The Systemic Risk Council has submitted a comment letter to the Financial Stability Board (FSB) on recent proposals intended to address structural vulnerabilities in the asset management industry.
"The council is encouraged by the Financial Stability Board's focus on the asset management industry," says Sir Paul Tucker, chairman of the Systemic Risk Council. "It is important that any risk arising from the structures and practices of asset management firms be identified and understood."
"Most important, where those risks are material, they must be mitigated in a proportionate way before such vulnerabilities are demonstrated by a new financial crisis."
In its letter, the council expresses its support for the FSB's work on potential risks to financial stability arising from asset management structures and practices.
The council offers broad comments and recommendations under the four categories identified in the Consultative Document: (1) liquidity mismatch; (2) leverage within funds; (3) operational risk and challenges in transferring investment mandates or client accounts; and (4) securities lending activities of asset managers and funds.
Specifically, the council recommends that the FSB consider:
Minimum levels of liquid assets: Open-end funds invested in illiquid and opaque assets should hold a minimum level of liquid assets, the calibration of the requirement depending in part on whether "swing pricing" applies.
Notice periods for redemption: Open-end funds invested in illiquid assets should be subject to a notice period for redemption, again taking account of any swing pricing.
Leverage limits: Irrespective of whether they offer daily liquidity, funds invested in illiquid assets should be subject to leverage limits that become stricter as a fund gets larger, with calibration depending on whether a liquid-assets requirement applies.
Stress testing: Stress testing should be at the level of individual funds and, where relevant, system wide.
Equity requirements for indemnities: Common equity should be held against indemnities provided by asset managers to funds they manage or to third parties.
Disclosure of asset-manager indemnities: Individual asset managers should disclose their aggregate contingent liabilities.
In addition, the council identified and discussed a possible area for further work by the FSB relating to unlevered funds that do not offer frequent redemption opportunities as well as provided an observation on issues that it believes should be covered in the FSB's planned future work on pension funds.
