[Federal Register Volume 84, Number 49 (Wednesday, March 13, 2019)]
[Proposed Rules]
[Pages 9028-9048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04488]


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 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. 84, No. 49 / Wednesday, March 13, 2019 / 
Proposed Rules  

[[Page 9028]]



FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Part 1310

RIN 4030-ZA00


Authority To Require Supervision and Regulation of Certain 
Nonbank Financial Companies

AGENCY: Financial Stability Oversight Council.

ACTION: Notification of proposed interpretive guidance; request for 
public comment.

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SUMMARY: This proposed interpretive guidance, which would replace the 
Financial Stability Oversight Council's existing interpretive guidance 
on nonbank financial company determinations, describes the approach the 
Council intends to take in prioritizing its work to identify and 
address potential risks to U.S. financial stability using an 
activities-based approach, and enhancing the analytical rigor and 
transparency in the processes the Council intends to follow if it were 
to consider making a determination to subject a nonbank financial 
company to supervision by the Federal Reserve.

DATES: Comment due date: May 13, 2019.

ADDRESSES: You may submit comments by either of the following methods. 
All submissions must refer to the document title and RIN 4030-AA00.
    Electronic Submission of Comments: You may 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 Council to make them available to the public. 
Comments submitted electronically through the http://www.regulations.gov 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: 
Mark Schlegel, 1500 Pennsylvania Avenue NW, Room 2208B, Washington, DC 
20220.
    All properly submitted comments will be available for inspection 
and downloading at http://www.regulations.gov.
    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: Bimal Patel, Office of Domestic 
Finance, Treasury, at (202) 622-2850; Eric Froman, Office of the 
General Counsel, Treasury, at (202) 622-1942; or Mark Schlegel, Office 
of the General Counsel, Treasury, at (202) 622-1027.

SUPPLEMENTARY INFORMATION:

I. Background

    The statutory purposes of the Financial Stability Oversight Council 
(the ``Council'') are to identify risks to U.S. financial stability, 
promote market discipline, and respond to emerging threats to the 
stability of the U.S. financial system. The Council's authorities to 
accomplish these statutory purposes include authorities to facilitate 
information sharing and coordination among regulators, monitor the 
financial services marketplace, make recommendations to regulators, and 
require supervision by the Board of Governors of the Federal Reserve 
System (the ``Federal Reserve'') for nonbank financial companies that 
may pose risks to U.S. financial stability.
    Section 111 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5321) (the ``Dodd-Frank Act'') established 
the Council. The purposes of the Council under section 112 of the Dodd-
Frank Act (12 U.S.C. 5322) are (A) to identify risks 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) 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 
(C) to respond to emerging threats to the stability of the United 
States financial system.
    As a threshold matter, the Council emphasizes the importance of 
market discipline, rather than government intervention, as a mechanism 
for addressing potential risks to U.S. financial stability posed by 
financial companies. The Dodd-Frank Act gives the Council broad 
discretion to determine how to respond to potential threats to U.S. 
financial stability. The Council's duties under section 112 of the 
Dodd-Frank Act include monitoring the financial services marketplace in 
order to identify potential threats to U.S. financial stability, and 
recommending to the Council member agencies general supervisory 
priorities and principles reflecting the outcome of discussions among 
the member agencies. The Council's duties under section 112 also 
include making recommendations to primary financial regulatory agencies 
\1\ to apply new or heightened standards and safeguards for financial 
activities or practices that could create or increase risks of 
significant liquidity, credit, or other problems spreading among 
financial companies and markets. The Council intends to seek to 
identify, assess, and address potential risks and emerging threats on a 
system-wide basis by taking an activities-based approach to its work, 
as further explained below.
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    \1\ ``Primary financial regulatory agency'' is defined in 
section 2(12) of the Dodd-Frank Act, 12 U.S.C. 5301(12).
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    The Dodd-Frank Act also authorizes the Council to determine that 
certain nonbank financial companies will be subject to supervision by 
the Federal Reserve and prudential standards. The Federal Reserve is 
responsible for establishing the prudential standards that will be 
applicable, under section 165 of the Dodd-Frank Act, to nonbank 
financial companies subject to a Council designation \2\ under section 
113 of the Dodd-Frank Act. The Council has previously issued rules, 
guidance, and other public statements regarding its

[[Page 9029]]

process for evaluating nonbank financial companies for a potential 
designation. On April 11, 2012, the Council issued interpretive 
guidance (the ``2012 Interpretive Guidance'') regarding the manner in 
which the Council makes designations under section 113 of the Dodd-
Frank Act, as an appendix to a final rule (together, the ``2012 Final 
Rule and Interpretive Guidance'').\3\ On May 22, 2012, the Council 
approved hearing procedures relating to the conduct of hearings before 
the Council in connection with proposed determinations regarding 
nonbank financial companies and financial market utilities and related 
emergency waivers or modifications under sections 113 and 804 of the 
Dodd-Frank Act.\4\ The hearing procedures were amended in 2013,\5\ and 
again in 2018.\6\ On February 4, 2015, the Council adopted supplemental 
procedures (the ``2015 Supplemental Procedures'') to the 2012 Final 
Rule and Interpretive Guidance.\7\ In June 2015, the Council published 
staff guidance with details regarding the methodologies used in Stage 1 
thresholds in connection with the determination process under section 
113.\8\ On November 17, 2017, the Department of the Treasury issued a 
report to the President in response to a Presidential Memorandum 
directing the Secretary of the Treasury to conduct a thorough review of 
the determination and designation processes of the Council.\9\ The 
Council is proposing this interpretive guidance (the ``Proposed 
Guidance''), which incorporates certain provisions of the 2015 
Supplemental Procedures, to revise and update the 2012 Interpretive 
Guidance. The Proposed Guidance is intended to enhance the Council's 
transparency, analytical rigor, and public engagement. If the Council 
issues final interpretive guidance based on this proposal, the final 
interpretive guidance will replace the 2012 Interpretive Guidance, the 
2015 Supplemental Procedures, and the 2015 staff guidance regarding the 
Stage 1 thresholds; the Council's hearing procedures will remain in 
effect.
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    \2\ Section 113 of the Dodd-Frank Act, 12 U.S.C. 5323, refers to 
a Council ``determination'' regarding a nonbank financial company. 
This proposal refers to ``determination'' and ``designation'' 
interchangeably for ease of reading.
    \3\ The 2012 Final Rule and Interpretive Guidance added a new 
part 1310 to title 12 of the Code of Federal Regulations, consisting 
of final rules (12 CFR 1310.1-1310.23) and interpretive guidance 
(Appendix A to Part 1310--Financial Stability Oversight Council 
Guidance for Nonbank Financial Company Designations). See 12 CFR 
part 1310, app. A (2012). The Proposed Guidance proposes to modify 
appendix A, but does not propose to modify the final rules added to 
title 12 by the 2012 Final Rule and Interpretive Guidance.
    \4\ 12 U.S.C. 5323, 5463; 77 FR 31855 (May 30, 2012).
    \5\ 78 FR 22546 (April 16, 2013).
    \6\ 83 FR 12010 (March 19, 2018).
    \7\ Financial Stability Oversight Council Supplemental 
Procedures Relating to Nonbank Financial Company Determinations 
(February 4, 2015), available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20-%20February%202015.pdf.
    \8\ See Council, Staff Guidance Methodologies Relating to Stage 
1 Thresholds (June 8, 2015), available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/FSOC%20Staff%20Guidance%20-%20Stage%201%20Thresholds.pdf.
    \9\ Treasury, Report to the President of the United States in 
Response to the Presidential Memorandum Issued April 21, 2017: 
Financial Stability Oversight Council Designations (November 17, 
2017), available at https://www.treasury.gov/press-center/press-releases/documents/pm-fsoc-designations-memo-11-17.pdf.
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    The Council expects that the Proposed Guidance will better enable 
the Council to:
     Leverage the expertise of financial regulatory agencies;
     Promote market discipline;
     Maintain competitive dynamics in affected markets;
     Appropriately tailor regulations to cost-effectively 
minimize burdens; and
     Ensure the Council's designation analyses are rigorous and 
transparent.

II. Overview of Proposed Guidance

    The Proposed Guidance would revise the 2012 Interpretive Guidance 
in order to ensure that the Council's work is clear, transparent and 
analytically rigorous, and to enhance the Council's engagement with 
companies, regulators, and other stakeholders. By issuing clear and 
transparent guidance, the Council seeks to provide the public with 
sufficient information to understand the Council's concerns regarding 
risks to financial stability, while appropriately protecting 
information submitted by companies and regulators to the Council.

A. Key Changes From 2012 Interpretive Guidance

    The Proposed Guidance would substantially transform the Council's 
existing procedures. Following are high-level descriptions of several 
of the most important changes, which are explained in greater detail 
below.
    First, under the Proposed Guidance, the Council will prioritize its 
efforts to identify, assess, and address potential risks and threats to 
U.S. financial stability through a process that emphasizes an 
activities-based approach. This approach is consistent with the 
Council's priorities of identifying and addressing potential risks and 
emerging threats on a system-wide basis, in order to reduce the 
potential for competitive market distortions that could arise from 
entity-specific determinations, and allow primary financial regulatory 
agencies to address identified potential risks. The Council will pursue 
entity-specific determinations under section 113 of the Dodd-Frank Act 
only if a potential risk or threat cannot be addressed through an 
activities-based approach. This approach will enable the Council to 
more effectively identify and address the underlying sources of risks 
to financial stability, rather than addressing risks only at a 
particular nonbank financial company that may be designated.
    Second, in the event the Council considers a nonbank financial 
company for a potential determination under section 113, the Proposed 
Guidance includes a new proposal that the Council perform a cost-
benefit analysis prior to making a determination. The Council will make 
a determination under section 113 only if the expected benefits to 
financial stability from the determination justify the expected costs 
that the determination would impose.
    Third, under the Proposed Guidance, the Council will assess the 
likelihood of a nonbank financial company's material financial distress 
when evaluating the firm for a potential designation, in order to 
evaluate the extent to which a designation may promote U.S. financial 
stability.
    Fourth, the Proposed Guidance condenses the current three-stage 
process for a determination under section 113 into two stages, by 
eliminating current stage 1 (as established by the 2012 Interpretive 
Guidance). Under current stage 1, a set of uniform quantitative metrics 
is applied to a broad group of nonbank financial companies in order to 
identify nonbank financial companies for further evaluation and to 
provide clarity for other nonbank financial companies that likely will 
not be subject to evaluation for a potential designation. The Proposed 
Guidance eliminates current stage 1, because it generated confusion 
among firms and members of the public and is not compatible with the 
proposal to prioritize an activities-based approach.
    Fifth, the Proposed Guidance further enhances the new, two-stage 
determination process by making numerous procedural improvements and 
incorporating several provisions of the 2015 Supplemental Procedures, 
which were intended to facilitate the Council's engagement and 
transparency. The Proposed Guidance would increase the Council's 
engagement with companies and their existing regulators during the 
designation process. One of the goals of this enhanced engagement is to 
provide the company with greater visibility into the aspects of its 
business that may pose risks to U.S. financial

[[Page 9030]]

stability. Enhanced engagement will also allow a company under review 
to provide the Council with relevant information, which will help to 
ensure that the Council is making decisions based on a diverse array of 
data and rigorous analysis. By making a company aware early in the 
review process of the potential risks the Council has identified, the 
Council seeks to give the company more information and tools to 
mitigate those risks prior to any Council designation, thereby 
providing a potential pre-designation ``off-ramp.''
    The Proposed Guidance also includes procedures intended to clarify 
the post-designation ``off-ramp.'' The Proposed Guidance provides that 
in the event the Council makes a final determination regarding a 
company, the Council intends to encourage the company or its regulators 
to take steps to mitigate the potential risks identified in the 
Council's written explanation of the basis for its final determination. 
Except in cases where new material risks arise over time, if a company 
adequately addresses the potential risks identified in writing by the 
Council at the time of the final determination and in subsequent 
reevaluations, the Council should generally be expected to rescind its 
determination regarding the company. By clarifying the ``off-ramp'' to 
rescission, and taking other steps to promote designated nonbank 
financial companies' ability to reduce the risks they could pose to 
financial stability, the Council seeks to both protect the U.S. 
financial system and reduce the regulatory burden on the companies.
    Sixth, the Proposed Guidance eliminates the six-category framework 
described in the 2012 Interpretive Guidance. As noted in the 2012 
Interpretive Guidance, the Dodd-Frank Act requires the Council to take 
into account 10 considerations when evaluating a company for a 
potential designation, and authorizes the Council to consider ``any 
other risk-related factors that the Council deems appropriate.'' \10\ 
The 2012 Interpretive Guidance established an analytic framework that 
groups all relevant factors, including the 10 statutory considerations 
\11\ and any additional risk-related factors, into six categories 
(size, interconnectedness, substitutability, leverage, liquidity risk 
and maturity mismatch, and existing regulatory scrutiny). The six-
category framework has not proven useful in guiding the Council's 
evaluations, and unnecessarily complicates the framework for the 
Council's analysis. As a result, the Proposed Guidance eliminates this 
six-category framework.
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    \10\ See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2).
    \11\ See section C(1) below for a list of the 10 statutory 
considerations.
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    The following sections provide detailed descriptions of (1) the 
proposed activities-based approach (section B); (2) the proposed 
analytic framework for the Council's evaluation of nonbank financial 
companies for a potential designation under section 113 of the Dodd-
Frank Act (section C); and (3) the process that the Council will 
generally follow when determining whether to designate, or rescind the 
designation of, a nonbank financial company (section D).

