Regulators need more data on possible leverage risks at the world’s big asset managers, suggests Mark Zelmer, deputy superintendent, Office of the Superintendent of Financial Institutions (OSFI).
Speaking to the C.D. Howe Institute in Toronto on Tuesday, Zelmer discussed global regulators’ efforts to identify financial stability risks at global asset managers. He is co-chairing a project for the Financial Stability Board (FSB) to uncover inherent vulnerabilities in the asset management industry that could represent global financial stability concerns.
That effort is looking at five areas: mismatches between the liquidity of investment fund assets and redemptions; leverage; the challenge of replacing a large asset manager amid systemic stress; securities lending; and potential vulnerabilities associated with pension funds and sovereign wealth funds. Of those, only liquidity, leverage, and the task of replacing a large asset manager are most relevant to the Canadian investment fund industry, Zelmer said.
On the topic of liquidity, Zelmer said that the ability of funds to cope with an unexpectedly large surge in redemption requests “merits further exploration.” However, he also noted that regulators “should resist the temptation to treat investment fund liquidity management practices as a macro-prudential tool for cushioning markets from the actions of end-investors. Taken to extremes, that would slow markets’ processing of new information, which could give rise to some easy arbitrage opportunities.”
In terms of leverage, Zelmer commented: “More attention needs to be paid … to leverage that could emerge in the future as prices change and derivative positions are marked to market. A good place to start would be to collect more comprehensive data that would help regulators understand not only how much leverage is actually in play at any given point in time, but also how much might emerge in the future as market prices change.”
Zelmer also noted that it would be a challenge to move the investment mandates of a large asset manager to another firm on short notice, particularly when markets are under stress. The issue, he said, is, “what steps could be taken to quickly transfer investment mandates from one manager to another in a smooth fashion, so as to minimize the need for any actual redemptions of fund units by end-investors that would then trigger transactions in financial markets.”
The FSB project is a “work in progress”, Zelmer said. “Work is currently underway to assess the materiality of all five vulnerabilities…We will also need to see if additional policy remedies are needed to buttress the current global regulatory framework.”
If the regulators do decide that regulatory reforms are required, Zelmer said the plan is “to explore measures that could be applied at a global level to specific activities or to all asset managers/investment funds engaged in that activity. This activities-based approach should help to limit any disruptions to the highly competitive landscape in the asset management sector.”
“The past eight years have seen some significant achievements as we work to implement the global regulatory reform agenda. But the journey is not yet over. We have more miles to travel and challenges to face,” Zelmer concluded.