08 April 2014

Responses to the FSB/IOSCO consultation on assessment methodologies

ALFI

The Association of the Luxembourg Fund Industry (ALFI) is of the view that highly regulated funds such as UCITS in Europe or regulated Alternative Investment Funds (AIFs) that already comply with detailed diversification rules and rules on leverage are not systemically important and do not cause systemic risk. In addition, asset managers are also not a source of systemic risk. They are not the counterparty to trades they conduct on behalf of their clients. Neither are they responsible for the allocation by clients of their assets. Managers act as agents for their clients. ALFI considers it more appropriate to focus on market activities that may give rise to such issues.

ALFI considers that using size to screen funds will generate false positive indicators and false negative indicators. A large well diversified vehicle with little leverage, such as an index fund, is unlikely to pose systemic risk issues. "Leverage" is a better measure for screening funds that may be the source of systemic risk. Those funds with substantial leverage should then be subjected to a more detailed review. Additional factors such as stability of funding sources, and concentrations of illiquid securities would be considered. ALFI does not consider the principle on substitutability as an indicator to adequately capture how failure of NBNI financial entities could cause significant disruption to the wider financial system and economic activity.

Full ALFI- response

AMIC

AMIC stressed in its response that the identification of NBNI G-SIFIs should recognise how they differ from bank and insurers SIFIs; typically asset managers have a very small balance sheet and hold assets of their clients and exercise fiduciary duties.

Size, according to AMIC, is one filter amongst others to be considered in the process of identification of the systemic risk of NBNI G-SIFIs. The definition of GNE is not appropriate for assessing “size” since it is not an accurate or consistent measure of exposure. In particular, with respect derivatives, gross notional values significantly overstate actual risk exposure and do not account for significant differences in the risk profiles of derivatives contracts in different asset classes or of different durations. Finally, looking at derivative gross notional values alone ignores a number of important risk mitigating practices related to derivatives, including hedging / netting, collateral / margin, and clearing.

International exposure should be considered as a factor of diversification that overall reduces risk , and local regulation is in place to protect foreign client’s rights. Therefore the use of service providers in other jurisdictions is not a valid set of criteria to identify NBNI G-SIFIs. This aspect is relevant to distributors, counterparties.

Following the FSB/IOSCO proposal to proceed with an entity-focused methodology, appropriate levels of scrutiny are individual investment funds rather than asset managers. A harmonised international implementation is the only way to prevent any local interpretation in the identification of NBNI SIFIs. AMIC members note that unfortunately the consultation paper does not describe any policy that might apply to NBNI SIFIs that would be identified through the methodology.

Full response

SIFMA

In its comment letter, SIFMA AMG members recommend that FSB and IOSCO shift the focus of the investment fund assessment methodology from investment funds to their activities. SIFMA AMG members believe it would be more appropriate to assess and regulate activities in which investment funds and other capital markets participants engage than it would be to try to identify individual entities that represent concentrated risk to such a degree that they warrant different regulation than their competitors.  

"SIFMA AMG strongly encourages regulators to consider the unique characteristics of the asset management industry as they develop their investment fund assessment methodology and work to manage systemic risk. The FSB and IOSCO should consider an activities-based approach to more effectively manage risk and avoid misguided regulation that could negatively impact the asset management industry. Further, regulators should recognize that separately managed accounts do not pose a specific or unique threat to financial stability", said Tim Cameron, managing director and head of SIFMA’s Asset Management Group.

SIFMA AMG submitted two letters: a comment letter focused on the assessment methodology for NBNI G-SIFIs, and a supplemental letter to the FSB and the SEC that provides important clarifications on the risk profile of separately managed accounts (SMAs) gleaned from a SIFMA AMG survey of asset managers.

Full press release

SIFMA- AMG's general comment letter

SIFMA- AMG’s supplemental letter

See also: IOSCO- and FSB- Consultation, 8.1.14