Newly Enforced AMC Rules: A Step in Right Direction

EghtesadOnline: Securities and Exchange Organization of Iran, which has lately joined IOSCO, the regulatory body of Iranian capital market, made an announcement on April 18 regarding asset management companies (AMCs) to all financial intermediaries and fund management industry.

News ID: ۷۸۲۵۱۵

07 May 2018

The High Council of Capital Market in Iran approved the announcement through general meetings with board members of SEO on all fixed income, mutual and mixed investment funds to maintain certain requirements in their inceptions as well as their operations.

As per the announcement, the capped limit of all investment funds at the time of inception is 5 trillion rials ($120 million) and increase on such limit is subject to a year after the inception. Increase in total asset under management of mutual and fixed income funds for more than 10 trillion rials ($220 million) is subject to the High Council of Capital Market Authority approval and total maximum limit on their assets under management for both mutual and fixed income funds has been set at 100 trillion rials ($2.2 billion) for all times during their operations.

In fact, it is almost 12 years since the new rules and regulation reforms have been implemented on the Iranian capital market. These reforms have led to the formation of many diversified financial instruments and entities, according to Financial Tribune.

A sound debt management strategy is key to sustainable and efficient management of public debt. Accordingly, the young structure of the Iranian capital market and novel formation of all instruments and entities may have been subject of interest for many market players such as banks, financial institutions and large enterprises.

Additionally, the capital market of Iran has been mainly formed by mature banking dominance through shareholding and significant influence on the direction of decision-makings.

Therefore, mostly capital market instruments were subject for interference of money market manipulations. Since the time of general banking affairs has raised concerns, as has risk management in firms, there has been a progressive shift in the balance of financial intermediation toward non-banks as non-toxic asset management tools in comparison with banking fixed deposits.

Probably, such major shifts both in terms of volume and types of assets held by non-bank financial intermediaries (specifically fixed income assets), particularly asset management, were suspicious for bypassing enforced banking rates by the money market regulator.

However, conversely, the capital market was always a pegged rate system with banking and money market rates in Iran and could never be considered as rating determination platform or even benchmarking in order to compete with banking rates.

Despite the fact that most of the assets held by capital market funds within the banking system as fixed deposits, the young capital market of Iran with almost $110 billion market capitalization could only enjoy a fraction of such assets held by non-bank financial intermediaries and managing the combination of two (both banking fixed deposits and regulated securities) could be considered toxic for asset management industry.

Respectively, such an imposed limitation could be a strategic necessity for trend modifications within the Iranian capital market and mandatory from risk management point of view.

Notwithstanding, it would be more likely to enforce this identified limitations on investment funds in accordance with their assets capacity to prevent any possible side effects in overall market function.

Due to the nature of these limitations, functionality of investment funds might not be affected severely, but large funds that hold large size debt securities could be impacted. Such multibillion investment funds have considerably boost the development of Iran’s debt financing market and ultimately the financing of large industries and enterprises both in terms of underwriting and secondary market liquidity measures.

Such quantitative easing policies on all investment funds would increase the efficiency levels of resource allocations exclusively within the capital markets, which could be aligned with domestic bond development plan by the government under the Sixth Five-Year Development Plan (2017-22) while slowing down the expansion pace of Iranian capital market in general.

Consequently, synchronization of spillage from large funds and their assets with the rest of the industry would, indeed, take some balancing time and effort, which might put investors under pressure.

Eventually, such enforcement in the long term would cause investors to seek greater yield by increasing durations and simultaneously the number of funds within the market will increase quantitatively, which could further generate employment in the asset management industry.