For the best part of this decade, macro-prudential supervisors have argued that investment funds contribute to the build-up of systemic risks. Today, EFAMA has published an ambitious report that provides a comprehensive overview of the contribution of the European investment fund sector to the diversity and resilience of capital markets.

Some key findings include:

• The investment fund sector is not systemically important, although there may be pockets of risk that require further attention from macro-prudential supervisors
• The Financial Stability Board’s NBFI methodology to identify “economic activities that may give rise to systemic risks, known as the NBFI Narrow Measure,” is flawed
• A successful Capital Markets Union (CMU) in Europe will require further growth in the investment fund sector
• European policymakers have a good grasp of the realities of the fund market and are addressing liquidity management appropriately within the AIFMD/UCITS review, however the envisaged FSB recommendations on Open-End Fund (OEF) liquidity management are problematic on more than one count

The report also makes a number of policy recommendations for consideration by the FSB and IOSCO in their work, including:

• The necessity for more effective, wholistic macro-prudential supervision
• Investment funds need access to all liquidity management tools and management companies require a better view of who the end-investors are
• Resilient capital markets will only come about through more comprehensive market reforms, including the introduction of a consolidate tape, the increased transparency and predictability of central counterparty margins, and greater regulatory guidance on the use of liquidity buffers by banks during periods of stress