Global watchdog finalizes proposed rules to tackle asset management risks

LONDON (Reuters) - Global regulators flagged on Thursday they would revisit plans on whether to designate big asset managers such as BlackRock BLK.N and Vanguard as being globally systemic and requiring tougher scrutiny, despite fierce resistance from the sector.

The Financial Stability Board (FSB), which coordinates financial regulation across the Group of 20 economies (G20), published final recommendations on Thursday for addressing actual and potential risks from “structural vulnerabilities” in the asset management sector.

The 14 recommendations will be fleshed out by regulators over the coming two years for implementation. They include several modest changes to the original proposals published by the FSB in June last year.

“The policy recommendations will better prepare asset managers and funds for future stress events,” said Daniel Tarullo, who chairs an FSB committee on supervisory and regulatory cooperation.

An initial attempt by the FSB to single out which funds are globally systemically important institutions (G-SIFIs) and needing tougher rules was derailed by IOSCO, the global securities market regulators’ body after opposition from big funds.

This resulted in a switch of focus to the sector’s activities.

IOSCO will flesh out many of the FSB’s 14 recommendations in 2017 and 2018 to put into practice.

The FSB indicated on Thursday that after the end of 2018 it would revisit its initial proposals on whether to designate funds as being globally systemically important. Some funds had hoped the proposals were dead and buried.

The Investment Company Institute, a funds industry body based in Washington, said it was concerned that the FSB still intends to revisit prior work on systemically important funds.

“If the FSB engages in an evidence-based analysis, we believe the FSB will conclude, at a minimum, that there is no basis for considering regulated funds and their managers for possible G-SIFI designation,” ICI President and CEO, Paul Schott Stevens, said in a statement.

Regulators have become concerned about the promise open-ended funds make to give investors their money back on a daily basis, even in stressed markets when liquidity is tight.

The fear is that such a “liquidity mismatch” can encourage cash raising through fire sales of assets such as bonds at the risk of undermining wider financial stability through contagion.

As many banks have shrunk under the weight of tougher regulation and changes in markets, asset management has grown from $53.6 trillion in 2005 to $76.7 trillion in 2015, or 40 percent of global financial system assets.

The recommendations also address the move by asset managers into “shadow-banking” or market financing activities such as lending securities or offering loans to companies as traditional banks retreat.

The FSB stopped short of saying how redemptions could be curbed in stressed markets, saying there should be a range of tools such as “gates” and redemption fees.

The FSB also recommended on Thursday that regulators should provide guidance on stress testing of individual open-ended funds on their ability to pay back investors quickly in stressed markets.

Stress testing, which checks resilience to extreme market shocks, is common in banking since the financial crisis and is burdensome and time-consuming.

Some asset managers already do their own stress-testing of individual funds, but this is patchy across the sector.

Editing by Susan Thomas, Greg Mahlich