Fidelity criticises FSB’s G-SIFI methodology
17 June 2015 Basel
Image: Shutterstock
US asset manager Fidelity has rubbished the Financial Stability Board’s (FSB) latest proposed methodology for designating large individual investment funds as global systemically important financial institutions (G-SIFIs).
Fidelity responded to the FSB’s second consultation on the methodology that should be used to designate non-bank, no-insurer G-SIFIs at the end of May. Its comments were published on 12 June.
The FSB wants to extend the SIFI framework that currently covers banks and insurers to other financial institutions, to reduce the “the systemic and moral hazard risks” that they pose.
In its comment letter, Fidelity said: “Investment funds and asset managers do not, and cannot, present the type and scale of risk required to justify a G-SIFI designation.”
“And even if a single fund or manager were capable of presenting that kind of risk to the global financial system, designation would not effectively address the risk.”
The FSB has taken particular issue with ‘shadow banking’ activities such as securities lending and repo, which asset managers engage in to boost returns.
“The significant number of funds available to investors, the intense competition in the industry and the high degree of substitution, mean that particular activities (eg, securities lending, repo, etc) are not limited to a small subset of the largest funds, but, rather, are conducted by a host of funds and other market participants.”
“If the goal is to reduce risk across the global financial system, then regulators must deal with the activities that create that risk consistently across the system. Regulators must restrict those activities not only across all funds, but across all market participants.”
Going on to defends its securities lending activities, Fidelity said that its mutual funds “engage in securities lending to a limited extent”, and its securities lending programmes “do not pose material investment risk to the funds, let alone the financial stability of the US”.
The asset manager lends equities through a third-party agency lending programme, which reinvests cash collateral in a Fidelity 2a-7 money market mutual fund.
For fixed income, Fidelity funds enter into loan agreements directly with counterparties and cash collateral is invested in overnight repo
“Both our agency lending programme and our direct lending programme have a number of oversight and compliance features that illustrate our mutual funds’ conservative approach to securities lending. These features help to safeguard the funds from potential losses and risks.”
Instead, the FSB should adopt a “product- and activity-focused approach as a constructive alternative to G-SIFI designation”, argued Fidelity.
Fidelity’s defence of its securities lending activities follows BlackRock’s bid to clarify its position in May, when it said policy makers have misunderstood securities lending practices and the associated risks.
These misunderstandings are centred around potential conflicts of interest, leverage, collateralisation of loans, use of cash collateral and cash reinvestment vehicles, the use of non-cash collateral and rehypothecation, and borrower default indemnification.
In addition, BlackRock claimed that there are many misunderstandings specific to its own involvement with securities lending, and these have “unfortunately” formed the foundation of recent policy discussions.
“We believe it is imperative for policy makers to have all the facts,” said BlackRock.
Fidelity responded to the FSB’s second consultation on the methodology that should be used to designate non-bank, no-insurer G-SIFIs at the end of May. Its comments were published on 12 June.
The FSB wants to extend the SIFI framework that currently covers banks and insurers to other financial institutions, to reduce the “the systemic and moral hazard risks” that they pose.
In its comment letter, Fidelity said: “Investment funds and asset managers do not, and cannot, present the type and scale of risk required to justify a G-SIFI designation.”
“And even if a single fund or manager were capable of presenting that kind of risk to the global financial system, designation would not effectively address the risk.”
The FSB has taken particular issue with ‘shadow banking’ activities such as securities lending and repo, which asset managers engage in to boost returns.
“The significant number of funds available to investors, the intense competition in the industry and the high degree of substitution, mean that particular activities (eg, securities lending, repo, etc) are not limited to a small subset of the largest funds, but, rather, are conducted by a host of funds and other market participants.”
“If the goal is to reduce risk across the global financial system, then regulators must deal with the activities that create that risk consistently across the system. Regulators must restrict those activities not only across all funds, but across all market participants.”
Going on to defends its securities lending activities, Fidelity said that its mutual funds “engage in securities lending to a limited extent”, and its securities lending programmes “do not pose material investment risk to the funds, let alone the financial stability of the US”.
The asset manager lends equities through a third-party agency lending programme, which reinvests cash collateral in a Fidelity 2a-7 money market mutual fund.
For fixed income, Fidelity funds enter into loan agreements directly with counterparties and cash collateral is invested in overnight repo
“Both our agency lending programme and our direct lending programme have a number of oversight and compliance features that illustrate our mutual funds’ conservative approach to securities lending. These features help to safeguard the funds from potential losses and risks.”
Instead, the FSB should adopt a “product- and activity-focused approach as a constructive alternative to G-SIFI designation”, argued Fidelity.
Fidelity’s defence of its securities lending activities follows BlackRock’s bid to clarify its position in May, when it said policy makers have misunderstood securities lending practices and the associated risks.
These misunderstandings are centred around potential conflicts of interest, leverage, collateralisation of loans, use of cash collateral and cash reinvestment vehicles, the use of non-cash collateral and rehypothecation, and borrower default indemnification.
In addition, BlackRock claimed that there are many misunderstandings specific to its own involvement with securities lending, and these have “unfortunately” formed the foundation of recent policy discussions.
“We believe it is imperative for policy makers to have all the facts,” said BlackRock.
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