23 June 2016

FSB publishes Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities

The risks addressed are:

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

The FSB’s work to understand and address potential financial stability risks from structural vulnerabilities associated with asset management activities was launched in March 2015, in part due to recent growth in asset management activities. Asset management activities have increased significantly over the past decade, including through open-ended funds that offer daily redemptions to their investors. Such growth has been accompanied by increased investment in particular asset classes, which encompass some less actively traded markets.  

Among the above four structural vulnerabilities, issues associated with (i) liquidity mismatch and (ii) leverage are considered key vulnerabilities. The recommendations for liquidity mismatch focus on open-ended funds (public and private, including exchange-traded funds but excluding money market funds). Those for leverage are meant to apply to all types of funds that may use leverage (that may arise through borrowings or through the use of derivatives). Meanwhile, recommendations for operational risk focus on asset managers that are large, complex, and/or provide critical services, and those for securities lending activities focus on asset managers’ agent lender activities (i.e. lending of securities of which an entity is not the beneficial owner), in particular their provision of indemnities to clients.

These recommendations are designed to provide authorities and asset management entities with the tools and data to effectively detect and address the identified risks. In relation to this, the International Organization of Securities Commissions (IOSCO) is also issuing today a statement on their initiative regarding the priorities for addressing data gaps related to the asset management sector. The FSB intends to finalise the policy recommendations by the end of 2016, many of which will be operationalised by IOSCO.

Full press release

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