MMI’s Legal & Compliance Committee has been actively involved in commenting on proposals that have been released by both the Financial Stability Oversight Council (“FSOC”) in the United States and internationally by the Financial Stability Board (“FSB”). Recently, the Committee’s initiatives on this front helped lead to a favorable development with the FSB.
Earlier this year, the Committee submitted two comment letters to the FSOC and FSB, each of which objected to the treatment of asset managers as creators, concentrators, or transmitters of systemic risks – particularly in the SMA context:
- On March 25, the Committee submitted a comment letter to the FSOC, the “super regulator” that includes representatives of the major financial services regulators in the United States. This letter was a response to the FSOC’s Notice Seeking Comment on Asset Management Products and Activities, which asked members of the asset management industry a series of questions relating to various risks in four broad areas: liquidity and redemptions, leverage, operational functions and resolutions. The request for comment was in connection with FSOC’s work analyzing risks associated with the asset management industry and whether such risks could affect the stability of the U.S. financial system. MMI’s letter explained why SMA programs do not create, concentrate, or transmit systemic risks and the ways that the SMA industry helps mitigate the effects of those risks to dampen or prevent their systemic spread.
- On May 21, the Committee submitted a separate comment letter to the FSB, the international panel of regulators that monitors and makes recommendations about the global financial system. The letter responded to the FSB’s request for comment on the second draft of its Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions (as abbreviated by the FSB, “NBNI G-SIFIs”). In the FSB’s proposed methodology, the NBNI G-SIFI category would include finance companies, market intermediaries, investment funds, and asset managers that fit their identification criteria as contributing to potential systemic risks. Any NBNI G-SIFIs so identified would be subject to enhanced regulatory scrutiny. MMI’s letter to the FSB argued against the application of the FSB’s methodology for identifying NBNI G-SIFIs to asset managers with significant SMA assets. Because the FSB’s proposal was based on many of the same misconceptions held by the FSOC, the Committee’s letter to the FSB made many of the same arguments as its letter to the FSOC.
The Committee’s efforts on these fronts were largely in step with arguments advanced by other trade associations and asset managers, including those with significant interests in the SMA and investment fund sectors.
Recent Action by the FSB
On July 30, the FSB announced that it will defer finalizing its methods for identifying NBNI G-SIFIs until it completes its further assessment of systemic risks arising from asset management activities. In other words, the FSB is going to determine – from a review of comments received – the extent to which those risks are actually present in the asset management industry before deciding how to identify the firms that create, concentrate, or transmit them.
Following this further study, the FSB will report to the G20 finance ministers later this year, with the goal of developing recommendations for identifying activities that give rise to systemic risks sometime in early 2016. This focus on activities, rather than firm types, appears to be a departure from the entity-focused approach the FSB has taken so far.
What This Development Means
The FSB’s announcement is an encouraging sign. Because the United States is a member of the FSB, there is an expectation that the FSOC will defer further action at least until the FSB releases its recommendations next year. It may also be that the FSOC will shift its focus to activities rather than firms in identifying sources of systemic risk.
At the same time, the FSB’s recent action does not mean that the desire to subject asset managers and SMAs to system risk regulation has subsided. It is also entirely possible that the FSOC will advance its initiatives while the FSB takes time to develop its thinking further. We would hope that, while these next steps are contemplated, the regulators will take into consideration comments by MMI and others explaining why the efforts to develop a paradigm for systemic risk regulation should not be directed at our industry.
Plainly, the final chapter in this area has not been written. As noted above, future action is inevitable. MMI is confident that the Committee has given the FSB and FSOC plenty to think about in the meantime. The Committee will continue to monitor for future developments and will keep the membership informed on its continuing efforts on this important set of issues.
Download MMI’s comment letter to the FSOC (PDF).
Download MMI’s comment letter to the FSB (PDF).