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 But the Financial Stability Oversight Council, tasked with finding
and reducing systemic risk, did not designate any asset managers as
"systemically important" - a move that could ease concerns that have
gripped the fund industry for years.
In a public meeting late on Monday, the regulatory group, including
the U.S. Treasury secretary and chair of the Securities and Exchange
Commission, updated its two-year-old review of risks to the U.S.
financial system posed by hedge, mutual and other funds' liquidity,
leverage and redemptions.
In the update, it set the stage for an analysis of hedge fund risk,
noting the council was "constrained by limitations in the available
data."
The working group, largely made up of staffers of member agencies,
will report by year-end on items including counterparty exposures,
margin investing, trading strategies and possible standards for
measuring leverage.
The Managed Funds Association, the hedge-fund industry's trade
group, said it hopes "to have a constructive dialogue with this
newly formed group."
It added its industry is smaller than many other parts of the
market, and hedge funds' leverage is, on average, lower than that of
banks.
The council also took a light stance on addressing liquidity and
redemption risks, saying it would wait to see how the SEC implements
funds rules proposed nearly a year ago.
The council will "review and consider whether risks to financial
stability remain," it said, adding it "will take into account how
the industry may evolve in light of any regulatory changes." It also
suggested certain steps that "should be considered" in how funds
handle illiquid assets, redemption costs, and financing.
The SEC proposed requiring mutual funds and exchange-traded funds to
set up programs for managing liquidity risks and broaden disclosures
about their liquidity and redemption practices. Regulators and
investors have been concerned that a market sell-off could result in
a situation where some funds and ETFs could not sell assets quickly
enough - and at sufficiently high prices - to pay all investors
seeking to redeem shares.
At Monday's meeting, SEC Chair Mary Jo White said that "although
there is overlap," FSOC's update "should not be read as an
indication of the direction that the SEC’s final asset management
rules may take."
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The council's mission dates to the Dodd-Frank financial reform law
of 2010, which designated some large banks as "systemically
important," a regulatory label indicating they are "too big to
fail." That designation can trigger capital requirements and other
regulatory oversight.
So far regulators have faced difficulty in designating nonbank firms
as one of the Systemically Important Financial Institutions, or
SIFIs, which is also allowed under Dodd-Frank.
On March 30 a U.S. district judge rescinded the designation for
major insurer MetLife Inc, which had argued that the FSOC used a
secretive and flawed process in determining it could harm the whole
system if it went into distress. The U.S. government has appealed
that decision.
U.S. asset managers including BlackRock Inc and Vanguard Group,
which collectively have about $18 trillion, have fought for years to
avoid being designated as SIFIs. Industry representatives have
argued their products invest directly and do not use the type of
leverage that caused problems during the financial crisis. It is
also unclear what type of government involvement a designation would
invite.
Vanguard, BlackRock and Fidelity declined comment on the FSOC's
report.
(Editing by Sandra Maler, Matthew Lewis and Leslie Adler)
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