B. Activities-Based Approach

    Under the Proposed Guidance, the Council would prioritize its 
efforts to identify, assess, and address potential risks and threats to 
U.S. financial stability through a process that emphasizes an 
activities-based approach. The Council will pursue entity-specific 
determinations under section 113 of the Dodd-Frank Act only if a 
potential risk or threat cannot be addressed through an activities-
based approach. This approach reflects two priorities: (1) Identifying 
and addressing, in consultation with relevant financial regulatory 
agencies,\12\ potential risks and emerging threats on a system-wide 
basis, thereby reducing the potential for competitive distortions among 
companies and in markets that could arise from entity-specific 
regulation and supervision, and (2) allowing relevant financial 
regulatory agencies, which generally possess greater information and 
expertise with respect to company, product, and market risks, to 
address potential risks, rather than subjecting the companies to new 
regulatory authorities. The 2012 Final Rule and Interpretive Guidance 
did not address the concept of an activities-based approach.
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    \12\ References in this preamble and guidance to ``relevant 
financial regulatory agencies'' may encompass a broader range of 
regulators than those included in the statutory definition of 
``primary financial regulatory agency.'' See Dodd-Frank Act section 
2(12), 12 U.S.C. 5301(12).
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    The Dodd-Frank Act gives the Council broad discretion to determine 
how to respond to potential threats to U.S. financial stability. As 
part of its activities-based approach, the Council will examine a 
diverse range of financial products, activities, and practices that 
could pose risks to financial stability. The types of activities the 
Council will evaluate are often identified in the Council's annual 
reports, and include activities related to the extension of credit, 
maturity and liquidity transformation, market making and trading, and 
other key functions critical to support the functioning of financial 
markets.\13\
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    \13\ For example, the Council's 2018 annual report noted risks 
such as cybersecurity events associated with the increased use of 
information technology, the concentrations of activities and 
exposures in central counterparties, and transition issues related 
to the move away from LIBOR to an alternative, sustainable reference 
rate.
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    The Proposed Guidance establishes a two-step process for the 
Council's activities-based approach. In the first step, in an effort to 
identify potential risks to U.S. financial stability, the Council 
intends to monitor diverse financial markets and market developments, 
in consultation with relevant financial regulatory agencies, to 
identify products, activities, or practices that could pose risks to 
financial stability.\14\ The Council intends to continue to monitor a 
broad scope of financial markets and market developments, which may 
include corporate and sovereign debt and loan markets, equity markets, 
new or evolving financial products, activities, and practices, and 
developments affecting the resiliency of financial market participants. 
If the Council's monitoring of markets and market developments 
identifies a product, activity, or practice that could pose a potential 
risk to U.S. financial stability, the Council, in consultation with the 
relevant financial regulatory agencies, will evaluate the potential 
risk to determine whether it merits further review or action. The 
Proposed Guidance defines a ``risk to financial stability'' as a risk 
of an event or development that could impair financial intermediation 
or financial market functioning to a degree that would be sufficient to 
inflict significant damage on the broader economy.\15\
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    \14\ The Council has a statutory duty to monitor the financial 
services marketplace in order to identify potential threats to U.S. 
financial stability. See Dodd-Frank Act section 112(a)(2)(C), 12 
U.S.C. 5322(a)(2)(C).
    \15\ The 2012 Final Rule and Interpretive Guidance did not 
define ``risk to financial stability.''
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    In its analysis in the first step of the activities-based approach, 
the Council will evaluate the extent to which certain characteristics 
could amplify potential risks to U.S. financial stability arising from 
products, activities, or practices. While these characteristics may not 
themselves present risks to U.S. financial stability, the Council will 
consider whether the combination or prominence of such characteristics 
in the products, activities, or practices under evaluation, warrants 
further scrutiny. Such characteristics include asset valuation risk or 
credit risk;

[[Page 9031]]

leverage, including leverage arising from debt, derivatives, off-
balance sheet obligations, and other arrangements; and the transparency 
of financial markets, such as growth in financial transactions 
occurring outside of regulated sectors, among others. When evaluating 
the potential risks associated with a product, activity, or practice, 
the Council will take into account these characteristics and various 
other factors that may exacerbate or mitigate the risks. For example, 
activities may pose greater risks if they are complex or opaque, are 
conducted without effective risk-management practices, are 
significantly correlated with other financial products, or are either 
highly concentrated or significant and widespread. A trading activity 
in a market subject to a significant amount of asset valuation risk, 
for instance, may pose a greater threat to financial stability if the 
activity is also complex. In contrast, regulatory requirements or 
market practices may mitigate risks by, for example, limiting exposures 
or leverage, enhancing risk-management practices, or restricting 
excessive risk-taking. Regulatory requirements associated with a 
lending activity, such as an asset concentration limit or repayment 
test, may reduce the potential risk to financial stability stemming 
from the activity. Council members can, at their discretion, raise 
potential risks for consideration by the Council, including with 
respect to risks that are, or are migrating, outside a particular 
regulator's jurisdiction.
    The Council's analysis in the first step of the activities-based 
approach will generally focus on four framing questions, which analyze: 
(1) Triggers of potential risks (for example, sharp reductions in the 
valuation of particular classes of financial assets or significant 
credit losses); (2) how adverse effects of the potential risk may be 
transmitted to financial markets or market participants (for example, 
through direct or indirect exposures in financial markets to the 
potential risk or funding or trading pressures that may result from 
associated declines in asset prices); (3) the effects the potential 
risk could have on the financial system (for example, the scale and 
magnitude of adverse effects on other companies and markets, and 
whether such effects could be concentrated or diffused among market 
participants); and (4) whether the adverse effects of the potential 
risk could impair the financial system in a manner that could harm the 
non-financial sector of the U.S. economy (for example, through 
curtailed or interrupted provision of credit to non-financial 
companies). As part of this analysis, the Council will engage in a 
collaborative discussion with relevant regulators.
    If the Council identifies a potential risk to U.S. financial 
stability in step one of the activities-based approach, then in the 
second step, the Council will work with the relevant financial 
regulatory agencies at the federal and state levels to seek the 
implementation of actions to address the identified potential risk.\16\ 
The Council will coordinate among its members and member agencies and 
will follow up on supervisory or regulatory actions to ensure the 
potential risk is adequately addressed. The goal of this step is for 
existing regulators to take appropriate action, such as modifying their 
regulation or supervision of companies or markets under their 
jurisdiction in order to mitigate potential risks to U.S. financial 
stability identified by the Council. Measures that existing regulators 
can take to address a particular risk may vary widely, based on their 
authorities and the urgency of the risk. The Council would seek to take 
advantage of existing regulators' expertise and regulatory authorities 
to address the potential risk identified by the Council.
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    \16\ The Council has a statutory duty to ``recommend to the 
member agencies general supervisory priorities and principles 
reflecting the outcome of discussions among the member agencies'' 
and to ``make recommendations to primary financial regulatory 
agencies to apply new or heightened standards and safeguards for 
financial activities or practices that could create or increase 
risks of significant liquidity, credit, or other problems spreading 
among bank holding companies, nonbank financial companies, and 
United States financial markets.'' See Dodd-Frank Act section 
112(a)(2)(F), (K), 12 U.S.C. 5322(a)(2)(F), (K).
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    The Council anticipates that appropriate measures it may take to 
address an identified potential risk will typically take the form of 
relatively informal actions, such as information sharing among 
regulators, but as deemed appropriate could also include more formal 
measures, such as the Council's public issuance of recommendations to 
regulators or the public. Such recommendations could be made in the 
Council's annual report, which includes the Council's recommendations 
to enhance the integrity, efficiency, competitiveness, and stability of 
U.S. financial markets, to promote market discipline, and to maintain 
investor confidence.
    Alternatively, if after engaging with relevant financial regulatory 
agencies, the Council finds that those regulators' actions are 
insufficient to address the identified potential risk to U.S. financial 
stability, the Council has authority under section 120 of the Dodd-
Frank Act to ``provide for more stringent regulation of a financial 
activity'' by publicly issuing nonbinding recommendations to 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 
jurisdictions.\17\ This transparent process includes consultation with 
the primary financial regulatory agency and public notice inviting 
comments. The Council intends to make recommendations under section 120 
of the Dodd-Frank Act only to the extent that its recommendations are 
consistent with the statutory mandate of the relevant primary financial 
regulatory agency.
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    \17\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
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    The Council expects that much of its initial identification and 
assessment of risks, and engagement with regulators, will be informal 
and nonpublic in nature. The staffs of Council members and member 
agencies will likely be responsible for much of the market monitoring, 
risk identification, information sharing, and analysis in the 
activities-based approach. This engagement may yield a range of diverse 
outcomes, including the sharing of data, research, and analysis among 
the Council and regulators, or the public issuance of recommendations 
by the Council in its annual report. Potential risks that merit further 
attention may be raised at meetings of the Council members or with 
other stakeholders, and, as appropriate, may result in public 
statements or recommendations by the Council, as described above.
    Questions for Comment on Activities-Based Approach:
    General Questions:
    1. Does the Council's proposal described above to prioritize its 
efforts to identify, assess, and address potential risks and threats to 
U.S. financial stability through a process that emphasizes an 
activities-based approach allow the Council to achieve its statutory 
purposes? Should the Council's proposed approach to the activities-
based approach be modified for other considerations?
    2. When undertaking the activities-based approach, are there 
specific categories of risks to U.S. financial stability that should be 
examined by the Council?
    Step One of Activities-Based Approach: Identifying Potential Risks

[[Page 9032]]

from Products, Activities, or Practices (Appendix, s. II(a)):
    3. Are the proposed financial markets and market developments 
examples (including corporate and sovereign debt and loan markets, 
equity markets, markets for other financial products, including 
structured products and derivatives, and short-term funding markets) 
for identifying products, activities, or practices that could pose 
risks to financial stability appropriate?
    4. What specific, consistent analyses should the Council perform to 
monitor markets generally or specific types of markets?
    5. The Proposed Guidance identifies certain characteristics that 
may amplify potential risks to U.S. financial stability arising from 
products, activities, or practices. Are the proposed characteristic 
examples (including asset valuation risk or credit risk, leverage, and 
liquidity risk or maturity mismatch) appropriate? Are there additional 
characteristics that the Council should consider, or are any of the 
identified criteria inappropriately specified?
    6. Are the four framing questions described in the Proposed 
Guidance for evaluating potential risks appropriate?
    Step Two of Activities-Based Approach: Working with Regulators to 
Address Identified Risks (Appendix, s. II(b)):
    7. Should the Council make any changes to step two of the 
activities-based approach, as described in the Proposed Guidance?

