The Financial Stability Board (FSB) has issued 14 policy recommendations to address what it describes as structural vulnerabilities from asset management activities. Nine of the recommendations relate to liquidity management, and the others to leverage, securities lending and operational risk management.
Within Europe, many of these recommendations are already in place in EU or national requirements, but a few – such as industry-wide stress testing – are new. Also, the FSB says it will now revisit assessment methodologies for identifying non-bank, non-insurance globally systemically important financial institutions (NBNI G-SIFIs) – a major bone of contention for the industry.
The FSB states that global assets under management (AuM) rose to USD 78 trillion in 2015, of which USD 40 trillion was in open-ended funds, ETFs and institutional funds. However, it also notes that third-party asset managers manage about only one-third of the total financial assets of pension funds, sovereign wealth funds (SWFs), insurance companies and high net worth individuals. Therefore, only about one-sixth of the overall investing market is covered by these policy recommendations. The FSB says it will conduct further assessment of pension funds and SWFs when it revisits assessment methodologies for identifying NBNI G-SIBs.
The FSB acknowledges that open-ended funds have been generally resilient and have not created financial stability concerns in recent periods of stress and heightened volatility, with the exception of some money market funds. It is concerned, though, that open-ended funds invested in less actively traded assets but which offer daily redemption for investors could amplify downward repricing of these assets and market illiquidity if many investors tried to redeem at the same time. However, the policy recommendations apply to all open-ended funds.
A number of the policy recommendations require regulators to collect and share more information from fund managers and to review disclosures to investors. They are also required to make available to fund managers a range of liquidity management tools (such as swing pricing and redemption fees) and “where relevant” to consider system-wide stress testing. It is not clear how in practice this would be done.
The lack of a consistent measure of leverage is noted. It is suggested that IOSCO develop risk-based measures and collect national and regional leverage data.
Recommendation 13 – that asset managers should be required to have comprehensive and robust risk management frameworks – is already in place within Europe. Also, there is already ESMA guidance on securities lending, but Recommendation 14 requires regulators to focus on any indemnifications provided by asset lenders or fund managers to clients, to avoid the development of material risks or regulatory arbitrage.
In summary, while the apparent premise that open-ended funds are a source of systemic risk is refuted by the industry as not stacking up against evidence-based analysis, for European fund managers the recommendations should not in themselves be of great concern. However, the ongoing application of a banking policy mindset to open-ended funds, and the FSB’s insistence on progressing work on the identification of NBNI G-SIFIs within the asset management sector, will potentially cause an unhelpful rift with the industry.