This consultation sets out proposed recommendations to address structural vulnerabilities from asset management activities. The 14 recommendations seek to address four financial stability risks:

  1. liquidity mismatch between fund investments and redemption terms and conditions for fund units;
  2. leverage within investment funds;
  3. operational risk and challenges in transferring investment mandates in stressed conditions; and
  4. securities lending activities of asset managers and funds.

Asset management activities have increased significantly over the past decade. Such growth has been accompanied by increased investment in particular asset classes, including some less actively traded markets, through open-ended funds that offer daily redemptions to their investors.

Among the four structural vulnerabilities, issues associated with liquidity mismatch and leverage are considered key vulnerabilities. The recommendations for liquidity mismatch focus on open-ended funds (public and private, including exchange-traded funds but excluding money market funds). Those for leverage apply to all types of funds that may use leverage (that may arise through borrowings or through the use of derivatives). Meanwhile, recommendations for operational risk focus on asset managers that are large, complex, and/or provide critical services, and those for securities lending activities focus on asset managers’ agent lender activities (i.e. lending of securities of which an entity is not the beneficial owner), in particular their provision of indemnities to clients.

The 14 policy recommendations proposed in the consultative document are designed to provide authorities and asset management entities with the tools and data to effectively detect and address the identified risks. The FSB intends to finalise the policy recommendations by the end of 2016, some of which will be operationalised by the International Organization of Securities Commissions (IOSCO). 

The FSB welcomes comments on this document. Comments should be submitted by 21 September 2016 by e-mail to [email protected] or post (Secretariat of the Financial Stability Board, c/o Bank for International Settlements, CH-4002, Basel, Switzerland). All comments will be published on the FSB website unless a commenter specifically requests confidential treatment.