FSB publishes final policy recommendations to address asset management structural vulnerabilities

Published: 17 January 2017

The Financial Stability Board (FSB) has published its final list of policy recommendations to address asset management structural vulnerabilities.  The list includes 9 recommendations to address (i) liquidity mismatch between fund investment assets and conditions for fund units, addressing the lack of information and transparency to investors; (ii) gaps in liquidity risk management tools both at the design phase and on an on-going basis, including recommendations for authorities to provide guidance or regulatory requirements about when and how liquidity management tools can or should be used especially in stressed situations, and guidance or requirements for stress testing; and (iii) market-wide stress testing. 

The list also includes a recommendation that IOSCO should “identify and/or develop consistent measures of leverage in funds to facilitate more meaningful monitoring of leverage for financial stability purposes, and help enable direct comparisons across funds and at a global level.  IOSCO should also consider identifying and/or developing more risk-based measure(s) to complement the initial measures with a view to enhance authorities’ understanding and monitoring of risks that leverage in funds may create. In both cases, IOSCO should give consideration to appropriate netting and hedging assumptions and where relevant build on existing measures.”  In this discussion, the FSB cites in footnote 54 to the leverage measure comparison contained in the AIMA/MFA response to the original FSB proposal.

There are also a couple recommendations regarding national data collection and IOSOC level data aggregation based on the consistent measures adopted by IOSCO.  Finally, there are recommendations to address operational risk and challenges in transferring investment mandates or client accounts and securities lending activities of asset managers and funds. 

We have recently seen proposals from various regulators in some of these areas and we should expect to see more in the future, especially as relates to stress testing, leverage measures and data collection.  If you have any questions regarding these recommendations, please contact Jennifer Wood.