C. Analytic Framework for Nonbank Financial Company Determinations

    The Council expects to advance beyond the activities-based 
approach, and evaluate a nonbank financial company for a potential 
determination under section 113 of the Dodd-Frank Act, only in a 
limited set of circumstances--namely, if (1) the Council's 
collaboration and engagement with the relevant financial regulatory 
agencies does not adequately address the potential risk identified by 
the Council, or if the potential threat to U.S. financial stability is 
outside the jurisdiction or authority of financial regulatory agencies, 
and (2) the potential threat identified by the Council is one that 
could be addressed by a Council determination regarding one or more 
companies. Following is a description of the substantive analysis the 
Council would undertake regarding any nonbank financial company under 
review for a potential determination.
1. Statutory Standards and Considerations
    Title I of the Dodd-Frank Act defines a ``nonbank financial 
company'' as a domestic or foreign company that is ``predominantly 
engaged'' in ``financial activities,'' other than bank holding 
companies and certain other types of firms.\18\ The Dodd-Frank Act 
provides that a company is ``predominantly engaged'' in financial 
activities if either (1) the annual gross revenues derived by the 
company and all of its subsidiaries from financial activities, as well 
as from the ownership or control of insured depository institutions, 
represent 85 percent or more of the consolidated annual gross revenues 
of the company; or (2) the consolidated assets of the company and all 
of its subsidiaries related to financial activities, as well as related 
to the ownership or control of insured depository institutions, 
represent 85 percent or more of the consolidated assets of the 
company.\19\ The Dodd-Frank Act requires the Federal Reserve to 
establish the requirements for determining whether a company is 
``predominantly engaged in financial activities'' for this purpose.\20\
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    \18\ See Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
    \19\ See Dodd-Frank Act section 102(a)(6), 12 U.S.C. 5311(a)(6).
    \20\ See Dodd-Frank Act section 102(b), 12 U.S.C. 5311(b). The 
Federal Reserve published a final rule in April 2013 establishing 
the requirements for determining if a company is ``predominantly 
engaged in financial activities.'' See 12 CFR 242.3.
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    Section 113 of the Dodd-Frank Act authorizes the Council to subject 
a nonbank financial company to supervision by the Federal Reserve and 
prudential standards if the Council determines that (1) material 
financial distress at the nonbank financial company could pose a threat 
to U.S. financial stability (the ``First Determination Standard''), or 
(2) the nature, scope, size, scale, concentration, interconnectedness, 
or mix of the activities of the nonbank financial company could pose a 
threat to U.S. financial stability (the ``Second Determination 
Standard''). The analytic framework in the Proposed Guidance focuses 
primarily on the First Determination Standard, because risks to 
financial stability (such as asset fire sales or financial market 
disruptions) are most commonly propagated through a nonbank financial 
company when it is in distress.
    The Council is statutorily required to take into account the 
following considerations in making a determination under section 113 of 
the Dodd-Frank Act: \21\
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    \21\ See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2). 
This list reflects the statutory considerations applicable to a 
determination with respect to a U.S. nonbank financial company. The 
Council is required to consider corresponding factors in making a 
determination with respect to a foreign nonbank financial company.
---------------------------------------------------------------------------

     The extent of the leverage of the company;
     The extent and nature of the off-balance-sheet exposures 
of the company;
     The extent and nature of the transactions and 
relationships of the company with other significant nonbank financial 
companies and significant bank holding companies;
     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 U.S. financial system;
     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;
     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;
     The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the company;
     The degree to which the company is already regulated by 
one or more primary financial regulatory agencies;
     The amount and nature of the financial assets of the 
company;
     The amount and types of the liabilities of the company, 
including the degree of reliance on short-term funding; and
     Any other risk-related factors that the Council deems 
appropriate.
    The Proposed Guidance clarifies several terms used in the 
Determination Standards that are not defined in the Dodd-Frank Act, 
including ``company,'' ``material financial distress,'' and ``threat to 
the financial stability of the United States.'' The Proposed Guidance 
would define ``threat to the financial stability of the United States'' 
by reference to the potential for ``severe damage on the broader 
economy,'' in contrast to the definition in the 2012 Interpretive 
Guidance, which refers to ``significant'' damage.
2. Transmission Channels
    The Proposed Guidance explains that the Council's evaluation of a 
nonbank financial company for a potential designation will focus 
primarily on how

[[Page 9033]]

the negative effects of the company's material financial distress, or 
of the nature, scope, size, scale, concentration, interconnectedness, 
or mix of the company's activities, could be transmitted to or affect 
other firms or markets, thereby causing a broader impairment of 
financial intermediation or of financial market functioning. The 
Council has identified three transmission channels as most likely to 
facilitate the transmission of these negative effects. These 
transmission channels are: (1) The exposure transmission channel; (2) 
the asset liquidation transmission channel; and (3) the critical 
function or service transmission channel. While these transmission 
channels were also described in the 2012 Interpretive Guidance, the 
Proposed Guidance would substantially enhance and clarify the Council's 
analyses under these three channels.
a. Exposure Transmission Channel
    Under the exposure transmission channel, the Council will evaluate 
whether a nonbank financial company's creditors, counterparties, 
investors, or other market participants have direct or indirect 
exposure to the nonbank financial company that is significant enough to 
materially and adversely affect those or other creditors, 
counterparties, investors, or other market participants and thereby 
pose a threat to U.S. financial stability. Among other factors, the 
Council expects to evaluate the amounts of exposures, the degree of 
protection for the counterparty under the terms of transactions, 
whether the largest counterparties include large financial 
institutions, and the company's leverage and size. The Council will 
also consider the exposures that counterparties and other market 
participants have to a nonbank financial company arising from the 
company's capital markets activities. The Council expects to consider a 
variety of factors in connection with this analysis, such as the amount 
and nature of, and counterparties to, the company's outstanding debt 
(regardless of term) and other liabilities, derivatives transactions 
(which may be measured on the basis of gross notional amount, net fair 
value, or potential future exposures), and securities financing 
transactions, among others. The Council will also consider factors that 
mitigate the potential risks posed by exposures to the nonbank 
financial company, such as whether exposures of a company's 
counterparties arising from capital markets activities are 
collateralized by high-quality, highly liquid securities. The Proposed 
Guidance notes that the Council will consider the extent to which 
assets are managed rather than owned by the company, in recognition of 
the distinct nature of exposure risks when the company is acting as an 
agent rather than as principal. In particular, in the case of a nonbank 
financial company that manages assets on behalf of customers or other 
third parties, the third parties' direct financial exposures are often 
to the issuers of the managed assets, rather than to the nonbank 
financial company managing those assets. Finally, the Council will 
evaluate the potential for contagion in conjunction with other factors 
summarized above when evaluating risk under this channel. As part of 
this assessment, the Council will consider relevant industry-specific 
historical examples, the scope of the company's interconnectedness with 
large financial institutions, and market-based or regulatory factors 
that may mitigate the risk of contagion, among other factors.
b. Asset Liquidation Transmission Channel
    Under the asset liquidation transmission channel, the Council will 
consider whether a nonbank financial company holds assets that, if 
liquidated quickly, could cause a fall in asset prices and thereby 
significantly disrupt trading or funding in key markets or cause 
significant losses or funding problems for other firms with similar 
holdings. The Council may also consider whether a deterioration in 
asset pricing or market functioning could pressure other financial 
firms to sell their holdings of affected assets in order to maintain 
adequate capital and liquidity, which, in turn, could produce a cycle 
of asset sales that could lead to further market disruptions. The 
Council's analysis of the asset liquidation transmission channel will 
focus on three central factors: (1) Liquidity of the company's 
liabilities; (2) liquidity of the company's assets; and (3) potential 
fire sale impacts.
    When analyzing the liquidity of the company's liabilities, the 
Council will assess the company's liquidity risk by reviewing factors 
such as the company's short-term financial obligations, financial 
arrangements that can be terminated by counterparties and therefore 
become short-term, and long-term liabilities that may come due in a 
short-term period, among other factors. The Council will also evaluate 
the company's leverage (for example, by assessing total assets and 
total debt measured relative to total equity, and derivatives 
liabilities and off-balance sheet obligations relative to total 
equity), as well as the company's short-term debt ratio. When analyzing 
the liquidity of the company's assets, the Council will consider which 
assets the company could rapidly liquidate, if necessary, to satisfy 
its obligations. The Council expects to focus on the size and liquidity 
characteristics of the company's investment portfolio, grouping the 
assets into categories based on liquidity. Finally, when analyzing 
potential fire sale impacts, the Council will consider the potential 
effects of the company's asset liquidation on markets and market 
participants. The Council will apply quantitative models to assess how 
the company could satisfy the identified range of potential liquidity 
needs, identified in the previous step of the Council's analysis, by 
rapidly selling its identified liquid assets.
c. Critical Function or Service Transmission Channel
    Finally, under the critical function or service transmission 
channel, the Council will consider the potential for a nonbank 
financial company to become unable or unwilling to provide a critical 
function or service that is relied upon by market participants and for 
which there are no ready substitutes. This analysis considers the 
extent to which other firms could provide similar financial services in 
a timely manner at a similar price and quantity if a nonbank financial 
company withdraws from a particular market, a factor commonly known as 
``substitutability.'' Substitutability also captures situations in 
which a nonbank financial company is the primary or dominant provider 
of services in a market that the Council determines to be essential to 
U.S. financial stability. When evaluating this transmission channel, 
the Council may consider the nonbank financial company's activities and 
critical functions and the importance of those activities and functions 
to the U.S. financial system, including how those activities and 
functions would be performed by the company or other market 
participants in the event of the company's material financial distress; 
the competitive landscape for markets in which a nonbank financial 
company participates and for the services it provides; the company's 
market share in specific product lines; and the ability of substitutes 
to replace a service or function provided by the company, among other 
factors.
    In addition to the three transmission channels, the Proposed 
Guidance explains that the Council also intends to consider a nonbank 
financial company's complexity, opacity, and resolvability when 
evaluating whether the company poses a risk to U.S. financial 
stability.

[[Page 9034]]

