November 17, 2017 Treasury report reviews FSOC's process for designating systemically important non-banks Report says Council should consult more with primary regulators, improve its analysis of risk, and better weigh costs and benefits of designations The Treasury Department on November 17, 2017, released the fourth in a series of reports on financial regulatory reform required by a series of executive orders issued by President Trump earlier this year. This report, which evaluates the Financial Stability Oversight Council's (FSOC) regime of designating certain large non-bank financial companies as systemically important (SIFIs), was required by an April 21, 2017, memorandum by the President that tasked the Treasury secretary with conducting "a thorough review of the FSOC determination and designation processes." That review, according to the memorandum, required Treasury to assess if the SIFI designation process for non-banks is "sufficiently transparent" and provides "adequate due process," whether the Council's designation processes "adequately consider the costs of any determination or designation on the regulated entity" and offer "a meaningful opportunity to have determinations or designations reevaluated in a timely and transparent manner," among several other questions. Attached with this Alert please find PDFs of the Treasury's report (68 pages) and a two-page fact sheet on the report's conclusions. Five goals. In its report, Treasury generally found that the Council in the past has resorted to designations too quickly without adequate analysis of data or consultation with other financial regulators. Treasury listed five goals that the FSOC's designation process should achieve: 1) leveraging the expertise of primary financial regulatory agencies; 2) promoting market discipline; 3) maintaining a level playing field among firms; 4) appropriately tailoring regulations to minimize burdens; and 5) ensuring the FSOC's pre-designation analyses are "rigorous, clear, and transparent." The report says FSOC should shift to an "industry-wide or activities-based approach" in determining whether to apply a SIFI designation for non-banks. Treasury says that will require three steps: 1) reviewing potential risks to financial stability from activities and products; 2) working first with a company's primary regulators to address potential risks to financial stability, and if those regulators don't sufficiently address the problem, the FSOC should make "formal, non-binding recommendations" to them; and 3) considering applying the SIFI designation only after consulting with the primary regulators. More 'analytic rigor.' Treasury further says that FSOC should change its guidance to firms that could potentially be designated by assuring it will "assess the likelihood of a firm's material financial distress" as part of analysis. As part of generally adding more "analytic rigor" to the analysis that precedes any non-bank designation, FSOC should conduct a cost-benefit analysis and only follow through on a designation if the benefits to financial stability outweigh the costs. Treasury also recommends that FSOC improve the way it communicates with non-banks that face designation, make the Council's processes simpler, and increase the public transparency of its basis for any SIFI determinations. Treasury's report also urges FSOC to "articulate more clearly" to non-banks the specific risks that led to their designation, and to begin a process that will allow designated firms to get annual feedback about "the extent to which potential changes by the company" would address the Council's concerns. Financial market utilities. A section of the report devoted to Financial Market Utilities (FMU) — the eight clearinghouses and futures exchanges that have been designated as systemically important by FSOC — recommends that the Council's approach to FMUs be more "analytically rigorous" and transparent. The relevant financial regulators should continue working together to coordinate supervision of FMUs and to "develop effective resolution strategies," the report says, and the FSOC should better leverage the expertise of primary regulators when determining whether to designate a market utility. "Key issues related to FMU operation … such as Federal Reserve account access and potential access to Federal Reserve emergency facilities, should be studied further," the report says. After the FSOC voted to lift the SIFI designation for AIG in October, and MetLife's designation was stripped by a federal judge in March 2016 (in a case whose appeal is still pending), Prudential Financial is the only non-bank that still carries a SIFI designation from FSOC. The FSOC voted to lift the SIFI designation for GE Capital in June 2016 after the company divested most of its financial and depository assets. ———————————————
——————————————— Designations Fact Sheet
Designations Memo
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