Much in what FSOC proposed on Thursday for regulating asset managers was forecast in a FedFin white paper, which anticipated the shift now made official from firm-specific designations to a hard look at activities and practices that FSOC thinks may pose systemic risk. Karen Petrou’s memo on Friday focused on resolution – a major challenge to asset-managing banks and non-banks because so much in the bank-centric resolution framework is inapplicable. Karen argues that most systemic risk is more than well addressed if firms and their customers and counterparties know that the asset manager will fail if it cannot handle stress and that, even so, investors will have ready access to their holdings.
Importantly, some of the strains on large asset managers come from other sectors – e.g., CCPs – with wholly-uncertain resolution regimes. Calling this out makes it clear where the financial market’s weak links truly lie. Other problems are specific to asset managers – e.g., their operational capacity to return investments in stressed conditions – and still others – leverage in terms of high-risk holdings – are generic prudential regulatory challenges.
FedFin has counselled clients on both their own risks to asset managers and those within the industry that determine comparative advantage. We will shortly be addressing FSOC’s proposal and determining not just the policy questions it raises, but also how FSOC, the SEC, and FRB are likely to answer them and, then, how that drives this critical market.
We would be pleased to address your questions about the future of policy in the asset-management sector. Please send e-mail to firstname.lastname@example.org and we will connect you with the relevant FedFin analyst.