Notice2023-08969
Analytic Framework for Financial Stability Risk Identification, Assessment, and Response
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 28, 2023
Issuing agencies
Financial Stability Oversight Council
Abstract
The Financial Stability Oversight Council (Council) is proposing to adopt an analytic framework that describes the approach the Council expects to take in identifying, assessing, and responding to certain potential risks to U.S. financial stability.
Full Text
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[Federal Register Volume 88, Number 82 (Friday, April 28, 2023)]
[Notices]
[Pages 26305-26311]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-08969]
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FINANCIAL STABILITY OVERSIGHT COUNCIL
Analytic Framework for Financial Stability Risk Identification,
Assessment, and Response
AGENCY: Financial Stability Oversight Council.
ACTION: Proposed analytic framework; request for public comment.
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SUMMARY: The Financial Stability Oversight Council (Council) is
proposing to adopt an analytic framework that describes the approach
the Council expects to take in identifying, assessing, and responding
to certain potential risks to U.S. financial stability.
DATES: Comment due date: June 27, 2023.
ADDRESSES: You may submit comments by either of the following methods.
All submissions must refer to the document title and RIN 4030-[XXXX].
Electronic Submission of Comments: You may submit comments
electronically through the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt, and enables the Council to make them available to the public.
Comments submitted electronically through the <a href="https://www.regulations.gov">https://www.regulations.gov</a> website can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Mail: Send comments to Financial Stability Oversight Council, Attn:
Eric Froman, 1500 Pennsylvania Avenue NW, Room 2308, Washington, DC
20220.
All properly submitted comments will be available for inspection
and downloading at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
In general, comments received, including attachments and other
supporting materials, are part of the public record and are available
to the public. Do not submit any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
FOR FURTHER INFORMATION CONTACT: Eric Froman, Office of the General
Counsel, Treasury, at (202) 622-1942; Devin Mauney, Office of the
General Counsel, Treasury, at (202) 622-2537; or Carol Rodrigues,
Office of the General Counsel, Treasury, at (202) 622-6127.
SUPPLEMENTARY INFORMATION:
I. Background
Section 111 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') established the Financial
Stability Oversight Council (Council), and section 112 sets forth its
duties and purposes, which include identifying risks to U.S. financial
stability and responding to emerging threats to the stability of the
U.S. financial system.\1\
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\1\ 12 U.S.C. 5321 & 5322.
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The proposed Analytic Framework for Financial Stability Risk
Identification, Assessment, and Response (Proposed Analytic Framework)
describes the approach the Council expects to take in identifying,
assessing, and responding to certain potential risks to U.S. financial
stability. The Proposed Analytic Framework is not a binding rule,\2\
and does not establish rights or
[[Page 26306]]
obligations applicable to any person or entity, but is intended to help
market participants, stakeholders, and other members of the public
better understand how the Council expects to perform certain of its
duties.
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\2\ In a rule codified at 12 CFR 1310.3, the Council voluntarily
committed that it would not amend or rescind certain interpretive
guidance regarding nonbank financial company determinations set
forth in Appendix A to 12 CFR part 1310 without providing the public
with notice and an opportunity to comment in accordance with the
procedures applicable to legislative rules under 5 U.S.C. 553.
Section 1310.3 does not apply to the Council's issuance of rules,
guidance, procedures, or other documents that do not amend or
rescind Appendix A, and accordingly, it does not apply to the
Proposed Analytic Framework. Nonetheless, in the interest of
transparency and accountability, the Council has chosen to publish
its Proposed Analytic Framework and provide an opportunity for
public comment.
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II. Questions for Public Comment
The Council seeks public comment on any aspect of the Proposed
Analytic Framework, including the following questions:
1. Will the Proposed Analytic Framework enable the Council to
achieve its statutory purposes and perform its statutory duties? Should
the Proposed Analytic Framework address additional topics? Are there
topics the Proposed Analytic Framework addresses but should not?
2. The Proposed Analytic Framework states that financial stability
can be defined as the financial system being resilient to events or
conditions that could impair its ability to support economic activity,
such as by intermediating financial transactions, facilitating
payments, allocating resources, and managing risks. Are there other
definitions of ``financial stability'' the Council should consider?
