In several recent FedFin reports, we’ve updated our forecast of systemic regulation for U.S. asset managers based on recent information from the FRB, FSB, and BOE. We confirm our prior forecasts that:
- There is no prospect of near-term SIFI designation for global asset managers. Activity-and-practice standards will focus on additional liquidity-risk protection and capital for indemnification agreements related to securities financing and seed capital investments. Final global repo-margin standards will advance, but enforcement in the U.S. for asset managers is uncertain although the FRB will seek to enforce these margins indirectly through banks and broker-dealers affiliated with asset managers.
- Asset-management resolution protocols will be advanced with a strong focus on operational infrastructure and intra-group contagion risk. Asset management conducted in GSIBs will face immediate scrutiny through revised living-will protocols. Global regulators will try to force asset managers to agree to early-termination stays. Absent statutory change, prospect for actual agreement remains at best uncertain.
- Correlation risk across asset-management operations will be further studied, but little near-term action is anticipated other than in the recovery-and-resolution framework.
- Stress-testing and liquidity standards will lead to increases in cash reserves, but the ability of asset managers to deposit these in custody banks or hold cash-equivalent investments will face continued challenge due to U.S. GSIB leverage requirements and cash-equivalent scarcity. Funds will face structural interest-rate risk because ultra-low rates make even minimally positive returns hard to achieve without added risk. Conversely, higher rates will not translate into fund returns unless deposit and cash-equivalent rates rise, which is uncertain due to continued flight-to-quality and regulatory stress.
To learn more about FedFin’s strategic practice, please reply by return e-mail. Several papers addressing the issues briefly noted above may also be found at http://www.fedfin.com/info-services/issues-in-focus.