Liquidity mismatch between underlying assets and open-ended fund structures is one of the key vulnerabilities in the asset management industry, according to a new consultation document from the Financial Stability Board that seeks to address systemic risk in the industry.
Leverage was considered another key vulnerability in the FSB document, which includes 14 policy recommendations, as well as securities lending activities, and operational challenges connected with asset managers that are “large, complex, and/or provide critical services”.
BlackRock, Vanguard Asset Management and State Street Global Advisors are listed among the 10 asset managers with more than $1trn, which could be problematic due to their scale.
The draft document argues the asset management industry is becoming increasingly important as global AUM grew from $50trn to $76trn in the decade leading up to 2014. It says the industry accounts for 40 per cent of global financial system assets.
It says despite recent periods of stress and volatility the $31trn in open-ended funds has not yet caused financial stability concerns, except in some money market funds.
However, the document argues investors exposed to less liquid asset classes through open-ended funds could suffer greater and more sudden losses if market prices were to drop suddenly and liquidity deteriorated.
The document notes extraordinary monetary policy has pushed investors into higher-yielding, less actively-traded asset classes in an open-ended structure.
Policy to address securities lending policy is focused on asset managers that provide indemnifications to clients, while leverage applies to all types of funds that use leverage.
The FSB had initially planned to include pension and sovereign wealth funds in their policy recommendations, but has now decided to readdress them in a separate assessment.
Chair of the FSB, and Bank of England governor, Mark Carney, says: “The growth in market-based finance has diversified the sources of credit and investment.
“Given its increased importance, a resilient asset management sector is vital to finance strong, sustainable and balanced growth.”
Carney says the policy recommendations are to ensure the asset management industry can continue to fulfil its roles.
Chair of the FSB standing committee on supervisory and regulatory cooperation Daniel Tarullo says: “The proposed policy recommendations are designed to enhance the resilience of asset managers and funds to future stress in financial markets.
“They will also help authorities obtain a better understanding of the trends and risks associated with asset management activities within and across jurisdictions”.
The FSB will be seeking feedback on the document, Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities, until 21 September.
The FSB hopes to finalise the recommendations by the end of the year.