can be traded. These are ideally positioned to invest in less-liquid private market assets. Unfortunately, they are not serving this need because the existing regulatory framework makes them highly vulnerable to attack by predatory activists seeking short-term profits. The SEC can protect fund investors by allowing boards to implement common sense anti-takeover measures.

This includes approving proposed exchange rules that would allow CEFs to operate like other SEC-regulated funds and not have to hold annual shareholder meetings. Annual shareholder meetings provide these activists with the opportunity to repeatedly threaten CEFs, forcing them to spend an inordinate amount of time and resources defending themselves.

Another priority of the Trump administration is eliminating outdated regulatory burdens. The SEC’s requirement that fund communications be sent via snail mail paper copies unless a customer specifically opts out is a great example of a rule that should be updated. Establishing electronic delivery as the default delivery method would bring regulatory requirements in line with modern technology and investor preferences.

And finally, the SEC can foster innovation by enabling funds to offer both mutual fund and exchange traded fund share classes, an efficiency-enhancing structure that has thus far been limited to a single fund sponsor. Acting SEC chair Mark Uyeda recently announced that he has already directed staff to look closely at the issue. If confirmed as SEC chair, Atkins is well-positioned to spearhead such reforms and allow more Americans to benefit from our capital markets.

Eric J. Pan is President and CEO of the Investment Company Institute.

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Eric J. Pan

Tue, 04/01/2025 - 13:13

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EU Markets Need to Commit to Catch up With the US on T+1

admin — Fri, 18 Oct 2024 16:59:17 +0000

EU Markets Need to Commit to Catch up With the US on T+1 admin October 18, 2024

By Eric J. Pan

(Originally published in the Financial Times on October 18, 2024)

In May, the US and Canada moved from settling securities transactions two days after a trade to one. This shift to ‘T+1’ was a resounding success. The EU should follow suit.

T+1 means greater efficiency, increased liquidity, and enhanced risk mitigation. As policymakers focus on strengthening capital markets, adopting T+1 has become critical for all major financial centres.

The UK has announced its intent to transition by year-end 2027. The Swiss are keen to co-ordinate with the UK and EU. In the EU, a firm commitment to a date certain for T+1 is needed now, along with full support for the significant investment by industry to modernise markets, enhance capital markets competitiveness, and deliver benefits to investors.

Given that work, and the intricacies of the EU legislative process, European policymakers should announce in the clearest terms that they will make all necessary legal and regulatory changes to enable adoption of T+1 by the close of 2027 in alignment with the UK, including through a formal amendment of the EU’s Central Securities Depositories Regulation.

Under the new T+1 regime in the US, some 95 per cent of transactions are affirmed on the trade date itself, a marked improvement on the 73 per cent rate recorded in January 2024. The settlement ‘fail rate’ was just 2 per cent — consistent with the figure under T+2. Margin posted in the clearing fund fell by $3bn a day, a 23 per cent drop from prior 3-month averages, freeing up $750bn annually for broker-dealers to use elsewhere. These results showcase how a shorter settlement cycle creates a more efficient, resilient market. European investors deserve these same advantages.

Adopting T+1 will strengthen European capital markets, and reduced counterparty risk is a central reason why. Currently, the two-day gap between trade execution and settlement creates the risk that a counterparty could default before a trade is finalised. This risk is especially significant during market volatility. Moving to T+1 reduces this exposure, offering better protection for investors and creating a more stable market environment.

A shorter settlement cycle also will lower costs and improve capital efficiency, reducing the need for collateral. This would unlock billions of euros otherwise tied up in margin. This freed-up capital can be reinvested into new opportunities, boosting market activity. For investors, this means lower trading costs and more efficient use of capital.

The faster trades settle, the faster investors can reinvest. T+1 would increase liquidity in European markets and improve price discovery, again lowering transaction costs. This will create a more dynamic marketplace.

Cross-border harmonisation between capital markets is another important benefit. North American and other international markets are on T+1. The UK is following suit. The EU risks falling behind. EU-listed ETFs, for instance, currently settle trades on a T+2 basis, but, if these products have exposure to US securities, those transactions must settle on T+1. This mismatch creates unnecessary complications and costs. Adopting T+1 will reduce these cross-border inefficiencies, ensuring the EU stays a competitive and attractive destination for investment.

That competitive edge has been a key focus of recent European reports on the Savings and Investments Union. T+1 would keep European investors on a level playing field globally and drive innovation in financial technology. It would also help integrate Europe’s capital markets and keep the EU, UK, and Switzerland in sync.

This will be a large-scale undertaking. The move will require modernisation of market infrastructure, technology, and back-office operations. In the US, buy-side participants worked with the broker-dealer community and the main central clearing party to produce a detailed playbook for the transition. This work enabled the US Securities and Exchange Commission to set a clear transition date. We offer similar support to EU policymakers.

