FSB publishes final recommendations to address structural vulnerabilities from asset management activities

What is the aim of the FSB’s policy recommendations?

The FSB has published final policy recommendations to address the following areas:

  • liquidity mismatch between fund investments and redemption terms and conditions for open-ended fund units;
  • leverage within funds;
  • operational risk and challenges in transferring investment mandates or client accounts; and
  • securities lending activities of asset managers and funds. 

What has been the main change to the FSB’s recommendations for the industry since the consultation in June 2016?

The FSB recommends that authorities should have requirements or guidance for asset managers in proportion with the level of risks they pose to the financial system, rather than only to asset managers that are large, complex and/or provide critical services.

The FSB recommends that these requirements and guidance should include the authorities expectations on comprehensive and robust risk management frameworks and practices, especially with regards to business continuity plans and transition plans.

  • In some other recommendations, the FSB has clarified the wording or expanded the surrounding commentary. For example, in the recommendation that authorities should monitor securities lending indemnifications, the FSB’s commentary now states that it may be appropriate to take a consistent approach in other areas where asset managers take on similar financial risk as principals.

Implications for clients

The impact for firms will depend on how the recommendations are implemented at an EU level and then locally in Ireland. Potential changes could include:

  • More detail on which types of asset classes or investment strategies are deemed unsuitable for funds offering frequent redemptions.
  • More detailed requirements or guidance for asset managers on fund liquidity stress testing.
  • Additional reporting requirements to enable authorities to carry out system-wide stress testing.
  • Authorities may be given the power to direct the application of exceptional liquidity management tools in exceptional cases.
  • Potential changes to investor disclosures on fund liquidity profiles to reduce the perception that a fund which offers daily redemptions necessarily holds liquid assets.
  • More harmonised regulatory reporting on funds’ liquidity profiles across jurisdictions.
  • More consistent measure(s) of fund leverage across jurisdictions to be reported to regulators.
  • Greater regulatory and supervisory focus on contingency plans for the smooth transfer of investment mandates.
  • Greater supervisory focus on monitoring indemnifications provided by asset managers to insure clients against potential losses from securities lending activities, to ensure they adequately cover potential credit losses.

Next steps

  • These recommendations will be operationalised by IOSCO and the relevant FSB working groups. There are various implementation deadlines set out in the document, the latest of which is in 2019.
  • Following this, the FSB intends to continue its work on assessment methodologies for non-bank non-insurer global systemically important financial institutions in conjunction with IOSCO. This work was delayed in July 2015 pending completion of the work on structural vulnerabilities from asset management activities. The revived project will focus on any residual entity-based sources of systemic risk that cannot be effectively addressed by market-wide activities-based policies. It will also include an assessment of the potential vulnerabilities of pension funds and sovereign wealth funds.
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