Signs that global securities regulators may be backing away from the idea of designating asset managers as systemically important are credit positive for the industry’s major firms, according to a new report from Moody’s Investor Services.
The International Organization of Securities Commissions’ (IOSCO) recent pledge to carry out a full review of asset management activities before conducting further work on methodologies to identify systemically important asset management firms and funds, “increases the likelihood that a regulatory framework for asset managers will focus on the systemic implications of the firm’s activities rather than its scale,” states the report from the New York City-based credit rating agency.
This shift is credit positive for large asset managers such as BlackRock, Inc., Vanguard and FMR LLC; because, “bank-style regulations would have negative consequences on these companies’ market competitiveness and profitability,” the report states.
Since the financial crisis, global regulators have moved to designate certain banks and insurers as systemically important, with the idea that they should also face tougher rules to help guard against their possible failure, which could be particularly damaging to the financial system or result in taxpayer-funded bailouts. Policymakers have also indicated that they will do the same for major asset management firms and even funds.
IOSCO is now refocusing its efforts on “assessing whether activities performed by asset managers, in their role as fiduciary agents, pose systemic risk to financial markets. Its analysis will focus on market structure, product risk and how the asset manager or investment fund can or cannot mitigate these risks,” the report notes
Although use of leverage, or the possibility of “fire sales”, may represent a risk to market stability, these factors do not necessarily pose a solvency risk to an individual asset manager, the report notes. “Renewed regulatory focus on addressing industry-wide risks is likely to lead to new regulations that are less costly for large asset managers compared with our expectation of high cash costs and competitive restrictions associated with an individual global systemically important financial institution designation,” it suggests.
“Overall, the IOSCO’s decision to examine systemic risk posed by asset managers’ products and activities is better suited for the asset managers’ business model than bank-style regulation,” the report concludes. “This approach will not put large scale asset management companies at a disadvantage to smaller players by limiting their activities and development in certain business areas. In addition, this revised stance is in line with that of the U.S. Securities and Exchange Commission and Financial Stability Oversight Council, so it should not distort competitiveness at a global level.”