The Investment Company Institute published a press release entitled, "ICI: G-SIFI Designation of Regulated Funds Unnecessary and Inappropriate, Would Harm Investors", which says, "Designation of regulated funds like US mutual funds as "global systemically important financial institutions" (G-SIFIs) is neither necessary nor appropriate, ICI says in a comment letter to the Financial Stability Board. The consequences of designating such funds "would be highly adverse to the designated fund, its investors, the overall fund marketplace and fund investing at large," ICI says." The FSB proposed a threshold of $100 billion in assets for SIFIs, which would currently include just three money market funds -- Vanguard Prime MMF (VMMXX) at $130.7 billion, Fidelity Cash Reserves (FDRXX) at $116.4 billion, and JPMorgan Prime MM (CJPXX) at $110.9 billion as of March 31 (according to Crane Data's MFI XLS).
The release continues, "The ICI letter explains that the methodology proposed by the FSB for assessing investment funds, based on a per se threshold of US$100 billion in assets, would lead to 14 regulated US funds being ultimately put on the path for designation by the US Financial Stability Oversight Council (FSOC) as "systemically important financial institutions" (SIFIs). National authorities in other jurisdictions could set their own thresholds and sweep in more funds for enhanced regulation."
It adds, "The ICI letter explains how the existing regulation and defining characteristics, as well as the historical experience, of regulated US stock and bond funds make designation inappropriate. ICI President and CEO Paul Schott Stevens submitted the letter on behalf of the Institute's entire fund membership, including US and global funds."
ICI President and CEO Paul Schott Stevens comments, "The FSB's consultation seems to reflect an inclination on the part of some regulators to paint the entire canvas of the financial system with a single broad brush and to dramatically expand bank regulatory standards to other types of financial institutions, regardless of how they are structured, operated, and currently regulated. We urge the FSB, as well as the FSOC, to adopt procedures that assure greater transparency and that promote greater public and industry confidence."
The release continues, "ICI suggests that a better way to protect investors and address regulators' concerns about potential risks is through an activity-based approach to regulation. The approach that US and European Union regulators currently are taking on money market funds is an example of an activity-based approach to risk-mitigating regulation, the letter says. The letter explains that, in isolation, the size of an investment fund -- in contrast to the size of a bank -- reveals very little about whether that fund could pose risk to the financial system. ICI urges that any initial threshold used by the FSB for evaluating investment funds should include a measure of leverage -- the essential fuel for financial crises."
It adds, "The FSB's proposed "materiality threshold" of US$100 billion in assets is at odds with the FSB's stated goal of consistent treatment for different types of financial institutions. The 14 regulated US funds that meet the threshold are "orders of magnitude smaller than global systemically important banks (G-SIBs)," the letter states. "Far from promoting consistency, the consultation in fact proposes to apply a unique and more sweeping standard to investment funds, without any justification for this difference in treatment.""
ICI explains, "Regulated funds also contrast sharply with banks in their use of leverage. The balance sheet leverage ratio of the 14 regulated US funds averages 1.04, as compared to an average of 10.7 for US G-SIBs. At this rate, for a regulated US fund to achieve the same dollar amount of indebtedness as the smallest US G-SIB, the fund would have to hold US$5.4 trillion in assets under management -- 17 times greater than the world's largest regulated fund."
Finally, the release tells us, "Regulators already are making notable use of both new and existing authorities to address risks where they arise. For example, in addition to money market fund reform efforts by US and international regulators, US regulators are also continuing to address specific concerns with securities lending, repurchase agreements, and swaps trading, clearing, and settlement. The US Securities and Exchange Commission is working to strengthen its oversight of US asset managers and regulated funds -- an effort that ICI welcomes and is supporting. In addition, ICI's Board of Governors has endorsed a voluntary industry initiative to shorten settlement cycles for a range of securities. ICI and its members in many jurisdictions are engaging across this range of initiatives to help advance efforts to make markets and market participants more resilient to future shocks, without imposing undue costs and burdens on regulated funds and their investors."