As part of this analysis, the Council may assess the complexity of the 
nonbank financial company's legal, funding, and operational structure, 
and any obstacles to the rapid and orderly resolution of the company. 
In addition, consistent with section 113 of the Dodd-Frank Act, the 
Proposed Guidance explains that the Council will consider the degree to 
which a nonbank financial company is already regulated by one or more 
primary financial regulatory agencies. When considering existing 
regulatory scrutiny, the Council may weigh factors such as the extent 
to which the company's primary financial regulator has imposed risk-
management standards as relevant to the type of company, as well as 
regulators' processes for inter-regulator coordination.
    Questions for Comment on Analytic Framework for Nonbank Financial 
Company Determinations:
    General Questions:
    8. The Proposed Guidance describes a uniform analytic framework for 
determinations that would be applied across industries; are there 
industry-specific factors that should be addressed in the Proposed 
Guidance?
    9. The Proposed Guidance defines ``material financial distress'' as 
a nonbank financial company being in imminent danger of insolvency or 
defaulting on its financial obligations. Should the Council consider 
alternative interpretations of this term or apply additional metrics or 
criteria when interpreting this term?
    10. The Proposed Guidance defines ``threat to the financial 
stability of the United States'' as the threat of an impairment of 
financial intermediation or of financial market functioning that would 
be sufficient to inflict severe damage on the broader economy. What 
criteria or metrics should the Council consider when evaluating whether 
a threat is sufficient to inflict ``severe'' damage on the broader 
economy?
    11. Are the Council's proposed three transmission channels 
(appendix, s. III(b)) appropriate for evaluating whether a nonbank 
financial company under section 113 of the Dodd-Frank Act meets one of 
the Determination Standards?
    a. Do the three transmission channels capture the ways in which the 
negative effects described in the Determination Standards could be 
transmitted to or affect other firms or markets?
    b. Are there ways in which the three transmission channels (or the 
three factors that the Council will focus on in the asset liquidation 
channel) may interact that would compound the negative effects of a 
single channel?
    Exposure Transmission Channel (Appendix, s. III(b)):
    12. The Council may consider various types of exposures that 
counterparties and other market participants have to a nonbank 
financial company, which the Proposed Guidance notes are highly 
dependent on the nature of the company's business. Are there other 
unique types of exposures that such parties may have to a nonbank 
financial company, or factors that may mitigate the risks posed by 
these exposures? How should the Council take into account any such 
mitigating factors in its analysis?
    Asset Liquidation Transmission Channel (Appendix, s. III(b)):
    13. The Council may consider a company's liquidity risk, based on a 
set of proposed factors (short-term financial obligations. financial 
arrangements that can be terminated by counterparties and therefore 
become short-term, etc.) when evaluating the asset liquidation channel. 
Are there other factors the Council should consider, in addition to 
those proposed? Is there an appropriate time period during which the 
Council should evaluate a company's liquidity risk, tailored for 
specific types of financial products?
    14. The Council may also evaluate a company's leverage when 
evaluating this transmission channel, based on a set of proposed 
factors (including total assets and total debt measured relative to 
total equity, and derivatives liabilities and off-balance sheet 
obligations relative to total equity). Are there other factors the 
Council should consider, in addition to those proposed? How should the 
Council assess the effects of a company's leverage in this channel?
    15. When evaluating potential fire sale impacts as part of this 
channel, what quantitative models should the Council consider?
    Critical Function or Service Transmission Channel (Appendix, s. 
III(b)):
    16. Are there relevant quantitative metrics for measuring risks 
under the critical function or service transmission channel? Should the 
Council consider additional factors under this channel when evaluating 
the activities and functions of a company in order to measure its 
substitutability?
    17. What metrics can be used to measure whether a service or 
function is critical to financial stability?
    Complexity and Resolvability; Existing Regulatory Scrutiny 
(Appendix, s. III(c)-(d)):
    18. Is the Council's proposed framework appropriate for assessing 
the complexity and resolvability of a nonbank financial company and its 
existing regulatory scrutiny (appendix, s. III(c)-(d)) when considering 
a potential designation?
3. Other Considerations
    Under the Proposed Guidance, the Council will perform a cost-
benefit analysis before making any designation under section 113. The 
Council proposes to make a designation under section 113 only if the 
expected benefits justify the expected costs that the determination 
would impose.\22\ The key elements of regulatory analysis include (1) a 
statement of the need for the proposed action, (2) an examination of 
alternative approaches, and (3) an evaluation of the benefits and costs 
of the proposed action and the main alternatives.\23\ The Council will 
quantify reasonable estimable benefits and costs (using ranges, as 
appropriate), and will also consider non-quantified benefits and costs, 
in assessing the net benefits of a designation. The Council will 
conduct this analysis only in cases where the Council is concluding 
that the company meets one of the standards for a determination by the 
Council under section 113 of the Dodd-Frank Act, because in other cases 
doing so would not affect the outcome of the Council's analysis.
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    \22\ See MetLife, Inc. v. Financial Stability Oversight Council, 
177 F. Supp.3d 219, 242 (D.D.C. 2016) (quoting 12 U.S.C. 
5323(a)(2)(K) and Michigan v. Environmental Protection Agency, 135 
S. Ct. 2699, 2707 (2015)).
    \23\ See Office of Management and Budget Circular A-4 (Sept. 17, 
2003).
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    The Council will consider the benefits of a designation to the U.S. 
financial system, the U.S. economy, and the nonbank financial company 
due to additional regulatory and supervisory requirements resulting 
from the determination, including the benefits of the prudential 
standards adopted by the Federal Reserve under section 165 of the Dodd-
Frank Act. When evaluating potential benefits to the U.S. financial 
system and the U.S. economy arising from a designation, the Council may 
consider whether the designation enhances financial stability and 
improves the functioning of markets by reducing the likelihood or 
severity of a potential financial crisis, among other factors. With 
respect to company-specific benefits, a company subject to a 
designation may derive benefits from anticipated new or increased 
requirements, including, for example, a lower cost of capital or higher 
credit ratings upon meeting its post-designation regulatory and 
supervisory requirements.
    When evaluating the costs of a designation, the Council will 
consider

[[Page 9035]]

not only the cost to the nonbank financial company from anticipated new 
or increased regulatory requirements in connection with a designation, 
but also costs to the U.S. economy. Relevant costs to the company will 
likely include costs related to risk-management requirements, 
supervision and examination, and liquidity requirements. When 
evaluating the costs of a determination to the U.S. economy, the 
Council will assess the impact of the determination on the availability 
and cost of credit or financial products in relevant U.S. markets, 
among other factors.
    Consistent with sound risk regulation, the Council will consider 
not only the impact of an identifiable risk, but also the likelihood 
that the risk will be realized. The Council will therefore assess the 
likelihood of a company's material financial distress, applying 
qualitative and quantitative factors, when evaluating the overall 
impact of a Council designation for any company under review under the 
First Determination Standard. To assess the risk of material financial 
distress, the Council may consider a range of factors, including 
market-based measures (e.g., distance-to-default measures), accounting-
based measures (e.g., statistical models using capital adequacy), and 
market- and accounting-based measures (e.g., academic models). The 
Council's analysis of the likelihood of a nonbank financial company's 
material financial distress will be conducted taking into account a 
period of overall stress in the financial services industry and a weak 
macroeconomic environment. When possible, the Council will attempt to 
quantify the likelihood of material financial distress; as an 
alternative, when doing so is not possible with respect to a specific 
firm, the Council will generally consider quantitative and qualitative 
factors related to the types of market-based or accounting-based 
measures noted above, and historical examples regarding the 
characteristics of financial companies that have experienced financial 
distress.
    As noted below, the Council will consult with the company's primary 
financial regulatory agency (if any) when assessing the company, 
including regarding the company's resolvability, complexity, and the 
likelihood of its material financial distress.
    Questions for Comment on Other Considerations (Benefits and Costs 
of Determination; Likelihood of Material Financial Distress):
    Benefits and Costs of Determination (Appendix, s. III(e)):
    19. Is the proposed framework for assessing the benefits and costs 
of a potential determination appropriate? How should the Council assess 
benefits and costs that are difficult to monetize or quantify?
    20. Should the Council consider other benefits or costs than those 
proposed in section III.e of the Proposed Guidance?
    21. How should the Council estimate the costs of any new regulatory 
requirements that would result from the Council's designation? What 
sources should the Council rely upon when estimating such costs?
    22. Should the Council consider additional factors when considering 
the benefits or costs of a designation to the U.S. economy?
    23. Should the Council consider any additional benefits to the 
company subject to a designation, or additional benefits to the U.S. 
financial system and the U.S. economy arising from a Council 
designation other than those listed in section III.e of the Proposed 
Guidance? How should the Council quantify any such benefits? What 
sources should the Council rely upon when estimating such benefits?
    24. How should the Council address uncertainty (for example, using 
alternate baselines or sensitivity analyses)?
    25. Are there additional approaches the Council should consider 
when measuring potential threats to financial stability in order to 
assess any improvement in financial stability following a 
determination?
    26. Should the Council interpret its authority under section 113 of 
the Dodd-Frank Act in a manner that is consistent with the opinion of 
the U.S. District Court for the District of Columbia in MetLife, Inc. 
v. Financial Stability Oversight Council? \24\
---------------------------------------------------------------------------

    \24\ 177 F. Supp.3d 219 (D.D.C. 2016).
---------------------------------------------------------------------------

    Likelihood of Material Financial Distress (Appendix, s. III(e)):
    27. Is the proposed framework for assessing the likelihood of 
material financial distress when evaluating the impact of a potential 
determination appropriate?
    28. What metrics or factors should the Council consider when 
attempting to quantify the likelihood of a company's material financial 
distress? If such quantification is not possible with respect to a 
specific company, what additional factors should the Council consider? 
What are the appropriate methodologies or models (including appropriate 
time horizons and assumptions) to assess the likelihood of a nonbank 
financial company's material financial distress?
    29. After the Council assesses the likelihood of a company's 
material financial distress, what should be the threshold for the 
Council taking further action regarding a potential determination with 
respect to the company?

D. Determination and Annual Reevaluation Process

    As noted above, the Council will prioritize an activities-based 
approach for identifying, assessing, and addressing potential risks to 
financial stability. The Council, may, however, subject a nonbank 
financial company to review for an entity-specific determination under 
section 113 of the Dodd-Frank Act if the activities-based approach 
would not adequately address potential risks to U.S. financial 
stability.\25\
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    \25\ The Council would be most likely to consider a 
determination under section 113 only in rare instances such as an 
emergency situation or if a potential threat to U.S. financial 
stability is outside the jurisdiction or authority of financial 
regulatory agencies.
---------------------------------------------------------------------------

    The Proposed Guidance condenses the current three-stage 
determination process into two stages by eliminating current stage 1, 
makes other procedural improvements, and incorporates certain 
provisions of the 2015 Supplemental Procedures.\26\ Following is a 
description of the processes set forth in the Proposed Guidance for the 
Council's evaluation of a nonbank financial company for a potential 
determination under section 113 and the Council's annual reevaluations 
of any such determinations.
---------------------------------------------------------------------------

    \26\ As discussed in section II(A) above, the Proposed Guidance 
eliminates the six-category framework described in the 2012 
Interpretive Guidance.
---------------------------------------------------------------------------

1. Stage 1: Preliminary Evaluation of Nonbank Financial Companies
    In the first stage of the determination process, the Council will 
notify nonbank financial companies identified as potentially posing 
risks to U.S. financial stability. The Council or its Deputies 
Committee will vote to commence review of a nonbank financial company 
in Stage 1. Under the Proposed Guidance, the Council would engage 
extensively with the relevant company and its existing financial 
regulators during Stage 1.
    The Council's preliminary analysis will be based on quantitative 
and qualitative information available to the Council primarily through 
public and regulatory sources. In addition, a company under review in 
Stage 1 may voluntarily submit to the Council any information it deems 
relevant to the Council's evaluation and may, upon request, meet with 
staff on the Council's analytical team. In order to reduce the burdens 
of review on the company, the

[[Page 9036]]

Council will not require the company to submit information during Stage 
1. The Council may consider the company and its subsidiaries together, 
to enable the Council to consider potential risks arising across the 
consolidated organization.
    For any company under review in Stage 1 that is regulated by a 
primary financial regulatory agency or home country supervisor, the 
Council will consult with the regulator, as appropriate, before the 
Council votes on whether to advance the company to Stage 2. In 
consideration of the benefits that the Council will derive from 
extensive engagement with a company's primary financial regulatory 
agency, the Council will actively solicit the regulator's views 
regarding risks at the company and potential means to mitigate those 
risks, and will share its preliminary views regarding potential risks 
at the company with the regulator. The Council will continue to 
encourage the regulator to address relevant risks using the regulator's 
existing authorities.
    Enhanced engagement in Stage 1 is intended to allow a company under 
review to provide the Council with relevant information, which will 
help to ensure that the Council is making decisions based on a diverse 
array of data and rigorous analysis, and to provide the company with 
greater visibility into the aspects of its business that may pose risks 
to U.S. financial stability. Another goal of the enhanced engagement in 
Stage 1 is to enable the company to take actions in response to the 
Council's concerns, thereby providing a pre-designation ``off-ramp,'' 
while not burdening a company with the relatively higher costs that may 
be incurred during a Stage 2 evaluation. By making a company aware of 
the potential risks the Council has identified during its preliminary 
review, the Council seeks to give the company more information and 
tools to mitigate those risks prior to any Council designation. 
Following the preliminary evaluation in Stage 1, the Council may decide 
not to evaluate the company further, or it may begin a more detailed 
analysis of the company by advancing it to Stage 2.
2. Stage 2: In-Depth Evaluation
    In Stage 2, the Council will conduct an in-depth evaluation of any 
company that the Council has determined in Stage 1 merits additional 
review. Under the Proposed Guidance, the Council would continue in 
Stage 2 to engage extensively with the relevant company and its 
existing regulators.
    In Stage 2, the Council will request that the company provide 
information that the Council deems relevant to its evaluation, which 
will involve both qualitative and quantitative data. The Council will 
take certain preliminary steps before requiring the submission of 
reports from any nonbank financial company that is regulated by a 
Council member agency or any primary financial regulatory agency; 
acting through the Office of Financial Research (OFR), the Council will 
coordinate with these agencies and, whenever possible, rely on 
information available from the OFR or these agencies.
    The Council will also take steps to facilitate a transparent review 
process with the company during Stage 2. During Stage 2, the company 
may submit any other information that it deems relevant to the 
Council's evaluation, and the Council will make staff on the Council's 
analytical team available to meet with the representatives of the 
company, to explain the evaluation process and the framework for the 
Council's analysis. If the analysis in Stage 1 has identified specific 
aspects of the company's operations or activities as the primary focus 
for the evaluation, staff will notify the company of those issues. The 
Proposed Guidance also provides for the Council's Deputies Committee to 
meet with a company in Stage 2, to allow the company to present any 
information or arguments it deems relevant to the Council's evaluation. 
In addition, the Council will seek to continue its consultation with 
the company's primary financial regulatory agency or home country 
supervisor in a timely manner before the Council makes any proposed or 
final determination, encouraging the relevant regulator to address 
relevant risks using the regulator's existing authorities. The Council 
will notify the company when the Council believes that the evidentiary 
record regarding the company is complete, before the Council makes any 
proposed determination regarding the company, or alternatively notifies 
the company that it is no longer being considered for a designation at 
that time.
3. Proposed Determination; Hearing
    The procedural steps related to the Council's proposed 
determinations, subsequent hearings, and final determinations are 
largely specified in section 113 of the Dodd-Frank Act. The Proposed 
Guidance reflects and expands on those mandatory procedures.
    A nonbank financial company may be considered for a proposed 
determination based on the analysis performed in Stage 2. In the event 
the Council votes to make a proposed determination, the Council will 
issue a written notice and explanation of the proposed determination to 
the company, and will also provide the company's primary financial 
regulatory agency or home country supervisor (subject to appropriate 
protections for confidential information) with the nonpublic written 
explanation of the basis for the proposed determination. In accordance 
with section 113(e) of the Dodd-Frank Act, a nonbank financial company 
that is subject to a proposed determination may request a nonpublic 
hearing before the Council to contest the proposed determination.
4. Final Determination
    After making a proposed determination and holding any requested 
written or oral hearing, the Council may make a final determination in 
accordance with the Dodd-Frank Act that the company will be subject to 
supervision by the Federal Reserve and prudential standards. If the 
Council makes a final determination regarding the company, the Council 
will provide the company with a written notice of the Council's final 
determination, including an explanation of the basis for the Council's 
decision, and will also provide the company's primary financial 
regulatory agency or home country supervisor with the nonpublic written 
explanation of the basis of the Council's final determination, subject 
to appropriate protections for confidential information. Under the 
Proposed Guidance, the Council expects that its explanation of the 
final basis for any determination will highlight the key risks that led 
to the determination and include clear guidance regarding the factors 
that were most important in the Council's determination. The final 
determination process also incorporates several procedural steps in the 
2015 Supplemental Procedures. For example, the Council will provide 
each designated nonbank financial company with an opportunity for an 
oral hearing before the Council once every five years at which the 
company can contest the designation.
    Consistent with the 2012 Interpretive Guidance, when practicable 
and consistent with the purposes of the determination process, the 
Council will provide a nonbank financial company with a notice of a 
final determination at least one business day before publicly 
announcing the determination. As a result, the Council generally would 
not issue any public notice regarding its determination vote on the day 
of the vote; instead, to enable the company

