Similar to the new regulatory and capital rules for the banks in the post-crisis period, the asset-management industry may also have to fulfill strict capital requirements. Per a Wall Street Journal report, the U.S. Securities and Exchange Commission (SEC) is devising new rules to enhance the oversight of mutual funds and hedge funds industry. On the SEC’s part, this comes as an effort to ensure that the asset management industry is adequately shielded from any kind of financial shock.
Per the report, the SEC is in a preliminary stage of framing rules for the asset-management industry – including mutual funds, hedge funds and private-equity funds – in order to lower overall systematic risks.
In the new regime, we believe that asset managers such as BlackRock, Inc. (BLK), The Blackstone Group L.P. (BX), Cohen & Steers Inc. (CNS), AllianceBernstein Holding L.P. (AB), Fidelity Investments and Pimco will be required to disclose more information to the regulators about their portfolio holdings.
Further, asset managers may have to undergo the stress test to prove their capability to withstand financial shocks such as an abrupt change in interest rate or a widespread redemption.
Will the Rules Curb Asset Managers Business Growth?
The new rules, if implemented, are likely to restrict the usage of high-yielding but risky derivative products. We believe that it will, to some extent, limit the revenue growth of the asset managers. Moreover, meeting the regulatory capital requirements will restrict asset managers to expand their business. Basically, the advantages of high liquidity will not be there going forward.
SEC Concerns
The fact that some fund houses use derivative products in the portfolio to boost returns pose worries for the SEC. Again, burgeoning of alternative mutual funds with hedge-fund-line strategies is another cause of concern. Alternative asset managers not only aggressively use derivatives in both alternative funds and certain leveraged exchange-traded funds, but also sell these products to small investors.
However, if the new rules are implemented, we believe that the asset managers would be forced to limit the use of derivatives in mutual funds, so the risk will be lower. Moreover, the stress test, which is now mandatory in the banking sector, will serve to ensure that the mutual fund industry possesses the necessary loss-absorbing capital to counter large-scale redemptions or a sudden movement in the interest rate.
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