Financial regulators have published 14 proposals to manage what they perceive as financial stability risks in asset management.
In particular, the Financial Stability Board (FSB) highlighted the risk of a liquidity mismatch concerning redemptions in open-ended funds that invest in less liquid assets.
The FSB view on this liquidity risk has been called “flawed” by a leading investment industry group, the Investment Company Institute.
The FSB – set up by the G20 in 2009 to identify systemic risks in the financial system – acknowledges that open-ended funds generally have not created financial stability concerns in recent periods of stress, but it also said that “growth in the sector and increasing holdings of less liquid assets by investment funds suggest that risks may have increased in recent years”.
The FSB wants to increase information and transparency to regulatory authorities and investors, and to strengthen funds’ liquidity risk management options. System-wide stress testing by authorities is also suggested.
Mark Carney, chair of the FSB, said the recommendations – which include action on leverage and securities lending – would enhance the “resilience” of asset management activities.
Paul Schott Stevens, president and chief executive of the Investment Company Institute (ICI), welcomed an FSB decision to let the International Organisation of Securities Commissions evaluate the recommendations and consider next steps.
But he added: “Nevertheless, we remain troubled that this report continues to perpetuate the FSB’s flawed assumptions about liquidity risk management by open-end funds, despite detailed economic analysis from ICI in the comment record that calls into question these assumptions.
“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 [global systemically important financial institutions] designation.”
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