A number of large, global money managers are at risk of increased costs and competitive disadvantage if current proposals by global regulators to categorize them as systemically important financial institutions come to fruition.
The managers, along with the associations that represent them, are busy preparing responses to the second iteration of a consultation paper by the Financial Stability Board and the International Organization of Securities Commissions, “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions.”
The paper broadens the scope of one from January 2014, including adding the potential for money managers to be deemed systemically risky “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity at the global level.” Those entities might be in need of additional regulation, scrutiny and potentially need to set aside capital to mitigate future problems.
“We understand where the FSB and IOSCO are coming from. As guardians of financial stability, they need to lock down risks,” said Angus Canvin, London-based senior adviser, regulatory affairs, at The Investment Association, which represents U.K. money managers with a collective £5 trillion ($7.5 trillion) of assets under management. “If there is a serious problem, there needs to be the effective management of any risks to financial stability.”
However, sources in the money management industry warned that categorization as a SIFI would be detrimental to a money manager's business, and ultimately would increase costs for clients.
“There are risks in the process itself,” Mr. Canvin said. “Being designated a SIFI can cut both ways because the manager would face a heightened regulatory and supervisory burden and costs, which are likely to be passed on, of course. That could potentially alter the competitive playing field adversely, even ahead of final laws coming in.”
Mr. Canvin said The Investment Association will address this issue in its response. “This competitive disadvantage could be significant, while it is far from clear that there would be any benefit from being a SIFI, unless funds or managers were leveraged borrowers in the same way as banks,” he added.
“It would clearly increase costs,” said one senior executive at a global money management firm, who asked not to be named. “We feel that asset managers, and in particular those who focus on highly regulated mutual or commingled funds, do not present any systemic risk. This entire effort is misplaced.”
Soo Shin-Kobberstad, vice president, senior analyst in London at Moody's Investors Service Inc., said managers already are subject to regulation and capital requirement compliance. “This additional designation, and how it would have a material financial impact (to those existing requirements) is really, at the moment, unknown. It appears that the FSB and IOSCO are attempting to identify entities globally — be they asset managers or investment funds — that have extensive interconnectedness to the global financial system. What is clear (is) that they intend to expand disclosure requirements, which will increase operational cost. But transparency is a good thing for investors and debtholders,” she added.