The Financial Stability Board (FSB) has launched a consultation on policy recommendations designed to tackle “structural vulnerabilities” from asset management activities that could pose risks to financial stability.

The consultation closes in September, with the FSB intending to finalise the recommendations by the end of the year.

The International Organization of Securities Commissions (IOSCO) will be responsible for making many of them operational.

The policy recommendations will pave the way for the FSB, together with IOSCO, to resume its work on developing methodologies for identifying global, systemically important financial institutions other than banks and insurers.

It suspended this work in July last year.

The FSB has made 14 recommendations to address what it sees as four main ways in which asset managers are structurally vulnerable.

The vulnerabilities are:

  • Liquidity mismatch between fund investments and redemption terms and conditions for fund units
  • Leverage within investment funds
  • Operational risk and challenges in transferring investment mandates in a stressed condition
  • Securities lending activities of asset managers and funds

Commenting on the recommendations, Mark Carney, chair of the FSB, noted that sources of credit and investment had diversified as a result of the growth in market-based finance.

“Given its increased importance, a resilient asset-management sector is vital to finance strong, sustainable and balanced growth,” he said.

“These policy recommendations are designed to ensure that, across the FSB membership, asset managers can continue to fulfil these roles to the benefit of all.”

The FSB considers two of the four structural vulnerabilities to be key, namely liquidity mismatch and leverage.

It said the recommendations to tackle the former focus on open-ended funds, while those for leverage are meant to apply to all types of funds that may use leverage.

The policy proposals addressing operational risk focus on asset managers that are “large, complex and/or provide critical services”, and those for securities-lending activities focus on asset managers’ “agent lender activities” – i.e. when they lend securities of which an entity is not a beneficial owner.

The FSB said its work on structural vulnerabilities from asset management activities would inform a revised methodology for deciding whether asset managers should be deemed global systemically important institutions.

It added: “The focus, in the case of asset management, will be on any residual entity-based sources of systemic risk from distress or disorderly failure that cannot be effectively addressed by market-wide, activities-based policies.”

The FSB also hinted that pension funds could yet be considered systemically important, although its policy recommendations did not address their role directly. 

Data gaps

Concurrent with the FSB’s publishing its policy recommendations, IOSCO issued a statement setting out its plans to plug what it considers to be “data gaps” in the asset management industry.

“In recent years, a number of initiatives have led to the augmentation of the data collected with a particular focus on the hedge funds industry,” said the umbrella organisation for securities regulators.

“However, IOSCO considers more needs to be done to enhance the data collected and its use.

“A key priority is to encourage IOSCO members to collect data with a view to better identify systemic risk.”

IOSCO believes gathering data on three key areas should be prioritised: open-ended regulated Collective Investment Schemes (CIS), separately managed accounts and alternative funds.