Thursday, March 12, 2015

Latest FSB Global SIFI Consultation Draws Swift Criticism

Though the Financial Stability Board’s (FSB) March 4, 2015 consultation paper on Global SIFI designation is only a week old, it has already generated a chorus of  criticism and condemnation from some of the asset management industry’s most powerful players.  This second public consultation proposes revised methodologies for identifying non-bank non-insurer global systemically important financial institutions (NBNI G-SIFIs) based on comments received on the first consultative paper published in January 2014. The consultation proposes a general framework applicable to NBNI G-SIFIs, as well as a specific framework that would be applied based on the type of entity, including separate frameworks for asset managers and investment funds. Despite the multitude of comments on the January 2014 proposal, however, the identification methodology proposed is once again based on size, complexity, and systemic interconnectedness of particular entities, and assessments as to how those factors could cause significant disruption to the wider financial system and economic activity at the global level.  This focus on size and complexity has prompted the some of the asset management industry’s most influential groups to issue statements decrying the FSB’s apparent failure to heed their advice.  No doubt these scathing criticisms of the Global SIFI proposal will be reiterated, expanded, and elucidated further in each of the group’s forthcoming comment letters.


The consultation establishes size-based eligibility thresholds for traditional investment funds that will be evaluated for potential G-SIFI status:


  • $30 billion in net asset value (NAV), and balance sheet financial leverage of 3 times NAV, with a size-only backup of $100 billion in net assets under management (AUM).

  • $200 billion in gross AUM, unless there is a demonstration that the fund is not a dominant player in its markets.

The consultation also proposes eligibility thresholds for asset managers based on size:


  • $100 billion in balance sheet total assets, or another specific value.

  • $1 trillion in AUM, or another specific value.


Aside from the very concept that an asset manager might ever be “systemically important,” it is this size-based protocol that is drawing the ire of the asset management industry.  


“A significant step in the wrong direction"


Timothy Cameron, managing director of The Securities Industry and Financial Markets Association (SIFMA) and head of their asset management group sees the proposal as not only counterproductive, but also meaningless in managing systemic risk: 


"We are concerned that this FSB and IOSCO consultation on creating a methodology to assess asset managers and investment funds for potential G-SIFI designation is a significant step in the wrong direction that could lead to negative consequences for investors and capital markets with no meaningful benefit in managing systemic risk."


Cameron also claims that, in devising this newest proposal, the FSB and IOSCO ignored volumes of meaningful commentary received on the original proposal.  The focus on size and complexity that is effective in the banking context, he says, is wholly inapplicable in the asset management context.  


"This consultation appears to disregard the meaningful and substantive comments received by the FSB and IOSCO regarding the first methodology consultation, which demonstrated how asset managers and investment funds have fundamentally different risk profiles than banks, making G-SIFI designation at the entity level inappropriate. The consultation's continued focus on size, interconnectedness, complexity, substitutability and cross-jurisdictional activities does not accurately reflect factors which could lead to contagion risk in the asset management industry and therefore is not likely to be effective in managing systemic risk."


"As outlined in our comment letter, we strongly believe it is more effective for asset managers' primary regulators to review activities in which investment funds and firms engage in and consider if additional regulation is necessary to help manage risk. We encourage global prudential regulators to pause and allow national systemic risk regulators and primary regulators, such as the Securities and Exchange Commission (SEC), to complete their current initiatives focused on products and activities, and consider the cumulative impact of any new regulations before moving forward with any designations."



“A giant step backward"


The Investment Company Institute’s (ICI) President, Paul Schott Stevens held little back in his criticisms of the consultation.   As with SIFMA, he calls out the FSB and IOSCO for apparently ignoring the “thorough and thoughtful comments” on the first proposal:


“Regrettably, the FSB’s latest G-SIFI consultation appears to take a giant step backward. The FSB appears to have discounted key aspects of the extensive record placed before it."


“In response to its first consultation, the FSB received thorough and thoughtful comments demonstrating that the existing regulation and defining characteristics of regulated U.S. stock and bond funds, as well as their historical experience, make G-SIFI designation for these funds unnecessary and inappropriate. Yet the latest consultation:


  • continues to single out large, highly regulated U.S. funds as candidates for potential designation;

  • retains its undue emphasis on the size of a fund, potentially at the same threshold (US$100 billion in assets under management); and

  • adds criteria to sweep large asset managers into the designation net—again appearing to target large U.S. firms.

“As explained in our April 2014 comment letter to the FSB, G-SIFI designation of regulated funds would harm these funds, their investors, the overall fund marketplace, and fund investing and capital markets at large.”



SIFMA and the ICI have promised to lay out more fully their objections to the latest FSB G-SIFI proposals as they relate to asset managers and investment funds in their comment letters.  They are very likely to be joined by a chorus of other organizations, fund groups, and asset managers.  Comments on the consultative paper are due by May 29, 2015, with the FSB working toward finalizing the methodologies by the end of 2015. Once finalized, the FSB plans to coordinate with other relevant international bodies to develop “the incremental policy measures needed to address the systemic and moral hazard risks posed by NBNI G-SIFIs,” and subsequently to form an international organization charged with overseeing the identification process and maintain consistency.