Author Archives: Lynne Witter

Systemic Risk Council Letter to FSB on Asset Management Activities

On October 15, 2016, the Systemic Risk Council submitted a comment letter to the Financial Stability Board (FSB) on its recent Consultative Document, in which the FSB proposed policy recommendations intended to address structural vulnerabilities in the asset management industry.

In its letter, the Council expressed its support for the FSB’s work on potential risks to financial stability arising from asset management structures and practices. The Council offered broad comments under the four categories identified in the Consultative Document: (1) liquidity mismatch; (2) leverage within funds; (3) operational risk and challenges in transferring investment mandates or client accounts; and (4) securities lending activities of asset managers and funds. The Council offered six recommendations relating to the four categories for the FSB’s consideration.

In addition, the Council identified and discussed a possible area for further work by the FSB relating to unlevered funds that do not offer frequent redemption opportunities as well as provided an observation on issues that it believes should be covered in the FSB’s planned future work on pension funds.

Read the full letter here: Systemic Risk Council Letter to FSB on Asset Management Activities

Systemic Risk Council Letter to Fed on Total Loss-Absorbing Capacity and Long-Term Debt Proposal

On April 14, 2016, the Systemic Risk Council submitted a comment letter to Janet Yellen, Chair of the Board of Governors of the Federal Reserve System (the “Fed”), commenting on the recent proposed rulemaking introducing total loss-absorbing capacity (“TLAC”) and long-term debt (“LTD”) requirements aimed at minimizing the disorder from the failure of large and complex banks without invoking taxpayer solvency support.

The letter states the Council’s strong support of the Fed’s proposed rule, which it believes is an important initiative in the quest to reduce the costs to the public of the failure of large and complex financial groups. The letter urges the Fed to maintain a separate LTD requirement as a core part of its TLAC proposal, as that would serve to supplement the equity cushion that these firms choose to hold over and above the minimum equity requirement.

To strengthen the Fed’s proposal, the Council’s letter also makes the following key recommendations:

  • Introduce a minimum requirement for the internal debt issued by subsidiaries to parent companies so that losses in excess of equity can be transmitted smoothly to the holding company during periods of stress;
  • Review the approach to TLAC requirements for the U.S. subgroups of those foreign organizations that develop plans to be resolved in a series of parts or “multiple points of entry,” given that the current proposal might rest on false assumptions; and
  • In order to reduce market uncertainty, explore with fellow banking authorities domestically and internationally the possibility of rationalizing the treatment of certain debt instruments under the current regulatory capital requirements.

Read the full letter here:
Systemic Risk Council letter to Fed on total-loss absorbing capacity and long-term debt proposal

Systemic Risk Council letter to SEC on Open-End Fund Liquidity Risk Management

On January 13, 2016, the Systemic Risk Council issued a letter to the US Securities and Exchange Commission (SEC) in response to proposed rulemaking regarding how open-end mutual funds manage liquidity risk.

In its letter, the Systemic Risk Council cites the proposed rules as an important initiative and recognition of the potential adverse effects on capital markets when open-end funds fail to adequately manage liquidity.

The letter cautions against allowing too much subjectivity in the processes for deeming which portfolio assets are liquid under the proposed rules, and recommends that the SEC determine asset classes reasonably expected to be liquid in stressed conditions, noting “The need for a reasonable standard, instead of individual decision-making, arises because of the risk of market confusion arising from a proliferation of idiosyncratic liquidity assessments and because, by definition, individual asset managers cannot be expected to internalize the wider economic costs of a liquidity breakdown.”

The letter also recommends that the SEC consider applying “the new asset-based liquidity requirements with varying intensity according to a fund’s liquidity and leverage-based risk, while providing reasonable assurance that every fund can withstand liquidity risk” and notes that with appropriate disclosures, investors would be afforded opportunity to make investment decisions based on their investment objectives, risk tolerances, and understanding of those disclosures.

Read the full letter here:

Systemic Risk Council letter to SEC on Open-End Fund Liquidity Risk Management