U.S. study says asset managers could pose systemic market risk

Reuters

By Sarah N. Lynch

WASHINGTON, Sept 30 (Reuters) - Some activities of assetmanagers could pose risks to the broader marketplace, accordingto a study released by the Treasury Department on Monday thatboosted the likelihood the largest such firms would face tougherfederal scrutiny.

The report does not draw any conclusions about particularasset managers or whether any firms should be designated aspotentially risky to the broader market.

While it does not call for new designations, the report doeslay out potential factors that could be used to determine if anasset manager is risky. Those factors include the use ofleverage aimed at boosting returns, such as through the use ofderivatives, or a reliance on borrowing.

The report also discusses how "herding," or the tendency ofmanagers to crowd into similar or the same assets at the sametime, can also pose risks if the investments are illiquid.

"A certain combination of fund and firm level activitieswithin a large, complex firm or engagement by a significantnumber of asset managers in riskier activities could pose,amplify or transmit a threat to the financial system," accordingto the report by the Office of Financial Research, theTreasury's financial research arm.

"These threats may be particularly acute when a small numberof firms dominate a particular activity or fund offering."

The findings make it appear more likely that tougherscrutiny is on the horizon for large firms such BlackRock, Vanguard Group Inc. and Fidelity Investments.

That is because the Financial Stability Oversight Council(FSOC), which called for the study, has been contemplatingwhether or not certain large, complex asset management firmsshould be designated as "systemically important financialinstitutions."

Any firm given this tag will face new capital requirementsand oversight by the Federal Reserve, in addition to any currentregulations.

BlackRock has staunchly opposed the idea of beingdesignated, saying its activities do not pose a risk to thefinancial system.

The FSOC is a council of regulators chaired by TreasurySecretary Jack Lew and comprised of the country's top financialregulators, including the heads of the Securities and ExchangeCommission and Commodity Futures Trading Commission, which bothregulate asset managers.

The Office of Financial Research helps conduct financialresearch for the council, and its head is a non-voting member ofthe FSOC.

The FSOC has already designated other kinds of financialinstitutions, including banks, clearing agencies and insurancefirms like American International Group and PrudentialFinancial, the second-largest U.S. life insurer.

It also does not focus on risks posed specifically by moneymarket funds, which have already been studied by the council.The SEC is currently weighing new rules designed to reducepotential risks posed by money funds, including a switch from astable $1 per share net asset value to a floating net assetvalue.

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