Asset managers to face tougher systemic risk tests
Europe’s main markets regulator head says there will be increased scrutiny for sector
Asset managers are to face tougher tests to assess whether they could become the centre point of systemic risk, according the head of Europe’s main markets regulator.
Steven Maijoor, chairman of the European Securities and Markets Authority, also called on the region’s policymakers to rethink the way they share oversight of the world’s clearing houses, another part of markets critical to market stability.
“Esma has already flagged that this year it will assess stress testing in the fund industry,” he said on a visit to London last week. “Additionally, our focus in this area is on issues such as liquidity management tools, leverage and stability.”
Its increased scrutiny on the asset management sector, which has boomed over the past decade, mirrors that of standard-setters and policymakers around the world.
There is a consensus that post-crisis reform of the banking sector is now largely in place or in train — and they are now thinking about how other parts of the financial system might be vulnerable.
The Financial Stability Board, which makes recommendations to the Group of 20 nations, laid out a 14-step plan this month to attempt to reduce risks from the sector to the rest of the financial system, such as encouraging stress tests.
The sector has grown from $53.6tn assets under management globally in 2005 to $76.7tn in 2015, according to FSB data.
Funds are also playing an increasingly large role in bond trading and other securities markets now that banks have scaled back their participation as middlemen matching buyers and sellers.
Although it has some minor enforcement powers, Esma’s role is mainly to give technical advice and guidance to other European regulatory bodies.
Mr Maijoor described the regulatory focus as “right” but added that it was “a very different sector to the banking one”.
“Any policy responses should take the different business model of funds into account, and securities regulators should be fully involved,” he added.
He also reiterated a call for the European Commission to rethink the way it monitors clearing houses, which manage the risk that a default can spread through the financial system.
The issue has renewed impetus since the UK voted to leave the EU last year.
Many European politicians have called for euro derivatives clearing — which takes place largely in London — to be moved into the EU so it can be overseen directly by the European Central Bank and other regulators. That has alarmed market participants because banks prefer to concentrate clearing in just a handful of locations.
EU rules give European regulators joint oversight of London-based clearing houses but do not allow for supervision of clearing houses outside the EU, or so-called third countries. That means it cannot see the possible impact of overseas clearing houses in Europe.
In a review of existing rules in 2015, Esma recommended that the entire equivalence and recognition process be rethought.
“We have very limited powers regarding information collection and risk assessment. Additionally, equivalence only works if other major jurisdictions also apply it, while in reality they now all require registration and supervision of EU clearing houses,” Mr Maijoor said.