same way, regardless of how likely they are to be sold following a market shock, masking the distinction between long- and short-term investors. Not only would this remove a critical source of liquidity and stability, it would actually aggravate downward price pressure, so making market shocks much worse than they otherwise would be.


In times of stress, rational investors sell assets only to meet liabilities, such as margin calls, loan repayments or fund redemptions. So it might make more sense to regulate financial organisations according to their liabilities as well as their assets, taking account things like call provisions and lock-in periods. This automatically distinguishes between long-and short-term investors and how much their market activity could imperil the system as a whole.


When all large organisations follow instructions from the same, possibly flawed, risk models they will all rush for the same exit in an emergency. Who will stand in as buyers? The answer can only be shadow banks and other organisations that are not captured by the regulations. Much could hang on their capacity – and willingness – to come to the rescue. THFJ


ABOUT THE AUTHOR


FRANCES COWELL Frances Cowell is an investment risk management executive who applies investment risk management to add value to portfolio performance by matching risk to investors’ objectives, drawing on extensive experience in institutional investment management spanning all asset classes and derivatives, as a portfolio manager, risk manager and in governance and policy oversight functions. Her finance career spans 30 years, having helped pioneer the use of financial derivatives to control risk, later extending the techniques learned there to control and target risk in conventional pension portfolios. For the last 15 years she has specialised in risk management for conventional, multi-asset portfolios and hedge funds, as Head of Investment Risk at Aviva Investors (then Morley Funds Management) and then CCLA. From 2007 to 2014 she served as a founding director of London Quant, a not-for-profit that hosts discussion of the practical application of investment theory. She also served for ten years on the board of a public sector body dedicated to enforcing ethical practices in non-financial professional activities, four of which were as Chairman. Most recently, she co-authored, with Matthew Levins, Crisis Wasted? Leading Risk Managers on Risk Culture, a book published by Wiley in October 2015, which addresses pressing issues affecting financial system stability.


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