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The concept of cash-rich buy-side
firms lending to each other is
gaining momentum.”
MARK HIGGINS, MANAGING DIRECTOR FOR EMEA
BUSINESS DEVELOPMENT, BNY MELLON MARKETS
becoming reliable sources of liquidity. Krol
acknowledged market making was happening
but on a small scale. “Again, it is the largest
managers who are thinking about it rather
than the mid-sized organisations,” he said.
It is critical that regulators think carefully
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TheTrade
Spring 2017
M A N A G E R S
S I F I s ? ]
if they choose to impose additional oversight
on asset managers. A number of national
competent authorities are already review-
ing these new practices at asset managers.
Securities lending has certainly caught the
attention of the US Securities and Exchange
Commission (SEC) who have recommended
managers report on their securities lending
activities. It is possible that if activities like
this proliferate at major asset managers,
they may be categorised as SIFIs, which
could come with it enormous costs. “Asset
managers do not take deposits whereas
banks do. Their investors expect and do bear
full market risk as opposed to depositors and
other senior creditors of banks. The level
of regulation imposed on asset managers
should therefore reflect that,” Krol said.
Neither FSOC nor the FSB has decided
to designate large asset managers as SIFIs.
FSOC has instead opted to scrutinise the
activities of asset managers such as liquidity
risk – trying to pinpoint whether mass re-
demptions would adversely impact financial
markets. The FSB – reportedly following
pressure from the US and UK regulators –
also decided against labelling asset manag-
ers as SIFIs. Instead, it is focusing on the
risk of liquidity mismatches; fund leverage;
operational risk; the porting of investment
mandates in stressed markets; and the
proliferation of securities lending activities
at certain asset managers. While regulators
have temporarily absolved fund managers
from SIFI designation, it is not a foregone
conclusion that this will be assured over the
long-term. Proponents of SIFI designation
highlight the near market crisis caused by
Long Term Capital Management (LTCM),
a highly leveraged hedge fund at the turn
of the millennium. Again, LTCM was an
exceptional circumstance and such leverage
today is non-existent. The most reason-
able approach is that managers, which do
encroach on banking activities, be regulated
proportionately. It is crucial that regulators
do not adopt a one-size-fits-all approach
towards the fund management industry if
this happens.