As we saw in the US, it’s worth the investment. Yet the collective action problem requires policymakers to put their weight behind the move. ICI and our fellow members of the EU Industry Taskforce delivered recommendations to the European Securities and Markets Authority this week. With 41 trading exchanges and 30 central securities depositories under the supervision of various European authorities, a clear timeline is critical. Brussels must not equivocate; it must fully and clearly back the initiative at the highest levels politically. Delay would be too costly.

Eric J. Pan is President and CEO of the Investment Company Institute.

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Eric J. Pan

Fri, 10/18/2024 - 12:59

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Only Activist Raiders Would Miss Annual Meetings

admin — Thu, 12 Sep 2024 14:17:33 +0000

Only Activist Raiders Would Miss Annual Meetings admin September 12, 2024

Closed-end funds' shareholder gatherings invite abuse; the NYSE is finally doing something about it.

by Paul Cellupica

(As published in Ignites, September 12, 2024)

Powerful activist investors have been abusing the New York Stock Exchange's annual shareholder meeting requirement for listed closed-end funds, a requirement that provides little benefit to long-term shareholders and costs them millions of dollars.

The NYSE's proposal to change its rules and eliminate this burden is the right move, and we urge the Securities and Exchange Commission to permit this rule change to protect long-term shareholders.

The annual meeting requirement for closed-end funds has created an end run around the investor protections of the Investment Company Act of 1940. Knowing that retail investors participate in shareholder meetings at lower rates, the architects of the '40 Act worried that a powerful, rogue shareholder — not dissimilar from the activists who prey on closed-end funds today — could elect directors under its control to change a fund's core provisions in its favor. Thus, rather than annual meetings, Congress built in other governance protections for funds' retail investors, including oversight by a board with a required percentage of independent trustees and a requirement that a majority of outstanding voting securities (as defined in '40 Act) approve changes in a fund's fundamental investment policies.

Nevertheless, closed-end funds must hold annual shareholder meetings only because of an antiquated NYSE rule that predates the '40 Act. It is critical for the SEC to recognize that Congress chose not to mandate annual meetings for closed-end funds and other registered funds. This antiquated NYSE listing rule applies to no other type of registered fund.

Furthermore, given the fundamentally different nature of investment companies compared with normal operating companies, the annual meeting requirement for closed-end funds neither makes sense nor operates for the benefit of funds' long-term shareholders.

Data on contested proxies shows that, over the past five years, retail investors directing their own vote held 59% of outstanding closed-end fund shares but accounted for just 37% of the votes cast. And when these shareholders did vote, they leaned heavily toward supporting management against the activist investors, with 84% of voting accounts — representing a majority of directed retail shares — voting in favor of management.

What's more, annual meetings are expensive. Cost estimates across 145 proxy campaigns between 2012 and 2019 totaled a whopping $373 million. Funds and their shareholders ultimately bear these costs.

But these annual meetings aren't just a cost with little benefit. They are a vehicle for harmful maneuvers by predatory activist investors to take control of funds under the misleading cloak of shareholder governance.

Activist investors like to claim that the "discount" that often exists between a closed-end fund's market price and underlying net asset value is a sign of poor management. However, such discounts reflect the potential financial impact of certain unaccrued expenses, such as liquidating the portfolio, unwinding a leveraged position or perceived tax liabilities, in addition to investor sentiment.

Although the presence of a discount can represent a buying opportunity to boost the dividend yield and allow for the potential of enhanced total returns, activist investors are exploiting the NYSE's annual meeting rules to take over listed closed-end funds, typically with the primary goal of arbitraging their way to short-term profits.

This was clearly seen in the case of the Voya Prime Rate Trust.

In April 2020, an activist in that fund used its control of 24.6% of the fund's outstanding shares to institute a proxy battle that changed all eight of the fund's directors. Of approximately 147 million shares outstanding, 39% voted for the activist's board slate, 25% voted for the existing board directors, and 34% — presumably retail investors — didn't vote, meaning the activist was able to replace directors with just 14% of outstanding shares that it didn't otherwise control.

The new board, controlled by the activist, terminated the existing investment advisor and sought to appoint the activist as the new advisor. Under the activist's influence, the fund engaged in two tender offers. Although the activist secured a nice profit for itself, the tenders resulted in a significant reduction in assets and loss in economies of scale for remaining shareholders.

Further, several of the fund's investment restrictions and portfolio allocations were ultimately changed. The portfolio, 96% of which had been composed of senior loans, slashed its senior loan exposure to 10% by last October, as it reallocated toward other closed-end funds, crypto trusts and private funds while incurring new expenses related to costly short-sale exposure. These quantified harms can be visualized here.

