When it comes to determining systemically importance in the investment industry, regulators should focus on what investment funds do, not how big they are, argues the U.S. Securities Industry and Financial Markets Association (SIFMA).
In its submission to a consultation initiated by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO), SIFMA’s Asset Management Group (AMG) argues that the proposed methodology for assessing the systemic importance of investment funds fails to meet the necessary standards of transparency, objectivity, consistency and reliability. It says that the selective regulation of a small number of investment funds due to a systemic designation “would likely have perverse and negative regulatory and market consequences”; and, it says this would not reduce the overall level of risk associated with global asset management activities.
SIFMA notes that investment funds have fundamentally different risk profiles than banks and insurers and lack many of the characteristics that have been used in designating those sorts of firms as systemically important. It argues that risk among investment funds, and in the asset management industry, is not concentrated in individual entities. Instead, it says risk is broadly distributed and migrates across sectors of the industry as markets shift.
It recommends that the FSB and IOSCO shift the focus of the proposed methodology for assessing systemic importance from investment funds to their activities. It argues that “it would be more appropriate to assess and regulate activities in which investment funds and other capital markets participants engage than it would be to try to identify individual entities that represent concentrated risk to such a degree that they warrant different regulation than their competitors.”
“The FSB and IOSCO should consider an activities-based approach to more effectively manage risk and avoid misguided regulation that could negatively impact the asset management industry. Further, regulators should recognize that separately managed accounts do not pose a specific or unique threat to financial stability,” said Tim Cameron, managing director and head of SIFMA’s Asset Management Group.
In its own submission to the consultation, the global trade association, the Institute of International Finance (IIF), stresses that size should not be considered the primary determinant of an entity’s systemic risk. Additionally, it says that existing regulations and the reforms to derivatives markets reforms that are already in progress should be taken into account when interpreting whether indicators actually pose a systemic risk.
The IIF endorses the FSB and IOSCO’s approach to focusing on investment funds rather than asset managers; and, says that, in the case of investment funds, leverage is the most important indicator of systemic risk.
“Given the potential impact of this work on the financial system, it is vital to ensure a robust and transparent final methodology that truly captures sources of systemic risk,” said Kevin Nixon, managing director for regulatory affairs at IIF. “As the FSB moves forward it should not work under the assumption that entities posing a global systemic risk currently exist within the non-bank non-insurer space.”
As part of its comment, the SIFMA AMG also reported the results of a survey on separately managed accounts (SMAs), which it conducted after the FSB and IOSCO identified SMAs as an area for further research. In total, nine managers with a combined firm total of US$11.2 trillion in AUM and a total AUM in SMAs of US$3.98 trillion participated in the survey.
It reports that its survey found that 99% of the large SMAs surveyed were invested in long-only strategies, and 53% were invested in passively managed, index strategies. In aggregate, less than 4% of the large SMAs surveyed employ leverage and the average leverage reported for these accounts is modest, it notes.
Additionally,it reports that less than 2% of the large SMAs surveyed held illiquid securities and less than 2% engage in securities lending and the majority of those portfolios are passively managed. Approximately 35% and 15% of large accounts surveyed are owned by pension funds and insurance companies, respectively, it said.