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SEC unveils plans to stress test US asset managers

Lucinda Beeman
Written By:
Lucinda Beeman

Asset managers in the US may face bank-style stress tests and a ban on the use of derivatives in retail funds in the latest initiative proposed by the Securities and Exchange Commission (SEC).

The US regulator announced major plans to increase risk control of asset management firms on Thursday in a bid to reduce the risks faced by this part of the financial industry, the Wall Street Journal reports.

These could include subjecting asset management groups and exchange traded funds to stress tests to ensure they could withstand another financial crisis, and forcing them to outline plans to unwind the business in case of a ‘major distruption’ to their operations.

SEC chairwoman Mary Jo White said the regulator wants fund groups to better manage investment risks, testing them to ensure they could survive a crisis, and making them detail how they could be dismantled in the event of “a major disruption in their business.”

The SEC is fearful widespread investor redemptions could drive down markets and destabilise the financial system, the WSJ reports.

The regulator may also force mutual funds to sold to retail investors to cut the use of derivatives, as risky instruments used in the management of the funds come under further scrutiny.

It is also seeking to gain better access to data from major asset management groups, with proposed plans to raise the level of disclosure of portfolio holdings.

Speaking at a conference sponsored by the New York Times, the SEC chairwoman said: “This is the right set of initiatives for this stage of the development of the modern asset-management industry,” due to its “increasingly complex portfolio composition and operations.”

The proposed rules would target more alternative investments first and foremost, such as hedge fund-like strategies made available to retail investors.

Banks in the US and Europe have already faced stringent stress tests, with 24 European banks failing the tests of the European Banking Authority (EBA) in October. However, the four UK banks tested withstood the tests, which were designed to improve banks’ capital base and help prevent a fresh financial crisis.

In the UK funds market, the FCA wrote to the managers of the largest bond funds in 2012 asking them to demonstrate how they would handle a liquidity squeeze and a flood of redemptions. This summer, the regulatorreminded investors once more that corporate bond funds in particular face liquidity issues and are not risk free.