A prescriptive approach to regulating leverage will distort markets, increase risk, and hinder economic growth
London, UK – MFA discouraged the Financial Stability Board (FSB) from adopting a prescriptive approach to regulating nonbank leverage in a comment letter submitted today. Prescriptive limits on nonbank leverage without consideration of a firm’s structure, investment strategy, or investor base jeopardises the stability and efficiency of the global financial system. The letter is in response to the FSB consultation regarding leverage in non-bank financial entities.
“Alternative asset managers enhance financial stability, strengthen capital markets, and drive economic growth. The existing regulatory framework for alternative asset managers is well-developed and fit for purpose. Regulators should avoid a prescriptive approach to regulating nonbank leverage that could undermine the benefits alternative asset managers bring to the financial system,” said Bryan Corbett, MFA President and CEO. “The responsible use of leverage by alternative asset managers, provided by highly regulated bank counterparties, supports financial markets by reducing portfolio risk and the cost of capital for businesses of all sizes.”
The letter emphasises that market participants differ in regulatory structures, risk profiles, and strategies. Alternative asset managers are well-regulated market participants with strict risk management policies who:
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Use investor monies to fund investment vehicles, not depositor money
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Responsibly use limited leverage that is subject to robust dealer margin and collateral requirements
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Manage investor redemptions to avoid liquidity mismatches
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Have no government backstop
Imposing prescriptive and arbitrary leverage regulations on alternative asset managers is unnecessary, and would lead to higher capital costs for businesses, inefficient capital allocation, and stunted economic growth.
The letter highlights how current risk management practices are tailored to meet the dynamic needs of the diverse structures, strategies, and risk profiles in the alternative asset manager industry. Prescriptive leverage regulations would be unable to keep up with constantly evolving market practices and quickly become outdated. This rigidity would disrupt the ability of alternative asset managers and their counterparties to rapidly respond to evolving risks, thereby dragging investor returns and harming financial stability.
Read the letter here.
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About the global alternative asset management industry
The global alternative asset management industry — including hedge funds, private credit funds, and hybrid funds — serves thousands of public and private pension funds, charitable endowments, foundations, and other global institutional investors. The industry provides portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets throughout the economic cycle.
About MFA
Managed Funds Association (MFA), based in Washington, D.C., New York City, 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 it, 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 180 fund manager members, including traditional hedge funds, private credit funds, and hybrid funds, that employ a diverse set of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors diversify their investments, manage risk, and generate attractive returns throughout the economic cycle.
