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FSB Proposals: Assets Managers May Face Tough Scrutiny

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Similar to “too-big-to-fail” banks, the $76 trillion asset management industry continues to be in the focus of the global regulatory bodies amid heightened regulations and scrutiny in the broader financial system post crisis. The Financial Stability Board (“FSB”) proposed 14 recommendations to address the contagion risks, given the structural vulnerabilities in asset management industry.

The FSB, a group of international regulators led by Bank of England's governor Mark Carney, called for additional oversight of exchange-traded, mutual and other funds, trading activities of which could potentially pose financial stability risks. According to the FSB, the funds should be able to sell assets to return investors their money even in stressed markets.

According to the FSB, the structural vulnerabilities in asset management industry included liquidity mismatch between fund investments and redemption terms and conditions for open-ended fund units, leverage within investment funds, securities lending activities of asset managers and funds as well as operational risk and challenges in transferring investment mandates in stressed conditions.

To address these structural vulnerabilities, the FSB proposed the following recommendations. Authorities should widen the availability of liquidity risk management tools to open-ended funds, while existing reporting requirements should be reviewed and improved to ensure adequacy.

Also, liquidity risk management tools should be made available to open-ended funds to reduce first-mover advantage. Moreover, the authorities should collect data on leverage in funds, monitor the use of leverage by funds and take action when appropriate.

Further, the International Organization of Securities Commissions (“IOSCO”) should collect national aggregated data on leverage across its member jurisdictions based on the simple and consistent measures it develops.

Also, system-wide and individual stress testing of asset managers similar to banks along with providing better disclosure to clients about risks involved in funds were among the 14 recommendations made by the FSB to authorities across the G20 nations on Wednesday.

Carney stated, “Given its increased importance, a resilient asset management sector is vital to finance strong, sustainable and balanced growth.”

Daniel Tarullo, Chair of the FSB Standing Committee on Supervisory and Regulatory Cooperation, said that “The proposed policy recommendations are designed to enhance the resilience of asset managers and funds to future stress in financial markets.”

The FSB proposals are to be implemented over two years from the end of 2017 after being finalized by the end of this year.

Assets under management rose from $50 trillion in 2004 to $76 trillion in 2014, according to the FSB. With the growth of the asset management industry, several risks and challenges have cropped up and the regulatory bodies continue to work on these issues and have taken up required measures.

Last year, the FSB dropped its plan to designate certain asset managers or funds as “systemically important” after resistance from the large players of the fund industry like BlackRock, Inc. (BLK - Free Report) , Fidelity Investments, Vanguard Group Inc. and Pacific Investment Management Co.

Tougher oversight proposed by the global regulatory bodies will surely not gel well with asset managers like BlackRock, Legg Mason Inc. , Franklin Resources Inc. (BEN - Free Report) and Invesco Ltd. (IVZ - Free Report) . The firms believe their size do not pose a systemic risk to financial stability of the broader financial market.

However, we believe that though the new proposals, if implemented, can impact the revenue growth of the companies in this industry to some extent, the broader system will be secured from any potential downturn.

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