3. The Council's monitoring for potential risks to financial
stability may cover an expansive range of asset classes, institutions,
and activities, some of which are noted in the Proposed Analytic
Framework. Are there asset classes, institutions, and activities not
listed in the Proposed Analytic Framework the Council should monitor
for potential risks to financial stability?
4. The Proposed Analytic Framework lists certain vulnerabilities
that most commonly contribute to risk to financial stability: leverage;
liquidity risk and maturity mismatch; interconnections; operational
risks; complexity and opacity; inadequate risk management;
concentration; and destabilizing activities. Are the Council's
descriptions of these vulnerabilities appropriate? Should the Proposed
Analytic Framework address additional vulnerabilities?
5. The Proposed Analytic Framework also provides sample metrics
associated with the listed vulnerabilities. Are the proposed sample
metrics appropriate for the purposes described in the Proposed Analytic
Framework? Are there additional sample metrics that the Proposed
Analytic Framework should incorporate?
6. The Council has identified four channels as most likely to
facilitate the transmission of the negative effects of a risk to
financial stability: exposures; asset liquidation; critical function or
service; and contagion. Do the transmission channels listed in the
Proposed Analytic Framework capture the most likely ways in which the
negative effects of a risk to financial stability could be transmitted
to other firms or markets? Should the Council consider additional
transmission channels?
7. With respect to the vulnerabilities and transmission channels
identified in the Proposed Analytic Framework, are there potential
interactions between or among these vulnerabilities and transmission
channels that the Proposed Analytic Framework should address?
III. Legal Authority
The Council has numerous authorities and tools under the Dodd-Frank
Act to carry out its statutory purposes.\3\ As the agency charged by
Congress with broad-ranging responsibilities under the Dodd-Frank Act,
the Council has the inherent authority to promulgate interpretive
guidance that explains the approach the Council expects to take in
identifying, assessing, and responding to certain potential risks to
U.S. financial stability.\4\ The Council also has authority to issue
policy statements.\5\ The Proposed Analytic Framework describes how the
Council intends to exercise its discretionary authority. The Proposed
Analytic Framework does not have binding effect; does not impose duties
on, or alter the rights or interests of, any person; and does not
change the statutory conditions or standards for the Council's actions.
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\3\ See, for example, Dodd-Frank Act sections 112(a)(2), 113,
115, 120, 804, 12 U.S.C. 5322(a)(2), 5323, 5325, 5330, 5463.
\4\ Courts have recognized that ``an agency charged with a duty
to enforce or administer a statute has inherent authority to issue
interpretive rules informing the public of the procedures and
standards it intends to apply in exercising its discretion.'' See,
for example, Production Tool v. Employment & Training
Administration, 688 F.2d 1161, 1166 (7th Cir. 1982). The Supreme
Court has acknowledged that ``whether or not they enjoy any express
delegation of authority on a particular question, agencies charged
with applying a statute necessarily make all sorts of interpretive
choices.'' See U.S. v. Mead, 533 U.S. 218, 227 (2001).
\5\ See Association of Flight Attendants-CWA, AFL-CIO v. Huerta,
785 F.3d 710 (D.C. Cir. 2015).
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IV. Executive Orders 12866, 13563, 14094
Executive Orders 12866, 13563, and 14094 direct certain agencies to
assess costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Pursuant
to section 3(f) of Executive Order 12866, the Office of Information and
Regulatory Affairs within the Office of Management and Budget has
determined that the Proposed Analytic Framework is not a ``significant
regulatory action.''
Financial Stability Oversight Council
Analytic Framework for Financial Stability Risk Identification,
Assessment, and Response
I. Introduction
This document describes the approach the Financial Stability
Oversight Council (Council) expects to take in identifying, assessing,
and responding to certain potential risks to U.S. financial stability.
