Tuesday, June 23, 2015

IOSCO Wants to Know Asset Managers Better in Shift from SIFI Label Focus

By Mark S. Nelson, J.D.

Several major players in the asset management world reacted favorably to a decision by the International Organization of Securities Commissions (IOSCO) to back off its earlier push to develop a framework for designating some asset managers as systemically important financial institutions. Both the Managed Funds Association (MFA) and the Investment Company Institute (ICI) voiced support for the IOSCO’s move.

According to a press release, the IOSCO decided to shift its “immediate focus” to understanding the larger milieu of asset managers’ activities and products rather than emphasizing a need to designate these entities as SIFIs. In March, the IOSCO published its second consultative document on non-bank non-insurer global systemically important financial institutions or NBNI G-SIFIs.

The March draft provoked a strong response from industry players who feared the IOSCO framework could help push regulators to pin the SIFI label on many asset managers. The Securities Industry and Financial Markets Association, representing a wide swath of the securities industry, had urged the IOSCO to take a more activities-and-products-centric approach to asset managers. The Private Equity Growth Capital Council, along with its European counterpart, commented jointly that private equity funds do not raise the type of systemic risks that would justify the SIFI tag.

Last week’s announcement by the IOSCO drew praise from the MFA, which emphasized the comparatively small size of the hedge fund industry. “IOSCO’s decision to focus on understanding potential risks to the financial system on a structural, market-wide basis, instead of focusing on individual funds is consistent with the approach of other global regulators,” said MFA President and CEO Richard H. Baker.

The ICI likewise backed the IOSCO’s new focus. Said ICI President and CEO Paul Schott Stevens: “As we have said repeatedly, asset management is a diverse enterprise, and effective risk mitigation in this area requires consideration of activities that are sector-wide.”

The Financial Stability Board posted the public comments on the ISOCO’s second consultative document on its website little more than a week ago. FSB Chairman Mark Carney issued a statement the day after the IOSCO publicized its new focus on asset managers by saying only that asset management industry poses many challenges, especially regarding investors’ perceptions of liquidity in fixed income markets, but without specifically mentioning the IOSCO developments.