[Federal Register Volume 75, Number 193 (Wednesday, October 6, 2010)]
[Proposed Rules]
[Pages 61653-61655]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25321]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 75, No. 193 / Wednesday, October 6, 2010 / 
Proposed Rules  

[[Page 61653]]



FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Chapter XIII


Advance Notice of Proposed Rulemaking Regarding Authority To 
Require Supervision and Regulation of Certain Nonbank Financial 
Companies

AGENCY: Financial Stability Oversight Council.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: Section 113 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``DFA'') gives the Financial Stability Oversight 
Council (the ``Council'') the authority to require that a nonbank 
financial company be supervised by the Board of Governors of the 
Federal Reserve System (``Board of Governors'') and subject to 
prudential standards if the Council determines that material financial 
distress at such a firm, or the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the activities of the 
firm, could pose a threat to the financial stability of the United 
States.
    This advance notice of proposed rulemaking (ANPR) invites public 
comment on the criteria that should inform the Council's designation of 
nonbank financial companies under the DFA.

DATES: Comments on this ANPR must be received by November 5, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding 
this advance notice of proposed rulemaking according to the 
instructions for ``Electronic Submission of Comments'' below. All 
submissions must refer to the document title. The FSOC encourages the 
early submission of comments.
    Electronic Submission of Comments. Interested persons must submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. Electronic submission of comments allows 
the commenter maximum time to prepare and submit a comment, ensures 
timely receipt, and enables the FSOC to make them available to the 
public. Comments submitted electronically through the http://www.regulations.gov Web site 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.

    Note: To receive consideration as public comments, comments must 
be submitted through the method specified above. Again, all 
submissions must refer to the docket number and title of the notice.

    Public Inspection of Public Comments. All properly submitted 
comments will be available for inspection and downloading at http://www.regulations.gov.
    Additional Instructions. Please note the number of the question to 
which you are responding at the top of each response. Though the 
responses will be screened for obscenities and appropriateness, in 
general comments received, including attachments and other supporting 
materials, are part of the public record and are immediately available 
to the public. Do not enclose any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.

FOR FURTHER INFORMATION CONTACT: For further information regarding this 
interim final rule contact the Office of Domestic Finance, Treasury, at 
(202) 622-1703. All responses to this Notice and Request for 
Information should be submitted via http://www.regulations.gov to 
ensure consideration.

SUPPLEMENTARY INFORMATION:

I. Background

    The Council was established by section 111 of the DFA for the 
purposes of ``(A) * * * identify[ing] risk to the financial stability 
of the United States 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; (B) * * * promot[ing] 
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 
(C) * * * respond[ing] to emerging threats to the stability of the 
United States financial system.'' The Council has ten voting members 
and 5 nonvoting members. The voting members consist of the Secretary of 
the Treasury who also is the Chairperson of the Council, the Chairman 
of the Board of Governors of the Federal Reserve System, the 
Comptroller of the Currency, the Director of the Bureau of Consumer 
Financial Protection, the Chairman of the Securities and Exchange 
Commission, the Chairperson of the Federal Deposit Insurance 
Corporation, the Chairperson of the Commodity Futures Trading 
Commission, the Director of the Federal Housing Finance Agency, the 
Chairman of the National Credit Union Administration Board, and an 
independent member appointed by the President with the advice and 
consent of the Senate, having insurance expertise. The nonvoting 
members are the Director of the Office of Financial Research, the 
Director of the Federal Insurance Office, and a State insurance 
commissioner, a State banking supervisor, and a State securities 
commissioner, each designated by a selection process determined by 
their respective state supervisors or commissioners.
    Through this ANPR the Council is seeking to gather information as 
it begins to develop the specific criteria and analytical framework by 
which it will designate nonbank financial companies \1\ for enhanced 
supervision under the DFA.
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    \1\ As defined in Section 102(a)(4) of DFA.
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a. Considerations in Making a Determination

    Under the provisions of the DFA, in making a determination on 
whether the company should be subject to supervision by the Board of 
Governors, the Council must consider:
    (A) The extent of the leverage of the company;
    (B) The extent and nature of the off-balance-sheet exposures of the 
company;
    (C) The extent and nature of the transactions and relationships of 
the company with other significant nonbank financial companies and 
significant bank holding companies;
    (D) The importance of the company as a source of credit for 
households, businesses, and State and local

