25 April 2014

FSB-IOSCO: Responses to consultation on the assessment methodology for identifying NB-NI SIFIs

EFAMA

EFAMA does not believe that Gross Notional Exposure or GNE (defined as the absolute sum of all long and short positions, considering notional value (delta ‐adjusted when applicable) for derivatives is a relevant indicator of the systemic importance of an investment fund. Indeed, GNE is a crude and potentially misleading measure, since it does not capture the risk in the sense of the size of the exposure or its volatility. The Inaccuracy of GNE as a measure of leverage stems from the fact that it does not in any manner take into account hedges or offsetting of positions. As a result, using this metric would very often lead to very significant overestimations of the systemic risk that a fund may pose. EFAMA suggests for more work to be done on the optimal level of leverage in the system as a whole, as well as in itscomponent parts.

Full EFAMA response

IIF

The IIF does not share IOSCO and the FSB’s conclusion that "supervisory judgment likely needs to play a bigger role in methodologies for identifying NBNI G-SIFIs compared to the G-SIB or G-SII methodologies". They are afraid that the proposed International Oversight Group will not be able to guarantee international consistency. Instead, too great a reliance on supervisory judgment and discretion may in fact undermine the credibility of the intended approach. Supervisory discretion may not only include a temptation to respond to political pressures but also make criticism of measurement and policy all the more challenging. In contrast, the IIF supports the use of an objective approach, where measures of systemic risk should be based on the consistent and transparent use of common metrics that are objectively indicative of global systemic risk. Thus, ensuring data quality and consistency is essential to achieve a level playing field.

IIF also argues that it is not necessarily the case that NBNI entities that present a global systemic risk do in fact exist. We will argue below that given the unique nature of the business models in question, and the differences between NBNIs and banking and insurance, a well-calibrated risk-sensitive methodology may yield a null set of NBNI G-SIFIs.

Full IIF response

IMA

The IMA requests a further round of consultation with industry, beyond the current one, to address the following two considerations:

• to scrutinise proposed measures. The Current consultation makes no proposal as to the measures that would  apply to any funds that were in practice designated as systemic;
• to calibrate the leverage indicator. A strong consensus appear to be emerging that further attention needs to be paid to leverage (more so than outright size) and for those funds that have the ability to rapidly change their level of leverage.

In response to what is the appropriate threshold level, taking into account the range given above, for hedge funds, the IMA views that the levels set out suggest that a relatively low level of leverage is being targeted as the trigger for systemic significance. It May be that the trigger should be set at a higher level, making the methodology more tolerant of leverage. They note that much higher levels of leverage are being contemplated for the banking world (under The emerging leverage ratio), in spite of that model’s inherent fragility. They suggest that more work needs to be done on the optimal level of leverage in the system as a whole, as well as in its component sectors and individual entities.

Full IMA response

PEGCC/EVCA

The PEGCC and EVCA are concerned that, as currently defined, investment advisers and managers may be captured by the definition of "market intermediary" in the Proposed Framework. The FSB and IOSCO do not explain why investment advisory activities are related to the global systemic risks posed by market intermediaries, as described in the Proposed Framework. Private equity firms, like most investment advisers, do not hold substantial amounts of assets on their balance sheet, do not utilize meaningful leverage at the firm-level, do not have significant exposures to counterparties, do not execute securities transactions with customers or otherwise provide market liquidity and participate in a highly competitive market where no individual firm has systemically significant market share. The PEGCC and EVCA recommend that the definition be clarified so that it no longer includes entities that are primarily in the business of acting as investment advisers.

Full PEGCC and EVCA response

SIFMA

SIFMA is concerned that the Consultative Document does not make clear whether an investment fund's "investment strategy" means the assets in which the investment fund invests, or the assets in which the investment fund invests and the investment fund's particular investment approach and/or trading style. For example, a merger arbitrage investment fund and a targeted single-industry long-only investment fund may invest in the same securities and have comparable portfolios at certain points in time but clearly should not be deemed to have the same investment strategy. SIFMA is concerned that national authorities would encounter significant difficulty in evaluating investment funds on the basis of their investment strategies even if the term were clearly defined, and do not think that national regulators in different jurisdictions are likely to define or regulate investment funds' strategies consistently.

Full SIFMA response

Press release

Full consultative document

All comment letters

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