Some of the world’s largest asset managers have united against the Financial Stability Board (FSB), arguing their role in the securities lending market does not make them a financially systemic institution.
The FSB is considering whether to classify the largest asset managers as global systematically important financial institutions (G-SIFI), and hit them with tougher rules on repo haircuts and reporting securities financing transactions.
In its consultation, securities lending is one of the categories in which the FSB could extend the G-SIFI classification to asset managers.
Last week, the FSB released responses to the consultation, and to no surprise it received a wave of criticism from firms such as BlackRock, PIMCO, Fidelity, and group bodies against the proposal.
In a response from the European Fund and Asset Management Association (EFAMA), it argued “securities lending is in Europe an ‘efficient portfolio management’ technique…. it logically does not make asset managers unique and thus may not be construed as a potential systemic indicator only for the latter category.”
The response from EFAMA highlights that custodian banks take on most of the securities lending activities of an asset manager via a tri-party agreement. According to figures from the International Securities Lending Association (ISLA), as of mid-May global custodians accounted for some €6.8 trillion, or 48%, out of the total €14.3 trillion of securities on loan globally. The largest asset managers, on the other hand, only accounted for 16%.
In BlackRock’s response, it argued that rules should instead focus on securities lending activities, rather than zoning in on asset managers.
“The risks associated with various activities within securities lending – be it haircuts, cash reinvestment, or borrower default indemnification – need to be addressed at the activity level not the entity level. In fact, by focusing on securities lending by external asset managers, many active securities lending agents will necessarily be out of scope,” said BlackRock.
“Asset managers who act as securities lending agents are not interconnected with banks or broker-dealers. Their role is an agent to the asset owner.”
Furthermore, the response from the Securities Industry and Financial Markets Association (SIFMA), which represents asset management firms, argued while securities lending rules could be constructive for investors, it warns that grouping asset managers into a one-size-fits-all model could be dangerous.
“Disclosures related to securities lending practices, if appropriately tailored, could potentially assist investors and counterparties in making informed choices about their assets and how they engage in lending practices,” it said.
“However, if such potential disclosures are considered, care must be taken to not permit changes to turn securities lending into a one size fits all practice, which could lead to concentration, stifle innovation, and foster risks that do not currently exist."
The FSB plans to finalise rules on securities finance and on G-SIFI classifications by the end of the year.