Fidelity criticises FSB鈥檚 G-SIFI methodology
17 June 2015 Basel
Image: Shutterstock
US asset manager Fidelity has rubbished the Financial Stability Board鈥檚 (FSB) latest proposed methodology for designating large individual investment funds as global systemically important financial institutions (G-SIFIs).
Fidelity responded to the FSB鈥檚 second consultation on the methodology that should be used to designate non-bank, no-insurer G-SIFIs at the end of May. Its comments were published on 12 June.
The FSB wants to extend the SIFI framework that currently covers banks and insurers to other financial institutions, to reduce the 鈥渢he systemic and moral hazard risks鈥� that they pose.
In its comment letter, Fidelity said: 鈥淚nvestment funds and asset managers do not, and cannot, present the type and scale of risk required to justify a G-SIFI designation.鈥�
鈥淎nd even if a single fund or manager were capable of presenting that kind of risk to the global financial system, designation would not effectively address the risk.鈥�
The FSB has taken particular issue with 鈥榮hadow banking鈥� activities such as securities lending and repo, which asset managers engage in to boost returns.
鈥淭he significant number of funds available to investors, the intense competition in the industry and the high degree of substitution, mean that particular activities (eg, securities lending, repo, etc) are not limited to a small subset of the largest funds, but, rather, are conducted by a host of funds and other market participants.鈥�
鈥淚f the goal is to reduce risk across the global financial system, then regulators must deal with the activities that create that risk consistently across the system. Regulators must restrict those activities not only across all funds, but across all market participants.鈥�
Going on to defends its securities lending activities, Fidelity said that its mutual funds 鈥渆ngage in securities lending to a limited extent鈥�, and its securities lending programmes 鈥渄o not pose material investment risk to the funds, let alone the financial stability of the US鈥�.
The asset manager lends equities through a third-party agency lending programme, which reinvests cash collateral in a Fidelity 2a-7 money market mutual fund.
For fixed income, Fidelity funds enter into loan agreements directly with counterparties and cash collateral is invested in overnight repo
鈥淏oth our agency lending programme and our direct lending programme have a number of oversight and compliance features that illustrate our mutual funds鈥� conservative approach to securities lending. These features help to safeguard the funds from potential losses and risks.鈥�
Instead, the FSB should adopt a 鈥減roduct- and activity-focused approach as a constructive alternative to G-SIFI designation鈥�, argued Fidelity.
Fidelity鈥檚 defence of its securities lending activities follows BlackRock鈥檚 bid to clarify its position in May, when it said policy makers have misunderstood securities lending practices and the associated risks.
These misunderstandings are centred around potential conflicts of interest, leverage, collateralisation of loans, use of cash collateral and cash reinvestment vehicles, the use of non-cash collateral and rehypothecation, and borrower default indemnification.
In addition, BlackRock claimed that there are many misunderstandings specific to its own involvement with securities lending, and these have 鈥渦nfortunately鈥� formed the foundation of recent policy discussions.
鈥淲e believe it is imperative for policy makers to have all the facts,鈥� said BlackRock.
Fidelity responded to the FSB鈥檚 second consultation on the methodology that should be used to designate non-bank, no-insurer G-SIFIs at the end of May. Its comments were published on 12 June.
The FSB wants to extend the SIFI framework that currently covers banks and insurers to other financial institutions, to reduce the 鈥渢he systemic and moral hazard risks鈥� that they pose.
In its comment letter, Fidelity said: 鈥淚nvestment funds and asset managers do not, and cannot, present the type and scale of risk required to justify a G-SIFI designation.鈥�
鈥淎nd even if a single fund or manager were capable of presenting that kind of risk to the global financial system, designation would not effectively address the risk.鈥�
The FSB has taken particular issue with 鈥榮hadow banking鈥� activities such as securities lending and repo, which asset managers engage in to boost returns.
鈥淭he significant number of funds available to investors, the intense competition in the industry and the high degree of substitution, mean that particular activities (eg, securities lending, repo, etc) are not limited to a small subset of the largest funds, but, rather, are conducted by a host of funds and other market participants.鈥�
鈥淚f the goal is to reduce risk across the global financial system, then regulators must deal with the activities that create that risk consistently across the system. Regulators must restrict those activities not only across all funds, but across all market participants.鈥�
Going on to defends its securities lending activities, Fidelity said that its mutual funds 鈥渆ngage in securities lending to a limited extent鈥�, and its securities lending programmes 鈥渄o not pose material investment risk to the funds, let alone the financial stability of the US鈥�.
The asset manager lends equities through a third-party agency lending programme, which reinvests cash collateral in a Fidelity 2a-7 money market mutual fund.
For fixed income, Fidelity funds enter into loan agreements directly with counterparties and cash collateral is invested in overnight repo
鈥淏oth our agency lending programme and our direct lending programme have a number of oversight and compliance features that illustrate our mutual funds鈥� conservative approach to securities lending. These features help to safeguard the funds from potential losses and risks.鈥�
Instead, the FSB should adopt a 鈥減roduct- and activity-focused approach as a constructive alternative to G-SIFI designation鈥�, argued Fidelity.
Fidelity鈥檚 defence of its securities lending activities follows BlackRock鈥檚 bid to clarify its position in May, when it said policy makers have misunderstood securities lending practices and the associated risks.
These misunderstandings are centred around potential conflicts of interest, leverage, collateralisation of loans, use of cash collateral and cash reinvestment vehicles, the use of non-cash collateral and rehypothecation, and borrower default indemnification.
In addition, BlackRock claimed that there are many misunderstandings specific to its own involvement with securities lending, and these have 鈥渦nfortunately鈥� formed the foundation of recent policy discussions.
鈥淲e believe it is imperative for policy makers to have all the facts,鈥� said BlackRock.
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