In response to criticism of its order requiring fund managers to use the Fair Value through Other Comprehensive Income, or mark-to-market valuation approach of portfolios, the Securities and Exchange Commission (SEC) has taken action to reassure investors in the fixed-income segment of the market that their holdings are safe.
By establishing “a fair and transparent playing field so that both investors and operators are safeguarded,” the securities industry regulator claims that the action aims to protect all types of investors as well as the integrity of the market.
In a recent media interaction, Director-General of the SEC, Daniel Ogbarmey Tetteh, explained that fund managers have witnessed a sharp increase in redemption requests, fuelled by the prevailing high-interest rate regime as well as a desire to seek safety in alternate asset classes such as currency and precious metals.
This, he said, elevated the need for fund managers to sell – at a loss – securities which would otherwise have been held to maturity.
“The SEC has taken note of the current high-interest rate environment in Ghana with its adverse effects on liquidity in the secondary market for bonds, and high clients’ redemption requests; necessitating the sale of investment securities ordinarily designated as held to maturity,” the Commission’s directive read in part.
“In the situation such as we have currently, wherein interest rates have gone up and bond prices have fallen, if you do not mark-to-market and investors want to exit for whatever reason, perhaps due to panic, you do not let the investor see the investment’s value currently as it does not reflect current market conditions,” Mr. Tetteh added.
In an interview with the B&FT, the President of the Ghana Securities Industry Association (GSIA), Winston Nelson, noted that although investors are jittery about the new market valuation directive, it remains the best way to go… given the state of the market. This should protect investments and the entire market.
“We think it is the right thing to do. It is better now than having to kick the can down the road and resolve it later. Although the market will be jittery, it is the way to go. If the bond prices recover, investors will now make better gains,” Mr. Nelson said.
“We believe that, technically, this should have happened much earlier; especially when bond prices started trending down.
“Previously, because the coupons and prices were around the same level, the mark-to-market was not a big feature because the bond prices and coupon rates were close. But now that yields are on the ascendency, the bond prices are dropping; hence, it is important that the portfolios are marked to the market,” he said.
Unrealised gain vs unrealised loss
The SEC boss further stated that while investors risk losing a portion of their holdings due to current market conditions – a phenomenon that is accurately captured through the mark-to-market model, it does not amount to a ‘haircut’ with investors better-off holding closer to maturity.
“What people need to understand is that there is a difference between unrealised gain and unrealised loss. For instance, if I have invested GH¢100,000 and today the fund manager shows me that based on market conditions the value has dropped to GH¢90,000; if I stay put and I do not panic and check out, and the market corrects – which it does in the long-run – I do not realise the loss. It is a loss on paper; but if I panic and leave, then I lock-in and make the loss a reality and the mark-to-market method makes this very clear… It is far different from the conversation on haircuts, as this is just asking for a fair, transparent method for everyone to see the true value of these assets,” he stated.
The SEC has directed stakeholders – Fund Managers, Custodians and Trustees – to obtain prices available from the Ghana Fixed Income Market (GFIM) for all listed fixed income securities to enable pricing of securities to reflect market values.
“The Ghana Fixed Income Market (GFIM) shall make available end-of-day prices for all fixed-income securities in 2023. In the interim, Fund Managers, Custodians and Trustees are directed to use average prices published by GFIM to mark-to-market their fixed-income securities. Unlisted securities shall be valued periodically, taking into account market movements, contractual cashflows and recoverability of the underlying assets.”