Global policy-makers are issuing their long-awaited methodology for determining which brokerage firms and asset managers may be considered systemically important to the global financial system.
The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) published their proposed methodologies for identifying the financial services firms — other than banks and insurers — that would be considered systemically important financial services institutions.
The proposed methodologies “aim to identify financial entities whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity at the global level,” the regulatory bodies say.
The proposals include a high-level framework for identifying these firms, along with detailed sector-specific methodologies for finance companies; market intermediaries such as brokerages; as well as asset managers and investment funds.
Since the global financial crisis, regulators have been seeking to determine which firms are crucial to the global financial services system and subjecting them to added regulation and oversight. So far, they’ve done this for banks and insurers, but they have yet to settle on a methodology for other types of firms, such as brokerages, hedge funds and asset managers.
“The revised proposal marks an important step toward addressing any ‘too big to fail’ problems among entities that are neither banks nor insurers. These include finance companies, market intermediaries, investment funds and asset managers,” said Mark Carney, chairman of the FSB. “It will also enhance authorities’ understanding of the risks to global financial stability posed by the activities of entities in financial markets, including the distress or disorderly failure of non-banks and non-insurers.”
The FSB and IOSCO say that the proposed methodologies aim to capture different types of systemic impact posed by a wide range of business models and risk profiles while maintaining broad consistency with the existing approach to banks and insurers. However, they also allow a greater role for supervisory judgment than in the approach to banks and insurers given the diversity of these businesses and the lack of consistent data on them.
The methodologies will rely on detailed analysis by national regulators, supplemented by supervisory information sharing and international co-ordination through the FSB.
“The non-bank/non-insurer financial space covers a wide range of business models and risk profiles,” said Greg Medcraft, chairman of the IOSCO board and a member of the FSB Plenary. “The second consultation will allow authorities to better understand systemic risks posed by the asset-management sector in particular. We look forward to hearing industry’s views on the important issues the consultation paper raises.”
At this point, the FSB and IOSCO are not naming particular firms that should be considered systemically important, nor are they proposing what added regulation these firms should face in order to reduce systemic risk. Rather, these policy measures will be developed once the assessment methodologies have been finalized.
“Understanding the key drivers and transmission mechanism of risks posed by the failure of a non-bank/non-insurer financial entity to the global financial system is the first step of designing the appropriate policy tools to address such risks,” said Daniel Tarullo, chairman of the FSB standing committee on supervisory and regulatory co-operation. “This consultation will help formulate such understanding among authorities.”
Comments on the proposals are due by May 29.