REGULATION/LEGISLATION

FSB finalizes recommendations to address structural vulnerabilities in money management

The Financial Stability Board published its final recommendations to address structural vulnerabilities arising from money management activities, and also outlined preliminary results of analysis into potential vulnerabilities of pension funds and sovereign wealth funds.

The FSB's 14 policy recommendations follow a comment period regarding its proposals, launched in June. The recommendations address issues that could present risk to financial stability, said the FSB Thursday.Recommendations cover four areas: liquidity mismatch between investments and redemption terms and conditions for open-end fund units; leverage within investment funds; operational risk and challenges at money management firms under stressed conditions; and securities lending activities.

The final recommendations reflect a number of changes to the proposals to incorporate responses. The FSB said recommendations on liquidity have been revised to encourage authorities to develop consistent reporting requirements, to better distinguish information that is useful to authorities and investors, and to emphasize the exploratory nature of systemwide stress testing at this point. Purposes and uses of measures regarding leverage have also been clarified, said the FSB.

The FSB has said it will conduct further assessment of pension funds and sovereign wealth funds — which were originally identified alongside the four areas addressed in the final recommendations for further analysis — when it revisits the scope of non-bank, non-insurer global systemically important financial institution assessment methodologies.

“However, the relevant authorities may refer to the recommendations in this document in considering their policies towards pension funds and SWFs in their jurisdictions if they consider the recommendations appropriate,” said the FSB.

The FSB also reiterated preliminary results of its analysis of pension funds and sovereign wealth funds, where it has identified moves into higher risk and less-liquid alternative assets as potentially giving rise to vulnerabilities; the potential to engage in leveraged strategies as part of liability-driven investing strategies; and sovereign wealth funds' investments in illiquid assets as something that “could potentially lead to a transmission of stress to the financial system in the event of divestment from those positions.”

The FSB added: “As assessments of SWF adherence to the Santiago Principles (a set of 24 voluntary principles and practices) suggest that the practices to manage risks such as liquidity risks and leverage vary widely, (and) further careful assessment of each SWF's potential vulnerabilities may be warranted.”

The recommendations document is available on the FSB's website. Some of the recommendations will be put into effect by the International Organization of Securities Commissions, which has been asked to complete its work on the liquidity recommendations by the end of 2017 and on leverage measures by the end of 2018.