The Council's practices set forth in this document are among the
methods the Council uses to satisfy its statutory purposes: (1) to
identify risks to U.S. financial stability that could arise from the
material financial distress or failure, or ongoing activities, of
large, interconnected bank holding companies or nonbank financial
companies, or that could arise outside the financial services
marketplace; (2) to promote market discipline, by eliminating
expectations on the part of shareholders, creditors, and counterparties
of such companies that the government will shield them from losses in
the event of failure; and (3) to respond to emerging threats to the
stability of the U.S. financial system.\6\ The Council's specific
statutory duties include monitoring the financial services marketplace
in order to identify potential threats to U.S. financial stability and
identifying gaps in regulation that could pose risks to U.S. financial
stability, among others.\7\
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\6\ Dodd-Frank Act Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) section 112(a)(1), 12 U.S.C. 5322(a)(1).
\7\ Dodd-Frank Act section 112(a)(2), 12 U.S.C. 5322(a)(2).
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Financial stability can be defined as the financial system being
resilient to events or conditions that could impair its ability to
support economic activity, such as by intermediating financial
transactions, facilitating payments, allocating resources, and managing
risks. Adverse events, or shocks, can arise from within the financial
system or from external sources. Vulnerabilities in the financial
system can amplify the impact of a shock, potentially leading to
substantial disruptions in the provision of financial services. The
Council seeks
[[Page 26307]]
to identify and respond to risks to financial stability that could
impair the financial system's ability to perform its functions to a
degree that could harm the economy. Risks to financial stability can
arise from widely conducted activities or from the activities of
individual entities, and from long-term vulnerabilities or from sources
that are new or evolving.
This document describes the Council's analytic framework for
identifying, assessing, and responding to potential risks to financial
stability. The Council seeks to reduce the risk of a shock arising from
within the financial system, to improve resilience against shocks that
could affect the financial system, and to mitigate financial
vulnerabilities that may increase risks to financial stability. The
actions the Council may take depend on the nature of the vulnerability;
for example, vulnerabilities originating from activities that may be
widely conducted in a particular sector or market over which a
regulator has adequate existing authority may be addressed through an
activity-based or industry-wide response; in contrast, in cases where
the financial system relies on the ongoing financial activities of a
small number of entities, such that the impairment of one of the
entities could threaten financial stability, or where a particular
financial company's material financial distress or activities could
pose a threat to financial stability, an entity-based action may be
appropriate. The Council's authorities, some of which are described in
section II.c, are complementary, and the Council may select one or more
of those authorities to address a particular risk.
Among the many lessons of financial crises are that risks to
financial stability can be diverse and build up over time, dislocations
in financial markets and failures of financial companies can be sudden
and unpredictable, and regulatory gaps can breed risk. The Council was
created in the aftermath of the 2007-2009 financial crisis and is
statutorily responsible for identifying and pre-emptively acting to
address potential risks to financial stability. Many of the same
factors, such as leverage, liquidity risk, and operational risk,
regularly recur in different forms and under different conditions to
generate risks to financial stability. At the same time, the U.S.
financial system is large, diverse, and continually evolving, so the
Council's analytic methodologies adapt to address evolving developments
and risks.
This document is not a binding rule, but is intended to help market
participants, stakeholders, and other members of the public better
understand how the Council expects to perform certain of its duties.
The Council may consider factors relevant to the assessment of a
potential risk or threat to U.S. financial stability on a case-by-case
basis, subject to applicable statutory requirements. The Council's
annual reports describe the Council's work in implementing its
responsibilities.
II. Identifying, Assessing, and Addressing Potential Risks to Financial
Stability
a. Identifying Potential Risks
To enable the Council to identify potential risks to U.S. financial
stability, the Council, in consultation with relevant U.S. and foreign
financial regulatory agencies, monitors financial markets, entities,
and market developments to identify potential risks to U.S. financial
stability.
In light of the Council's broad statutory mandate, the Council's
monitoring for potential risks to financial stability may cover an
expansive range of asset classes, institutions, and activities, such
as:
<bullet> markets for debt, loans, short-term funds, equity
securities, commodities, digital assets, derivatives, and other
institutional and consumer financial products and services;
<bullet> central counterparties and payment, clearing, and
settlement activities;
<bullet> financial entities, including banking organizations,
broker-dealers, asset managers, investment companies, insurance
companies, mortgage originators and servicers, and specialty finance
companies;
<bullet> new or evolving financial products and practices; and
<bullet> developments affecting the resiliency of the financial
system, such as cybersecurity and climate-related financial risks.