The SEC should do everything it can to prevent these harmful activist tactics, because they prevent retail investors from using closed-end funds for long-term investing purposes. At a time when the unlisted closed-end fund market is booming and demand for ETFs shows little sign of slowing, there were no listed closed-end fund launches last year and few thus far in 2024.

This is to the detriment of retail shareholders who use listed closed-end funds to gain exposure to a wide array of income-producing assets that may be difficult to access in an open-end fund because of their less-liquid nature or for other reasons. How can this be in the interests of the U.S. capital markets and serve the goal of enhancing American investors' long-term investing opportunities?

Activists claim they are unlocking value and are aligned with retail investors. But radically altering the investment strategies that long-term shareholders signed up for when they purchased the fund doesn't fit the bill. We are glad the NYSE is proposing to eliminate the unnecessary annual meeting requirement, lowering costs for retail shareholders and making it that much harder for activists to commandeer closed-end funds.

Paul Cellupica is the general counsel at the Investment Company Institute.

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Thu, 09/12/2024 - 10:00

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For US Treasury Troubles, Treat the Cause Not the Symptom

admin — Mon, 19 Aug 2024 14:54:24 +0000

For US Treasury Troubles, Treat the Cause Not the Symptom admin August 19, 2024

Regulatory alarm about hidden risk in the Treasury futures market misses the point, fund association execs write.

by Paul Cellupica and Sean Collins

(As published on Risk.net, August 19, 2024)

Financial regulators in the US have recently expressed worries over the growing use of Treasury futures by registered funds, particularly an increase in long positions over the past three years. These futures positions, in the view of regulators, may be causing vulnerabilities in the US rates market and are therefore a potential source of financial stability risk – one that may need to be addressed. Some regulators have even suggested that the rise in funds’ long futures exposure is being driven by artificial incentives and is costing shareholders, implying further need for regulatory reform.

We believe those assessments are inaccurate. And if regulators want to reduce trading that involves Treasury futures, we caution against policy actions that would treat the symptom rather than the root cause: inefficiencies in the cash Treasury market.

Both long and short positions in Treasury futures are valuable and legitimate tools for funds. For example, they can help asset managers quickly and efficiently adjust their duration and yield curve positioning and better manage credit risk and counterparty risk. And because the futures market can be more liquid than the cash market, Treasury futures can help funds manage their overall liquidity profiles.

Despite those and other practical use cases, growing demand for these instruments has increased concerns among regulators over basis trading – where trading firms such as hedge funds buy Treasury bonds using repo financing, and short Treasury futures. The offsetting long positions in futures are generally held by asset managers. Regulators want to see less basis trading, apparently on the view that if those trades need to be unwound during a crisis, it could lead to heavy sales of Treasury bonds that markets wouldn’t easily digest, in turn distorting Treasury bond prices.

If that’s the goal, the better approach would be to address the inefficiencies in the cash Treasury market that form the precondition for the basis trade. One possibility, as some regulators have indicated, is to change the supplementary leverage ratio (SLR), which requires banks to hold (costly) capital at all times against their holdings of Treasury securities and deposits at the Federal Reserve. Such action would help to eliminate the arbitrage opportunity for the basis trade but still leave a healthy Treasury futures market for risk management and other purposes.

Many observers have commented that the SLR likely added to stresses in the cash Treasury market in March 2020 by raising the costs to dealers of intermediating Treasuries. Indeed, a number of current and former Treasury and Fed officials have for several years indicated that the SLR should be revised in light of the market’s early pandemic experience. But nothing has happened yet.

In a speech this summer before the New York Fed and the European Central Bank, US Treasury undersecretary for domestic finance Nellie Liang suggested excluding banks’ deposits at the Fed from the SLR calculation, perhaps at the discretion of regulators during periods of market stress. That’s a step in the right direction, but more can be done.

Both Treasuries and banks’ deposits at the Fed should be excluded from the SLR calculation permanently and continuously, rather than temporarily at the discretion of regulators during a crisis. That approach would better enhance the ability of dealers to intermediate during stress periods and lessen market uncertainty on whether SLR relief might be forthcoming amid bond market strains.

Moreover, there are other concrete steps that should be taken to make the cash Treasury market significantly more efficient and liquid.

First, regulators should also exempt directly held Treasuries from the SLR. Second, they should begin to facilitate all-to-all trading in the Treasury market, whereby any market participant could meet and execute trades with any other without having to pass through a dealer. Third, the Securities and Exchange Commission (SEC), which adopted rules last year that will require central clearing of all Treasury repo transactions, should take steps to make it easier for funds and other buy-side actors in the Treasury markets to unbundle the execution and clearing of these transactions (so-called “done away” trading).

As noted above, regulators have also pointed to the protection of fund shareholders as an area of concern vis-à-vis basis trades. For instance, Liang suggested in her speech that funds are buying Treasury futures rather than actual Treasuries in part because the interest expense of funding Treasury securities through repo is included in fund expense ratios, while the cost of a Treasury derivatives transaction is not.