[[Page 9037]]

adequately to prepare its public disclosures regarding the Council's 
determination, the first public announcement by the Council will 
generally be the day after the Council's vote.
5. Annual Reevaluations of Nonbank Financial Company Determinations
    For any nonbank financial company that is subject to a final 
determination, the Council is required by statute to reevaluate the 
determination at least annually, and to rescind the determination if 
the Council determines that the company no longer meets the statutory 
standards for a designation. The Proposed Guidance proposes to 
incorporate a number of additional procedural steps for annual 
reevaluations to enhance engagement with companies and their 
regulators, and to increase transparency. One of the goals of these 
changes is to clarify the ``off-ramp'' process for a designated 
company, which would enable the company to identify changes it could 
consider making to address the potential threat to financial stability 
identified by the Council, and receive feedback regarding whether those 
changes may address the Council's concerns. The Council intends that 
this process should be flexible and tailored to the risks posed by 
designated companies, rather than hard-wired or overly prescriptive. 
The process is intended to incentivize designated companies to address 
the key factors that led to designation, which would promote the 
Council's goal of reducing risks to U.S. financial stability.
    As an example, the Proposed Guidance provides that in the event the 
Council makes a final determination regarding a company, the Council 
intends to encourage the company and, if appropriate, its regulators to 
take steps to mitigate the potential risks identified in the Council's 
written explanation of the basis for its final determination. Except in 
cases where new material risks arise over time, if a company adequately 
addresses the potential risks identified in writing by the Council at 
the time of the final determination and in subsequent reevaluations, 
the Council should generally be expected to rescind its determination 
regarding the company. To facilitate this process, companies are 
encouraged during annual reevaluations to submit information regarding 
any changes related to the company's risk profile that mitigate the 
potential risks identified in the Council's final determination of the 
company and in reevaluations of the determination. If the company 
explains in detail potential changes it could make to its business to 
address the potential risks previously identified by the Council, staff 
of Council members and Council member agencies will endeavor to provide 
their feedback on the extent to which those changes may address the 
potential risks.
    The Proposed Guidance also underscores that the Council applies the 
same standards of review in its annual reevaluations as the standard 
for an initial determination regarding a nonbank financial company: 
Either the company's material financial distress, or the nature, scope, 
size, scale, concentration, interconnectedness, or mix of the company's 
activities, could pose a threat to U.S. financial stability. If the 
Council determines that the company no longer meets those standards, 
the Council will rescind its determination. The Proposed Guidance also 
stresses that, while the Council's annual reevaluation of a company 
subject to a final determination will generally focus on changes since 
the Council's previous review, the ultimate question the Council will 
seek to assess is whether changes in the aggregate since the company's 
designation have caused the company to cease meeting the Determination 
Standards.\27\
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    \27\ In a reevaluation of a determination, the Council may 
choose to consider only one Determination Standard, because changes 
that address the potential risks previously identified by the 
Council under one Determination Standard may also address potential 
risks relevant to the other Determination Standard.
---------------------------------------------------------------------------

    Questions for Comment on Determination Process and Annual 
Reevaluations:
    General Questions:
    30. Do the proposed changes to the determination and reevaluation 
process achieve the intended purposes of improving the Council's 
engagement with companies, regulators, and other stakeholders and 
incorporating various due process and other procedural improvements 
designed to foster a fair, more transparent, and more robust engagement 
with companies under review?
    31. In certain circumstances, a company's regulator may be willing 
to share confidential information with the Council only if the Council 
commits, to the extent permissible under applicable law, to maintain 
the confidentiality of the information and not to share the information 
with the subject company. How should the Council balance regulators' 
need for confidentiality with the need to be transparent with companies 
under review?
    Stage 1: Preliminary Evaluation of Nonbank Financial Companies 
(Appendix, s. IV(a)):
    32. Are there specific factors or considerations that the Council 
should discuss with a primary financial regulatory agency or home 
country supervisor of a company under review in Stage 1? What types of 
information should the Council solicit from the agency or supervisor?
    Stage 2: In-Depth Evaluation (Appendix, s. IV(b)):
    33. Should the Council follow additional procedural steps or steps 
for outreach to a company that has entered Stage 2?
    34. Should the Council take additional steps to work with the 
primary financial regulatory agency or home country supervisor of a 
company that has entered Stage 2 before making a designation?
    Annual Reevaluations of Nonbank Financial Company Determinations 
(Appendix, s. V):
    35. Is the Council's proposed process for annual reevaluations of 
nonbank financial company determinations appropriate?
    36. Should the Council follow additional procedural steps, or 
provide additional opportunities for a company to provide information 
to the Council, before the Council conducts its annual reevaluation of 
the company?
    37. How should the Council narrow the amount of information 
evaluated during the annual reevaluation process, given the compressed 
timeframe for annual reviews? What issues should the Council focus on, 
given this compressed timing?
    38. If the Council does not rescind a determination with respect to 
a company, should the Council provide additional explanation to the 
company, or additional procedural steps for the company to respond to 
the Council's decision?

III. Legal Authority of Council and Status of the Proposed Guidance

    The Council has numerous authorities and tools under the Dodd-Frank 
Act to carry out its statutory purposes.\28\ The Council expects that 
its response to any potential risk or threat to U.S. financial 
stability will be based on an assessment of the circumstances. As the 
agency charged by Congress with broad-ranging responsibilities under 
sections 112 and 113 of the Dodd-Frank Act, the Council has the 
inherent authority to promulgate interpretive guidance under those 
provisions that explains and interprets the statutory factors that the 
Council will consider when employing the

[[Page 9038]]

activities-based approach and undertaking the determination 
process.\29\ The Council also has authority to issue procedural rules 
\30\ and policy statements.\31\ The Proposed Guidance describes the 
Council's interpretation of the statutory factors and provides 
transparency to the public as to how the Council intends to exercise 
its statutory grant of discretionary authority. Except to the extent 
that the Proposed Guidance sets forth rules of agency organization, 
procedure, or practice, the Council has concluded that the Proposed 
Guidance does not have binding effect; does not impose duties on, or 
alter the rights or interests of, any person; does not change the 
statutory standards for the Council's decision making; and does not 
relieve the Council of the need to make entity-specific determinations 
in accordance with section 113 of the Dodd-Frank Act. The Proposed 
Guidance also does not limit the ability of the Council to take 
emergency action under section 113(f) of the Dodd-Frank Act if the 
Council determines that such action is necessary or appropriate to 
prevent or mitigate threats posed by a nonbank financial company to 
U.S. financial stability. As a result, the Council has concluded that 
the notice and comment requirements of the Administrative Procedure Act 
do not apply.\32\ Nonetheless, the Council invites interested persons 
to submit comments regarding the Proposed Guidance. Furthermore, 
contemporaneous with the publication of this proposed interpretive 
guidance, the Council is separately publishing, elsewhere in this issue 
of the Federal Register, a final rule, RIN 4030-AA03, stating that the 
Council shall not amend or rescind its interpretive guidance on nonbank 
financial company determinations without providing the public with 
notice and an opportunity to comment under the Administrative Procedure 
Act.
---------------------------------------------------------------------------

    \28\ 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.
    \29\ 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).
    \30\ See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 5321(e)(2).
    \31\ See Association of Flight Attendants-CWA, AFL-CIO v. 
Huerta, 785 F.3d 710 (D.C. Cir. 2015).
    \32\ See 5 U.S.C. 553(b)(A).
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IV. Paperwork Reduction Act

    The collection of information contained in the Proposed Guidance 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control 1505-0244. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a valid control number assigned by the Office of 
Management and Budget.
    The collection of information under the Proposed Guidance is found 
in 12 CFR 1310.20-1310.23, which were added pursuant to the 2012 Final 
Rule and Interpretive Guidance.\33\
---------------------------------------------------------------------------

    \33\ See note 3 above.
---------------------------------------------------------------------------

    The hours and costs associated with preparing data, information, 
and reports for submission to the Council constitute reporting and cost 
burdens imposed by the collection of information. The estimated total 
annual reporting burden associated with the collection of information 
in the Proposed Guidance is 20 hours, based on an estimate of one 
respondent. We estimate the cost associated with this information 
collection to be $9,000. These estimates are significantly lower than 
those in the Paperwork Reduction Act discussion in the 2012 Final Rule 
and Interpretive Guidance, because the Council expects that, 
notwithstanding any additional reporting burden that financial 
companies participating in the activities-based approach may incur, the 
aggregate reporting burden on companies will be significantly reduced 
as a result of the Council's proposal to pursue entity-specific 
determinations under section 113 of the Dodd-Frank Act only if a 
potential risk or threat cannot be addressed through an activities-
based approach.
    In making this estimate, the Council estimates that due to the 
nature of the information likely to be requested, approximately 75 
percent of the burden in hours will be carried by financial companies 
internally at an average cost of $400 per hour, and the remainder will 
be carried by outside professionals retained by financial companies at 
an average cost of $600 per hour. In addition, in determining these 
estimates, the Council considered its obligation under 12 CFR 
1310.20(b) to, whenever possible, rely on information available from 
the OFR or any Council member agency or primary financial regulatory 
agency that regulates a nonbank financial company before requiring the 
submission of reports from such nonbank financial company. The Council 
expects that its collection of information under the Proposed Guidance 
would be performed in a manner that attempts to minimize burdens for 
affected financial companies. The aggregate burden will be subject to 
the number of financial companies that participate in the activities-
based approach or are evaluated in the determination process, the 
extent of information regarding such companies that is available to the 
Council through existing public and regulatory sources, and the amount 
and types of information that financial companies provide to the 
Council.
    Interested persons are invited to submit comments regarding the 
estimates provided in this section. Comments on the collection of 
information should be sent to the Office of Management and Budget, 
Attn: Desk Officer for the Financial Stability Oversight Council, 
Office of Information and Regulatory Affairs, Washington, DC 20503, 
with copies to Samantha MacInnis, Department of the Treasury, 
Washington, DC 20220. Comments on the collection of information must be 
received by May 13, 2019.
    Comments are specifically requested concerning:
    (1) Whether the proposed collection of information is necessary for 
the proper performance of the functions of the Council, including 
whether the information will have practical utility;
    (2) The accuracy of the estimated burden associated with the 
proposed collection of information;
    (3) How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    (4) How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.