[[Page 61654]]

governments and as a source of liquidity for the United States 
financial system;
    (E) The importance of the company as a source of credit for low-
income, minority, or underserved communities, and the impact that the 
failure of such company would have on the availability of credit in 
such communities;
    (F) The extent to which assets are managed rather than owned by the 
company, and the extent to which ownership of assets under management 
is diffuse;
    (G) The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the company;
    (H) The degree to which the company is already regulated by 1 or 
more primary financial regulatory agencies;
    (I) The amount and nature of the financial assets of the company;
    (J) The amount and types of the liabilities of the company, 
including the degree of reliance on short-term funding; and
    (K) Any other risk-related factors that the Council deems 
appropriate.
    The Council must consider similar factors in determining whether a 
foreign nonbank financial company should be designated and its U.S. 
operations and activities subject to supervision by the Board of 
Governors. In addition, the Council must consider the factors relevant 
to a U.S. or foreign nonbank financial company in determining whether a 
U.S. or foreign company, respectively, should be designated for 
supervision by the Board of Governors under the special anti-evasion 
provisions in section 113(c) of the DFA.

b. Process for Making a Determination

    Under the provisions of the DFA, the Council must provide a nonbank 
financial firm with advance notice that it plans to designate the firm, 
and the firm has up to 30 days to request a hearing and an additional 
30 days to submit material. Upon holding a hearing, the Council has up 
to 60 days to make a final determination. If a firm does not make a 
timely request for a hearing, the Council must notify the firm of its 
final determination within 40 days of the firm's receipt of advance 
notice from the Council. In making a determination, the Council must 
consult with the primary financial regulator, if any, of the affected 
firm, and with the appropriate foreign regulatory authorities as 
appropriate.\2\ Once designated, the Council must reevaluate its 
determination regarding each designated firm at least annually. Council 
designations are subject to judicial review. The Council is not 
requesting comments on these procedural requirements.
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    \2\ Under Section 113(f), the Council may waive the requirements 
on an emergency basis if necessary to prevent or mitigate threats to 
financial stability.
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II. Criteria for Designation

    1. What metrics should the Council use to measure the factors it is 
required to consider when making determinations under Section 113 of 
DFA?
    a. How should quantitative and qualitative considerations be 
incorporated into the determination process?
    b. Are there some factors that should be weighted more heavily by 
the Council than other factors in the designation process?
    2. What types of nonbank financial companies should the Council 
review for designation under DFA? Should the analytical framework, 
considerations, and measures used by the Council vary across 
industries? Across time? If so, how?
    3. Since foreign nonbank companies can be designated, what role 
should international considerations play in designating companies? Are 
there unique considerations for foreign nonbank companies that should 
be taken into account?
    4. Are there simple metrics that the Council should use to 
determine whether nonbank financial companies should even be considered 
for designation?
    5. How should the Council measure and assess the scope, size, and 
scale of nonbank financial companies?
    a. Should a risk-adjusted measure of a company's assets be used? If 
so, what methodology or methodologies should be used?
    b. Section 113 of DFA requires the Council to consider the extent 
and nature of the off-balance-sheet exposures of a company. Given this 
requirement, what should be considered an off-balance sheet exposure 
and how should they be assessed? How should off-balance sheet exposures 
be measured (e.g., notional values, mark-to-market values, future 
potential exposures)? What measures of comparison are appropriate?
    c. How should the Council take managed assets into consideration in 
making designations? How should the term ``managed assets'' be defined? 
Should the type of asset management activity (e.g., hedge fund, private 
equity fund, mutual fund) being conducted influence the assessment 
under this criterion? How should terms, conditions, triggers, and other 
contractual arrangements that require the nonbank financial firm either 
to fund or to satisfy an obligation in connection with managed assets 
be considered?
    d. During the financial crisis, some firms provided financial 
support to investment vehicles sponsored or managed by their firm 
despite having no legal obligation to do so. How should the Council 
take account of such implicit support?
    6. How should the Council measure and assess the nature, 
concentration, and mix of activities of a nonbank financial firm?
    a. Section 113 of DFA requires the Council to consider the 
importance of the company as a source of credit for households, 
businesses, and State and local governments, and as a source of 
liquidity for the United States financial system. Given this 
requirement, are there measures of market concentration that can be 
used to inform the application of this criterion? How should these 
markets be defined? What other measures might be used to assess a 
nonbank financial firm's importance under this criterion?
    b. Section 113 of DFA requires the Council to consider the 
importance of the company as a source of credit for low-income, 
minority, and underserved communities. Given this requirement, are 
there measures of market concentration that can be used to inform the 
application of this criterion? How should these markets be defined? 
What other measures might be used to assess a nonbank financial firm's 
importance under this criterion?
    7. How should the Council measure and assess the interconnectedness 
of a nonbank financial firm?
    a. What measures of exposure should be considered (e.g., 
counterparty credit exposures, operational linkages, potential future 
exposures under derivative contracts, concentration in revenues, direct 
and contingent liquidity or credit lines, cross-holding of debt and 
equity)? What role should models of interconnectedness (e.g., 
correlation of returns or equity values across firms, stress tests) 
play in the Council's determinations?
    b. Should the Council give special consideration to the 
relationships (including exposures and dependencies) between a nonbank 
financial company and other important financial firms or markets? If 
so, what metrics and thresholds should be used to identify what 
financial firms or markets should be considered significant for these 
purposes? What metrics and thresholds should be used in assessing the 
importance of a nonbank financial company's relationships with these 
other firms and markets?

