The Financial Stability Board has published proposals to address structural vulnerabilities in money management activities, setting out 14 policy recommendations.
The proposals aim to address four structural vulnerabilities that the FSB said could potentially present financial stability risks. Those vulnerabilities are a liquidity mismatch between investments and redemption terms and conditions for fund units; leverage within investment funds; operational risks and challenges in transferring investment allocations in stressed conditions; and securities lending activities.
The FSB said in a news release accompanying the paper that of the four, issues associated with liquidity mismatch and leverage are considered key. The recommendations for liquidity mismatch focus on open-end strategies, including exchange-traded funds, but excluding money market funds. Leverage-related recommendations apply to all types of strategies that use leverage, which might arise through the use of derivatives, for example.
One recommendation for liquidity vulnerabilities is for authorities to "collect information on the liquidity profile of open-end funds in their jurisdiction proportionate to the risks they may pose from a financial stability perspective." The FSB added that authorities should "review existing reporting requirements and enhance them as appropriate to ensure they are adequate, and that required reporting is sufficiently granular and frequent."
Operational risk recommendations focus on money managers that are large, complex and/or provide critical services, while securities lending-related proposals focus on lending on behalf of a client or agent lender activities.
Regarding leverage, the FSB recommends that authorities "collect data on leverage in funds, monitor the use of leverage by funds that are not subject to leverage limits or which pose significant leverage-related risks to the financial system, and take action when appropriate."
The recommendations are designed to provide authorities and money management firms with the tools and data needed to detect and address the risks identified by the FSB. In relation to this, the FSB said in its news release that the International Organization of Securities Commissions will also issue a statement on an initiative regarding priorities for addressing data gaps related to money management.
The FSB intends to finalize its policy recommendations by the end of this year. The paper, “Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities,” will be open for comment until Sept. 21.
“The growth in market-based finance has diversified the sources of credit and investment,” said Mark Carney, chairman of the FSB, in the release. “Given its increased importance, a resilient asset management sector is vital to finance strong, sustainable and balanced growth. These policy recommendations are designed to ensure that across the FSB membership asset managers can continue to fulfill these roles to the benefit of all.”
The FSB began work to understand and address potential risks to financial stability stemming from money management activities in March 2015.
The paper is available on the FSB's website.