Industry rejects SIFI designation for buy-side

Major asset managers and industry groups have warned against designating institutional investors or their funds as systemically important financial institutions.

Major asset managers and industry groups have warned against designating institutional investors or their funds as systemically important financial institutions (SIFIs).

Responses to an International Organization of Securities Commissions (IOSCO) and Financial Stability Board (FSB) consultation on whether funds or the firm that run them should be subject to more stringent risk controls have widely rejected calls for such a move.

Among the responses, Fidelity Worldwide Investment Partners, one of the world’s largest asset managers, said the basis of the consultation was flawed.

“Authorised funds cannot ‘fail’ (apart, possibly through fraud.) The investment risk is accepted by the underlying investor. Funds do not act as principals,” it said in its response.

Instead, Fidelity believes regulators should continue to focus on ways to reduce risk in the banking system, for which the SIFI designator was originally intended, as any chain of events that causes widespread investment losses will occur within banks.

Blackrock, the largest investment company by assets under management in the world, said that the only potential risks imposed by funds would be as a result of leverage and not by the size of the institution.

“The size of a fund is not indicative of systemic risk, and most of the largest funds today are unlikely to pose systemic risk issues,” Blackrock said.

“’Leverage’ is a better measure for screening funds. Funds with substantial leverage could be subjected to a more detailed review. Additional factors such as size, liquidity, redemption provisions, counterparty relationships and volatility could then be considered.”

Most responses criticised the consultation, and in particular the FSB’s approach, for trying to apply concepts related to its experience with the banking industry, to another sector of financial services that has very different characteristics.

US buy-side lobby group the Investment Company Institute, said: “The concepts of ‘distress’ and ‘disorderly failure’—stemming directly from the FSB’s concern with too-big-to-fail institutions—are derived from experience with banks and have little relevance to investment funds. Investment losses do not constitute ‘distress’: unlike bank depositors, fund investors are not promised either a gain on their investment or a return of their principal.

However, despite this rejection of claims that asset managers can cause systemic risks, both Fidelity and Blackrock are reportedly being reviewed by the US’s Financial Stability Oversight Council, which is investigating whether their large size and range of subsidiaries could lead to them posing a risk to the financial system.

The consultation closed on 7 April and IOSCO has not specified when it might propose a way to designate some asset managers or their funds as SIFIs. If they did, these funds ability to invest and trade in riskier instruments could be impacted, and respondents to the consultation suggest such a move would ultimately be damaging for end investors’ returns.