The Treasury’s Office of Financial Research (the “OFR”) delivered a report to the Financial Stability Oversight Council (the “FSOC”) discussing ways that activities in the asset management industry might create, amplify, or transmit stress through the U.S. financial system. The FSOC solicited the report to inform its consideration of whether to subject asset management firms to enhanced prudential standards and supervision under Section 113 of the Dodd-Frank Act. The report addresses the following topics:
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the activities of asset management firms and the funds they manage;
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the key factors that make the industry vulnerable to shocks: (1) “reaching for yield” and asset class herding behaviors; (2) redemption risk in collective investment vehicles; (3) use of leverage, which can amplify asset price movements and increase the potential for fire sales; and (4) firms as sources of risk;
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the key channels through which shocks can be transmitted, such as exposures across funds and firms and the impacts of fire sales; and
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the data available to measure those activities, vulnerabilities, and channels, and the nature of the gaps in those data, particularly with respect to separate accounts, privately owned firms, repurchase agreement markets, and securities lending activity.
The report notes that it does not focus on particular risks posed by money market funds and does not address the activities and risks posed by hedge funds, private equity, and other private funds, which will be subject to additional analysis as the OFR, SEC, and CFTC evaluate the information being filed on Form PF.
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