The Financial Stability Oversight Council, or FSOC, decided to study the activities of asset management firms to better inform its analysis of whether—and how—to consider such firms for enhanced prudential standards and supervision under Section 113 of the Dodd-Frank Act. FSOC asked the Office of Financial Research, or OFR, in collaboration with FSOC members, to provide data and analysis to inform this consideration. OFR has published a study that responds to that request by analyzing industry activities, describing the factors that make the industry and individual firms vulnerable to financial shocks, and considering the channels through which the industry could transmit risks across financial markets.
The study describes, among other things:
- the key factors that make the asset management industry vulnerable to shocks: (1) “reaching for yield” and herding behaviors; (2) redemption risk in collective investment vehicles; (3) leverage, which can amplify asset price movements and increase the potential for fire sales; and (4) firms as sources of risk; and
- the key channels through which shocks can be transmitted: exposures across funds and firms and the impacts of fire sales.
The SEC is soliciting public feedback on the study.