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FSOC targets asset management firms as next SIFIs

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Asset management firms look to be next on the Financial Stability Oversight Council’s list to be considered Systemically Important Financial Institutions (SIFIs).

At the behest of FSOC, the Office of Financial Research released a report Monday titled Asset Management and Financial Stability that provides an overview of the asset management industry and analyzes how asset management firms and the activities in which they engage can introduce vulnerabilities that could pose, amplify, or transmit threats to financial stability.

FSOC is studying the activities of asset management firms to better inform its analysis of whether — and how — to consider such firms for enhanced prudential standards and supervision under Section 113 of the Dodd-Frank Act.

Related story: SEC fiduciary rule unlikely in Dodd-Frank’s third year

The report notes that the U.S. asset management industry, which oversees the allocation of approximately $53 trillion in financial assets, “is central to the allocation of financial assets on behalf of investors. By facilitating investment for a broad cross-section of individuals and institutions, discretionary asset management plays a key role in capital formation and credit intermediation, while spreading any gains or losses across a diverse population of market participants.”

The industry, the report goes on to state, “is marked by a high degree of innovation, with new products and technologies frequently reshaping the competitive landscape and changing the way that financial services are provided.”

Marcus Stanley, policy director for Americans for Financial Reform, told ThinkAdvisor that he’s “very glad to see regulators examining the potential for systemic risk created by asset management activities.” He notes that out of the five largest asset managers listed in the report (see below) “only one is currently supervised as part of a systemically significant financial entity. It is vital for regulators to understand how their activities may contribute to broader risks and whether additional supervision or designation as a nonbank SIFI is called for.”

Unlike commercial banking and insurance activities, the report notes that asset managers act primarily as agents: managing assets on behalf of clients as opposed to investing on the managers’ behalf. The losses, therefore, “are borne by — and gains accrue to — clients rather than asset management firms.”

The report then points to four factors that make the industry vulnerable to financial shocks: “reaching for yield” and herding behaviors; redemption risk in collective investment vehicles; leverage, which can amplify asset price movements and increase the potential for fire sales; and firms as sources of risk.

While the report does not focus on particular risks posed by money market funds and does not address in detail the activities and risks posed by hedge funds, private equity and other private funds, the OFR said that additional analysis will be conducted in conjunction with further analysis of data that these funds have begun to file on Form PF.

The report does, however, note the risks inherent in exchange traded funds and separate accounts, and points out that the failure of a large asset management firm “could be a source of risk, depending on its size, complexity, and the interaction among its various investment management strategies and activities.”

There are now three nonbanks designated as SIFIs: AIG, Prudential and GE Capital.

The report then names the top 10 asset management firms according to assets under management, which includes Prudential Financial at number nine, which just lost its appeal and was designated a nonbank SIFI by FSOC.

The top 10 is as follows:

  1. BlackRock;
  2. Vanguard;
  3. State Street Global Advisors;
  4. Fidelity Investments;
  5. PIMCO;
  6. J.P. Morgan Asset Management;
  7. BNY Mellon Asset Management;
  8. Deutsche Asset and Wealth Management;
  9. Prudential Financial; and
  10. Capital Research and Management Co.

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