INTERNATIONAL: FSB launches consultation on structural vulnerabilities from asset management activities

Thursday June 23 2016

The Financial Stability Board (FSB) today published a document for public consultation ‘Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities’. The document sets out 14 proposed policy recommendations to address the following structural vulnerabilities from asset management activities that could potentially present financial stability risks:

• liquidity mismatch between fund investments and redemption terms and conditions for fund units;
• leverage within investment funds;
• operational risk and challenges in transferring investment mandates in stressed conditions; and
• securities lending activities of asset managers and funds.

Asset management activities have increased significantly over the past decade, including through open-ended funds that offer daily redemptions to their investors. Such growth has been accompanied by increased investment in particular asset classes, which encompass some less actively traded markets.

Among the above four structural vulnerabilities, issues associated with (i) liquidity mismatch and (ii) leverage are considered key vulnerabilities. The recommendations for liquidity mismatch focus on open-ended funds (public and private, including exchange-traded funds but excluding money market funds). Those for leverage are meant to apply to all types of funds that may use leverage (that may arise through borrowings or through the use of derivatives). Meanwhile, recommendations for operational risk focus on asset managers that are large, complex, and/or provide critical services, and those for securities lending activities focus on asset managers’ agent lender activities (i.e. lending of securities of which an entity is not the beneficial owner), in particular their provision of indemnities to clients.

The recommendations are designed to provide authorities and asset management entities with the tools and data to effectively detect and address the identified risks.

FSB Background

The FSB launched in March 2015 to work to understand and address potential financial stability risks from structural vulnerabilities associated with asset management activities. This work has focused on: assessing recent changes in the structure of asset management activities; identifying and prioritising potential structural sources of vulnerability that could affect the global financial system; evaluating the role that existing policy measures could play in mitigating potential risks; and making policy recommendations as necessary.

The FSB is chaired by Mark Carney, Governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Click on the above link for further information