Sectors and activities that may impact U.S. financial stability are
often described in the Council's annual reports. The Council reviews
information such as historical data, research regarding the behavior of
financial markets and financial market participants, and new
developments that arise in evolving marketplaces. The Council relies on
data, research, and analysis including information from Council member
agencies, the Office of Financial Research, primary financial
regulatory agencies, industry participants, and other sources.\8\
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\8\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
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b. Assessing Potential Risks
The Council works with relevant financial regulatory agencies \9\
to evaluate potential risks to financial stability to determine whether
they merit further review or action. The evaluation of any potential
risk to financial stability will be highly fact-specific, but the
Council has identified certain vulnerabilities that most commonly
contribute to such risks. The Council has also identified certain
sample quantitative metrics that are commonly used to measure these
vulnerabilities, although the Council may assess each of these
vulnerabilities using a variety of quantitative and qualitative
factors. The following list is not exhaustive, but is indicative of the
vulnerabilities and metrics the Council expects to consider.
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\9\ References in this document to ``relevant financial
regulatory agencies'' may encompass a broader range of regulators
than those included in the statutory definition of ``primary
financial regulatory agency'' under Dodd-Frank Act section 2(12), 12
U.S.C. 5301(12).
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<bullet> Leverage. Leverage can amplify risks by reducing market
participants' ability to satisfy their obligations and by increasing
the potential for sudden liquidity strains. Leverage can arise from
debt, derivatives, off-balance sheet obligations, and other
arrangements. Leverage can arise broadly within a market or at a
limited number of firms in a market. Metrics relevant for assessing
leverage may include ratios of assets, risk-weighted assets, debt,
derivatives liabilities or exposures, and off-balance sheet obligations
to equity.
<bullet> Liquidity risk and maturity mismatch. A shortfall of
sufficient liquidity to satisfy short-term needs, or reliance on short-
term liabilities to finance longer-term assets, can subject market
participants to rollover or refinancing risk. These risks may force
entities to sell assets rapidly at stressed market prices, which can
contribute to broader stresses. Relevant metrics may include the ratio
of short-term debt to unencumbered short-term high-quality liquid
assets, and amounts of funding available to meet unexpected reductions
in available short-term funding.
<bullet> Interconnections. Direct or indirect financial
interconnections, such as exposures of creditors, counterparties,
investors, and borrowers, can increase the potential negative effect of
dislocations or financial distress. Relevant metrics may include total
assets, off-balance-sheet assets or liabilities, total debt,
derivatives exposures, values of securities financing transactions, and
the size of potential requirements to post margin or
[[Page 26308]]
collateral. Metrics related to the concentration of holdings of a class
of financial assets may also be relevant.
<bullet> Operational risks. Risks can arise from the impairment or
failure of financial market infrastructures, processes, or systems,
including due to cybersecurity vulnerabilities. Relevant metrics may
include statistics on cybersecurity incidents or the scale of critical
infrastructure.
<bullet> Complexity or opacity. A risk may be exacerbated if a
market, activity, or firm is complex or opaque, such as if financial
transactions occur outside of regulated sectors or if the structure and
operations of market participants cannot readily be determined. In
addition, risks may be aggravated by the complexity of the legal
structure of market participants and their activities; unavailability
of data due to lack of regulatory or public disclosure requirements and
by obstacles to the rapid and orderly resolution of market
participants. Factors that generally increase the risks associated with
complexity or opacity may include a large size or scope of activities,
a complex legal or operational structure, activities or entities
subject to the jurisdiction of multiple regulators, and complex funding
structures. Relevant metrics may include the number of jurisdictions in
which activities are conducted, and numbers of affiliates.
<bullet> Inadequate risk management. A risk may be exacerbated if
it is conducted without effective risk-management practices, including
the absence of appropriate regulatory authority and requirements. In
contrast, existing regulatory requirements or market practices may
reduce risks by, for example, limiting exposures or leverage,
increasing capital and liquidity, enhancing risk-management practices,
restricting excessive risk-taking, providing consolidated prudential
regulation and supervision, or increasing regulatory or public
transparency. Relevant metrics may include amounts of capital and
liquidity.
