strong defense of the stability and safety of the asset management industry, Investment Company Institute President and CEO Paul Schott Stevens told the Mutual Fund and Investment Management Conference that not only are asset managers and the funds that they offer not sources of risk to the overall financial system, but some misguided efforts to regulate them as such may do vastly more harm than good.  Mr. Stevens' remarks were a reaction to reports recently issued by the Office of Financial Research (OFR) and others concluding that asset management firms and the activities in which they engage can introduce vulnerabilities that could pose, amplify, or transmit threats to financial stability.  Stevens worries that the conclusions of the OFR report and a similar report by the Financial Stability Board, "could be the predicate for new, bank-style prudential regulation of the asset management industry—which could significantly harm funds and the investors who use them."

On November 5, 2013, the Financial Stability Board (FSB) launched the second stage of its two-stage quantitative impact study on the proposed regulatory framework for securities financing transactions.  As you may recall, on August 29, 2013, the FSB published the results of the first stage of its look into securities finance.  The report, Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos, sets out policy recommendations for addressing financial stability risks in relation to securities lending and repos. These measures formed part of an overall set of policy recommendations to strengthen oversight and regulation of shadow banking, an overview of which was published on the same date.

The second prong of the FSB's look into securities finance will be a more comprehensive quantitative assessment of the effect of the FSB's earlier haircut proposals on a broader set of firms.  The study will look into both the effects of the proposed minimum standards for methodologies used by firms in calculating their own haircuts and the numerical haircut floors to be applied to certain securities financing transactions.

Securities lending is a potentially pro-cyclical source of funding, raising the possibility that participants will have to dump securities during times of financial stress.  It can lead to unexpected connections among disparate market players, such as insurance companies and hedge funds.  As a result, securities lending may contribute to the opacity of the financial system and erode the willingness of participants to take on counterparty risk.  In addition, it is a source of contagion, with the distress of one firm ramifying throughout the financial system in unpredictable ways.