SIFMA AMG Comments on the FSB Consultation on Asset Management Activities

SIFMA’s Asset Management Group (“SIFMA AMG”) has submitted comments to the Financial Stability Board (“FSB”) regarding the FSB’s Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities (the “Consultation”).

“We appreciate the FSB’s efforts to recognize the differences between asset management and other financial services firms, and support the FSB’s acknowledgement of the role of securities regulators,” said Timothy Cameron, managing director and head of SIFMA AMG. “Our goal is to provide the FSB with information to further inform their approach to and views of asset management as unique and well-equipped to continue its track record for successfully meeting shareholder redemptions through normal and stress conditions without presenting a systemic risk to global financial stability.”

SIFMA AMG members are generally supportive of many of the recommendations in the Consultation, yet also highlight for the FSB how the deep and intricate regulatory framework that governs the everyday operations of asset managers and investment funds already address many of the concerns presented in the Consultative Document.

SIFMA AMG’s letter further outlines its views on the specific FSB recommendations, including:

Liquidity

SIFMA AMG notes that liquidity risk management is absolutely fundamental to the daily operations of open-end funds. Evidence demonstrates the asset management industry has consistently been able to meet shareholder redemptions through periods of market stress.  National securities regulators are best positioned to lead, and the International Organization of Securities Commissions (“IOSCO”) should coordinate, any inquiries into new liquidity challenges.  Therefore, SIFMA AMG supports the Consultation’s reference to IOSCO operationalizing many of the recommendations.  The letter further addresses the FSB’s specific recommendations.

Leverage

Leverage serves many important, beneficial functions and should not be subject to undue restriction. SIFMA AMG agrees with the FSB that the use of leverage is not widespread, and therefore does not believe that it is a source of systemic risk. SIFMA AMG members support regulators’ efforts to better understand leverage and harmonize reporting requirements, but caution against the use of simplistic metrics to measure funds’ use of leverage and the imposition of additional leverage restrictions. Funds’ use of leverage is already subject to extensive existing and pending regulation and reporting requirements.

Operational Risk

There is a misconception that financial stress and market volatility are correlated and cause operational issues in the asset management industry. In fact, the record demonstrates that asset managers and their funds routinely enter and exit the market without creating systemic disruptions.

Regulatory and reputational considerations compel asset managers to develop sophisticated and evolving risk management processes that are in the best interests of their clients.  In addition, in the U.S., for example, the SEC has proposed new regulations to address business continuity and transition planning.

Securities Lending

Securities lending is not a source of systemic risk.  Moreover, securities lending is already subject to a range of existing and pending regulations that SIFMA AMG believes adequately address any risks that may be associated with the practice. The indemnifications that are the subject of the FSB’s recommendation are well regulated and the potential liability is self-contained and limited to the difference between the replacement cost of the security and the value of the collateral pledged.