INTERNATIONAL: IOSCO publishes consultation paper on Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions

Thursday January 9 2014

The International Organization of Securities Commissions (IOSCO) has published a consultation paper on Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions (NBNI G-SIFIs).

The paper sets out, for public consultation, the proposed assessment methodologies for identifying NBNI G-SIFIs, extending the SIFI framework that currently covers banks and insurers to all other financial institutions. This is challenging as the high-level framework and specific methodologies have to capture a wide range of business models and risk profiles, while maintaining broad consistency with the methodologies for banks and insurers.

The paper contains a dedicated section for investment funds which outlines the systemic importance of asset management entities and contains a number of proposed approaches for the assessment of systematic risk for such entities, including:

i) Family of funds – In addition to individual funds, it may also be necessary to consider families/groups of funds following the same or similar investment strategy that are managed by the same asset manager. While any one of such funds may be too small to be considered systemically relevant under the proposed methodology, it may be necessary to consider such funds in the aggregate.

ii) Asset managers on a stand-alone entity basis – Under this approach, the question of whether asset managers themselves may be of systemic importance would be analysed. For instance, it is the manager that is in a position potentially to create systemic exposure through the activities it performs as a firm, for example, risk management or securities lending and repo transactions. Additionally, asset managers are exposed to operational and reputational risks.

iii) Asset managers and their funds collectively – In addition to the stand-alone asset manager, it may be necessary for a complete analysis to examine the asset manager and all assets under its management, given that it is the asset manager that determines, for example, the investment strategy and risk management practices. Theoretically, reputational risk of an asset manager or one of the funds it manages may create runs both on the asset manager as well as on its funds.

Another possible approach set out in the paper to assessing systemic risk in the asset management sector would be to consider possible financial stability risks that could arise out of certain asset management-related activities. Under this approach, the methodologies would consider how particular activities or group of activities might pose systemic risks.

The FSB and IOSCO welcome comments on this document. Comments should be submitted by 7 April 2014 by email to fsb@bis.org or post (Secretariat of the Financial Stability Board, c/o Bank for International Settlements, CH-4002, Basel, Switzerland). All comments will be shared with IOSCO and will be published on the FSB and IOSCO websites unless a commenter specifically requests confidential treatment.

Click on the above link for the Consultation Document.