Letter to CBI encourages regulator to improve its access to accurate, relevant, and internationally standardized data from investment funds
Brussels, Belgium – Managed Funds Association (MFA) urged the Central Bank of Ireland (CBI) to refrain from using macroprudential policy to apply bank-like regulations to private funds in a comment letter submitted today. The letter, in response to a CBI Discussion Paper, argues that private funds do not pose systemic risk, are structured differently than banks, and should not be subjected to bank-like supervision and regulation.
The letter explains that bank-like regulation is inappropriate for private funds because it targets vulnerabilities that do not exist in the private fund industry. In the letter, MFA describes how the structure of private funds mitigates risks present in banks, including:
- Liquidity risk: Sophisticated, institutional investors in private funds agree to strict redemption limitations and lockup periods, eliminating liquidity mismatches during times of stress.
- Contagion risk: If a private fund fails, the losses are borne by that specific fund’s investors and do not impact investments in other funds. The failure is firewalled from, and will not ripple across, the broader financial system.
- Taxpayer risk: Private funds do not have an implicit or explicit government backstop or insurance. Taxpayers are not responsible for losses in the industry.
“Private funds do not pose a systemic risk and their business model is incompatible with bank-like regulation,” said Bryan Corbett, MFA President and CEO. “They employ robust risk management practices and their structure limits contagion and liquidity risks. Counterparties also help manage risk through collateral and margin requirements. Introducing a bank-like supervisory regime will not enhance financial stability, but will limit businesses access to capital and harm investors, including pensions. Regulators should instead identify and address gaps in data that will enable them to assess any vulnerabilities.”
In the letter, MFA urges the CBI to focus on improving its access to accurate, relevant, and internationally standardized data from investment funds instead of implementing a bank-like regulatory regime. Improving CBI access to data will help regulators better understand what risks are present in the financial system and the appropriate policy to address it.
The letter explains why bank-like regulation is unnecessary for private funds and could impair financial stability.
“Private funds, regardless of strategy, are fundamentally different from banks. Private funds are not funded by liabilities like deposits, which are redeemable at par and on demand, and do not benefit from deposit insurance or typical government-sponsored liquidity. Instead, private funds investors commit long-term capital, take investment risk, and accordingly agree to redemption limits established and enforced by fund managers to manage liquidity… [T]he costs imposed by the capital requirements, supervision and resolution planning requirements that result from bank-like regulation would be significant and potentially fatal to the private fund and, we would suggest, wholly unnecessary and/or redundant to existing requirements. Elimination of private funds reduces the availability of capital for businesses and would adversely affect innovation and increase financing costs, reducing the resiliency of both the financial markets and the real economy.”
Read the entire letter here.
About the Global Alternative Asset Management Industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of over €5 trillion (Q3 2023). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About Managed Funds Association
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 170 member firms, including traditional hedge funds, credit funds, and crossover funds, that collectively manage nearly €3 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.