Some large U.S. asset managers and money market funds are likely to be designated as systemically important financial institutions (SIFIs), which will lead to tougher regulation and higher costs, says Moody’s Investors Service in a new report.
The rating agency reports that the U.S. Financial Stability Oversight Council issued a final rule outlining the process for designating systemically important non-bank financial institutions last month, but at this point the quantitative thresholds for defining SIFIs are still evolving, and the regulations are still preliminary.
Moody’s predicts that some of the largest asset managers and money market funds will likely be designated as SIFIs, but which ones remain unclear, it says. Additionally, it is also not clear what the final requirements imposed on these firms will be, although it suggests that they may need to meet new standards relating to capital, leverage, risk management, credit exposures, and annual stress testing.
“What is clear is that asset managers and money market funds designated as SIFIs will see their expenses go up,” says Dagmar Silva, a Moody’s vice president, senior analyst, and an author of the report. “The cost of doing business will increase for entities designated as SIFIs, which could put them at a disadvantage to midsize managers that avoid the designation, for whom the playing field will be more level.” Silva adds that it expects that the stiffer regulation would also bolster the creditworthiness of affected firms.
Looking ahead, Moody’s says asset managers and MMFs that are close to the threshold for SIFI designation may alter their business strategies in order to avoid the designation. And, it says that merger and acquisition activity is likely to fall off, particularly for large firms that would attempt to reduce the chances of designation.