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Asset managers may face stress tests, leverage scrutiny, FSB says


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Asset managers may face stress tests, leverage scrutiny, FSB says

Assetmanagers could face stress tests and see their leverage and securities lendingscrutinized under policy recommendations to be drawn up by the world's topfinancial regulator.

TheFinancial Stability Board,which groups together central banks, regulators and finance ministries fromaround the world, will launch a public consultation on addressing structuralvulnerabilities in asset management in the middle of 2016, it said March 31after a meeting in Tokyo. It aims to finalize recommendations by the end of theyear.

Theimportance of asset managers in financing the global economy has grown sincethe financial crisis, meaning it is vital to ensure their resilience, the FSBsaid in a news release. The comments came after the International Organizationof Securities Commissions saidin November that funds could potentially face expensive measures such as highercapital requirements.

TheFSB intends to produce recommendations aimed at ensuring funds aren't caughtwithout the cash to pay back investors if market stress triggers a rush ofredemptions, it said.

Recommendationswill address imbalances between funds' short-term needs for cash andlonger-term liabilities, as well as their leverage and their lending ofsecurities. The FSB also said it encouraged authorities to consider stresstesting funds, and to gather more information on their liquidity and leverage.

"Takentogether, these policy recommendations should make a wide range of markets moreresilient," the FSB said.

TheFSB is chaired by Bank of EnglandGovernor Mark Carney. The Bank of England said in September 2015 that it waslooking into the risksof open-ended funds offering short-notice redemption, stressing its concernover the possibility that asset managers might all try to sell assetssimultaneously at times of stress.

Assetmanagers are most worried by the possibility that the FSB could recommendhigher capital requirements, David Wright, the then-secretary general of IOSCO,said in an interview in November.

Itwas possible, though, that the FSB might recommend no significant changes torules governing asset managers, which already face regulations on investment,redemption risk and liquidity levels, Wright said.

Apartfrom asset managers, the FSB is continuing to look at other ways to bolster theworld's financial architecture. It aims to launch high-level guidance for theresolution of central counterparties in time for the Group of 20 nations summitin Hangzhou in September, and said it has also proposed a framework forassessing the implications for financial stability of distributed ledgertechnology, otherwise known as blockchain.