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Markets and Securities Services |
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FSB policy recommendations
The FSB is an international body and as such
its macro-prudential recommendations are
directed at the International Organization of
Securities Commissions (IOSCO), European and
national regulators. While not targeted at asset
managers directly, the recommendations are
still useful early warnings of the direction of
regulatory travel.
Importance of the asset management sector
According to the FSB, global assets under
management (AUM) have risen from
USD53.6 trillion in 2005 to USD76.7 trillion
in 2015 (which equates to 40% of the global
financial system’s assets). As a result of this
growth, the FSB began work in March 2015
to identify specific areas of vulnerability in
the asset management sector, reporting its
initial findings six months later. The report
highlighted five key areas:
• Mismatch between liquidity of fund
investments and redemption terms and
conditions for fund units (liquidity mismatch).
• Leverage within investment funds.
• Operational risk and challenges in transferred
investment mandates in stressed conditions.
• Securities lending activities of asset managers
and funds.
• And potential vulnerabilities of pension funds
and sovereign wealth funds.
The FSB then carried out further analysis in
respect of these five areas and issued its policy
recommendations in January of this year. Nine
of the 14 recommendations aim to address
liquidity mismatch issues, making it clear that
this area is of importance to the FSB.
FSB liquidity mismatch recommendations
The FSB’s liquidity mismatch recommendations
fall into four broad categories.
•
Recommendations to address the lack of
information and transparency regarding
liquidity mismatch:
Regulatory authorities
should consider collecting more data on the
liquidity profile of open-ended funds and
reviewing existing reporting requirements
to ensure that they are receiving enough
detailed information to allow them to monitor
such funds properly and that such funds are
disclosing enough information to investors
regarding liquidity risk.
•
Recommendations to improve liquidity
risk management tools in normal times:
Regulatory authorities should issue rules
or guidance that a fund’s assets should
be consistent with its redemption terms
throughout the life cycle of the fund and not
just on establishment. In addition, authorities
should widen the availability of liquidity
management tools to open-ended funds
to help funds meet redemption requests
even under stressed market conditions
REGULATORY DEVELOPMENTS:
ILLIQUID ASSETS AND
OPEN-ENDED FUNDS
Since the financial crisis, regulators and central banks have been continuously
monitoring the health of the financial system, and, as the life blood of
the system, liquidity is particularly important. The regulatory spotlight
has now fallen on the asset management sector and open-ended funds,
prompted, in part, by the impact on open-ended property funds following
the result of last year’s EU referendum in the UK. In this article, we consider
the recommendations of the Financial Stability Board (FSB) in its policy
recommendation paper (PRP)
1
and the views of the Financial Conduct
Authority (FCA) as set out in its discussion paper (DP)
2
on illiquid assets and
open-ended funds, and consider some of the implications for asset managers.
Addressing the lack
of information and
transparency regarding
liquidity mismatches.
Addressing the lack
of information and
transparency regarding
liquidity mismatches.
Addressing the lack
of information and
transparency regarding
liquidity mismatches.
System-wide liquidity
stress testing.
The adequacy of liquidity
risk management
tools for stressed
circumstances.
Impr ving l quidity
manag ment tools
normal times.
FSB liquidity
mismatch
recommendations
which look at...
Addressing the lack
of information and
transparency regarding
liquidity mismatches.