BlackRock, the world’s largest money manager, said in a May 2015 letter to the FSB that asset managers “are not the source of systemic risk,” and that “asset managers are fundamentally different from banks and other financial institutions.”

Too-Big-to-Fail Firms

The industry argued that instead of a list of too-big-to-fail investment firms, regulators should consider ways of bolstering oversight of specific products, practices or activities. The FSB and IOSCO agreed last year, and decided to wait to finalize the method for assessing systemically important financial firms that aren’t banks or insurers.

“The good news is we’ve been able to shift this discussion from looking at asset managers as systemically important to looking at the activities that asset managers engage in,” Paul Andrews, secretary general of IOSCO, said this month.

The FSB said in its 43-page consultation that although there haven’t been recent problems, funds may “amplify market stress” by rushing to sell assets to meet unanticipated or large demands from clients to redeem their investments. In periods of stress, there might be a so-called first-mover advantage for investors to rush to redeem their funds ahead of others, which could then lead to a fire-sale of assets and spread panic in markets.

Stressed Markets

In the U.S., the Financial Stability Oversight Council, a panel led by the Treasury secretary, said in April that there may be financial stability concerns arising from funds that invest in assets that are difficult to sell in volatile or stressed markets. Meanwhile, the U.S. Securities and Exchange Commission conducted a review of the industry following the collapse in late 2015 of a fund overseen by Third Avenue Capital Management LLC that focused on high-yield and distressed debt.

The SEC has also proposed rules requiring funds to have more cash and assets to sell quickly, while the FSB said on Wednesday that more disclosure to investors about funds’ liquidity and explicit or enforceable limits on illiquid assets might be necessary.
The investment industry has rejected concerns about potential fire-sales. The Investment Company Institute, a lobbying group for mutual and exchange-traded funds, has said that large redemptions at individual high-yield bond funds haven’t undermined the stability of the financial system and that funds have instead added liquidity during periods of market turmoil.

Systemic Risks

The largest asset-management companies are also likely to oppose an FSB recommendation for greater scrutiny of their lending of securities to other traders. Financial institutions often pay a fee and provide collateral to a fund company in order to borrow securities for their own trading purposes. Mutual and other retail investment funds accounted for 44 percent of the 14 trillion euros ($15.8 trillion) in securities made available for lending, according to 2015 data cited by the FSB.