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Categorized | Financial

US asset managers face tighter scrutiny

Posted on September 30, 2013

In a sign that asset managers could be the next group of financial institutions to face tighter government regulations, the US Treasury’s Office of Financial Research issued a report on Monday detailing the ways in which the industry could create vulnerabilities in the financial system.

The data will be used by the Financial Stability Oversight Council, which requested the report and makes decisions on whether certain non-bank financial institutions including asset managers pose a systematic risk.

    The designation of being a Systematically Important Financial Institution, or SIFI, carries stricter government regulations in risk-based capital, leverage and liquidity.

    The research office said asset managers could create vulnerabilities in the financial system if they increased leverage, bought similar assets at the same time because of competitive pressures, or engaged in fire sales.

    But the report also said there were gaps in the data because not every asset manager was required to publicly report data, making it difficult to conduct a broad analysis.

    A senior research office official said it was difficult to say how much of a risk the asset managers posed, but the issue was material enough that the vulnerabilities were identified in the report.

    The research office did not focus on specific companies that could pose risks, but it did mention the largest asset managers, including BlackRock, Vanguard Group and Fidelity Investments. At least some of these groups are expected to lobby against a potential SIFI designation, according to people familiar with the matter.

    The report also noted that risk management practices were varied and although all registered investment companies and advisers were required to have chief compliance officers by the Securities and Exchange Commission, not all asset managers had chief risk officers.

    The research office listed several kinds of behaviour that could pose a risk, such as low interest rates prompting portfolio managers to purchase riskier assets, or sudden, large redemption requests in a stressed market.

    “Concerns about the liquidity of one fund can quickly spread to similar or related funds, or to the sponsor of a fund complex,” the report said.

    The report also said increased leverage could be a problem and noted that “during the financial crisis, the use of derivatives to boost leverage resulted in significant losses for some registered funds”.

    Asset managers could also transmit risk through links with creditors, counterparties and investors. The report noted that asset managers had increased their connections with banks, broker-dealers, insurance companies and others, which could create more vulnerabilities in the financial system.

    On September 20, the Financial Stability Oversight Council rejected an appeal by life insurer Prudential Financial, which objected to the SIFI label and is weighing its options.

    That move came after the FSOC designated insurance group AIG and GE Capital, the finance arm of General Electric, as systematically important. AIG, which needed a $182bn bailout by the US government during the financial crisis, and GE didn’t fight the SIFI label.