Financial watchdogs are having to revise plans to regulate the world's biggest investment funds because original proposals would have made it more difficult for asset managers to invest in infrastructure projects that are key to reviving growth.
Regulators have been working on rules for big funds to ensure they can withstand a financial crisis and mass withdrawals by customers that could destabilize the global financial system.
The Financial Stability Board's (FSB) first draft of the plans was criticized by the funds industry for potentially imposing new capital requirements on funds like similar rules for big banks.
David Wright, secretary general of the International Organization of Securities Commissions (IOSCO), an FSB member that is helping to rewrite the plans, said there would be more of a focus on activities of funds and not just their size.
This would consider issues such as the risk of outflows of money in stressed markets and how this could create contagion.
"This has been a difficult and complex debate and is still going on," Wright told a conference on Tuesday organised by ICI Global, a funds trade body that lobbied against the FSB's first proposals.
"There is now a much closer look at how the asset management industry is functioning, trying to think more granularly about where risks are, whether they are in asset managers or in the funds," Wright said.
The original proposals sparked behind-the-scenes clashes between central bankers and securities regulators. Central bankers are keen on measures to reduce risks, but securities regulators want to nurture market-based finance, such as fund investments into infrastructure projects like roads.
Channelling fund money into infrastructure is favoured as way to help to revive sluggish economies in Europe where banks have had to rein in lending to cope with tougher regulation.
Central bankers outnumber securities regulators at the FSB but both sets of regulators are working cohesively, Wright said.
He said that as banks become more heavily regulated, some risks that are not fully understood are shifting into markets, so it was right that central bankers should take a greater interest in these markets.
"The important thing is that the industry works with the regulator to refine down the issue and get towards a rational policy outcome based on evidence and facts," Wright said.
The FSB, which coordinates regulatory policy for the Group of 20 (G20) economies, will publish revised plans by early 2015.
The FSB's definition of funds that were big enough to pose a risk to the financial system captured 14 funds, all in the United States. These included funds such as the Vanguard Total Stock Market Index and the PIMCO Total Return fund.
Dan Waters, managing director of ICI Global, welcomed the revised approach which he said would look at market activities more broadly and not just on a fund by fund basis.
"Size was the wrong starting point... but there will still be some element related to entities," Waters told Reuters, referring to the funds themselves.
