SIFI challenge for asset managers

31 Mar, 2015

A coordinated approach by international regulators towards oversight of fund managers deemed to be systemically important financial institutions (SIFIs) must be undertaken so as to avoid confusion.

At present, a number of different regulatory agencies including the European Banking Authority (EBA), the Financial Stability Oversight Council (FSOC) in the US, and the Financial Stability Board (FSB) in conjunction with the International Organisation of Securities Commissions (IOSCO), are consulting with the industry on financial stability concerns. One of the most pressing issues is whether to bracket large asset managers including hedge funds as SIFIs.

“There is a possibility – given the lack of coordination between regulators – that there could be duplicative rules being imposed on fund managers, albeit all of those likely to be dubbed SIFIs at present are based in the US,” said Angus Canvin, senior adviser for regulatory affairs at The Investment Association in London.

The EBA – despite having a remit focused on banking – recently said it was trying to determine whether money market funds including UCITs as well as alternative investment fund managers (AIFMs) should be identified as shadow banks. Such a label could force credit institutions including banks to curb their exposures to these entities or assess the risks such entities pose to their businesses.

FSOC – despite hinting in the summer of 2014 that it would focus less on the systemic risks posed by asset managers and more on the products and activities they engage in – is awaiting consultations on whether to deem large fund managers as SIFIs. Large firms including BlackRock and Fidelity have been vocal in their opposition at being designated SIFIs, a scenario which could result in them being subject to bank style rules and regulations. Both firms highlighted asset managers do not pose a systemic risk, as evidenced by the limited impact on the market following the huge outflows from PIMCO after the exit of its star manager Bill Gross.

However, it is the FSB and IOSCO consultations that could be the most worrisome. The FSB/IOSCO’s second consultation published earlier this month has recommended a materiality threshold of $100 billion in net assets for fund managers and $400 billion gross notional exposure (which crudely includes derivatives exposure and leverage) for hedge funds. Fund manager and industry association objections to these thresholds in the primary consultation in January 2014 appear not to have held much sway.

The implications of being designated SIFIs should not be underestimated by the asset management industry. The costs of the added supervision and capital requirements could be prohibitively expensive for some firms. Should regulators get their way, non-bank non-insurer SIFIs (NBNI SIFIs) could be subject to capital requirements, limits on single counterparty credit exposures, basic liquidity risk management standards, limits on liquidity risk, stress testing and living wills.