[[Page 61655]]

    8. How should the Council measure and assess the leverage of a 
nonbank financial firm? How should measures of leverage address 
liabilities, off-balance sheet exposures, and non-financial business 
lines? Should standards for leverage differ by types of financial 
activities or by industry? Should acceptable leverage standards 
recognize differences in regulation? Are there existing standards 
(e.g., the Basel III leverage ratio) for measuring leverage that could 
be used in assessing the leverage of nonbank financial companies?
    9. How should the Council measure and assess the amount and types 
of liabilities, including the degree of reliance on short-term funding 
of a nonbank financial firm?
    a. What factors should the Council consider in developing 
thresholds for identifying excessive reliance on short-term funding?
    b. How should funding concentrations be measured?
    c. Do some nonbank financial companies have funding sources that 
are contractually short-term but stable in practice (similar to 
``stable deposits'' at banks)?
    d. Should the assessment link the maturity structure of the 
liabilities to the maturity structure and quality of the assets of 
nonbank financial companies?
    10. How should the Council take into account the fact that a 
nonbank financial firm (or one or more of its subsidiaries or 
affiliates) is already subject to financial regulation in the Council's 
decision to designate a firm? Are there particular aspects of 
prudential regulation that should be considered as particularly 
important (e.g., capital regulation, liquidity requirements, 
consolidated supervision)? Should the Council take into account whether 
the existing regulation of the company comports with relevant national 
or international standards?
    11. Should the degree of public disclosures and transparency be a 
factor in the assessment? Should asset valuation methodologies (e.g., 
level 2 and level 3 assets) and risk management practices be factored 
into the assessment?
    12. During the financial crisis, the U.S. Government instituted a 
variety of programs that served to strengthen the resiliency of the 
financial system. Nonbank financial companies participated in several 
of these programs. How should the Council consider the Government's 
extension of financial assistance to nonbank financial companies in 
designating companies?
    13. Please provide examples of best practices used by your 
organization or in your industry in evaluating and considering various 
types of risks that could be systemic in nature.
    a. How do you approach analyzing and quantifying interdependencies 
with other organizations?
    b. When and if important counterparties or linkages are identified, 
how do you evaluate and quantify the risks that a firm is exposed to?
    c. What other types of information would be effective in helping to 
identify and avoid excessive risk concentrations that could ultimately 
lead to systemic instability?
    14. Should the Council define ``material financial distress'' or 
``financial stability''? If so, what factors should the Council 
consider in developing those definitions?
    15. What other risk-related considerations should the Council take 
into account when establishing a framework for designating nonbank 
financial companies?

    Dated: October 1, 2010.
Alastair Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the 
Treasury.
[FR Doc. 2010-25321 Filed 10-4-10; 4:15 pm]
BILLING CODE 4810-25-P-P