Treasury Official Calls Asset Managers to Action

A senior Treasury official has asked hedge fund and other asset managers to answer the call to action and develop best practices to mitigate systemic risk and protect investors. The primary vehicle to do this is the newly-formed private sector committee of asset managers, said Assistant Secretary Anthony Ryan before the SIFMA asset managers group.

Specifically, he emphasized that asset managers must make their counterparty lending institutions understand the risks inherent in the funds’ investment strategies. They must determine appropriate credit terms. In doing so, they must assess liquidity risk and operational risk. They also need to be disciplined and independent in quantifying valuations. Furthermore, they need to guard against the risks to their reputation. Regulators will closely monitor the lending institutions' management of these risks and assess whether their performance is in line with expectations set out in regulatory guidance.

To deal with these challenges, continued the Treasury official, asset managers must be part of the solution and maintain appropriate policies and protocols. Current practices must be reviewed and continually enhanced. Besides counterparty risk management, asset managers also have a responsibility to continue to strengthen the clearing, and settlement arrangements for all securities, particularly OTC derivatives. The recent principles announced by the President’s Working Group on Financial Markets focused on the importance of counterparty risk, he noted, but this is a foundation that must be built upon by the asset management community.

More broadly, the official noted that institutional investors, such as pension plans, have a large influence on the asset management industry, with their assets invested on behalf of millions of beneficiaries. Noting that fiduciaries to pension plans include asset managers, the official reminded the managers that they represent the first and most important line of defense. Fiduciaries have an ongoing responsibility to perform due diligence and must continually ensure that their investment decisions are prudent and conform to sound practices, including diversification. It is therefore important to ensure that governance and asset management practices are as robust as possible.

While acknowledging that portfolio managers must sometimes take risks, the official added that they must excel in risk management as much as return management. Risk management is not some part-time responsibility, he emphasized, rather it is fundamental to a fiduciary's duty. In this context, he praised hedge fund managers for evolving in response to institutional investors' demands for more detailed information, higher quality business standards and increased transparency.