The Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO) have asked for feedback on whether potential risks posed by asset managers to the global financial system should be assessed at the entity or fund level.
The FSB and IOSCO today unveiled for public consultation their proposed methodologies for identifying non-bank-non-insurer global systematically important financial institutions (NBNI G-SIFIs).
The consultation includes a sector-specific methodology for investment funds, which covers collective investment schemes including mutual funds, exchange-traded funds, hedge funds, private equity funds and venture capital but does not include separately managed accounts (SMAs). The FSB and IOSCO said the treatment of such accounts is under review pending more work to assess the potential financial stability risks posed by SMAs.
The bodies justified the current focus of their methodology on the fund level by pointing out that funds are typically separate legal entities from their managers and economic exposures are generally created at this level. But they acknowledged that the methodology “could be potentially broadened” on grounds that families of funds run by a single asset manager often follow the same or similar investment strategy. The FSB and IOSCO also pointed out that there may be cause to assess asset managers on a standalone basis or collectively alongside their funds. “It is the manager that is in a position potentially to create systematic exposure through the activities it performs as a firm, for example risk management or securities lending or repo transactions. Additionally, asset managers are exposed to operational and reputational risks,” the watchdogs said.
The assessment methodology document noted that, while the failure of investment funds could be transmitted to the wider financial system, for example through impairment of counterparties or loss of liquidity in specific markets, the risk profile of funds was of a “very different nature” to other financial entities, such as banks. “Fund investors bear both upside rewards and downside risks from movements in the value of the underlying assets. Bank depositors are not in the same position,” the report noted. It also cited high levels of substitutability between funds and the regular launching and closing of funds with “negligible or no market impact”.
In the US, the Financial Stability Oversight Council (FSOC) is considering whether to designate large asset managers such as BlackRock and Fidelity as systemically important. FSOC, a division of the US Treasury established by the Dodd-Frank Act, has already identified three US non-banks as systemically important financial institutions: insurance group AIG, Prudential Financial and the finance unit of General Electric.
The FSB/IOSCO consultation did not identify any specific NBNI G-SIFIs nor specify policy measures to be applied to such entities. The methodologies are only intended to identify non-banks and non-insurers in the finance sector of such size, complexity and interconnectedness that their demise would “cause significant disruption to the financial system”.
According to the consultation, the distress of an NBNI financial entity is most commonly transmitted via the exposures of creditors, counterparties and investors; liquidation of the entity’s assets leading to a fall in asset prices; and the inability of a NBNI financial entity to provide a critical function to the market.
In November 2011, G-20 leaders asked the FSB, in consultation with IOSCO, to establish methodologies that would identify systemically important NBNI financial institutions. At a meeting in St Petersburg in September 2013, G-20 leaders then asked FSB, IOSCO and other standards setting bodies to develop for public consultation methodologies for identifying NBNI G-SIFIs. Assessment methodologies have already been developed for globally systematically important banks and insurers. Comments submitted to the FSB by 7 April 2014 will be published on the FSB and IOSCO websites.
Housed at the Bank for International Settlement, the FSB was established in the aftermath of the financial crisis to coordinate the work of national financial authorities and international standard setting bodies and facilitate the implementation of regulatory, supervisory and other financial sector policies in the interest of financial stability.