The fund industry is pushing back against the Financial Stability Board's proposal for stress tests on mutual funds.
The Basel, Switzerland-based FSB proposed
stress tests for mutual funds, similar to those for banks , in June to regulators in the G20 nations. The FSB's proposals would be designed to show how funds would react to large waves of redemptions, such as might happen in bond funds during an interest rate spike. The FSB also proposed redemption fees to limit redemptions and offset the damage done if funds had to sell at fire-sale prices to meet investor demands for their cash.
FSB argues that waves of redemptions could pose risks to the entire financial system, not just mutual fund customers. In short, it's saying that fund redemptions would be a systemic risk, much like the failure of a major bank.
Not surprisingly, the fund industry has pushed back. “We continue to believe that the FSB's process should be driven by historical experience and empirical data, rather than by hypothesis and conjecture,” said
Paul Schott Stevens, the chief executive of the Investment Company Institute, the funds' trade group.
“In particular, we emphasize again that there is no empirical basis for the FSB to pursue the designation of regulated funds or their managers as global systemically important financial institutions.”
Similarly,
Vanguard was generally lukewarm about the proposal. “Vanguard does not agree with the FSB's claims that the asset management industry has structural vulnerabilities that could present systemic risk,” said Vanguard spokesman David Hoffman. “Vanguard contends that the existing regulatory regimes effectively mitigate risks posed by funds, although we fully support the FSB's recommendations that seek to improve transparency to both regulators, and investors, in order to advance oversight of the industry.”
Both Vanguard and BlackRock, however, did not reject the proposals out of hand. “We commend the FSB for shifting focus to activities based on empirical assessment of risk within the asset management industry,” Mr. Hoffman said. “We believe systemic risk designations based on fund or firm size would harm capital markets and retail investors, whereas a sharper focus on investment-related activities can help foster more constructive outcomes. We also support the general principle of fund-level stress-testing, as long as firms have discretion over implementation and it's not overly prescriptive.”
BlackRock backed stress-testing of individual funds, but also rejected a system-wide test, arguing that asset managers represented only about a third of the market for securities, with pensions, hedge funds and other investors representing the bulk. “Genuine efforts to address risks to the entire financial system must at a minimum address the majority of participants within the system,”
BlackRock said in a Sept. 21 letter to the FSB. “Limiting recommendations to only activities and services performed by asset managers, as opposed to all such activities taking place across the system, will shift risk around but will not mitigate risk.”
Fidelity, for now, is saying little. “We understand that any proposals remain a work in progress,” said Fidelity spokesman Charles Keller. “So, it would be premature for us to comment at this time.”
