IA: Size is useless tool for identifying systemic risks

IA: Size is useless tool for identifying systemic risks

Size is not a valid indicator of systemic risk, and a fresh approach to tackling risk is needed, rather than seeking to penalise large investment firms, Richard Metcalfe has said.

The director of regulatory affairs at the Investment Association warned against regulators putting a disproportionate focus on the size of a fund or investment management firm when assessing the risks posed to financial markets.

He said: “It is not how big you are, it is what you do with it. Where systemic risks may arise, they must be neutralised and we will be working closely with policymakers to ensure that an effective approach is adopted”.

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His comments formed part of the trade association’s 16-page response to the Financial Stability Board and International Organization of Securities Commissions’ consultation on methodologies for identifying risk.

He said an approach that focused on activities that might give rise to dangerous levels of interconnectedness and leverage was needed, rather than firm or fund size.

“Even if an investment manager does ‘fail’, the investments in a fund remain segregated and can be transferred elsewhere without clients’ money ever being at risk,” he added.

Fund manager BlackRock also submitted its response to the FSB/IOSCO report. In the two-page response, BlackRock said it was largely supportive of regulatory reform that effectively addresses systemic risks and improves market stability, stating: “All investors, including asset managers and asset owners, benefit from properly functioning capital markets.”

However, it called on international regulators not to put all their focus on large investment managers. The response said: “Regulators must take a holistic approach that encompasses products and activities across the entire market ecosystem.

“Asset managers and investment funds are just one component of this market ecosystem. Policy makers need to develop a better understanding of asset owners, including why asset owners allocate their assets to a certain market or asset class.

“In order to address systemic risk, product regulation needs to be applied across products to be effective. Likewise, investment activities need to be regulated regardless of which entity is managing the assets.”

Adviser View

John Ditchfield, director of London-based Barchester Green Investment, said: “If it is true that the flash crash was caused by one person who was able to manipulate the market from a laptop, and cause a 700 point fall in the Dow Jones, then it is not how big you are but what you are doing that matters.

“Regulators think about these concepts in terms of hours, days and weeks, but trade is being placed in milliseconds.”