The Financial Stability Oversight Council pledged Monday to monitor asset managers for systemic dangers that may arise from liquidity and redemption risks in pooled investment vehicles
“The council intends to review and consider whether risks to financial stability remain (in registered investment companies),” the FSOC said in a report. “This review will take into account how the industry may evolve in light of any regulatory changes, whether additional data is needed to comprehensively assess liquidity and redemption risk and the difference in risk profiles among mutual funds and other pooled investments.”
While supporting the report as a “meaningful review” of FSOC’s work on asset management, Securities and Exchange Commission Chair Mary Jo White said it is not an indication of the SEC’s direction on regulating the sector.
She added she expects the commission will publicly consider a proposal for stress tests for the industry soon.
The report noted exchange-traded funds are not subject to the same types of liquidity and redemption risks as other open-end funds.
However, the FSOC, composed of the nation’s financial regulatory agencies, said it would monitor the potential for ETFs to disconnect from the price of their underlying securities and the possible impact on financial stability.
There is evidence institutional investors are increasingly using ETFs rather than derivatives to hedge, according to the FSOC, which has been accused by some business interests and congressional Republicans of intruding on the SEC’s turf.
The council warned asset management companies’ reliance on service providers and technology could pose serious systemic threats.
On hedge funds, the council said it is forming an interagency working group to better understand whether certain fund activities pose systemic risk.
The report said it is fairly clear there is a concentration of leverage in a small number of large hedge funds, but unclear if and where dangerous concentrations of risk exist.