FSB puts asset managers under the spotlight
28 June 2016 London
Image: Shutterstock
The Financial Stability Board (FSB) has highlighted the securities lending activities of asset managers acting as agent lenders as one of four key financial stability risks to be addressed in 2016.
The G20’s FSB has proposed 14 preliminary recommendations to address “structural vulnerabilities from asset management activities” in a recent consultation paper ahead of its final proposals due later this year.
Specifically, asset managers acting as agent lenders and providing indemnities to beneficial owners to mitigate counterparty risk were cited as potential sources of operational risk during stress situations.
Authorities should monitor these agent lenders’ indemnity activities in order to “detect the development of material risks or regulatory arbitrage that may adversely affect financial stability”. The FSB’s paper added: “Authorities should verify and confirm asset managers adequately cover potential credit losses from the indemnification provided to their clients.”
The paper proposed: “Indemnification-related exposures should be subject to a regulatory treatment that adequately covers their risks but also takes due consideration to avoid creating incentives for such activities to migrate to less regulated sectors, while taking into account differences in how entity types are structured and in the approaches taken by regulators.”
According to the FSB’s paper, the agent lender businesses of asset managers came to the board’s attention after it noted a significant growth in their activities over the past decade.
Some of the final recommendations will be operationalised by the International Organization of Securities Commissions, once approved.
The board’s other recommendations focused on liquidity mismatches between fund investments and redemption terms and conditions for fund units and issues around leverage within investment funds.
The finalised proposals on asset manager risks will also pave the way for the FSB’s delayed assessment methodologies for non-bank, non-insurer global systemically important financial institutions, which were officially pushed back last year until the board’s work with asset managers was complete after its initial proposals sparked complaints from industry participants such as Fidelity.
The FSB is accepting comments on this latest paper until 21 September.
The G20’s FSB has proposed 14 preliminary recommendations to address “structural vulnerabilities from asset management activities” in a recent consultation paper ahead of its final proposals due later this year.
Specifically, asset managers acting as agent lenders and providing indemnities to beneficial owners to mitigate counterparty risk were cited as potential sources of operational risk during stress situations.
Authorities should monitor these agent lenders’ indemnity activities in order to “detect the development of material risks or regulatory arbitrage that may adversely affect financial stability”. The FSB’s paper added: “Authorities should verify and confirm asset managers adequately cover potential credit losses from the indemnification provided to their clients.”
The paper proposed: “Indemnification-related exposures should be subject to a regulatory treatment that adequately covers their risks but also takes due consideration to avoid creating incentives for such activities to migrate to less regulated sectors, while taking into account differences in how entity types are structured and in the approaches taken by regulators.”
According to the FSB’s paper, the agent lender businesses of asset managers came to the board’s attention after it noted a significant growth in their activities over the past decade.
Some of the final recommendations will be operationalised by the International Organization of Securities Commissions, once approved.
The board’s other recommendations focused on liquidity mismatches between fund investments and redemption terms and conditions for fund units and issues around leverage within investment funds.
The finalised proposals on asset manager risks will also pave the way for the FSB’s delayed assessment methodologies for non-bank, non-insurer global systemically important financial institutions, which were officially pushed back last year until the board’s work with asset managers was complete after its initial proposals sparked complaints from industry participants such as Fidelity.
The FSB is accepting comments on this latest paper until 21 September.
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