FSOC on Asset Management
Financial
Stability Oversight Council
Open
Meeting
Monday,
April 18, 2016
Key
Topics & Takeaways
-
FSOC Process: TreasurySecretary Lew underscored that the Financial Stability Oversight Council’s
(FSOC’s) “fundamental duty” is to monitor potential risks to financial
stability in order to make the financial system more resilient. In doing so, he
countered the notion that the FSOC begins its work with “preconceived notions
and predetermined outcomes.” Rather, he argued that the FSOC focuses on
issues and questions that are widely studied by market participants, academic
experts and other market observers that share a common interest in maintaining
well-functioning markets that promote stable economic growth.
- Unanimous Approval:
The motion to release the statement
outlining the FSOC’s review of asset management products and activities was
unanimously approved by the Council members.
Participants
- Jacob Lew, Secretary of
the Treasury and Council Chairman
- Patrick Pinschmidt,
Deputy Assistant Secretary, Treasury Department
- Janet Yellen, Chair,
Federal Reserve Board of Governors
-
Mary Jo White, Chair,
Securities and Exchange Commission
- Timothy Massad, Chair,
Commodity Futures Trading Commission
- Richard Cordray, Director, Consumer Financial
Protection Bureau
- Debbie Matz, Chair, National Credit Union
Administration
- Thomas Curry,
Comptroller of the Currency
- Martin Gruenberg,
Chair, Federal Deposit Insurance Corporation
Opening Remarks
In
his remarks,
Lew underscored that the FSOC’s “fundamental duty” is to monitor potential
risks to financial stability in order to make the financial system more
resilient. He maintained that the FSOC’s mission can “only be achieved” by
bringing together the entire financial regulatory community, and he recalled
that the Dodd-Frank Act gave the regulators the collective responsibility to
address emerging risks before they threaten the financial system and “damage”
the economy. Lew countered the notion that the FSOC begins its work with
“preconceived notions and predetermined outcomes.” Rather, he argued that
the FSOC focuses on issues and questions that are widely studied by market
participants, academic experts and other market observers that share a common
interest in maintaining well-functioning markets that promote stable economic
growth.
Lew
explained that the statement
that the Council will vote on today indicates the key areas of focus and next
steps they will take to address emerging risks.
Lew
also touted the “extensive outreach” that the Council conducted with the asset
management industry, and explained that it “benefited greatly” from the
insights shared by fellow regulators including Securities and Exchange
Commission (SEC) Chair Mary Jo White. He highlighted that the Council has
a “clear mandate” to look across the financial industry to address emergent
risks, and he underscored the importance of the Council continuing to lead the
international efforts in this area.
Lew
highlighted the FSOC’s two key findings on liquidity and leverage. Lew
explained that liquidity may give rise to financial stability risks due to
redemption risks, particularly in mutual funds. However, he explained that the
Council has not come to conclusion that level of leverage in the asset
management industry would lead to financial instability, and he indicated that
a working group will be formed comprising Council agencies to further assess
leverage risks in the private funds industry.
Staff Presentation
Patrick Pinschmidt, Deputy Assistant
Secretary, U.S. Treasury Department
Pinschmidt
recalled that the Council’s work in undertaking a review of potential financial
stability risks stemming from the asset management industry began with a public
conference held in May 2014, which he claimed helped shape the Council’s
initial approach. Pinschmidt reiterated that the Council decided to focus on
potential risks stemming from asset management activities and products.
He added that the public comment period in December 2014 and ongoing engagement
with market participants has “contributed greatly” to the Council’s review and
underscores the “thoughtful and transparent manner” of the Council’s work on
asset management issues.
Pinschmidt
clarified that the FSOC focuses on potential risks to financial stability
rather than investment risk, such as how asset management products or
activities could create, amplify or transmit risks across the financial system
in ways that can contribute to financial stability. Accordingly, he highlighted
five key issues being reviewed by the Council: 1) liquidity; 2) leverage; 3)
operational functions; 4) securities lending; and 5) resolvability and
transition planning. Pinschmidt explained that each of those five areas will be
reviewed for potential material risks posed to financial stability, as well as
the extent to which those risks are mitigated by market practices or
regulations. Pinschmidt explained that the FSOC recognizes that the SEC
has proposed rules in many of these areas, however he clarified that today’s
update does not evaluate the specific impact that the SEC’s rules may have on
these areas since their final rules may differ materially from what was
initially proposed.
