BLK BlackRock Inc

By Dawn Lim and Justin Baer 

BlackRock Inc. and Vanguard Group made it more expensive for large Wall Street traders to redeem shares in some exchange-traded funds for cash this week, an acknowledgment of the deteriorating liquidity in markets around the world.

BlackRock on Friday raised the costs of cashing out of a $6 billion short maturity bond ETF to the maximum limit for bank middlemen, intermediaries and other large investors involved in exchanging ETF shares for their underlying investments. The fund, known as the iShares Short Maturity Bond ETF, now charges 200 basis points on cash redemptions, a four-fold increase from 50 basis points yesterday, according to people familiar with the matter.

The cost of the charge will be applied as a discount on what price the seller cashes out on, said one of the people.

The unprecedented stress on markets is making liquidity increasingly more expensive. Liquidity is the ease at which investors can cash out of assets without sacrificing gains.

More investors are afraid that firms who rely on short-term funding won't be able to repay their debt as the coronavirus takes a growing toll on U.S. business.

BlackRock's surcharge on cash redemptions from the fund -- known by its ticker NEAR -- fluctuates daily. Investors can avoid the charges if they choose to exchange the ETF shares for the underlying securities. The charges don't apply to investors who trade ETFs on exchanges.

A BlackRock spokesman said Wall Street intermediaries made $100 million in cash redemptions from the fund the same day the change was made.

Blackrock, in a memo to Wall Street executives on Friday, said "reduced market liquidity and significant dealer balance sheet capacity constraints have caused prices of short duration instruments to sharply decline." The note, which was viewed by The Wall Street Journal, followed a sharp selloff in the short maturity bond market on Thursday.

The fund's price declined by about 6% on Thursday. BlackRock in its memo said "we believe that NEAR's market price was reflecting the underlying market given the falling price levels in the underlying bonds and the potential execution uncertainty." The fund's price is up by more than 2% today.

Some of the BlackRock ETF's holdings include debt issued by Ford Motor Credit Co., Charter Communications and Nissan Motor Acceptance Corp.

Higher surcharges show the pressures facing Wall Street players critical to the orderly functioning of the $6 trillion ETF industry. Each day bank intermediaries and other Wall Street middlemen buy baskets of instruments to exchange for shares of ETFs, or vice versa, in an attempt to profit from price differences. Their work keeps ETF prices closely in check with their underlying investments.

Vanguard also is imposing new costs for such large intermediaries who want cash redemptions from two ETFs. This week the company imposed a surcharge of up to 200 basis points on cash redemptions from the Vanguard Mortgage-Backed Securities ETF and the Vanguard Total International Bond ETF.

The two Vanguard funds collectively manage nearly $40 billion in assets. The surcharges on cash redemptions is 50 basis points right now. Vanguard didn't charge any cash redemption fees previously.

"These fees are in place to defray the impact of transaction costs on behalf of shareholders, particularly during this period of unprecedented volatility in bond markets," a Vanguard spokesman said.

In a sign of the challenges facing the U.S. economy, the Federal Reserve stepped in to calm short-term debt markets earlier this week with a plan to lend to U.S. companies in the commercial-paper market. The Fed had deployed a similar facility between 2008 and 2010 in a bid to lift the economy out of the financial crisis.

Write to Dawn Lim at dawn.lim@wsj.com and Justin Baer at justin.baer@wsj.com

(END) Dow Jones Newswires

March 20, 2020 19:43 ET (23:43 GMT)

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