Global regulators moved to rein in risk at the world’s biggest money managers led by BlackRock Inc., calling for new curbs on trading activities to protect against the potential that losses at investment funds could threaten the broader financial system.
The Financial Stability Board, whose members include the U.S. Federal Reserve and the Bank of England, said on Wednesday that exchange-traded, mutual and other funds deserve extra oversight to ensure they can sell assets to meet investors’ demands to pull out their money during volatile markets. While there is scant history of funds spreading risk throughout the system, the growth of the $76 trillion industry and funds’ move into more complex assets have drawn regulators’ attention, the FSB said.
As a result, authorities are planning to require funds to provide greater disclosure to clients about risks and to strengthen internal standards for managing investments in stressed markets. Regulators also plan to beef up rules for overseeing funds’ leverage and use of derivatives and to review asset-managers’ lending of securities to other parts of the market. The FSB said it may still move to designate certain asset-management companies as systemically important and in need of stricter supervision.
“Given its increased importance, a resilient asset management sector is vital to finance strong, sustainable and balanced growth,” BOE Governor Mark Carney, who chairs the FSB, said in a statement. Daniel Tarullo, a governor of the Federal Reserve, said that the recommendations “are designed to enhance the resilience of asset managers and funds to future stress in financial markets.”
The draft policy recommendations are the latest step by regulators around the world to curb risks beyond the banking and insurance industries, which received most of authorities’ 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.
Assets under management rose to $76 trillion in 2014 from $50 trillion in 2004 and have grown since the crisis, according to the FSB.
The board said in its report that it will seek comments on the proposals until Sept. 21 and intends to complete the recommendations by the end of the year. It will then turn its attention to considering whether an asset-management company itself, or possibly a sovereign-wealth fund, rather than their activities, can be a source of systemic risk.
Regulators and the asset-management industry have clashed repeatedly in the past few years, with firms such as BlackRock and Fidelity Investments arguing that authorities misunderstand the nature of the asset-management business and have 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.
The FSB and the International Organization of Securities Commissions, a group of market regulators, had earlier considered whether to assess investment funds with more than $100 billion in assets to determine if they’re too big to fail. That idea ran into strident opposition from the fund industry, with BlackRock, Fidelity Investments, Vanguard Group Inc. and Pacific Investment Management Co., among others, meeting with regulators and lawmakers and writing letters and reports in a lobbying effort to get them to reconsider.