Liquidity
risk
With
respect to liquidity risk, Pinschmidt explained that the Council found that
liquidity transformation and the first-mover advantage may raise financial
stability issues particularly in times of market stress. As such, the
Council recommends: 1) robust liquidity risk management practices that may
reduce risk, particularly in funds that are prepared for stressed market
conditions; 2) clear regulatory guidelines that place limits on holding less
liquid assets; 3) enhanced disclosure of funds’ holdings; 4) regulators should
take steps to allow and facilitate mutual funds’ use of tools to address
redemption risks; and 5) policymakers should promote additional public
disclosure and analysis of external sources of financing for mutual
funds.
Leverage
On
leverage issues, Pinschmidt explained that the Council is predominantly
concerned with the private funds space, which he claimed requires additional
analysis including more and better data. Noting that no single regulator
has a “complete window” into the risk profile of hedge funds, limiting the
Council’s understanding of the financial stability risks in that market,
Pinschmidt explained that the FSOC will create an interagency working group
that will share and analyze relevant regulatory information in order to better
understand hedge fund activities and potential risks to financial stability. He
indicated that the working group will report on its findings by the fourth
quarter of this year.
Operational
risks
Pinschmidt
explained that the Council found that there is a potential for disruption or
failure resulting in broader transmission of risk, and that further analysis is
required in this area.
Securities
lending
Pinschmidt
explained that more complete information on securities lending is necessary to
assess the materiality of the risks in this market. He explained that
data enhancements are underway to improve regulatory data collection and
reporting, interagency data sharing, and coordination with international
counterparts.
Resolvability
and transition planning
Pinschmidt
noted that certain stress scenarios affecting asset managers may lead to
business disruption, and he explained that the SEC is expected to propose rules
to require investment advisors to develop transition plans to deal with
potential business disruption.
Mary
Jo White, Chair, Securities and Exchange Commission
In
her remarks, White expressed her
support for the publication of the Council’s update, which she said provides a
“current snapshot” of its efforts examining potential financial stability risks
emanating from asset management products and activities. White explained
that the FSOC’s initiatives are “complementary” to the SEC’s proposed reforms
for asset managers, and she indicated that transition planning and stress
testing proposals should be published by the SEC soon.
Janet Yellen, Chair, Federal Reserve Board of
Governors
Yellen
indicated her support for the proposed statement on asset management products
and activities. She noted the asset management industry’s expanded role
in providing credit to the economy and increased complexity of some products,
which she said could create risks to financial stability. Yellen also expressed
support for the development of an interagency working group to examine leverage
levels within the private funds industry.
Martin Gruenberg, Chair, Federal Deposit
Insurance Corporation
Gruenberg
also expressed his support for the publication of the FSOC’s statement. He
noted that the asset management industry has grown in size and importance in
recent years, which he said has made the industry more consequential to
financial markets and broader economy. Gruenberg suggested mitigating liquidity
risks by adopting robust liquidity risk management practices, establishing
clear regulatory guidelines, and limiting use of less liquid assets. He added
that leverage use by hedge funds merits further analysis.
Timothy Massad, Chair, Commodity Futures
Trading Commission
In
his remarks, Massad indicated
his support for issuing the Council’s statement, and he endorsed further
analysis of the use of leverage by hedge funds. Massad explained that the use
of derivatives by funds is particularly relevant to the CFTC, yet he cautioned
that regulators currently do not have a good metric to measure leverage and
have not yet “connected the dots” between the use of leverage and financial
stability risks. He noted that hedge funds with the largest derivatives
exposures stem from cleared derivatives, and suggested that more work is needed
to refine data and conduct in-depth analysis of these exposures.
Thomas Curry, Comptroller of the Currency
Curry
stated that the interagency working group that will focus on hedge fund
activates will enable regulators and supervisors to assess the sufficiency and
accuracy of existing regulatory data. He noted that the report “goes a
long way” to clarifying the unique features of bank collective investment funds
and similarities between these funds and other investment funds. He
claimed that the vast majority of assets held under these funds are retirement
savings that pose less liquidity and redemption risks, but he explained that
the Office of the Comptroller of the Currency would continue to focus on
liquidity and leverage issues that may be associated with these funds.
Vote
The
motion to release the statement outlining the FSOC’s review of asset management
products and activities was unanimously approved by the Council members.
