Pimco Chief Applauds Iosco SIFI Shift

The chief executive of bond giant Pacific Investment Management Co. has lauded a key global regulatory authority’s decision to shelve its work on designating asset management entities as systemically important in favor of a broader review of risks posed by products and activities across the sector.

“We think it is a stride forward and very important to the sustainability of functioning capital markets," Douglas Hodge said in an interview on Thursday.

The $1.6 trillion asset manager’s chief executive was reacting after a decision the day before by International Organization of Securities Commissions, one of two global bodies that had been working on firm or fund-specific designations, to change course.

Iosco said on Wednesday it will reassess its work on ways to identify systemically important asset managers or funds after first studying potential systemic risks posed by products and activities across the sector.

The shift in the body’s focus is one that industry giants and lobbyists have pushed hard for amid fears that entity-specific labels would subject firms or funds to bank-like supervision and regulation.

Mr. Hodge said Iosco’s decision showed an understanding that Pimco and other asset managers, unlike banks, broadly manage money on behalf of clients and do not have large balance sheets themselves. “There is an important distinction between a balance-sheet regime and a capital-markets regime. [Iosco is] now taking an approach that is more appropriate for the asset management industry,” he said.

While the decision has been well received, the Financial Stability Board has also been working on ways to designate asset-management entities as systemically important, and it is the FSB, rather than Iosco, that will ultimately decide how to proceed on the SIFI approach to asset managers.

A second consultation on ways to identify SIFIs in the fund management industry concluded last month and was harshly criticized by fund managers including Pimco, BlackRock, Fidelity and Vanguard as well as industry bodies. The FSB will discuss its findings in the coming months, according to a person familiar with the plans.

Mr. Hodge said that the regulatory narrative this year has been heavily focused on market liquidity. Regulators and market participants have grown increasingly vocal about concerns over a potential mismatch in fixed-income liquidity as a result of reduced bond inventories at banks thanks to post-crisis regulation and growing bond funds.

“I think we’ve all been tempered by the taper tantrum,” Mr. Hodge said, referring to the 2013 episode in which Treasuries and other assets were sold off amid fears over the end of the Federal Reserve’s bond-buying quantitative easing.

He added of the market today: “We still believe that we can transact. There is a price at which securities will find fair value and that’s what capital markets are designed to do.”

Pimco used its own experience managing outflows following the departure of co-founder Bill Gross as an example of large fund managers’ ability to handle heavy redemptions in its response to the most recent FSB and Iosco consultation.

Regulators on both sides of the Atlantic have raised concerns over liquidity and redemption risks in bond funds in recent weeks with the U.S. Treasury Department’s Financial Stability Oversight Council, a body charged with identifying threats to U.S. financial stability, writing in its annual report that it is exploring fund redemption management practices .

In the U.K., Andrew Bailey, chief executive of the unit of the Bank of England that oversees U.K. banks and insurers, said in a speech last month that the regulator is considering requiring funds to hold more liquid assets to ease redemptions or mandate that redemption terms take secondary-market liquidity into consideration.

Mr. Hodge said: “It’s not clear whether gates or other tools actually reduce the risk. Arguably, we saw in the financial crisis that funds that did put up gates brought investors to their door to redeem even faster. There needs to be more study around those ideas before they take any regulatory reform in this direction.”