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IMA Response to CEBS Large Exposures Questionnaire Summary

Core Content

The IMA (Investment Management Association) represents the UK-based investment management industry, which manages approximately £2 trillion in assets. This includes a variety of investment vehicles such as unit trusts, open-ended investment companies (OEICs), private client accounts, and institutional funds. The IMA argues that the current large exposures regulatory framework is not appropriate for investment management firms due to their unique business model and risk characteristics.

Main Points and Key Arguments

• Need for Large Exposures Rules: IMA questions the necessity of large exposures rules in the post-CRD environment, as Pillar 2 already allows firms to identify and manage major risks, including credit risk, with appropriate capital requirements.

• Exemption for Short-Term Receivables: IMA suggests that amounts receivable within 90 days should be exempt from large exposures rules, as these are typically not a significant risk to the firm’s capital.

• Exemption for AAA-Rated Money Market Funds: IMA believes that investments in AAA-rated money market funds should be exempt from large exposures rules due to their liquidity and credit quality.

• Diversification in Authorised Funds: Investment management firms that manage UCITS funds operate within a highly regulated and diversified framework, so large exposures rules should account for this.

• Capital and Risk Characteristics: Investment management firms do not expose principal amounts to risk, as they do not lend or take market positions on their own account. Their capital is not at risk from fee receivables until they are included in audited reserves.

Key Differences Between Investment Management and Banking

• Client Assets Segregation: Investment management firms manage client assets separately from their own, typically under the custody of an independent custodian.

• Fee Structure: Fees are typically a percentage of funds under management, with performance fees being a percentage of investment performance. These are not considered credit risk but rather operational and commercial considerations.

• No Lending Activities: Investment management firms do not engage in lending or securities financing transactions, which are not permitted under the CRD for limited licence firms.

• Business Model: The business model of investment management firms is fundamentally different from that of banks, as their revenue is driven by the size of assets under management, not by trading or lending activities.

Regulatory Capital and Risk Management

• Regulatory Capital Not at Risk: Fees receivable are not included in regulatory capital until they are part of audited reserves, which typically occurs after the fees are received.

• Internal Risk Management: Investment management firms monitor concentration risks, but they do not consider credit risk to be a major risk. They focus on the impact of concentration on business performance, not on capital adequacy.

• Stress Testing: Firms conduct sensitivity analysis on the impact of changes in funds under management, which effectively covers concentration risk. This is not typically a formal stress testing process but is integrated into business planning.

• Exemptions and Harmonisation: IMA advocates for retaining existing exemptions for short-term receivables and bank balances with maturity under one year, and for applying similar exemptions to AAA-rated money market funds and UCITS funds.

Concerns About Current Regulatory Framework

• Unreasonable Capital Requirements: IMA warns that requiring additional capital for fee accruals or invoiced but unpaid fees could lead to capital requirements that are too high and not aligned with the nature of the business.

• Inconsistent Application Across Member States: IMA notes that the large exposures regime is not consistently applied across different EU countries, particularly in Germany and France, where some investment management firms may breach the rules.

Conclusion

IMA concludes that the current large exposures framework is not suitable for investment management firms and that the introduction of Pillar 2 requirements would render specific large exposures rules unnecessary. They advocate for exemptions that reflect the unique risk profile of the sector and call for a more appropriate regulatory approach that aligns with the actual risk exposures of investment management firms.