The International Monetary Fund (IMF) has called for an overhaul of asset management regulation in response to increasing liquidity and concentration risks. The organisation has announced stress testing for asset managers in order to bring the industry under greater scrutiny.
In its latest 135-page report, Global Financial Stability the IMF says stress tests for asset managers should be similar to those in the banking system based on the view that risks for global stability associated with the industry are on the rise. The report has raised questions whether the sector should become regulated by the Prudential Regulation Authority (PRA).
“The new attention to possible risks related to asset management is motivated by the growth of the industry, its larger focus on less liquid bonds, and by concerns that in some advanced economies, many funds have increasingly been buying similar assets, while banks have withdrawn from market making,” said Gaston Gelos, chief of the global financial stability analysis division at the IMF.
The report also argues for better liquidity rules and definitions for funds, to reduce the risks posed to investors in periods of stress. It said the risks in asset management have gone up along with the size of the industry, which bought and sold securities totalling US$76tn (£51.8tn) during 2014 – the equivalent of global GDP, and a rise of 40 per cent from 10 years ago.
Bond funds have grown significantly, investing in less-liquid assets such as emerging market bonds and high yield corporate bonds, the report said. This has increased the mismatch between the liquidity of assets and liabilities, because many funds allow investors to redeem on a daily basis.
According to the report, nearly 41 per cent of the total assets under management are open-ended mutual funds, while ETFs are at 4 per cent. Within the report, opinions are divided about the nature and magnitude of any associated risks from less leveraged, “plain-vanilla” investment products such as mutual funds and ETFs. However, in principle, even these can pose financial stability risks.