V. Executive Orders 12866 and 13563

    Executive Orders 12866 and 13563 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). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules,

[[Page 9039]]

and of promoting flexibility. The Office of Information and Regulatory 
Affairs within the Office of Management and Budget has designated this 
interpretive guidance as a ``significant regulatory action'' under 
section 3(f) of Executive Order 12866.

List of Subjects in 12 CFR Part 1310

    Brokers, Investments, Securities.

    The Financial Stability Oversight Council proposes to amend 12 CFR 
part 1310 as follows:

PART 1310--AUTHORITY TO REQUIRE SUPERVISION AND REGULATION OF 
CERTAIN NONBANK FINANCIAL COMPANIES

0
1. The authority citation for part 1310 continues to read as follows:

    Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.

0
2. Appendix A is revised to read as follows:

Appendix A to Part 1310--Financial Stability Oversight Council Guidance 
for Nonbank Financial Company Determinations

I. Introduction

    Section 113 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act'') \1\ authorizes the Financial 
Stability Oversight Council (the ``Council'') to determine that a 
nonbank financial company will be supervised by the Board of 
Governors of the Federal Reserve System (the ``Federal Reserve'') 
and be subject to prudential standards in accordance with Title I of 
the Dodd-Frank Act if either of two standards is met. Under the 
first standard, the Council may subject a nonbank financial company 
to supervision by the Federal Reserve and prudential standards if 
the Council determines that material financial distress at the 
nonbank financial company could pose a threat to the financial 
stability of the United States. Under the second standard, the 
Council may determine that a nonbank financial company will be 
supervised by the Federal Reserve and subject to prudential 
standards if the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the nonbank 
financial company could pose a threat to U.S. financial stability. 
Section 113 of the Dodd-Frank Act also lists considerations that the 
Council must take into account in making a determination.
---------------------------------------------------------------------------

    \1\ See Dodd-Frank Act section 113, 12 U.S.C. 5323.
---------------------------------------------------------------------------

    Section II of this document describes the approach the Council 
intends to take in prioritizing its work to identify and address 
potential risks to U.S. financial stability using an activities-
based approach. This approach reflects the Council's priorities of 
identifying potential risks on a system-wide basis, reducing the 
potential for competitive distortions that could arise from entity-
specific determinations, and allowing primary financial regulatory 
agencies \2\ to address identified potential risks. First, the 
Council will monitor markets to identify potential risks to U.S. 
financial stability and to assess those risks on a system-wide 
basis. Second, the Council will then work with relevant regulators 
to seek the implementation of actions intended to address identified 
potential risks to financial stability.
---------------------------------------------------------------------------

    \2\ ``Primary financial regulatory agency'' is defined in 
section 2(12) of the Dodd-Frank Act, 12 U.S.C. 5301(12).
---------------------------------------------------------------------------

    Section III of this appendix describes the manner in which the 
Council intends to apply the statutory standards and considerations 
in making determinations under section 113 of the Dodd-Frank Act, if 
the Council determines that potential risks to U.S. financial 
stability are not adequately addressed through the activities-based 
approach. Section III defines key terms used in the statute, 
including ``threat to the financial stability of the United 
States.'' Section III also includes a detailed description of the 
analysis that the Council intends to conduct during its reviews, 
including a discussion of channels through which risks from a 
company may be transmitted to other companies or markets, and the 
Council's assessment of the likelihood of the company's material 
financial distress and the benefits and costs of a determination.
    Section IV of this appendix outlines a two-stage process that 
the Council will follow in non-emergency situations when determining 
whether to subject a nonbank financial company to Federal Reserve 
supervision and prudential standards. In the first stage of the 
process, the Council will notify the company and its primary 
financial regulatory agency and conduct a preliminary analysis to 
determine whether the company should be subject to further 
evaluation by the Council. During the second stage of the evaluation 
process, the Council will conduct an in-depth evaluation if it 
determines in the first stage that the nonbank financial company 
merits additional review.
    The Council's practices set forth in this guidance to address 
potential risks to U.S. financial stability are intended to comply 
with 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.\3\ Council actions seek to foster transparency and 
to avoid any government intervention that could create competitive 
distortions in markets for financial services and products. Further, 
nonbank financial companies should not benefit from an implicit 
federal financial safety net. Therefore, the Council emphasizes the 
importance of market discipline as a mechanism for addressing 
potential risks to U.S. financial stability posed by financial 
companies.
---------------------------------------------------------------------------

    \3\ Dodd-Frank Act section 112(a)(1), 12 U.S.C. 5322(a)(1).
---------------------------------------------------------------------------

    This interpretive guidance is not a binding rule, except to the 
extent that it sets forth rules of agency organization, procedure, 
or practice. This guidance is intended to assist financial companies 
and other market participants in understanding how the Council 
expects to exercise certain of its authorities under Title I of the 
Dodd-Frank Act. The Council retains discretion, subject to 
applicable statutory requirements, to consider factors relevant to 
the assessment of a potential risk or threat to U.S. financial 
stability on a case-by-case basis. If the Council were to depart 
from the interpretative guidance, it would need to provide a 
reasoned explanation for its action, which would ordinarily require 
acknowledging the change in position.\4\
---------------------------------------------------------------------------

    \4\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 
(2009).
---------------------------------------------------------------------------

II. Activities-Based Approach

    The Dodd-Frank Act gives the Council broad discretion in 
determining how to respond to potential threats to U.S. financial 
stability. A determination to subject a nonbank financial company to 
Federal Reserve supervision and prudential standards under section 
113 of the Dodd-Frank Act is only one of several Council authorities 
for responding to potential risks to U.S. financial stability.\5\ 
The Council will prioritize its efforts to identify, assess, and 
address potential risks and threats to U.S. financial stability 
through a process that emphasizes an activities-based approach, and 
will pursue entity-specific determinations under section 113 of the 
Dodd-Frank Act only if a potential risk or threat cannot be 
addressed through an activities-based approach. This approach 
reflects two priorities: (1) Identifying and addressing, in 
consultation with relevant financial regulatory agencies,\6\ 
potential risks and emerging threats on a system-wide basis and to 
reduce the potential for competitive distortions among companies and 
in markets that could arise from entity-specific regulation and 
supervision, and (2) allowing

[[Page 9040]]

relevant financial regulatory agencies, which generally possess 
greater information and expertise with respect to company, product, 
and market risks, to address potential risks, rather than subjecting 
the companies to new regulatory authorities.
---------------------------------------------------------------------------

    \5\ For example, the Council has authority to make 
recommendations to the Federal Reserve concerning the establishment 
and refinement of prudential standards and reporting and disclosure 
requirements applicable to nonbank financial companies supervised by 
the Federal Reserve; make recommendations to primary financial 
regulatory agencies to apply new or heightened standards and 
safeguards for a financial activity or practice conducted by certain 
financial companies if the Council determines that such activity or 
practice could create or increase certain risks; and designate 
financial market utilities and payment, clearing, and settlement 
activities that the Council determines are, or are likely to become, 
systemically important. Dodd-Frank Act sections 115, 120, 804, 12 
U.S.C. 5325, 5330, 5463.
    \6\ References in this appendix to ``relevant financial 
regulatory agencies'' may encompass a broader range of regulators 
than those included in the statutory definition of ``primary 
financial regulatory agency.'' See Dodd-Frank Act section 2(12), 12 
U.S.C. 5301(12).
---------------------------------------------------------------------------

    As part of its activities-based approach, the Council will 
examine a range of financial products, activities, or practices that 
could pose risks to U.S. financial stability. These types of 
activities are often identified in the Council's annual reports, 
such as activities related to (1) the extension of credit, (2) the 
use of leverage or short-term funding, (3) the provision of 
guarantees of financial performance, and (4) other key functions 
critical to support the functioning of financial markets. The 
Council considers a risk to financial stability to mean a risk of an 
event or development that could impair financial intermediation or 
financial market functioning to a degree that would be sufficient to 
inflict significant damage on the broader economy. The Council's 
activities-based approach is intended to identify and address risks 
to financial stability using a two-step approach, described below.

a. Step One of Activities-Based Approach: Identifying Potential Risks 
From Products, Activities, or Practices

Monitoring Markets

    The Council has a statutory duty to monitor the financial 
services marketplace in order to identify potential threats to U.S. 
financial stability.\7\ In the first step of the activities-based 
approach, to enable the Council to identify potential risks to U.S. 
financial stability, the Council, in consultation with primary 
financial regulatory agencies, intends to monitor diverse financial 
markets and market developments to identify products, activities, or 
practices that could pose risks to financial stability. When 
monitoring potential risks to financial stability, the Council 
intends to consider the linkages across products, activities, and 
practices, and their interconnectedness across firms and markets.
---------------------------------------------------------------------------

    \7\ Dodd-Frank Act section 112(a)(2), 12 U.S.C. 5322(a)(2).
---------------------------------------------------------------------------

    For example, the Council's monitoring may include:
     Corporate and sovereign debt and loan markets;
     equity markets;
     markets for other financial products, including 
structured products and derivatives;
     short-term funding markets;
     payment, clearing, and settlement functions;
     new or evolving financial products, activities, and 
practices; and
     developments affecting the resiliency of financial 
market participants.
    To monitor markets and market developments, the Council will 
review information such as historical data, research regarding the 
behavior of financial market participants, and new developments that 
arise in evolving marketplaces. The Council will regularly rely on 
data, research, and analysis from Council member agencies, the 
Office of Financial Research, industry participants, and other 
public sources. Consistent with its statutory obligations, the 
Council will, whenever possible, rely on information available from 
primary financial regulatory agencies.\8\
---------------------------------------------------------------------------

    \8\ Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
---------------------------------------------------------------------------

Evaluating Potential Risks

    If the Council's monitoring of markets and market developments 
identifies a product, activity, or practice that could pose a 
potential risk to U.S. financial stability, the Council, in 
consultation with relevant financial regulatory agencies, will 
evaluate the potential risk to determine whether it merits further 
review or action. The Council's work in this step may include 
efforts such as sharing data, research, and analysis among Council 
members and member agencies and their staffs; consultations with 
regulators and other experts regarding the scope of potential risks 
and factors that may mitigate those risks; and the collaborative 
development of analyses for consideration by the Council. As part of 
this work, the Council may also engage with industry participants 
and other members of the public as it assesses potential risks.
    The Council will assess the extent to which characteristics such 
as the following could amplify potential risks to U.S. financial 
stability arising from products, activities, or practices:
     Asset valuation risk or credit risk;
     leverage, including leverage arising from debt, 
derivatives, off-balance sheet obligations, and other arrangements;
     liquidity risk or maturity mismatch, such as reliance 
on funding sources that could be susceptible to dislocations;
     counterparty risk and interconnectedness among 
financial market participants;
     the transparency of financial markets, such as growth 
in financial transactions occurring outside of regulated sectors;
     operational risks, such as cybersecurity and 
operational resilience; or
     the risk of destabilizing markets for particular types 
of financial instruments, such as trading practices that 
substantially increase volatility in key markets.
    Various factors may exacerbate or mitigate each of these types 
of risks. For example, activities may pose greater risks if they are 
complex or opaque, are conducted without effective risk-management 
practices, are significantly correlated with other financial 
products, and are either highly concentrated or significant and 
widespread. In contrast, regulatory requirements or market practices 
may mitigate risks by, for example, limiting exposures or leverage, 
enhancing risk-management practices, or restricting excessive risk-
taking.
    While the contours of the Council's initial evaluation of any 
potential risk will depend on the type and scope of analysis 
relevant to the particular risk, the Council's analyses will 
generally focus on four framing questions:
    1. How could the potential risk be triggered? For example, could 
it be triggered by sharp reductions in the valuation of particular 
classes of financial assets?
    2. How could the adverse effects of the potential risk be 
transmitted to financial markets or market participants? For 
example, what are the direct or indirect exposures in financial 
markets to the potential risk?
    3. What impact could the potential risk have on the financial 
system? For example, what could be the scale of its adverse effects 
on other companies and markets, and would its effects be 
concentrated or distributed broadly among market participants? This 
analysis should take into account factors such as existing 
regulatory requirements or market practices that mitigate potential 
risks.
    4. Could the adverse effects of the potential risk impair the 
financial system in a manner that could harm the non-financial 
sector of the U.S. economy?
    If a product, activity, or practice creating a potential risk to 
financial stability is identified, the Council will work with 
regulators to address the identified risk, as described in section 
II.b of this appendix.

