The International Monetary Fund (IMF) is seeking a regulatory crackdown on asset managers, which includes introduction of stress tests for asset managers.
IMF has called for the move in its twice-yearly Global Financial Stability Report, where it questions the existing regulatory set-up.
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IMF said in the report that the current regulatory framework "is not set up to fully address risks, neither at the institutional nor systemic level".
According to the IMF, fund managers, and even those offering plain vanilla products rather than exotic investments like hedge funds may pose risk.
The report further says that clients of fund management firms can sometimes have an incentive to get out fast when trouble strikes, which creates another risk.
"Large-scale sales by funds may exert significant downward asset-price pressures, which could affect the entire market and trigger adverse feedback loops," IMF claimed in the report.
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By GlobalDataThe report warns that buying and selling through funds can raise the probability of distressed sales during a crisis, in turn creating destabilising knock-on effects for other organizations.
The report therefore, recommends regulators to consider redemption fees as a way to limit fire sales in events of a crisis.
IMF is concerned that in some cases, asset management firms are owned by large banks, which according to IMF creates "potentially very influential and complex mega conglomerates".
At the same time, the report also manifests concern about the move of mutual funds into bonds, where "price disruptions?.?.?.?have potentially larger consequences than large price swings in equity markets."
Yet, the fund dismisses the view that the largest asset managers are necessarily the most dangerous from the point of view of financial stability. Instead, it says regulators should focus on the specific activities and products sold by each manager.
The fund therefore, calls regulators to offer a clearer definition of "liquid assets" as well as provide more guidance on how to match the liquidity profile of each fund category with its redemption policies.
It also suggests regulators to focus on the specific activities and products sold by each manager.
