Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities
This report sets out 14 policy recommendations to address the following structural vulnerabilities from asset management activities that could potentially present financial stability risks:
- liquidity mismatch between fund investments and redemption terms and conditions for open-ended fund units;
- leverage within investment funds;
- operational risk and challenges at asset managers in stressed conditions; and
- securities lending activities of asset managers and funds.
Asset management activities have increased significantly over the past decade, including through open-ended funds that offer daily redemptions to their investors. Such growth has been accompanied by increased investment in particular asset classes, which encompass some less actively traded markets. The trend towards greater market-based intermediation through asset management entities should enhance the efficiency, and contribute to the overall resilience, of the financial system. While historical evidence suggests that open-ended funds generally have not created financial stability concerns in recent periods of stress, growth in the sector and increasing holdings of less liquid assets by investment funds suggest that risks may have increased in recent years.
In the area of liquidity mismatch, the recommendations are designed to increase information and transparency to both authorities and investors with respect to open-ended funds as well as to strengthen liquidity risk management frameworks and practices of those funds. They also address the potential use of system-wide stress testing by authorities. Leverage recommendations focus on the measurement and monitoring of leverage within investment funds. The recommendation on operational risk would help ensure risk management frameworks and practices are commensurate with the level of risks that an asset manager’s activities pose to the financial system. The securities lending recommendation focuses on situations where indemnifications are provided by asset managers to their clients in relation to securities lending activities.
The FSB published proposed policy recommendations for public consultation in June 2016. The final recommendations in this document reflect a number of changes to the proposed recommendations to incorporate responses to the consultation. Among other things, the recommendations on liquidity have been revised to encourage authorities to develop consistent reporting requirements, to better distinguish the information that is useful to authorities and investors, and to emphasise the exploratory nature of system-wide stress testing at this time. The purposes and uses of leverage measures have been clarified.
Some of the recommendations will be operationalised by the International Organization of Securities Commissions (IOSCO). IOSCO has been asked to complete its work on the liquidity recommendations by the end of 2017 and on leverage measures by the end of 2018. The FSB will regularly review progress in the operationalisation and implementation of the recommendations.