Amundi is the leading asset manager in Europe and ranks among the top 10 worldwide with more than 950 billion € under management at the end of March 2015. Among the many clients it offers investment solutions to, there are banks. Furthermore, banks are regular counterparties of the funds it manages, on reverse repo or derivative OTC markets for example, not to mention the role of the depository of the funds. Therefore, Amundi is very concerned with the discussion opened by EBA on the definition of shadow banking (SB).
If Amundi shares EBA’s approach it cannot draw the same conclusion with respect to funds.
First, we think that EBA should better refer to Market finance instead of Shadow banking : these are considered as equivalent wordings by FSB. It would make the paragraphs relating to funds more readable as it is an evidence that funds are not banks at all, neither shadow nor licensed.
Conversely, funds provide finance to the real economy through market instruments. Fund management implies risk taking (and transferring), liquidity management (and maturity gaps) and practically no leverage (except for hedge funds). Funds are managed by seasoned professionals who comply with internal procedures that result from the strict regulation that has been imposed by UCITS and AIFM directives: organization of the management company, risk control, diversification rules, liquidity stress, conflict of interest management, transparency and extensive reporting… to mention a few. We oppose the conclusion in § 12 that they, prima facie, belong to SB. Identically, we suggest that page 20, line 5, the word “nevertheless” be replaced to read “Consequently, with regard to funds, …” as we feel that it is a direct consequence of the fact that UCITS (and AIFs ) are subject to an appropriate sector-specific prudential framework. We believe, that in terms of financial stability, the regulation of the funds aiming at the better protection of investors is not lagging behind other prudential regulations.
With respect to bank-like activities conducted by asset managers on their own balance sheet, if any, we believe that they should be captured and prudentially regulated. As stressed by EBA, it is already the case for the asset managers that belong to banking groups and are prudentially consolidated.
Amundi believes that those funds which are not Europe based should be considered as SB entities except for those established in jurisdictions where reciprocity and mutual recognition of quality has been negociated. In other words equivalence is not the appropriate criterion, but reciprocity.
For European funds, EBA does not draw the logical conclusion of its reasoning and should exclude not only UCITS but also all the AIFs that do not use significant leverage (as defined in AIFMD on the basis of a commitment exceeding 3 times the capital subscribed). Only the hedge funds should be captured and not the quasi-UCITS AIFs, which are by far much more numerous. FSB itself realized in its 2014 report that long only equity funds should not be included in SB as they do not present systemic risk, irrespective of the fact that they are European UCITS or AIFs. The key factor for risk is leverage.
Amundi shares FSB’s point that beside entities some activities should be considered when assessing systemic risk and financial stability. FSB identified securitisations, money market funds (MMF) and securities lending and repo as presenting specific potentialities of risk. We think that steps are taken in order to reach an appropriate level of regulation of these activities and would recommend EBA to wait for the finalization of SFT or MMF regulations before calibrating its own requirements in the field. We also expect that the European Commission will, following its recent consultation on securitization, propose a framework for a safe instrument. As underlined in the consultation on Capital Market Union, launched by the European Commission and as mentioned in EBA’s own paper, these activities are essential to allow for a deleveraging of banks’ balance sheets and a market financing of the real economy.
More specifically with respect to MMFs, we take the point expressed by the ESRB in 2012 that Constant NAV MMFs present a higher risk of “run” than VNAV MMFs. We believe that regulators should focus not on size only but on the potential valuation gap that is specific to CNAV funds, which are sold as deposit like instruments, when assessing whether some MMFs belong to the SB.
To sum it up, Amundi considers that :
• Not only UCITS but also AIFs without significant leverage should be out of scope as they both follow rules that are designed to ensure a proper investor protection and that eventually reduce the risks of the funds demanding that they be appropriately monitored;
• All position representing less than 0.25% of the capital of a regulated bank should be out of scope ; we support the explicit inclusion of Option 1 page 32 within the guidelines;
• Third countries funds should not be exempted, except if they are established in a country that has agreed on a reciprocal recognition of the quality of the European UCITS and AIFs without substantial leverage and allow them a favourable treatment;
• Bank-like activities conducted by an asset manager on its own balance sheet (as opposed to as an agent on behalf of a fund or client) should be captured either directly or through a consolidation within a prudentially regulated group;
• A simple list of SB entities within the scope of the regulation and exempted entities published by EBA seems the only way to introduce a workable regulation as many entities have different types of activities that will make them difficult to be classified.
Amundi is concerned by the consequences of a possible poor calibration of an aggregate risk limit. This concern would be reduced if it were made clear :
• That small positions below 0.25% of the capital of an entity would be out of scope and not included in the aggregate limit,
• The perimeter of SB would not include UCITS nor AIFs without substantial leverage nor VNAV MMFs.
More generally, we consider that individual limits should be sufficient to manage the risks and believe that aggregate limit will not be relevant because of the very large diversity of SB entities and activities. In our view there is not much sense in adding factoring with hedge funds and repos with a broker…
Though, the aggregate approach could apply as a fallback.