Regulators must proceed with caution if they’re to go ahead and pile further regulations on top of Europe-based alternative investment funds and their managers, trade groups warn.
The European Commission’s consultation on nonbank financial intermediation regulation was closed to comment Nov. 22. The commission had asked for input from the industry on what it had identified as key vulnerabilities stemming from NBFI, such as money managers and investment funds, pension funds and other nonbank entities. Nonbank financial intermediaries accounted for about 41% of the European Union’s total financial assets as of Sept. 30, 2023, with banks accounting for about 36%. Other assets are held by central banks, the consultation paper said.
However, financial stability-related concerns about NBFI have emerged in terms of responses to major events in recent years, such as the U.K. gilt crisis in 2022, and a number of consultations have been underway in the U.S., U.K. and elsewhere on potential gaps in the macroprudential framework under which these entities operate.
The EC’s consultation focused on unmitigated liquidity mismatches, questioning whether a COVID-19-related “dash for cash” might be experienced in less-liquid funds, such as open-end fixed income and real estate funds; the buildup of excessive leverage, warning that “excessive leverage could also go undetected when using complex investment strategies involving several legal entities and fund of funds”; and the interconnectedness among NBFI sectors and between intermediaries and banks.
The Managed Funds Association urged the commission not to apply a “one-size-fits-all macroprudential regulatory framework to nonbank financial intermediaries,” it said in a statement.
The commission also wanted respondents to outline other areas that pose systemic risk to the economy and financial markets.
Alternative investment funds are not a systemic risk because their investors are “sophisticated institutional investors who fully understand investment risks.” They also use limited leverage, the MFA said.
"Alternative investment funds are an important, well-regulated part of Europe’s economy and are not a systemic risk,” said Bryan Corbett, MFA president and CEO, in the statement. “Imposing a one-size-fits-all regulatory framework on alternative asset managers would restrict their ability to provide capital to European companies, create jobs and enhance capital markets.”
The Alternative Investment Management Association also highlighted that alternative investment funds are “not concentrated or large enough to create systemic risk.”
"Investment funds and asset managers are already highly and robustly regulated” by the Alternative Investment Fund Managers Directive, AIMA said in a roundup of its response to the commission.
Rather than looking at more reporting, the commission should consider how to better use and coordinate existing reporting, which it said is “extensive but not fully joined up.”
Finally, AIMA questioned the language used by the commission, adding that the term “nonbank financial intermediation is so broad as to be meaningless given the broad range of entities, business models and activities encompassed.” As such, “that term perpetuates the incorrect idea that banking regulation is somehow a gold standard when it is simply inappropriate for investment funds and their managers.”
