In a speech to the C.D. Howe Institute earlier this week, the Office of the Superintendent of Financial Institutions (OSFI)’s Mark Zelmer likened the regulator's position to that of the wizard Gandalf in J. R. R. Tolkien's Lord of the Rings trilogy.

Discussing the relationship between market participants and global financial stability, OSFI Deputy Superintendent Zelmer used Tolkien's work as an analogy for the industry. If financial black swan events are created by the evil necromancer Sauron, then OSFI is cast in the role of Gandalf.

"Gandalf was a wizard who played an important role in helping Frodo succeed in his quest, just as we at OSFI work with the financial institutions we supervise to protect the interests of depositors, policyholders and creditors while allowing those institutions to compete and take reasonable risks. I must confess that I have some difficulty in visualising major banks and life insurance companies as hobbits, but I digress," said Zelmer.

He went on to discuss some of the vulnerabilities specific to asset managers. While asset managers tend to be smaller and less complex than the banks and have not been designated as systemically important financial institutions, Zelmer pointed out the sector is still subject to stress and dangers.

In particular, the Deputy Superintendent outlined three key risks for asset managers. He warned that (i) liquidity mismatches could contribute to instability in financial markets, (ii) funds that rely on leverage may represent important structural vulnerability, and (iii) there could be disruptions when investment mandates are transferred from one institution to another. OSFI is considering whether additional policy remedies are needed to buttress the current regulatory framework against these kinds of risks.

"If so, our plan is to explore measures that could be applied at a global level to specific activities or to all asset managers/investment funds engaged in that activity. This activities-based approach should help to limit any disruptions to the highly competitive landscape in the asset management sector," concluded Zelmer. "The past eight years have seen some significant achievements as we work to implement the global regulatory reform agenda. But the journey is not yet over. We have more miles to travel and challenges to face before we can cast the ring of financial turmoil into the fire of Mount Doom."