Money managers watching the Financial Stability Oversight Council grapple with systemic risk breathed more easily after being given a chance at a recent Washington conference to explain what they do. Still, they're not letting down their guard or putting away potential weapons just yet.
Panelists representing money management heavyweights such as BlackRock Inc., State Street Corp., Pacific Investment Management Co. LLC, AQR Capital Management LLC, Citadel LLC and Fidelity Investments explained it is investors, not money managers, who decide in which sectors they want to be invested. “The major takeaway was that run risk (the risk of a run on a particular fund or firm that could affect other participants) is idiosyncratic; it's not systemic,” said Timothy Cameron, Washington-based managing director and head of the asset management group at the Securities Industry and Financial Markets Association. “The more that all of the regulators learn about the role performed by asset managers, it is our hope they will recognize that asset managers aren't systemic in and of themselves.”
The FSOC was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and given broad authority to identify and monitor excessive risks to the U.S. financial system.
Under Dodd-Frank, bank holding companies with $50 billion or more in assets are automatically deemed systemically important financial institutions, or SIFIs, and subject to additional supervision by the Federal Reserve. A non-bank financial institution can be designated if two-thirds of voting members find it could pose a threat. The council already has designated three non-banks — American International Group, General Electric Capital Corp. and Prudential Financial Inc. — as SIFIs.
The spotlight turned on money managers last September when an FSOC report prepared by the Treasury Department's Office of Financial Research identified activities of 20 of the largest U.S. money managers as possible sources of risk. The list, which was based on Pensions & Investments' data, includes BlackRock with $4.3 trillion in assets under management; Vanguard Group Inc. with $2.8 trillion; State Street Global Advisors with $2.3 trillion; Fidelity Investments with $2.2 trillion and PIMCO with $1.5 trillion.
Since then, anxiety levels among money managers have continued to rise, largely because of a lack of insight — and input — into the FSOC process for designating systemically important financial institutions. Nervous money managers and industry groups like the SIFMA have let their many concerns be known on Capitol Hill, leading to bipartisan pressure from House and Senate members to rethink the FSOC's mandate. House Financial Services Committee Chairman Jeb Hensarling, R-Texas, has twice called on the FSOC to “cease and desist” until Congress learns more about the process.
To help ease those fears, the Treasury Department convened a public conference May 19 to hear from academics and to let the money managers explain their business models.
Norm Champ, director of the SEC investment management division, pointed out at the start of the conference that the money management industry is both diverse and unique, but governed by several levels of fiduciary responsibility and third-party custodians, and “highly regulated” by the SEC.
The industry also has done more to manage risk, panelists at the conference said.
“Idiosyncratic jumps in default risk” stemming from external factors such as market shifts, sector risk or investors' asset reallocations are continually subject to managers' own “deep-down analysis,” said panelist William De Leon, managing director and global head of portfolio risk management at PIMCO, Newport Beach, Calif.