IMF calls for greater regulation of funds industry

Bond funds can pose major financial stability risks with the delegation of investment to asset managers encouraging destabilising behaviour and amplifying shocks, according to a new report from the International Monetary Fund (IMF).

“The role of fixed-income funds, which entail larger contagion risks than traditional equity investment, has expanded considerably,” the organisation said in a chapter on asset managers in its latest Global Financial Stability Report. .

The study said that even so-called “plain-vanilla” investment products such as mutual funds and exchange-traded funds could pose stability risks.

“Easy redemption options and the presence of a “first-mover” advantage can create risks of a run, and the resulting price dynamics can spread to other parts of the financial system through funding markets, balance sheets and collateral channels, “the study said.

The IMF called for oversight of the industry to be strengthened with better microprudential supervision of risks and through the adoption of a macroprudential orientation.

“Securities regulation should shift to a more hands-on supervisory model, supported by global standards on supervision and better data and risk indicators. The roles and adequacy of existing risk management tools, including liquidity requirements, fees and fund share pricing rules, should be reexamined, taking into account the industry’s role in systematic risk and the diversity of its products, “ the IMF said.