Asset managers should provide investors with more information about how they manage liquidity and leverage in their open-ended funds, Financial Stability Board (FSB) has said.
As part of the FSB’s ongoing consultation into liquidity and structual risks posed by asset managers, the global body - chaired by Bank of England governor Mark Carney - has made 14 recommendations about how to address financial stability risks, mainly from open-ended funds.
In order to address the lack of information and transparency for investors, it recommends national regulators collect details of the liquidity profiles of open-ended funds “proportionate to the risks they may pose from a financial stability perspective”.
Asset managers should also inform investors if there is a liquidity mismatch in funds, and ensure reports are detailed and frequent.
Investors should also be made aware of what liquidity controls asset managers have in place and under what circumstances they would be used. These include measures such as swing pricing, redemption fees and “other anti-dilution methods”.
The FSB said authorities should also consider the possibility of using system-wide stress testing of funds to assess their resiliency, and that of the industry as a whole, in the case of a collective sell-off.
Additional details also emerged of the FSB’s thoughts on asset managers it previously considered systemically important. The body of central bankers, alongside the International Organisation of Securities Commissions (IOSCO), had long considered forcing ‘systemically important’ asset managers to hold capital reserves in case of market stress.
After dropping the ideas in 2015, the FSB now suggested asset managers deemed “large, complex, and/or provide critical services” should be required to have risk management plans in place so that clients do not suffer during stressed conditions.
IOSCO is expected to put the FSB’s policy recommendations into operation once they are finalised after consultation, at the end of 2016.
Chair of the FSB Mark Carney said: “A resilient asset management sector is vital to finance strong, sustainable and balanced growth. These policy recommendations are designed to ensure that across the FSB membership asset managers can continue to fulfil these roles to the benefit of all”.
The original consultation was launched in March 2015 due to the surge in asset management activities, increasing the need for regulators to have a greater understanding of the potential financial stability risks and the capacity to address any structural vulnerabilities, the FSB said.
Daniel Tarullo, chair of the FSB standing committee on supervisory and regulatory cooperation, said: “The proposed policy recommendations are designed to enhance the resilience of asset managers and funds to future stress in financial markets. They will also help authorities obtain a better understanding of the trends and risks associated with asset management activities within and across jurisdictions”.