Neither the Treasury Department nor any other regulatory body has provided evidence for that claim. What’s more, ICI’s members indicate that investment decisions regarding physical and synthetic Treasuries are based on what is best for a fund. Managers have a fiduciary duty to their clients, including a duty of best execution. If taking a long position in Treasury futures is better or more efficient for a fund and its shareholders than buying Treasury securities directly, or vice versa, that is what the fund’s manager will do.

Finally, we urge regulators not to ignore or discount the impact of the comprehensive regulatory frameworks imposed on funds by the SEC and other market regulators.

Registered funds’ use of Treasury futures, in addition to their use of repo and reverse repo when trading US government debt, is subject to robust and extensive regulation under the Investment Company Act of 1940 and other securities laws. In 2020, the SEC tightened up the regulatory framework governing registered funds’ use of derivatives, including Treasury futures. Under these new rules, unless they only use derivatives to a very limited degree, funds must adopt a derivatives risk management programme with detailed, enumerated requirements, including an outer limit on fund leverage risk based on the fund’s value-at-risk.

The SEC’s 2020 rules also allow funds that engage in reverse repo to treat these transactions as derivatives subject to that VAR test or to limit reverse repo and other similar financing transactions to the applicable asset coverage limit under the 1940 Act for senior debt securities. That grants funds additional flexibility to engage in Treasury transactions financed by repos and reduces any potential regulatory incentive to transact Treasury futures instead of physical Treasuries.

Treasury futures deserve attention from regulators, as they have become an important component of cash management strategies and financial markets generally. We hope that regulators draw their conclusions about the reasons for, and implications of, fund managers’ use of these instruments by analysing all the facts and avoiding needless speculation.

Paul Cellupica is the general counsel of the Investment Company Institute. Previously, he was deputy director and chief counsel of the SEC’s division of investment, and has held senior legal roles at Pimco, TIAA and MetLife.

Sean Collins is chief economist at the Investment Company Institute. Before joining ICI in 2000, Collins was a staff economist at the Federal Reserve Board and an economist at the Reserve Bank of New Zealand.

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Capital Markets Union: The Trap of Isolationism

admin — Thu, 01 Aug 2024 12:59:34 +0000

Capital Markets Union: The Trap of Isolationism admin August 1, 2024

By Eric J. Pan

(Originally published in Les Echos on August 1, 2024)

Capital markets union is essential to the success of the European project. Vibrant capital markets efficiently channel investment to companies and, with historically higher long-term rates of return compared to those offered by bank accounts, are an unequivocal engine of household wealth creation. CMU would expand these benefits to individuals across Europe and enhance its competitiveness on the global stage.

Ironically, however, the EU’s prospect of an open capital market and economic dynamism is at risk of being undermined by an inward-looking approach.

Some in Europe argue that policymakers should encourage a "home bias" among individual investors, an idea rooted in concerns that greater retail investment will disproportionately benefit the United States.

Others have gone as far as calling for reforms to discourage European households from investing in international markets and limit the ability of international firms to expand services in Europe.

Such thinking goes against the interests of European households, European companies, and Europe in general.

First, European households benefit from investing in international markets. For example, an investment in the US-based S&P 500 from 2009 through today would have generated twice the cumulative returns of an equivalent allocation to the EURO STOXX 50. Thanks to UCITS, which provide access to international and domestic markets, those higher investment gains are a reality for many European households.

Second, as EU policymakers look to jumpstart investments in industries of the future, it’s important to remember that capital is global. Europe needs international asset managers—not only domestic ones—to help fund business expansion, research and development, and capital-intensive projects domestically.

The data shows that overseas managers are already a large source of capital for European companies. As of year-end 2023, for example, US-domiciled mutual funds and exchange-traded funds held €1.5 trillion in European equities and bonds (excluding securities from the UK). Moreover, US-based asset managers have been equally active in offering Europeans homegrown investment choices. US-based sponsors of UCITS held €640 billion in European equities and bonds (ex-UK) at the end of last year, representing more than one-fifth of all UCITS assets invested in Europe.

Finally, success for Europe’s capital markets means attracting talent and expertise in Europe. International financial institutions actively recruit Europe’s top university graduates and provide high-paying jobs to EU citizens, employing investment analysts, software developers, and thousands of other knowledge workers.

Europe’s future lies in being the strongest possible participant in global financial markets, not as Île européenne. CMU based on openness to international markets and international firms is a vital step in preserving Europe’s leadership in the global economy which is the true way Europe will secure its strength and independence.

Treating international firms and international markets as second-class will set Europe back just when it most needs to grow.

Eric J. Pan is President and CEO of the Investment Company Institute.

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