The world's largest money managers are in line for tougher rules as global regulators push ahead with plans to identify too-big-to-fail firms in the face of opposition from the industry.
The Financial Stability Board and the International Organization of Securities Commissions said Wednesday that the failure of a money manager could “cause or amplify significant disruption to the global financial system.” Firms such as Pacific Investment Management Co., Fidelity Investments and BlackRock had challenged this premise in response to an initial proposal last year.
“The revised proposal marks an important step toward addressing any too-big-to-fail problems among entities that are neither banks nor insurers,” said FSB Chairman Mark Carney, who is also governor of the Bank of England, in a statement. “It will also enhance authorities' understanding of the risks to global financial stability posed by the activities of entities in financial markets.”
The FSB already ranks banks and insurance companies by their potential to cause a global meltdown. The regulator is seeking views on how to identify too-big-to-fail money managers and hasn't yet spelled out the rules they might face.
The FSB, which brings together regulators and central bankers from the Group of 20 nations, said on Wednesday that a money manager “that faces distress or forced failure could, in certain circumstances, potentially cause or amplify significant disruption to the global financial system and economic activity across jurisdictions.”
In its proposal last year, the FSB said investment funds with more than $100 billion in assets should be assessed to determine if they're too big to fail. The revised proposal retains size thresholds. For example, hedge funds and private equity firms with exposures of more than $400 billion would now automatically go on a preliminary list of systemically important firms.
Supervisors will then make a more detailed assessment of funds and money managers based on criteria such as the use of leverage, interconnectedness with the wider financial system and geographic spread, before compiling a final too-big-to-fail list, which would be published and updated annually.
Specific responses fund managers made to last year's proposals included that size is not an appropriate criterion for measuring systemic risk, with leverage a more accurate measure. They also said authorities should focus on regulating particular activities that are of concern rather than targeting individual firms or funds.