For
more information on this meeting and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Capital/Resolution Authority/SIFIs,Hearing Summaries Agency:FSOC,Publish Year:2016
Financial
Stability Oversight Council
Open
Meeting
Monday,
April 18, 2016
Key
Topics & Takeaways
-
FSOC Process: TreasurySecretary Lew underscored that the Financial Stability Oversight Council’s
(FSOC’s) “fundamental duty” is to monitor potential risks to financial
stability in order to make the financial system more resilient. In doing so, he
countered the notion that the FSOC begins its work with “preconceived notions
and predetermined outcomes.” Rather, he argued that the FSOC focuses on
issues and questions that are widely studied by market participants, academic
experts and other market observers that share a common interest in maintaining
well-functioning markets that promote stable economic growth.
- Unanimous Approval:
The motion to release the statement
outlining the FSOC’s review of asset management products and activities was
unanimously approved by the Council members.
Participants
- Jacob Lew, Secretary of
the Treasury and Council Chairman
- Patrick Pinschmidt,
Deputy Assistant Secretary, Treasury Department
- Janet Yellen, Chair,
Federal Reserve Board of Governors
-
Mary Jo White, Chair,
Securities and Exchange Commission
- Timothy Massad, Chair,
Commodity Futures Trading Commission
- Richard Cordray, Director, Consumer Financial
Protection Bureau
- Debbie Matz, Chair, National Credit Union
Administration
- Thomas Curry,
Comptroller of the Currency
- Martin Gruenberg,
Chair, Federal Deposit Insurance Corporation
Opening Remarks
In
his remarks,
Lew underscored that the FSOC’s “fundamental duty” is to monitor potential
risks to financial stability in order to make the financial system more
resilient. He maintained that the FSOC’s mission can “only be achieved” by
bringing together the entire financial regulatory community, and he recalled
that the Dodd-Frank Act gave the regulators the collective responsibility to
address emerging risks before they threaten the financial system and “damage”
the economy. Lew countered the notion that the FSOC begins its work with
“preconceived notions and predetermined outcomes.” Rather, he argued that
the FSOC focuses on issues and questions that are widely studied by market
participants, academic experts and other market observers that share a common
interest in maintaining well-functioning markets that promote stable economic
growth.
Lew
explained that the statement
that the Council will vote on today indicates the key areas of focus and next
steps they will take to address emerging risks.
Lew
also touted the “extensive outreach” that the Council conducted with the asset
management industry, and explained that it “benefited greatly” from the
insights shared by fellow regulators including Securities and Exchange
Commission (SEC) Chair Mary Jo White. He highlighted that the Council has
a “clear mandate” to look across the financial industry to address emergent
risks, and he underscored the importance of the Council continuing to lead the
international efforts in this area.
Lew
highlighted the FSOC’s two key findings on liquidity and leverage. Lew
explained that liquidity may give rise to financial stability risks due to
redemption risks, particularly in mutual funds. However, he explained that the
Council has not come to conclusion that level of leverage in the asset
management industry would lead to financial instability, and he indicated that
a working group will be formed comprising Council agencies to further assess
leverage risks in the private funds industry.
Staff Presentation
Patrick Pinschmidt, Deputy Assistant
Secretary, U.S. Treasury Department
Pinschmidt
recalled that the Council’s work in undertaking a review of potential financial
stability risks stemming from the asset management industry began with a public
conference held in May 2014, which he claimed helped shape the Council’s
initial approach. Pinschmidt reiterated that the Council decided to focus on
potential risks stemming from asset management activities and products.
He added that the public comment period in December 2014 and ongoing engagement
with market participants has “contributed greatly” to the Council’s review and
underscores the “thoughtful and transparent manner” of the Council’s work on
asset management issues.
Pinschmidt
clarified that the FSOC focuses on potential risks to financial stability
rather than investment risk, such as how asset management products or
activities could create, amplify or transmit risks across the financial system
in ways that can contribute to financial stability. Accordingly, he highlighted
five key issues being reviewed by the Council: 1) liquidity; 2) leverage; 3)
operational functions; 4) securities lending; and 5) resolvability and
transition planning. Pinschmidt explained that each of those five areas will be
reviewed for potential material risks posed to financial stability, as well as
the extent to which those risks are mitigated by market practices or
regulations. Pinschmidt explained that the FSOC recognizes that the SEC
has proposed rules in many of these areas, however he clarified that today’s
update does not evaluate the specific impact that the SEC’s rules may have on
these areas since their final rules may differ materially from what was
initially proposed.
