Large hedge funds will get a close look from federal regulators concerned that they may pose risks to the broader economy because of the extent of their borrowing.
The Financial Stability Oversight Council announced Monday evening that it was creating a new working group to examine hedge funds and determine whether they are a threat to the financial system. The working group will bring together multiple agencies to figure out whether a large, indebted hedge fund could get intro trouble and threaten the entire system as the failure of a large bank would.
The announcement came at the end of a meeting of the council regarding its long-running study of the asset management industry. Tasked with searching for hidden risks to the financial system, the council, which comprises the heads of all the major financial regulatory agencies, has been mulling whether there are circumstances in which an asset manager such as BlackRock or Vanguard could disrupt the financial system.
In providing an update on that work, Treasury Secretary Jack Lew, head of the council, said “we need to be vigilant in monitoring and understanding” new threats to the system.
The council has the power to subject any financial firm it deems “systemically important” to heightened supervision and bank-like regulation.
It has declined to use that authority in assessing the asset management industry. On Monday, it instead recommended a set of rules to address liquidity and redemption risks that could be promulgated by the agencies. Those included rules to limit mutual funds’ ability to hold certain illiquid assets.
Through its research on the asset management industry, the council learned that leverage is concentrated among large hedge funds, which are a diverse set of financial firms that are more lightly regulated than other investment vehicles because they take on a small number of clients.
In a statement issued shortly after the meeting’s conclusion, Securities and Exchange Commission Chairwoman Mary Jo White said the council’s work was “complementary” to that of the SEC, which has jurisdiction over asset managers. The SEC, White said, would work on potential rules for those companies through the regular process that allows for public comment.
