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FSB tweaks asset management plan, but G-SIFI thrust frustrates

The Financial Stability Board (FSB) has set out its final policy recommendations for tackling structural weak spots in asset management activities, making some welcome changes but also frustrating some in the industry by deciding to pursue work that could lead to asset managers being deemed “systemically important”.

The Basel-based FSB has been examining the asset management sector since 2015 due to concerns its growth, alongside trends such as increased investment in illiquid assets, could pose a danger to financial stability.

It made policy recommendations to tackle “structural vulnerabilities” of asset management activities in June last year, covering risks such as liquidity mismatches in open-ended funds and leverage within investment funds.

The FSB, with other international bodies, has been considering designating asset managers as globally systemically financial institutions (G-SIFIs) alongside banks and insurers but delayed a decision on this until after its work on the structural vulnerabilities of asset managers was completed.

The FSB said its final policy recommendations deviated from its June 2016 proposals in a few ways to reflect responses to its consultation.

“Among other things,” it said, “the recommendations on liquidity have been revised to encourage authorities to develop consistent reporting requirements, to better distinguish the information that is useful to authorities and investors, and to emphasise the exploratory nature of system-wide stress testing at this time.

“The purposes and uses of leverage measures also have been clarified.”

The FSB said it also clarified the circumstances where authorities could consider providing specific guidance to facilitate the use of exceptional liquidity management tools to include, for example, when there is a market dislocation or overall market stress. 

‘Bad policy’ warning

In a statement, Paul Schott Stevens, president and chief executive at the Investment Company Institute (ICI), which represents investment funds in the US and around the world, said the FSB had made “some helpful changes”.

He also welcomed the FSB charging the International Organization of Securities Commissions (IOSCO) with evaluating the recommendations and considering next steps.

He said the ICI remained troubled, however, that the report continued to “perpetuate the FSB’s flawed assumptions about liquidity risk management by open-ended funds”.

Angus Canvin, senior adviser at the Investment Association (IA) in the UK, told IPE the association had “minor quibbles” with some of the recommendations, but that, “in the big scheme of things”, the association was “broadly speaking happy with where the FSB has landed”, as this was a major improvement on where the FSB began its work on asset management two years ago.

The “best bit”, he said, was the role assigned to IOSCO, as this is “where the expertise concerning our industry really lies”.

However, like the ICI, the IA remains concerned the FSB has said it would resume its work on methodologies that could lead to asset managers being designated G-SIFIs like banks and insurers.

The IA believes these methodologies are “fundamentally misconceived”, according to Canvin.

“Policy made on that basis will be bad policy we think,” he said. “It’s frustrating to us, and we regret that the FSB has said it will go back to this discredited methodology.”

The ICI’s Stevens also lamented the FSB’s plans to continue its work on methodologies to identify non-bank non-insurance G-SIFIs (NBNI G-SIFIs).

“If the FSB engages in an evidence-based analysis, we believe the FSB will conclude – at a minimum – that there is no basis for considering regulated funds and their managers for possible G-SIFI designation,” he said. 

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