US FSOC systemic risk study angers buy-side

Asset managers have criticised a US Financial Stability Oversight Council study examining buy-side firms’ systemic risk to financial stability, saying it lacks evidence and should be withdrawn.

Asset managers have criticised a US Financial Stability Oversight Council (FSOC) study examining buy-side firms’ systemic risk to financial stability, saying it lacks evidence and should be withdrawn. 

Twenty-eight organisations responded to the call for submissions to the study, which was conducted after the FSOC released rules on the supervision of certain non-bank financial companies.

The Council recognised it needed to treat asset managers differently, and so asked its Office of Financial Research (OFR) to analyse the extent to which asset managers posed a threat to the stability of the US financial system. The final study was released in September.

In the report, the OFR said the US asset management industry played a key role in capital formation and credit intermediation, while spreading any gains or losses across market participants.

Although it recognised that institutional investors differed to commercial banking and insurance activities, the OFR said some asset mangers activities are similar to those provided by banks.

The key factors that make the industry vulnerable to shocks, the OFR said, include asset managers’ ‘reach for yield’ – taking higher risks for higher returns – and herding behaviours; risk in collective investment vehicles, such as exchange-traded funds; and leverage that can amplify asset price movements and increase the potential for fire sales.

Barbara Novick, vice-chairman at BlackRock, the world’s largest asset management firm with US$3.7 trillion of assets under management, said no additional regulation is needed to eliminate a ‘too-big-to-fail’ expectation in relation to asset managers, ‘because the expectation simply does not exist”.

“Asset managers have very small balance sheets, as they do not act as lenders or counterparties, and therefore, do not present a systemic risk at company level,” Novick said. She added that they act as agents for clients, investing in accordance with client guidelines.

In a joint submission by the Asset Management Group, the Securities Industry and Financial Markets Association and the Investment Adviser Association, the groups said the study contained a number of “unsupported conclusions and overly broad assertions” that lead to an inaccurate view of the industry.

The associations said the OFR appeared to only use a fraction of available data, and asset managers were not approached to be involved in the research.

“The study should not be relied on to inform policy discussions about the asset management industry, let alone to serve as the basis for regulatory action with respect to the entities, activities and markets that comprise the industry,” it said. “In this regard, we strongly urge OFR to withdraw the study.”

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