FSOC hears from money managers, House critics on systemically important designations

Barbara Novick
BlackRock's Barbara Novick

Financial Stability Oversight Council should “cease and desist” its review of money managers and other financial institutions that might be designated systemically important, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said Tuesday at a hearing on the designation process.

“Since they manage someone else's funds, it is almost inconceivable that an asset manager's failure could cause systemic risk,” Mr. Hensarling said. He and other House Republicans want Congress to first review FSOC methods.

Concerns raised by the money management industry over the process for designating systemically important financial institutions led officials at the Treasury Department to convene a public conference Monday to hear from academics and money managers, including representatives from BlackRock (BLK), Pacific Investment Management Co., AQR Capital Management, Citadel Advisors, Loomis Sayles & Co. and Pine River Capital Management.

The FSOC was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to identify and monitor excessive risks to the U.S. financial system to prevent another financial crisis. The financial crisis “was about illiquidity and leverage,” Michael Mendelson, portfolio manager for risk-parity strategies at AQR, said at the conference. “The asset management industry was pretty much a bystander.”

Barbara Novick, vice chairwoman and head of government relations for BlackRock, cautioned that “much of the discussion to date has focused on size, which is actually one of the least relevant factors when looking at risk.”

Loomis Sayles Chief Information Officer John Gidman told attendees that “there has been tremendous growth” in risk management. “It's not a case of faith; it's a case of due diligence,” Mr. Gidman said.

Mary Miller, Treasury undersecretary for domestic finance, stressed that the conference was a fact-finding exercise and that FSOC “clearly recognizes that asset managers are different.” While FSOC officials will continue to engage the asset management industry and study its risk potential, Ms. Miller said at the conference, “it is indeed possible that we will take no action.”