<bullet> Concentration. A risk may be amplified if financial
exposures or important services are highly concentrated in a small
number of entities, creating a risk of widespread losses or the risk
that the service could not be replaced in a timely manner at a similar
price and volume if existing providers withdrew from the market.
Relevant metrics may include market shares in segments of applicable
financial markets.
<bullet> Destabilizing activities. Certain activities, by their
nature, particularly those that are sizeable and interconnected with
the financial system, can destabilize markets for particular types of
financial instruments or impair financial institutions. This risk may
arise even when those activities are intentional and permitted by
applicable law, such as trading practices that substantially increase
volatility in one or more financial markets, or activities that involve
moral hazard or conflicts of interest that result in the creation and
transmission of significant risks.
The vulnerabilities and metrics listed above identify risks that
may arise from broadly conducted activities or from a small number of
entities; they do not dictate the use of a specific authority by the
Council. Risks to financial stability can arise from widely conducted
activities or from a smaller number of entities, and the Council's
evaluations and actions will depend on the nature of a vulnerability.
While risks from individual entities may be assessed using these types
of metrics, the Council also evaluates broader risks, such as by
calculating these metrics on an aggregate basis within a particular
financial sector. For example, in some cases, risks arising from
widespread and substantial leverage in a particular market may be
evaluated or addressed on a sector-wide basis, while in other cases
risks from a single company whose leverage is outsized relative to
other firms in its market may be considered for an entity-specific
response.
In addition, in most cases the identification and assessment of a
potential risk to financial stability involves consideration of
multiple quantitative metrics and qualitative factors. Therefore, the
Council uses metrics such as those cited above individually and in
combination, as well as other factors, as appropriate, in its analyses.
The Council considers how the adverse effects of potential risks
could be transmitted to financial markets or market participants and
what impact the potential risk could have on the financial system. Such
a transmission of risk can occur through various mechanisms, or
channels. The Council has identified four transmission channels that
are most likely to facilitate the transmission of the negative effects
of a risk to financial stability. These transmission channels, which
are non-exhaustive, are:
<bullet> Exposures. Direct and indirect exposures of creditors,
counterparties, investors, and other market participants can result in
losses in the event of a default or decreases in asset valuations. In
particular, market participants' exposures to a particular financial
instrument or asset class could impair those market participants if
there is a default on or other reduction in the value of the instrument
or assets. The potential threat to U.S. financial stability will
generally be greater if the amounts of exposures are larger; if
transaction terms provide less protection for counterparties; if
exposures are correlated, concentrated, or interconnected with other
instruments or asset classes; or if significant counterparties include
large financial institutions.
<bullet> Asset liquidation. A rapid liquidation of financial assets
can pose a threat to U.S. financial stability when it causes a
significant fall in asset prices that disrupts trading or funding in
key markets or causes losses or funding problems for market
participants holding those assets. Rapid liquidations can result from a
deterioration in asset prices or market functioning that could pressure
firms to sell their holdings of affected assets to maintain adequate
capital and liquidity, which, in turn, could produce a cycle of asset
sales that lead to further market disruptions. The potential risk is
greater, for example, if leverage or reliance on short-term funding is
higher, if assets are riskier and would experience a reduction in
market liquidity in times of broader market stress, and if asset price
volatility could lead to significant margin calls.
<bullet> Critical function or service. A risk to financial
stability can arise if there could be a disruption of a critical
function or service that is relied upon by market participants and for
which there are no ready substitutes that could provide the function or
service at a similar price and quantity. This channel is more prominent
when the critical function or service is interconnected or large, when
operations are opaque, when the function or service uses or relies on
leverage to support its activities, or when risk management practices
related to operational risks are not sufficient.
<bullet> Contagion. Even without direct or indirect exposures,
contagion can arise from the perception of common vulnerabilities or
exposures, such as business models or asset holdings that are similar
or highly correlated. Such contagion can spread stress quickly and
unexpectedly, particularly in circumstances where there is limited
transparency into investment risks, correlated markets, or greater
operational risks. Contagion can also arise when there is a loss of
confidence in financial instruments that are treated as substitutes for
money. In these
[[Page 26309]]
circumstances, market dislocations or fire sales may result in a loss
of confidence in other financial market sectors or participants,
propagating further market dislocations or fire sales.