b. Step Two of Activities-Based Approach: Working With Regulators To 
Address Identified Risks

    If the Council identifies a potential risk to U.S. financial 
stability in step one of the activities-based approach, the Council 
will work with the relevant financial regulatory agencies at the 
federal and state levels to seek the implementation of actions to 
address the identified potential risk. The Council will coordinate 
among its members and member agencies and will follow up on 
supervisory or regulatory actions to ensure the potential risk is 
adequately addressed. The goal of this step would be for existing 
regulators to take appropriate action, such as modifying their 
regulation or supervision of companies or markets under their 
jurisdiction in order to mitigate potential risks to U.S. financial 
stability identified by the Council.\9\ If a potential risk 
identified by the Council relates to a product, activity, or 
practice arising at a limited number of individual financial 
companies, the Council nonetheless will prioritize a remedy that 
addresses the underlying risk across all companies that engage in 
the relevant activity. If the Council finds that a particular type 
of financial product could present risks to U.S. financial 
stability, there may be different approaches existing regulators 
could take, based on their authorities and the urgency of the risk, 
such as restricting or prohibiting the offering of that product, or 
requiring market participants to take additional risk-management 
steps that address the risks.
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    \9\ The Dodd-Frank Act provides that the Council's duties 
include to recommend to the member agencies general supervisory 
priorities and principles reflecting the outcome of discussions 
among the member agencies and to make recommendations to primary 
financial regulatory agencies to apply new or heightened standards 
and safeguards for financial activities or practices that could 
create or increase risks of significant liquidity, credit, or other 
problems spreading among bank holding companies, nonbank financial 
companies, and United States financial markets. Dodd-Frank Act 
sections 112(a)(2)(F), (K), 12 U.S.C. 5322(a)(2)(F), (K).
---------------------------------------------------------------------------

    If, after engaging with relevant financial regulatory agencies, 
the Council believes those regulators' actions are insufficient to

[[Page 9041]]

address the identified potential risk to U.S. financial stability, 
the Council has authority to 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, following consultation with the primary financial 
regulatory agency and public notice inviting comments, to the 
primary financial regulatory agency to apply new or heightened 
standards or safeguards for a financial activity or practice 
conducted by bank holding companies or nonbank financial companies 
under their jurisdiction.\10\ In addition, in any case in which no 
primary financial regulatory agency exists for the company 
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. 
The Council intends to make recommendations under section 120 of the 
Dodd-Frank Act only to the extent that its recommendations are 
consistent with the statutory mandate of the primary financial 
regulatory agency to which the Council is making the recommendation.
---------------------------------------------------------------------------

    \10\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
---------------------------------------------------------------------------

III. Analytic Framework for Nonbank Financial Company Determinations

    If the Council's collaboration and engagement with the relevant 
financial regulatory agencies does not adequately address a 
potential threat identified by the Council--or if a potential threat 
to U.S. financial stability is outside the jurisdiction or authority 
of financial regulatory agencies--and if the potential threat 
identified by the Council is one that could be addressed by a 
Council determination regarding one or more companies, the Council 
may evaluate one or more nonbank financial companies for an entity-
specific determination under section 113 of the Dodd-Frank Act, 
applying the analytic framework described below. This section 
describes the analysis the Council will conduct in general regarding 
individual nonbank financial companies that are considered for a 
potential determination, and section IV of this appendix describes 
the Council's process for those reviews.

a. Statutory Standards and Considerations

    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 Federal Reserve 
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 (the ``First Determination Standard'') 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 ``Second 
Determination Standard,'' and, together with the First Determination 
Standard, the ``Determination Standards'').\11\ The analytic 
framework described below focuses primarily on the First 
Determination Standard because threats to financial stability (such 
as asset fire sales or financial market disruptions) are most 
commonly propagated through a nonbank financial company when it is 
in distress.
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    \11\ If the Council is unable to determine whether the financial 
activities of a U.S. nonbank financial company pose a threat to the 
financial stability of the United States based on certain 
information, the Council may request the Federal Reserve to conduct 
an examination of the U.S. nonbank financial company for the sole 
purpose of determining whether the company should be supervised by 
the Federal Reserve for purposes of Title I of the Dodd-Frank Act. 
Dodd-Frank Act section 112(d)(4), 12 U.S.C. 5322(d)(4).
---------------------------------------------------------------------------

    Several terms used in the Determination Standards are not 
defined in the Dodd-Frank Act. The Council intends to interpret the 
term ``company'' to include any corporation, limited liability 
company, partnership, business trust, association, or similar 
organization.\12\ In addition, the Council intends to interpret 
``nonbank financial company'' as including any successor of a 
company that is subject to a final determination of the Council. The 
Council intends to interpret the term ``material financial 
distress'' as a nonbank financial company being in imminent danger 
of insolvency or defaulting on its financial obligations. The 
Council intends to interpret the term ``threat to the financial 
stability of the United States'' as meaning the threat of an 
impairment of financial intermediation or of financial market 
functioning that would be sufficient to inflict severe damage on the 
broader economy. For purposes of considering whether a nonbank 
financial company could pose a threat to U.S. financial stability 
under either Determination Standard, the Council intends to assess 
the company 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. The 
Council believes this is appropriate because in such a context, the 
risks posed by a nonbank financial company may have a greater effect 
on U.S. financial stability.
---------------------------------------------------------------------------

    \12\ The statutory definition of ``nonbank financial company'' 
excludes bank holding companies and certain other types of 
companies. Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
---------------------------------------------------------------------------

    The Dodd-Frank Act requires the Council to consider 10 specific 
considerations when determining whether a nonbank financial company 
satisfies either of the Determination Standards. These statutory 
considerations help the Council to evaluate whether one of the 
Determination Standards has been met: \13\
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    \13\ Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2). 
This list of considerations is applicable to U.S. nonbank financial 
companies. With respect to foreign nonbank financial companies, the 
Council is required to take into account a similar list of 
considerations, in some cases limited to the companies' U.S. 
business or activities. See Dodd-Frank Act section 113(b)(2), 12 
U.S.C. 5323(b)(2).
---------------------------------------------------------------------------

     The extent of the leverage of the company;
     the extent and nature of the off-balance-sheet 
exposures of the company;
     the extent and nature of the transactions and 
relationships of the company with other significant nonbank 
financial companies and significant bank holding companies;
     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 U.S. financial system;
     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;
     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;
     the nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the company;
     the degree to which the company is already regulated by 
one or more primary financial regulatory agencies;
     the amount and nature of the financial assets of the 
company; and
     the amount and types of the liabilities of the company, 
including the degree of reliance on short-term funding.
    The statute also requires the Council to take into account any 
other risk-related factors that the Council deems appropriate. Any 
determination by the Council will be made based on a company-
specific evaluation and an application of the standards and 
considerations set forth in section 113 of the Dodd-Frank Act, and 
taking into account qualitative and quantitative information the 
Council deems relevant to a particular nonbank financial company. 
The Council anticipates that the information relevant to an in-depth 
analysis of a nonbank financial company may vary based on the 
nonbank financial company's business.
    The discussion below describes how the Council will apply the 
Determination Standards in its evaluation of a nonbank financial 
company, including how the Council will take into account the 
statutory considerations, and other risk-related factors that the 
Council will take into account. 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, 
the Council expects that its evaluations of nonbank financial 
companies will be firm-specific and may include quantitative and 
qualitative information that the Council deems relevant to a 
particular nonbank financial company. The transmission channels, 
sample metrics, and other factors set forth below are not exhaustive 
and may not apply to all nonbank financial companies under 
evaluation.

b. Transmission Channels

    The Council's evaluation of any nonbank financial company under 
section 113 of the Dodd-Frank Act will seek to determine whether a 
nonbank financial company meets

[[Page 9042]]

one of the Determination Standards described above. In its analysis 
of a nonbank financial company, the Council will assess how the 
negative effects of the company's material financial distress, or of 
the nature, scope, size, scale, concentration, interconnectedness, 
or mix of the company's activities, could be transmitted to or 
affect other firms or markets, thereby causing a broader impairment 
of financial intermediation or of financial market functioning. Such 
a transmission of risk can occur through various mechanisms, or 
channels. The Council has identified three transmission channels as 
most likely to facilitate the transmission of the negative effects 
of a nonbank financial company's material financial distress, or of 
the nature, scope, size, scale, concentration, interconnectedness, 
or mix of the company's activities, to other financial firms and 
markets: Exposure; asset liquidation; and critical function or 
service. These three transmission channels are described below. The 
Council may also consider other relevant channels through which 
risks could be transmitted from a particular nonbank financial 
company and thereby pose a threat to U.S. financial stability. The 
Council will take into account the 10 statutory considerations as 
part of its evaluation of a nonbank financial company under the 
three transmission channels and the other factors described below.

Exposure Transmission Channel

    Under this transmission channel, the Council will evaluate 
whether a nonbank financial company's creditors, counterparties, 
investors, or other market participants have direct or indirect 
exposure to the nonbank financial company that is significant enough 
to materially and adversely affect those or other creditors, 
counterparties, investors, or other market participants and thereby 
pose a threat to U.S. financial stability.
    The Council expects that its analyses under the exposure 
transmission channel will generally include the factors described 
below. The potential threat to U.S. financial stability will 
generally be greater if the amounts of the exposures are larger; if 
the terms of the transactions provide less protection for the 
counterparty; and if the largest counterparties include large 
financial institutions. The Council also will consider a company's 
leverage and size. A company's leverage can amplify the risks posed 
by exposures, including off-balance sheet exposures, by reducing the 
company's ability to satisfy its obligations to creditors in the 
event of its material financial distress. Size is relevant to this 
analysis, as material financial distress at a larger nonbank 
financial company would generally transmit risk on a larger scale 
than distress at a smaller company. Size may be measured by the 
assets, liabilities, and capital of the firm. As required by 
statute, the Council will consider 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; this recognizes the 
distinct nature of exposure risks when the company is acting as an 
agent rather than as principal.\14\ In particular, in the case of a 
nonbank financial company that manages assets on behalf of customers 
or other third parties, the third parties' direct financial 
exposures are often to the issuers of the managed assets, rather 
than to the nonbank financial company managing those assets.
---------------------------------------------------------------------------

    \14\ Dodd-Frank Act section 113(a)(2)(F), 12 U.S.C. 
5323(a)(2)(F).
---------------------------------------------------------------------------

    The Council will consider the exposures that counterparties and 
other market participants have to a nonbank financial company 
arising from the company's capital markets activities. This 
assessment includes an evaluation of the company's relationships 
with other significant nonbank financial companies and significant 
bank holding companies. In most cases, the Council will consider 
factors such as the amount and nature of, and counterparties to, the 
company's:
     Outstanding debt (regardless of term) and other 
liabilities (such as guaranteed investment contracts issued by an 
insurance company or Federal Home Loan Bank loans).
     Derivatives transactions (which may be measured on the 
basis of gross notional amount, net fair value, or potential future 
exposures).
     Securities financing transactions (i.e., repurchase 
agreements and securities lending transactions).
     Lines of credit.
     Credit-default swaps outstanding for which the company 
or an affiliate is the reference entity (generally focusing on 
single-name credit-default swaps).
    Relevant metrics may include the number, size, and financial 
strength of a nonbank financial company's counterparties, including 
the proportion of its counterparties' exposure to the nonbank 
financial company relative to the counterparties' capital. The 
potential risk arising under this transmission channel depends not 
only on the number of counterparties that a nonbank financial 
company has, but also on the importance of that nonbank financial 
company to its counterparties and the extent to which the 
counterparties are interconnected with other financial firms, the 
financial system, and the broader economy. Therefore, the Council 
will focus on exposures of large financial institutions to the 
nonbank financial company under review. This analysis will take into 
account both individual counterparty exposures as well as aggregate 
exposures of other financial institutions to the company under 
review. The amount and types of other exposures that counterparties 
and other market participants have to a nonbank financial company is 
highly dependent on the nature of the company's business. The 
Council's analysis will take these other fact-specific 
considerations into account.
    The Council also will consider factors that mitigate the 
potential risks posed by exposures to the nonbank financial company. 
For example, exposures of a company's counterparties arising from 
capital markets activities may be collateralized by high-quality, 
highly liquid securities, such as U.S. Treasury securities, which 
reduces the potential for the exposure to serve as a channel for the 
transmission of risk.
    Contagion. The negative effects of the material financial 
distress of a large, interconnected nonbank financial company are 
not necessarily limited to the amount of direct losses suffered by 
the firm's creditors, counterparties, investors, or other market 
participants. In general, the wider and more interconnected a 
company's network of financial counterparties, the greater the 
potential negative effect of the material financial distress of the 
company. Aggregate exposures to a nonbank financial company can 
create a potential threat to U.S. financial stability if they lead 
to contagion among financial institutions and financial markets more 
broadly. Contagion has the potential to spread distress quickly and 
seemingly unexpectedly. Such transmission is associated with opaque 
balance sheets, closely correlated markets, and coordination 
failures among investors. In such circumstances, fire sales by a 
highly leveraged and interconnected nonbank financial company may 
result in a loss of confidence in other financial companies that are 
perceived to have similar characteristics. The Council will seek 
evidence regarding the potential for contagion, including relevant 
industry-specific historical examples and the scope of the company's 
interconnectedness with large financial institutions, among other 
factors. Various market-based or regulatory factors can strongly 
mitigate the risk of contagion. Contagion should be viewed in 
conjunction with other factors described above when evaluating risk 
under the exposure transmission channel.

