IMF Calls for Fund Manager Stress Tests | Chief Investment Officer

The International Monetary Fund (IMF) has called for an overhaul of asset management regulation in response to increasing liquidity and concentration risks.

In an update to its Global Financial Stability Report, the IMF called for “global standards” for fund management groups to enhance “microprudential supervision”.

“Supervision of funds and asset managers is generally weak across jurisdictions.” —International Monetary FundThe update, “The Asset Management Industry and Financial Stability”, also argued for better liquidity rules and definitions for funds, to reduce the risks posed to investors in periods of stress.

“Supervision of funds and asset managers is generally weak across jurisdictions,” the IMF said. “As a result, no financial soundness indicators have been developed for the industry, and stress testing of funds and asset management companies by regulators has been rare—a major contrast with bank supervisory practice.”

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The report added that “good practice” guidelines set up within the industry “provide some comfort”, but warned that fund managers were “likely to underestimate liquidity needs and the potential for correlated price effects” in periods of market stress.

While previous reports into systemic risks in fund management have tended to focus on leverage, the IMF’s report also highlighted potential risks posed by “plain vanilla” funds.

“Easy redemption options and the presence of a ‘first-mover’ advantage can create risks of a run [on a fund],” the authors wrote, “and the resulting price dynamics can spread to other parts of the financial system through funding markets and balance sheet and collateral channels.”

Asset Management Liquidity - IMF Some bond fund managers have warned of liquidity risks within fixed income markets as the volume of trades has collapsed in the wake of the financial crisis, while big funds have continued to bring in more assets.

The IMF’s report follows work by the Financial Stability Board and the International Organization of Securities Commissions on establishing “too big to fail” regulations and guidelines for asset managers. The two bodies have proposed measuring asset levels alongside other methods for determining the systemic importance of individual funds and asset management groups.

But the IMF’s researchers suggested that, due to the varying nature of risks depending on the asset class involved, the “investment focus” of a fund should be more important than the size alone.

“For a given fund size, the systemic risk contribution bears little relation to the size of a fund’s [parent company],” the IMF said. “The average contribution to systemic risk does not increase with a company’s size, at least not for the top asset managers considered here.”

The IMF’s full report on asset management can be found on its website.

The Ethics Council, formed by four of Sweden’s national pension funds, has excluded three companies from investment portfolios after deciding further dialogue over their concerns would be fruitless.

The AP funds one to four have excluded Agrium, Motorola Solutions, and Barrick Gold from potential future investment as they “all have been associated with violations of international conventions”, the council’s annual report stated.

“Engagement makes a difference.” —Ossian EkdahlCombined assets of the funds is more than SEK1 trillion (€100 billion).

“The Ethical Council has for several years been working with preventive dialogues in order to get companies to act more responsibly and thus reduce the risk that they violate international conventions,” the report said.

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The group took separate issues with these three companies.

“The Ethical Council has recommended exclusion of Barrick Gold due to serious negative environmental impact by depositing tailings in river system,” the report said. “The recommendation to exclude Motorola Solutions is based on their involvement in customized monitoring systems for settlements in the occupied parts of the West Bank and finally the company Agrium that intends to continue to buy and use phosphates from the occupied Western Sahara.”

During 2014, the council held 308 dialogues with international companies, which resulted in just these three being excluded. Incoming 2015 Council Chairman Ossian Ekdahl said this was encouraging.

“Preventive and proactive projects are important for the Ethical Council and it is important that these lead to concrete and positive results. Engagement makes a difference,” said Ekdahl.

The 2014 report details the results of successful dialogues with companies, including engagement with Nike over working conditions in some of its Asian factories and the mining industry more generally on human rights and environmental issues.

“Reactive, event-driven dialogues will always be a part of the council’s work, but preventive projects are often a better way to achieve change where the companies are more receptive to suggested improvements, in order to avoid future problems,” Ekdahl concluded.

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