The presence of any of the vulnerabilities listed above may
increase the potential for risks to be transmitted to financial markets
or market participants through these or other transmission channels.
The Council may consider these vulnerabilities and transmission
channels, as well as others that may be relevant, in identifying
financial markets, activities, and nonbank financial companies that
could pose risks to U.S. financial stability.
The Council may assess risks as they could arise in the context of
a period of overall stress in the financial services industry and in a
weak macroeconomic environment, with market developments such as
increased counterparty defaults, decreased funding availability, and
decreased asset prices, because in such a context, the risks may have a
greater effect on U.S. financial stability.
The Council's work often includes efforts such as sharing data,
research, and analysis among Council members and member agencies and
their staffs; consulting with regulators and other experts regarding
the scope of potential risks and factors that may mitigate those risks;
and collaboratively developing analyses for consideration by the
Council. As part of this work, the Council may also engage with market
participants and other members of the public as it assesses potential
risks. In its evaluations, the Council takes into account existing laws
and regulations that have mitigated a potential risk to U.S. financial
stability. The Council also takes into account the risk profiles and
business models of market participants. Empirical data may not be
available regarding all potential risks. The type and scope of the
Council's analysis will be based on the potential risk under
consideration. In many cases, the Council provides information
regarding its work in its annual reports.
c. Addressing Potential Risks
In light of the varying sources of risk described above (such as
activities, entities, exogenous circumstances, and existing or emerging
practices or conditions), the Council may take different approaches to
respond to a risk, and may use multiple tools to mitigate a risk. These
approaches may include acting to reduce the risk of a shock arising
from within the financial system, to mitigate financial vulnerabilities
that may increase risks to financial stability, or to improve the
resilience of the financial system to shocks. The actions the Council
takes may depend on the circumstances. When a potential risk to
financial stability is identified, the Council's Deputies Committee
will generally direct one or more of the Council's staff-level
committees or working groups to consider potential policy approaches or
actions the Council could take to assess and address the risk. Those
committees and working groups may consider the utility of any of the
Council's authorities to respond to risks to U.S. financial stability,
including but not limited to those described below.
Interagency coordination and information sharing. In many cases,
the Council works with the relevant financial regulatory agencies at
the federal and state levels to seek the implementation of appropriate
actions to ensure a potential risk is adequately addressed.\10\ If they
have adequate authority, existing regulators could take actions to
mitigate potential risks to U.S. financial stability identified by the
Council. There may be different approaches existing regulators could
take, based on their authorities and the urgency of the risk, such as
enhancing their regulation or supervision of companies or markets under
their jurisdiction; restricting or prohibiting the offering of a
product; or requiring market participants to take additional risk-
management steps. If existing regulators can address a risk to
financial stability in a sufficient and timely way, the Council
generally encourages those regulators to do so.
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\10\ See Dodd-Frank Act sections 112(a)(2)(A), (D), (E), (F).
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Recommendations to agencies or Congress. The Council may also make
formal public recommendations to primary financial regulatory agencies
under section 120 of the Dodd-Frank Act. Under section 120, the Council
may provide for more stringent regulation of a financial activity by
issuing nonbinding recommendations to the primary financial regulatory
agencies to apply new or heightened standards and safeguards for a
financial activity or practice conducted by bank holding companies or
nonbank financial companies under their jurisdiction.\11\ In addition,
in any case in which no primary financial regulatory agency exists for
the markets or companies conducting financial activities or practices
identified by the Council as posing risks, the Council can consider
reporting to Congress on recommendations for legislation that would
prevent such activities or practices from threatening U.S. financial
stability.\12\ The Council will make these recommendations only if it
determines that the conduct, scope, nature, size, scale, concentration,
or interconnectedness of the activity or practice could create or
increase the risk of significant liquidity, credit, or other problems
spreading among bank holding companies and nonbank financial companies,
U.S. financial markets, or low-income, minority, or underserved
communities.\13\ The new or heightened standards and safeguards for a
financial activity or practice will take costs to long-term economic
growth into account, and may include prescribing the conduct of the
activity or practice in specific ways (such as by limiting its scope,
or applying particular capital or risk management requirements to the
conduct of the activity) or prohibiting the activity or practice.\14\
In its recommendations under section 120, the Council may suggest broad
approaches to address the risks it has identified. When appropriate,
the Council may make a more specific recommendation. Prior to issuing a
recommendation under section 120, the Council will consult with the
relevant primary financial regulatory agency and provide notice to the
public and opportunity for comment as required by section 120.\15\
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\11\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
\12\ Dodd-Frank Act section 120(d)(3), 12 U.S.C. 5330(d)(3).
