EU regulators are assessing the potential threat to the financial system that a run on fixed-income funds could pose when central banks change course on monetary policy.
The size of the asset management industry has “raised issues about what happens in the case of a reversal in interest rates” that prompts investors to pull out their money, European Securities and Markets Authority (ESMA) Chair Steven Maijoor said.
Regulators “need to look seriously into this issue, collect the evidence and understand as well as possible the risks,” he said.
“Redemptions played a role in the financial crisis,” Maijoor said in an interview on Friday in Riga, Latvia. “Asset managers coped quite well with the reversals in the values at that time, but there’s no guarantee of that in the future.”
Traders and regulators are increasingly expressing concern about the stability of fixed-income markets in the wake of an October fall in the value of US Treasuries.
JPMorgan Chase and Co CEO Jamie Dimon said that was a “warning shot” to investors that the next crisis could be exacerbated by a lack of liquidity.
Banks and other market players are pointing the finger at a combination of new financial regulations, such as capital and disclosure rules, and a low interest-rate environment.
The role of asset managers is “one element of the debate” over concerns about market liquidity, Maijoor said.
“How the various pieces of legislation work together and impact financial markets — I think we need to closely watch that and closely monitor that,” he said.
ESMA is looking at these issues in tandem with the European Systemic Risk Board, a group that monitors threats across the financial system, he said.
Other recent episodes of volatility have included a drop in the value of the euro against the Swiss franc that followed the Swiss National Bank’s decision to abandon a cap on the interest rate and sharp price changes of gold and emerging market debt.
The Oct. 15 gyration, when US Treasury yields fluctuated by almost 0.4 percentage point, was an “unprecedented move” that would have serious consequences in a stressed environment, Dimon said.
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