Asset managers too small to topple system, says ICMA

Asset managers’ balance sheets are not large enough for them to be systemically risky, a global debate about risks in the financial system has been told.

The International Capital Markets Association (ICMA) has urged the Financial Stability Board (FSB) and the International Organization of Securities Commissions (Iosco) to focus on investment funds, not investment management firms, as a potential source of systemic risk.

The ICMA today released its quarterly report in which it gave details of its response to the FSB/Iosco consultation, which earlier this year studied how non-bank and non-insurer institutions might pose systemic risks.

In its response, the ICMA has said it accepts that asset managers undertake some operational activities, such as securities lending, using their own “limited” balance sheets that create a “small footprint in financial markets” and that firms run the risk of reputational damage, which could lead to redemptions.

“However, in both these cases we do not believe that the risk involved is systemic in nature, owing to typically small asset management company balance sheets and systemically insignificant proprietary activities undertaken, and the high degree of substitutability in case of reputational damage.”

Further, the ICMA rejected two of the three channels through which the FSB suggested investment funds might transmit systemic risk.

The two channels relate to where a fund is no longer able or willing to provide a critical function (the so-called “critical function” channel), and where a fund fails and has to liquidate assets quickly (the “asset liquidation” channel).

Essentially, the ICMA rejects these channels based on a lack of compelling evidence and because the ICMA feels market actors would act in such a way to head-off any disruption, such as by buying liquidated assets.

The ICMA did have some support for the “exposure/counterparty” channel, where failure of an entity would affect creditors, counterparties, investors or others with exposure to it.

“We believe that the exposures/counterparty channel properly and comprehensively captures any potential systemic risks posed by the financial distress or disorderly liquidation of an investment fund at global level,” the ICMA said in its response.

A number of other fund managers and bodies have responded to the FSB and Iosco consultation. In general, critics of the ideas put forward in the consultation say the asset size of an investment manager does not equate with systemic risk, and that regulation – such as the Alternative Investment Fund Managers Directive and Ucits – already act to reduce risk of systemic problems in the funds industry.

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