Asset Managers Face Stricter Rules for $77 Trillion Industry

  • Financial Stability Board guidelines seek to curb fund risks
  • BOE’s Carney says policies will enhance industry resilience

Global regulators sought to rein in risk at money managers such as BlackRock Inc. and Vanguard Group Inc., calling for new protections against potential fund losses that could roil the broader financial system.

The Financial Stability Board, whose members include the U.S. Federal Reserve and the Bank of England, recommended that regulators bolster oversight of exchange-traded, mutual and other funds to ensure they can withstand market stress. The policy guidelines, the upshot of years of debate, stopped short of earlier proposals for imposing stiff oversight of asset-management companies and stress tests across the $77 trillion industry.

“The policy recommendations published today will enhance the resilience of asset management activities so that this form of market-based finance can help underpin strong, sustainable and balanced economic growth,” Mark Carney, governor of the Bank of England and FSB chairman, said in a statement. Daniel Tarullo, a governor of the Federal Reserve, said that the policies “will better prepare asset managers and funds for future stress events.”

The International Organization of Securities Commissions, a group of global market regulators, will conduct further work on the recommendations on funds’ liquidity by the end of this year and on leverage measures by the end of 2018. The FSB said it may return to the question of whether individual fund companies should be designated systemically important and subject to stricter supervision.

Market Panic

The policies seek to ensure funds can sell assets easily to meet investors’ demands to pull out money during volatile markets. While the FSB said there is little history of funds stoking broader market panic, the industry’s growth and its move into more complex and less liquid assets have caught regulators’ attention and raised questions about whether the funds could feed crises.

Assets under management rose to $77 trillion in 2015 from $54 trillion a decade earlier and have grown significantly since the crisis, according to the FSB. The policy recommendations also seek to improve regulatory oversight of funds’ use of leverage and to ensure asset managers have policies to transfer client accounts if necessary.

The recommendations are the latest step by regulators around the world to curb risks beyond the banking and insurance industries, which received the most scrutiny in the aftermath of the 2008 financial crisis. As scores of post-crisis rules have taken effect, banks have stepped back from certain markets, such as corporate-bond trading, while asset managers have taken on a greater role.

Stress Tests

Regulators and the asset-management industry clashed repeatedly in the past few years, with firms such as BlackRock and Fidelity Investments arguing that authorities misunderstood the nature of the asset-management business and inappropriately compared them to to banks. Banks designated as systemically important face higher capital and other requirements to help them withstand losses in a potential downturn.

Last year, when the FSB proposed similar policies to those published on Thursday, BlackRock, Vanguard and Fidelity Investments praised the FSB for shifting its scrutiny of the industry to specific trading activities rather than the size or systemic importance of firms. The Investment Company Institute, an industry trade association, said on Thursday that there is “no basis for considering regulated funds and their managers” as systemically-important.

“We remain concerned that the FSB states an intent to return to its prior work on methodologies to identify global systemically important financial institutions outside of the banking and insurance sectors,” Paul Schott Stevens, president and chief executive of the ICI, said in a statement.

The ICI said regulators had made other changes that were helpful. The industry has opposed system-wide stress-testing, arguing that there are too many different types of funds for the tests to be valuable. On Thursday, the FSB that system-wide testing “is still at its exploratory stage.”

The FSB also said that pension and sovereign wealth funds could present threats to the financial system and that regulators would assess the industries further.

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