The Financial Stability Board, a panel of regulators from around the world, said that it would suspend its work on developing methods for designating large asset managers like Blackrock Inc. and Fidelity Investments candidates for enhanced supervision from prudential regulators in their home countries while it works on determining whether, in fact, asset managers pose a threat to the economy.
The asset management industry has objected to regulatory efforts to designate firms for enhanced supervision, saying that they have a far different risk profile than big banks, insurers and other firms that have been designated SIFIs by the FSB and, in the U.S., the Financial Stability Oversight Council. Asset managers say that because they are trading on behalf of clients they do not take risks on their own balance sheets and are not at risk of sudden liquidity shortfalls.
The FSB had been the lone holdout among global regulators in its push to designate asset managers as SIFIs.
The International Organization of Securities Commissions, which has been working with the FSB on this issue, in June said that it would focus more on studying the activities of asset managers to identify risks than the firms themselves.
In the U.S., the FSOC has moved away from designating individual asset management firms as SIFIs, which would subject them to enhanced prudential supervision from the Federal Reserve. The issue gained traction after the Office of Financial Research, a unit of the Treasury Department, issued a report in September 2013 highlighting some of the potential risks asset management firms presented, particularly with respect to the leverage they take on and the potential for runs in a crisis.
Federal Reserve Gov. Daniel Tarullo, who leads the central bank’s regulatory efforts, said in a June appearance at an Institute of International Finance conference in New York that U.S. regulators were focusing more on potential market-wide risks that could also ensnare large asset managers than on looking at individual firms themselves, largely because such firms do not have the same risk profiles as do large, global banks or other nonbank companies that have so far been designated as SIFIs.
“There may be risks there. That’s something that we need to determine,” Tarullo said. “But if there are, it’s almost surely the case that the response should be something that addresses directly and more precisely the nature of those risks, which is likely to be a market-wide phenomenon.”
While Tarullo said that the somewhat less liquid assets that large asset managers tend to specialize in could pose a threat to the financial system because investors can cash out in a crisis, a better model for regulating such firms could follow along the lines of the U.S. Securities and Exchange Commission’s rules for money market mutual funds.
The money market reforms, finalized last year, targeted the industry rather than individual firms by requiring changes to fund valuations and additional protections against runs.
--Editing by Emily Kokoll.
