SAO PAULO--(BUSINESS WIRE)--The criteria proposed by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) to identify major non-banks and non-insurers should not have a relevant impact on Brazilian asset managers, according to Fitch Ratings.
The criteria seek to identify global financial institutions whose disorderly failure could lead to turbulence in capital market operations and economic activities due to their size, complexity or connection with other financial agents. The criteria were released for public consultation on Jan. 8 and will be open for comments until April 7.
FSB's proposal is consistent with the "SIFI" framework covering systemically important banks and insurance companies that could cause negative impacts in case of failure.
In Brazil, the Securities and Exchange Commission (CVM), as a member of IOSCO and its board, would be responsible for evaluation of the institutions. The proposed criteria identifies major finance companies, brokerage houses, asset managers and hedge funds using parameters such as volume of assets under management (AUM), leverage, complexity, possibility of replacement and activities performed globally. Due to the strong regulation of the Brazilian market, most information required to conduct the analyses is already available to the regulator.
For asset managers, the scope of the analysis is concentrated at the investment fund level. The proposal discusses alternatives under which the review focuses on the family of funds, the asset manager itself, or a combination of both. The proposal identifies funds with AUM above $100 billion or with a gross exposure above $400 billion. No funds of that size operate in Brazil.
Some asset managers could reach this level if all assets under management in Brazil are combined. In December 2013, according to the Brazilian Association of Entities of the Financial and Capital Markets, BB DTVM, Itau-Unibanco and Bradesco would exceed this threshold. Caixa Economica Federal could be included if funds from the Unemployment Guarantee Fund (FGTS) are taken into account.
The proposal would allow local funds to use leverage, if properly registered at CVM. However, they usually do not report very high leverage ratios, nor do they reach the gross exposure suggested by the criteria. Should a review of the leverage of Brazilian funds become necessary, the regulator would be able to perform an in-depth analysis as all funds report their positions on a monthly basis.
Due to derivative market regulations in Brazil, participants almost exclusively use clearing houses (such as CBLC and Cetip) to liquidate their positions. CBLC works with pre-set concentration limits per investor, or group of investors, for assets traded at the exchanges. These characteristics of the Brazilian market allow a high degree of transparency and control over the size of any financial agent in any specific market or its gross exposure.
The level of complexity of investment strategies in Brazil has been increasing with the growth of multimarket fund classes (29.4% of industry AUM in December 2013). The major classes are macro, long & short, and multi strategy. Additionally, managers have pursued operations abroad, such as in the United States and Europe, which contributes to increased system interconnectivity.
Additional information is available on www.fitchratings.com.
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