MFA Submits Comments to FSB and IOSCO Regarding Methodology for Designating G-SIFIs

MFA submitted a comment letter to the Financial Stability Board ("FSB") and IOSCO regarding their second consultation document on assessment methodologies for identifying non-bank, non-insurer, global systemically important financial institutions ("G-SIFIs").

MFA stated that the consultation paper provides a "lengthy list" of indicators for investment funds, but does not propose specific thresholds for the various metrics and ratios, or provide an explanation of how these indicators identify one of the stated risks as a systemic risk, as opposed to an ordinary market, counterparty or operational risk.

MFA also pointed out that hedge funds and their managers employ an "array of risk management tools," and that a hedge fund has never been bailed out by the government. MFA outlined several ways that hedge funds differ from other financial institutions and therefore should not be considered G-SIFIs:

• hedge funds represent only a tiny fraction of the markets and are much too diverse in their strategies and investing activities to be the catalyst for systemic shock;
• the hedge fund industry is far less concentrated than other sectors in financial services;
• hedge funds pursue a wide range of investments and strategies that are often not correlated to the broader markets. Because hedge funds vary to meet the specific needs of their investors, they do not create pro-cyclical systemic risk; and
• data shows that hedge funds are less leveraged than many other types of financial institutions.

MFA argued that the FSB and IOSOC's use of gross notional exposure ("GNE") as a metric to determine a fund's gross assets under management does not accurately reflect a fund's market risk or counterparty exposure. MFA explained that this metric ignores key factors which include variations among asset classes, margining and collateral arrangements, and clearing status.

Additionally, MFA argued that more analysis needs to be done to provide a clear understanding on how risks are identified, which risks are systemic in nature, and how the designation of individual firms, as opposed to the regulation of activities, would address those identified risks. MFA recommended that the FSB and IOSCO take a more "holistic" approach to regulation in determining systemic risk concerns, and would only recommend indicators that are designed to measure systemic risk.

See: MFA Letter.Related news: SIFMA AMG Urges Regulators to Stop Efforts to Create Systemic Risk Methodology for Asset Managers and Funds (with Lofchie Comment) (May 29, 2015); FSB and IOSCO Propose Assessment Methodologies for Identifying Non-Bank Non-Insurer G-SIFIs (March 5, 2015).