The Fed: Asset managers could face new regulation to prevent runs: Fed’s Tarullo
WASHINGTON (MarketWatch)—Federal Reserve officials are considering new regulation of the “shadow banking” sector, and specifically new rules to prevent runs in large asset managers, said Federal Reserve Governor Daniel Tarullo said Friday.
Tarullo said regulators are worried that asset management vehicles hold relatively less liquid assets but allow investors to redeem their interests on short notice.
“There is a risk that in periods of stress, investor redemptions could exhaust available liquidity,” Tarullo said in a speech to a financial stability conference in suburban Washington, D.C.
Under these circumstances, a fund might respond by rapidly selling assets with contagion effects for the financial system that may be amplified by derivative transactions.
Large asset management firms including BlackRock, Fidelity and other companies have been arguing that they don’t pose systemic risks to the financial system. A panel of top regulators, the Financial Stability Oversight Council, last year considered whether to label individual asset managers as systemically important before deciding to focus on risky products and activities instead.
Tarullo suggested that any regulation was at an early stage.
He said that “considerable work” is needed to develop better data on assets under management to fill in “information gaps” that have concerned academics and policy analysts.
“And…we will need tools that will be efficient and effective responses to the risks identified,” he said.
Tarullo added the Fed will also continue to focus on stemming risks of potential runs in the financial market from the short-term wholesale funding market.
The Fed is likely to propose a new rule that will set minimum margins for “securities financing transactions” that involve extending credit to parties that are covered by federal regulation, he said.
The Fed will likely use its authority under the Securities Exchange Act of 1934 to set this new rule, he added.