Massive asset managers, including BlackRock Inc., Pacific Investment Management Co. LLC and Fidelity Management & Research Co., are pushing back hard on global regulators that are currently reviewing whether they should be deemed too big to fail.
In January, the Basel, Switzerland-based Financial Stability Board, headed by Bank of England Governor Mark Carney, and the International Organization of Securities Commissions (Iosco) put out a proposal to help determine when and if an asset manager should be deemed "globally systemically important." Regulators are on a mission to identify such firms, and in many cases require them to hold more capital, because their "distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity."
The January proposal is lengthy, but one of the key messages was that investment funds with more than $100-billion (U.S.) in net assets under management would be up for review – hence why funds such as Pimco, which had $1.9-trillion in assets under management at the end of 2013, are up in arms.
Reading through the comment letters – some of which are rather long – a few key themes emerge. To save you some time, we've outlined them below:
Asset managers are very, very different from banks and insurers
"Most funds employ little or no leverage and are essentially 100 per cent equity capital. Such funds cannot become insolvent and thereby disrupt the financial system by transmitting losses to their creditors. Instead, unlike banks, the substantial equity capital absorbs any declines in the value of the fund's portfolio of assets," Fidelity wrote.
On this same point, Pimco noted that the end clients absorb risk from the get-go. "This is in stark contrast to banks, finance companies and securities dealers, which are operating entities that principally generate risk assets for their shareholders, creditors and counterparties on their balance sheets."
Size doesn't correlate to riskiness
"Rather than size, factors such as engaging in excessive leverage or failing to collateralize counterparty risk, are much more likely to be indicators of activity that could cause significant disruption to the global financial system and economic activity across jurisdictions," Pimco wrote.
Liquidity isn't nearly as much of an issue for asset managers
"Asset managers are dramatically less susceptible to financial distress than banks, broker-dealers or insurers, making asset managers highly unlikely to 'fail' in the sense of a bank failure. Asset managers also do not fund their business using the short-term credit markets, and therefore they are not exposed to the type of liquidity squeeze that banks and broker-dealers may encounter," BlackRock wrote.
These arguments may sound familiar; asset managers have been making them for a few months now, because there have been similar reviews, including by the U.S. Treasury's Office of Financial Research last year. However, the verdict is still out on whether any regulators will actually act on the initiatives.