Biden administration to revive Obama-era reviews of hedge fund leverage, mutual fund investments, redemptions, Yellen says

The Biden administration plans to resuscitate Obama-era assessments of financial stability risks posed by hedge fund leverage as well as mutual funds’ investment and redemption practices, Treasury Secretary-nominee Janet Yellen said today.

“We saw some of those problems in March,” Yellen told the Senate Finance Committee at her confirmation hearing, referring to pandemic-related market turbulence caused in part by asset managers. “I would hope to look again at some of those approaches.”

As Treasury secretary, Yellen would head the Financial Stability Oversight Council, a group of the top US financial regulators charged with curbing threats to financial stability.

Under Trump-appointed Treasury Secretary Steven Mnuchin, FSOC’s role shrank, and the council disbanded an Obama-era group formed to evaluate financial stability threats created by hedge funds’ leverage. Yellen said she supports the way FSOC monitors asset managers’ potential economic threats on a sector-wide basis rather than individually.

“I thought that was the right approach,” she said. “I would hope to look again at some of those approaches.”

While Yellen was Federal Reserve chief during the Obama administration, she supported a proposal to look at asset manager activities that might pose systemic risks. That proposal was finalized last year.

— 2016 FSOC paper —

During the Obama era, FSOC issued a 2016 paper calling for steps to address financial stability risks caused by mutual funds that offer daily investor redemptions while investing in illiquid assets.

Among these steps were adoption of “robust” risk-management practices for mutual funds that invest in less liquid assets and establishment of “clear” guidelines restricting fund retention of illiquid assets.

With regard to hedge funds, the paper said their leverage reports on Securities and Exchange Commission Form PF offer incomplete information about risk exposures. These funds’ counterparties are also overseen by various regulators with different jurisdictions.

Most leverage appears to be concentrated in larger funds, the paper said.

To better understand hedge fund activities and determine whether they pose financial stability threats, FSOC created a working group that was disbanded during the Trump administration.