Liquidity
risk
With
respect to liquidity risk, Pinschmidt explained that the Council found that
liquidity transformation and the first-mover advantage may raise financial
stability issues particularly in times of market stress. As such, the
Council recommends: 1) robust liquidity risk management practices that may
reduce risk, particularly in funds that are prepared for stressed market
conditions; 2) clear regulatory guidelines that place limits on holding less
liquid assets; 3) enhanced disclosure of funds’ holdings; 4) regulators should
take steps to allow and facilitate mutual funds’ use of tools to address
redemption risks; and 5) policymakers should promote additional public
disclosure and analysis of external sources of financing for mutual
funds.
Leverage
On
leverage issues, Pinschmidt explained that the Council is predominantly
concerned with the private funds space, which he claimed requires additional
analysis including more and better data. Noting that no single regulator
has a “complete window” into the risk profile of hedge funds, limiting the
Council’s understanding of the financial stability risks in that market,
Pinschmidt explained that the FSOC will create an interagency working group
that will share and analyze relevant regulatory information in order to better
understand hedge fund activities and potential risks to financial stability. He
indicated that the working group will report on its findings by the fourth
quarter of this year.
Operational
risks
Pinschmidt
explained that the Council found that there is a potential for disruption or
failure resulting in broader transmission of risk, and that further analysis is
required in this area.
Securities
lending
Pinschmidt
explained that more complete information on securities lending is necessary to
assess the materiality of the risks in this market. He explained that
data enhancements are underway to improve regulatory data collection and
reporting, interagency data sharing, and coordination with international
counterparts.
Resolvability
and transition planning
Pinschmidt
noted that certain stress scenarios affecting asset managers may lead to
business disruption, and he explained that the SEC is expected to propose rules
to require investment advisors to develop transition plans to deal with
potential business disruption.
Mary
Jo White, Chair, Securities and Exchange Commission
In
her remarks, White expressed her
support for the publication of the Council’s update, which she said provides a
“current snapshot” of its efforts examining potential financial stability risks
emanating from asset management products and activities. White explained
that the FSOC’s initiatives are “complementary” to the SEC’s proposed reforms
for asset managers, and she indicated that transition planning and stress
testing proposals should be published by the SEC soon.
Janet Yellen, Chair, Federal Reserve Board of
Governors
Yellen
indicated her support for the proposed statement on asset management products
and activities. She noted the asset management industry’s expanded role
in providing credit to the economy and increased complexity of some products,
which she said could create risks to financial stability. Yellen also expressed
support for the development of an interagency working group to examine leverage
levels within the private funds industry.
Martin Gruenberg, Chair, Federal Deposit
Insurance Corporation
Gruenberg
also expressed his support for the publication of the FSOC’s statement. He
noted that the asset management industry has grown in size and importance in
recent years, which he said has made the industry more consequential to
financial markets and broader economy. Gruenberg suggested mitigating liquidity
risks by adopting robust liquidity risk management practices, establishing
clear regulatory guidelines, and limiting use of less liquid assets. He added
that leverage use by hedge funds merits further analysis.
Timothy Massad, Chair, Commodity Futures
Trading Commission
In
his remarks, Massad indicated
his support for issuing the Council’s statement, and he endorsed further
analysis of the use of leverage by hedge funds. Massad explained that the use
of derivatives by funds is particularly relevant to the CFTC, yet he cautioned
that regulators currently do not have a good metric to measure leverage and
have not yet “connected the dots” between the use of leverage and financial
stability risks. He noted that hedge funds with the largest derivatives
exposures stem from cleared derivatives, and suggested that more work is needed
to refine data and conduct in-depth analysis of these exposures.
Thomas Curry, Comptroller of the Currency
Curry
stated that the interagency working group that will focus on hedge fund
activates will enable regulators and supervisors to assess the sufficiency and
accuracy of existing regulatory data. He noted that the report “goes a
long way” to clarifying the unique features of bank collective investment funds
and similarities between these funds and other investment funds. He
claimed that the vast majority of assets held under these funds are retirement
savings that pose less liquidity and redemption risks, but he explained that
the Office of the Comptroller of the Currency would continue to focus on
liquidity and leverage issues that may be associated with these funds.
Vote
The
motion to release the statement outlining the FSOC’s review of asset management
products and activities was unanimously approved by the Council members.
For
more information on this meeting and to view a webcast, please click here.