\13\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
\14\ Dodd-Frank Act section 120(b)(2), 12 U.S.C. 5330(b)(2).
\15\ The Council also has authority to issue recommendations to
the Board of Governors of the Federal Reserve System (Federal
Reserve Board) regarding the establishment of prudential standards
and reporting and disclosure requirements applicable to large bank
holding companies and nonbank financial companies subject to Federal
Reserve Board supervision (Dodd-Frank Act section 115, 12 U.S.C.
5325); recommendations to regulators, Congress, or firms in its
annual reports (Dodd-Frank Act section 112(a)(2)(N), 12 U.S.C.
5322(a)(2)(N)); and other recommendations to Congress or Council
member agencies (Dodd-Frank Act section 112(a)(2)(D), (F), 12 U.S.C.
5322(a)(2)(D), (F)).
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Nonbank financial company determinations. In certain cases, the
Council may evaluate one or more nonbank financial companies for an
entity-specific determination under section 113 of the Dodd-Frank Act.
Under section 113, the Council may determine, by a vote of not fewer
than two-thirds of the voting members of the Council then serving,
including an affirmative vote by the Chairperson of the Council, that a
nonbank financial company will be supervised by the
[[Page 26310]]
Federal Reserve Board and be subject to prudential standards if the
Council determines that (1) material financial distress at the nonbank
financial company could pose a threat to the financial stability of the
United States or (2) the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the nonbank financial
company could pose a threat to the financial stability of the United
States. The Council has issued a procedural rule and interpretive
guidance regarding its process for considering a nonbank financial
company for potential designation under section 113.\16\ The Dodd-Frank
Act requires the Council to consider 10 specific considerations, such
as the company's leverage, relationships with other significant
financial companies, and existing regulation by primary financial
regulatory agencies, when determining whether a nonbank financial
company satisfies either of the determination standards.\17\ Due to the
unique threat that each nonbank financial company could pose to U.S.
financial stability and the nature of the inquiry required by the
statutory considerations set forth in section 113, the Council expects
that its evaluations of nonbank financial companies under section 113
will be firm-specific and may include an assessment of quantitative and
qualitative information that the Council deems relevant to a particular
nonbank financial company. The factors described above are not
exhaustive and may not apply to all nonbank financial companies under
evaluation.
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\16\ See 12 CFR part 1310.
\17\ Dodd-Frank Act section 113(a)(2) and (b)(2), 12 U.S.C.
5323(a)(2) and (b)(2).
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Payment, clearing, and settlement activity designations. The
Council also has authority to designate certain payment, clearing, and
settlement (PCS) activities ``that the Council determines are, or are
likely to become, systemically important'' under Title VIII of the
Dodd-Frank Act. PCS activities are defined as activities carried out by
financial institutions to facilitate the completion of financial
transactions such as funds transfers, securities contracts, futures,
forwards, repurchase agreements, swaps, foreign exchange contracts, and
financial derivatives. Under the Dodd-Frank Act, PCS activities may
include (1) the calculation and communication of unsettled financial
transactions between counterparties; (2) the netting of transactions;
(3) provision and maintenance of trade, contract, or instrument
information; (4) the management of risks and activities associated with
continuing financial transactions; (5) transmittal and storage of
payment instructions; (6) the movement of funds; (7) the final
settlement of financial transactions; and (8) other similar functions
that the Council may determine.\18\ Before designating a PCS activity,
the Council must consult with certain regulatory agencies and must
provide financial institutions with advanced notice of the proposed
designation by Federal Register publication. A financial institution
engaged in the PCS activity may request an opportunity for a written
or, at the sole discretion of the Council, oral hearing before the
Council to demonstrate that the proposed designation is not supported
by substantial evidence. The Council may waive the notice and hearing
requirements in certain emergency circumstances.\19\ Following any
designation of a PCS activity, the appropriate federal regulator will
establish risk-management standards governing the conduct of the
activity by financial institutions.\20\ The objectives and principles
for these risk-management standards will be to promote robust risk
management, promote safety and soundness, reduce systemic risks, and
support the stability of the broader financial system.\21\ The risk-
management standards may address areas such as risk management policies
and procedures, margin and collateral requirements, participant or
counterparty default policies and procedures, the ability to complete
timely clearing and settlement of financial transactions, and capital
and financial resource requirements for designated financial market
utilities, among other things.\22\
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\18\ Dodd Frank Act section 803(7)(C), 12 U.S.C. 5462(7)(C).
