Incentive structures in institutional asset management and their implications for financial markets - CGFS publications No 21 - March 2003

Preface The Committee on the Global Financial System (CGFS), known until 1999 as the Euro-Currency Standing Committee, serves as a discussion forum for the central bank community on financial stability questions. Central banks, being placed at the centre of the financial system, have a long tradition of analysing financial market developments. This applies to both the operational, ie monetary policy-related, and the financial stability perspectives. Furthermore, given their responsibilities in the latter area, central banks are, in practice, charged with encouraging, and actively contributing to, the development and maintenance of a robust financial market infrastructure. On that basis, the CGFS has, in the past, frequently been asked to examine the potential implications of innovations in financial instruments and global financial market practices. As part of the Committee's ongoing work in this area, the CGFS decided, in September 2001, to set up a Working Group to examine the incentive structures of institutional asset managers and to identify possible implications for financial markets of the main developments in that industry. The institutional asset management industry has grown substantially since the mid-1990s, matching the rise in stock market valuations up to early 2000. Going forward, since its growth is driven by underlying demographic shifts and pension reform, this trend is likely to continue, well beyond the present cyclical downturn. Given its growth and, hence, the increasing importance of the industry in a number of financial markets, structural developments can be expected to potentially affect market outcomes, an issue of great interest to the Committee and the central bank community. The Working Group on Incentive Structures in Institutional Asset Management was chaired by Michel Cardona of the Bank of France. A list of the members of the Working Group is annexed to this report. The Group joins with the Committee in expressing appreciation for the cooperation of the industry representatives that agreed to participate in the Working Group's interview process. The Committee believes that this new Working Group report is yet another example of the cooperative effort between central banks and market participants that tends to characterise CGFS-initiated projects. The CGFS continues to be interested in this topic and, as part of its regular monitoring exercise, intends to review developments in the institutional asset management industry in the future. The institutional asset management industry has become an important feature of modern financial markets, with the scale of this business's importance readily apparent from the …