07 May 2014

SIFMA: Asset managers do not pose systemic risk

SIFMA's Asset Management group is very concerned with the notion that asset managers and/or the funds they manage could be designated as SIFIs and, therefore, be subject to prudential or bank-like regulation that could stifle their ability to serve individual investors.

While SIFMA appreciates that the regulators have begun to take a deeper look at the asset management industry before enacting further regulation, the organization was surprised by the reports' noticeable lack of extensive research and failure to reflect the fundamental characteristics of asset managers. The OFR appears to have used only a small fraction of available data to support its conclusions about marketplace risk and thereby deprived the FSOC of a comprehensive view of the industry and its relevance to the financial stability of the US and our capital markets. 

The most effective way to mitigate risk posed by the financial industry is through market-wide regulation on activities which pose a systemic risk. In other words risk, if it's truly systemic, is not housed exclusively in a firm or a fund. In fact, current reform initiatives reflect an activities-based approach to regulation in order to address the types of risky behaviour that could impact financial stability.  In particular, we've seen, or are in the process of seeing, regulatory reforms in the derivatives, tri-party repo and money market spaces. The FSOC should allow our primary regulators, the SEC and the CFTC, to complete these initiatives and evaluate their cumulative impact on the mitigation of systemic risk, prior to moving forward with any sort of SIFI designation.

It's important to note the unique characteristics of asset managers when considering their impact on financial stability, as they are very different from other financial institutions. Asset managers invest money on behalf of their investor clients. They serve as fiduciaries with a legal obligation to invest assets according to guidelines set by clients. In this capacity, asset managers actively manage risks and, therefore, function as risk mitigators, not risk takers. There is a legal separation between a firm's assets and the assets of its customers. Additionally, asset managers do not guarantee positive investment returns, and do not back-stop investment losses. Asset managers are highly regulated and, subject to extensive public disclosure requirements and reviews.

Further, Asset Managers are highly substitutable.  It is relatively simple for investors to transfer control of assets to a new manager. These moves are common and are unlikely to encourage widespread redemptions in other products or managers. And, lastly, in this agent-client relationship, the asset manager does not retain custody of client (investor) assets. Thus, taken together, these collective considerations support the notion that, in the rare event of distress or failure of an asset manager, investor assets are not impacted - they are certainly not impacted in a fashion which would require tax payer support or a government bailout.

Full article

© SIFMA - Securities Industry and Financial Markets Association