IMF Wants More Hands-On Regulation Of Asset Managers

Global regulators need to improve the oversight of the investments held by mutual funds, exchange-traded funds and other asset managers, including setting fees when investors begin to flee such funds in a crisis, the International Monetary Fund said Wednesday.

The asset management industry has come under increased scrutiny from regulators around the world as attention turns from the risks to financial stability posed by the largest banks to the risks posed by the shadow banking sector, including asset managers. The IMF said that the shift is appropriate, even with regard to “plain vanilla” mutual funds and ETFs, but that the focus should be more on the activities in which they are engaged rather than the size of the firms themselves.

“The new attention to possible risks related to asset management is motivated by the growth of the industry, its larger focus on less liquid bonds, and by concerns that in some advanced economies, many funds have increasingly been buying similar assets, while banks have withdrawn from market making,” Gaston Gelos, the chief of the IMF’s Global Financial Stability Analysis Division, said in a statement.

According to IMF data, the asset management industry oversees and invests more than $75 trillion in assets globally. That total represents more than 100 percent of global gross domestic product, the report, a chapter from the IMF’s Global Financial Stability Report, said.

While the largest players in the industry are growing to be as large as some of the world’s biggest banks, they do not present the same insolvency risk as banks, the IMF said.

That’s because asset managers do not rely on short-term debt to fund themselves the way banks do. Instead, asset managers typically sell shares in funds to investors and do not rely on leverage, the report said.

However, that funding structure and the investment strategies employed by fund managers pose their own risks, the IMF said.

One potential problem is the risk that portfolio managers follow a herd mentality, with many investing in the same or similar class of illiquid assets like emerging market and high-yield corporate debt, the IMF said.

That herd mentality could affect the pricing of such assets, and if investors make a run for the exit, cause a crash in them, the IMF said.

Because of that, regulators should consider requiring redemption fees that would slow the outflow of investor funds, the IMF said.

“In particular, regulators should find ways to reduce the incentive for investors to withdraw their money when they see others exiting,” Gelos said. “This could be done, for example, by well-designed redemption fees that do not hurt investors overall, for example, if the revenue accrues to the fund’s net asset value.”

However, the IMF said that while putting in gates and suspensions on funds in a crisis should be a “part of the toolkit” for regulators to prevent runs on mutual funds and ETFs, they should be used with great care.

“Their imposition may also send negative signals to the market and lead to preemptive runs ahead of the instruments coming into force,” the report said.

Overall, the IMF urged regulators to alter their current oversight of asset management firms, particularly ETFs and mutual funds, from the current focus on disclosures and investor protection, to more hands-on regulatory approach that includes stress testing of the largest firms and a focus on risk management practices.

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