\19\ Dodd Frank Act section 804(c), 12 U.S.C. 5463(c).
\20\ Dodd Frank Act section 805(a), 12 U.S.C. 5464(a).
\21\ Dodd Frank Act section 805(b), 12 U.S.C. 5464(b).
\22\ Dodd Frank Act section 805(c), 12 U.S.C. 5464(c).
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Financial market utility designations. In addition, the Council has
authority to designate financial market utilities (FMUs) that it
determines are, or are likely to become, systemically important.\23\ An
FMU is defined as any person that manages or operates a multilateral
system for the purpose of transferring, clearing, or settling payments,
securities, or other financial transactions among financial
institutions or between financial institutions and the person.\24\ The
Council has issued a procedural rule regarding its authority to
designate FMUs.\25\ In determining whether designation of a given FMU
is warranted, the Council must consider (1) the aggregate monetary
value of transactions processed by the FMU; (2) the FMU's aggregate
exposure to its counterparties; (3) the relationship,
interdependencies, or other interactions of the FMU with other FMUs or
with PCS activities; (4) the effect of the FMU's failure or disruption
on critical markets, financial institutions, or the broader financial
system; and (5) any other factors that the Council deems
appropriate.\26\ Once designated as an FMU, the FMU is subject to the
supervisory framework of Title VIII of the Dodd-Frank Act. Section
805(a)(1)(A) requires the Federal Reserve Board to prescribe risk-
management standards governing the FMU's operations related to its PCS
activities unless the FMU is a derivatives clearing organization or
clearing agency.\27\ Specifically, section 805(a)(2) grants the
Commodity Futures Trading Commission or the Securities and Exchange
Commission, respectively, the authority to prescribe such risk-
management standards for a designated FMU that is either a derivatives
clearing organization registered under section 5b of the Commodity
Exchange Act or a clearing agency registered under section 17A of the
Securities Act of 1934.\28\ Such standards are intended to promote
robust risk management, promote safety and soundness, reduce systemic
risks, and support the stability of the broader financial system. In
addition, the Federal Reserve Board may authorize a Federal Reserve
Bank to establish and maintain an account for a designated FMU or
provide the designated FMU with access, in unusual or exigent
circumstances, to the discount window.\29\ A designated FMU is subject
[[Page 26311]]
to annual examinations by the relevant federal supervisory agency.\30\
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\23\ Dodd-Frank Act section 804(a)(1).
\24\ Dodd Frank Act section 803(6)(A), 12 U.S.C. 5462(6)(A).
\25\ 12 CFR part 1320.
\26\ Dodd Frank Act section 804(a)(2), 12 U.S.C. 5463(a)(2). See
also 12 CFR 1320.10.
\27\ Dodd-Frank Act section 805(a)(1)(A), 12 U.S.C. 5464(a)(1).
\28\ Dodd-Frank Act section 805(a)(2), 12 U.S.C. 5464(a)(2).
\29\ Dodd-Frank Act section 806(a)-(b), 12 U.S.C. 5465(a)-(b).
\30\ Dodd-Frank Act section 807, 12 U.S.C. 5466.
Kayla Arslanian,
Executive Secretary.
[FR Doc. 2023-08969 Filed 4-27-23; 8:45 am]
BILLING CODE 4810-AK-P-P
</pre></body>
</html>Indexed from Federal Register on April 28, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.