Asset Liquidation Transmission Channel

    Under this transmission channel, the Council will consider 
whether a nonbank financial company holds assets that, if liquidated 
quickly, could cause a fall in asset prices and thereby 
significantly disrupt trading or funding in key markets or cause 
significant losses or funding problems for other firms with similar 
holdings. This channel would likely be most relevant for a nonbank 
financial company that could be forced to liquidate assets quickly 
due to its funding and liquid asset profile. For example, this could 
be the case if a nonbank financial company relies heavily on short-
term funding. The Council may also consider whether a deterioration 
in asset pricing or market functioning could pressure other 
financial firms to sell their holdings of affected assets in order 
to maintain adequate capital and liquidity, which, in turn, could 
produce a cycle of asset sales that could lead to further market 
disruptions. This analysis includes an assessment of any maturity 
mismatch at the company--the difference between the maturities of 
the company's assets and liabilities. A company's reliance on short-
term funding to finance longer-term positions can subject the 
company to rollover or refinancing risk that may force it to sell 
assets rapidly at low market prices.
    The Council's analyses of the asset liquidation transmission 
channel will focus on three central factors, described below.
    Liquidity of the company's liabilities. The first factor in the 
Council's assessment under

[[Page 9043]]

this transmission channel is the amount and nature of the company's 
liabilities that are, or could become, short-term in nature. This 
analysis involves an assessment of the company's liquidity risk. 
Liquidity risk generally refers to the risk that a company may not 
have sufficient funding to satisfy its short-term needs. For 
example, relevant factors may include:
     The company's short-term financial obligations 
(including outstanding commercial paper).
     Financial arrangements that can be terminated by 
counterparties and therefore become short-term (including callable 
debt, derivatives, securities lending, repurchase agreements, and 
off-balance-sheet exposures).
     Long-term liabilities that may come due in a short-term 
period.
     Financial transactions that may require the company to 
provide additional margin or collateral to the counterparty.
     Products that allow customers rapidly to withdraw funds 
from the company.
     Liabilities related to other collateralized borrowings 
and deposits.
    The Council will quantitatively identify the scale of potential 
liquidity needs that could plausibly arise at the company. As part 
of this analysis, the Council will apply counterparty and customer 
withdrawal rates based on historical examples and other relevant 
models to assess the scope of plausible withdrawals. In addition, 
any ability of the company or its financial regulators to impose 
stays on counterparty terminations or withdrawals is relevant, 
because it may reduce the company's liquidity needs in an event of 
material financial distress. The Council also will consider the 
company's internal estimates of potential liquidity needs in a 
context of material financial distress.
    The company's leverage and short-term debt ratios are relevant 
to this analysis, as high leverage and reliance on short-term 
funding can increase the potential for a company to be subject to 
sudden liquidity strains that force it rapidly to sell assets. 
Leverage can be measured by the ratio of assets to capital or as a 
measure of economic risk relative to capital. The latter measurement 
can better capture the effect of derivatives and other products with 
embedded leverage on the risk undertaken by a nonbank financial 
company. Comparisons of leverage to peer financial institutions can 
help indicate the level of risk at the company. Metrics that may be 
used to assess leverage include:
     Total assets and total debt measured relative to total 
equity, which measures financial leverage.
     Derivatives liabilities and off-balance sheet 
obligations relative to total equity, which may show how much off-
balance sheet leverage a nonbank financial company may have.
     Securities financing transactions and funding 
agreements that provide alternative sources of liquidity or 
operating income, which indicate the use of operating leverage.
     Changes in leverage ratios, which may indicate that a 
nonbank financial company is increasing or decreasing its risk 
profile.
    Liquidity of the company's assets. The second factor under the 
asset liquidation transmission channel is an analysis of the 
company's assets that the company could rapidly liquidate, if 
necessary, to satisfy its obligations. In particular, the Council 
expects that this assessment will focus on the size and liquidity 
characteristics of the company's investment portfolio. The Council 
will assess the company's assets, grouped into categories such as 
highly liquid (for example, cash, U.S. Treasury securities, and U.S. 
agency mortgage-backed securities) and less-liquid (for example, 
corporate bonds, non-agency mortgage-backed securities, and 
mortgages and other loans) to determine if it holds cash instruments 
or readily marketable securities that could reasonably be expected 
to have a liquid market in times of broader market stress. To the 
extent that the company's assets are encumbered, those assets would 
generally not be considered to be available to satisfy short-term 
obligations.
    Potential fire sale impacts. The third factor in the asset 
liquidation transmission channel analysis is the potential effects 
of the company's asset liquidation on markets and market 
participants. As described above, the Council will assess the scale 
of potential liquidity needs that could plausibly arise at the 
company and the amount and nature of financial assets the company 
could sell to satisfy its obligations. In this step of the asset 
liquidation transmission channel analysis, the Council will apply 
quantitative models to assess how the company could satisfy the 
identified range of potential liquidity needs by rapidly selling its 
identified liquid assets. To assess this factor, the Council will 
compare the volume of the company's potential liquidation of 
particular categories of financial instruments with the average 
daily trading volume in the United States of those types of 
instruments. In general, a rapid liquidation of a significant amount 
of relatively illiquid financial instruments, or instruments that 
are widely held by other market participants, will have a greater 
effect on the market than a liquidation of the same amount of highly 
liquid instruments or instruments that are not widely held. The 
Council may also conduct an analysis to assess the relative impact 
of negative shocks to the equity or assets of certain financial 
institutions on other financial institutions. The Council expects 
that its analysis will generally focus on potential asset 
liquidation periods of 30 to 90 days.
    The order in which a nonbank financial company may liquidate 
assets is a factor in the extent of any fire sale risk, but is 
subject to considerable uncertainties. A company could liquidate a 
significant portion of its highly liquid assets first, in order to 
reduce the likelihood that the company would be forced to liquidate 
illiquid assets in the event of its material financial distress. 
However, in the event of the company's material financial distress, 
a company may also be expected to seek to maintain compliance with 
any applicable risk-based capital ratios and other requirements. 
Doing so might require a company to sell a mix of assets across a 
number of asset classes, rather than proceed with the sale of assets 
in order from most liquid to least liquid. Further, in the event of 
a significant market disruption, there could be a meaningful first-
mover advantage to selling less-liquid assets first. For example, 
markets for less-liquid assets, such as private and public corporate 
bonds and asset-backed securities, could be prone to disruption in 
the event that a seller liquidated a large portion of its portfolio 
of those assets. Given these potential discounts, in some 
circumstances a company may be incentivized to sell a portion of its 
less-liquid assets first and to hold U.S. government securities and 
agency mortgage-backed securities, which tend to increase in value 
during a period of market turmoil. To the extent that a company's 
highly liquid assets are encumbered (for example, under securities 
financing transactions or as collateral for loans), the company 
would also need to sell less-liquid assets to satisfy its liquidity 
needs. Further, a company's holdings of liquid assets could be 
reduced before the company enters material financial distress. As a 
result, the Council may take into account company-specific factors 
in assessing the order in which the company might liquidate assets. 
One approach the Council may take is to assess the potential effects 
if the company sells pro rata portions of the more-liquid segments 
of its investment portfolio (such as cash and highly liquid 
instruments, U.S. agency securities, investment-grade public 
corporate debt securities, publicly traded equity securities, and 
asset backed-securities).

Critical Function or Service Transmission Channel

    Under this transmission channel, the Council will consider the 
potential for a nonbank financial company to become unable or 
unwilling to provide a critical function or service that is relied 
upon by market participants and for which there are no ready 
substitutes. This factor is commonly referred to as 
``substitutability.'' Substitutability captures the extent to which 
other firms could provide similar financial services in a timely 
manner at a similar price and quantity if a nonbank financial 
company withdraws from a particular market. Substitutability also 
captures situations in which a nonbank financial company is the 
primary or dominant provider of services in a market that the 
Council determines to be essential to U.S. financial stability. A 
risk under this transmission channel may be identified if a company 
provides a critical function or service that may not easily be 
substitutable.
    Concern about a potential lack of substitutability could be 
greater if a nonbank financial company and its competitors are 
likely to experience stress at the same time because they are 
exposed to the same risks. The Council may also analyze the nonbank 
financial company's activities and critical functions and the 
importance of those activities and functions to the U.S. financial 
system and assess how those activities and functions would be 
performed by the nonbank financial company or other market 
participants in the event of the nonbank financial company's 
material financial distress. The Council also will consider 
substitutability with respect to any nonbank financial company with 
global operations to identify the substitutability of critical 
market

[[Page 9044]]

functions that the company provides in the United States in the 
event of material financial distress of a foreign parent company.
    The analysis of this channel incorporates a review of the 
competitive landscape for markets in which a nonbank financial 
company participates and for the services it provides (including the 
provision of liquidity to the U.S. financial system, the provision 
of credit to low-income, minority, or underserved communities, or 
the provision of credit to households, businesses and state and 
local governments), the ability of other firms to replace those 
services, and the nonbank financial company's market share. This 
analysis may focus on the company's market share in specific product 
lines and the ability of substitutes to replace a service or 
function provided by the company. The Council's evaluation of a 
nonbank financial company's market share regarding a particular 
product or service may include assessments of the ability of the 
nonbank financial company's competitors to expand to meet market 
needs during a period of overall stress in the financial services 
industry or in a weak macroeconomic environment; the costs that 
market participants would incur if forced to switch providers; the 
timeframe within which a disruption in the provision of the product 
or service would materially affect market participants or market 
functioning; and the economic implications of such a disruption.

c. Complexity and Resolvability

    The potential threat a nonbank financial company could pose to 
U.S. financial stability may be mitigated or aggravated by the 
company's complexity, opacity, or resolvability. In particular, a 
risk may be aggravated if a nonbank financial company's resolution 
under ordinary insolvency regimes could disrupt key markets or have 
a material adverse impact on other financial firms or markets. An 
evaluation of a nonbank financial company's complexity and 
resolvability entails an assessment of (1) the complexity of the 
nonbank financial company's legal, funding, and operational 
structure, and (2) any obstacles to the rapid and orderly resolution 
of the nonbank financial company:
     Legal structure factors may include the number of 
jurisdictions the company operates in, the number of subsidiaries, 
and the organizational structure.
     Funding structure factors may include the degree of 
interaffiliate dependency for liquidity and funding (such as 
intercompany loans or other affiliate support arrangements), payment 
operation (such as treasury operations), and risk-management.
     Operational structure factors may include the number of 
employees, the number of U.S. and non-U.S. locations, and the degree 
of inter-company dependency in regard to financial guarantees and 
support arrangements, the ability to separate functions and spin off 
services or business lines, the complexity and resiliency of 
intercompany and outsourced services and arrangements in resolution, 
and the likelihood of preserving franchise value in a recovery or 
resolution scenario.
     Cross-border operational factors may include size and 
complexity of the company's cross-border operations and impact of 
potential ring-fencing on an orderly resolution.
    Factors that would tend to increase the risk associated with a 
company's complexity and resolvability include large size or scope 
of activities; a complex legal or operational structure; multi-
jurisdictional operations and regulatory regimes; complex funding 
structures; the potential impact of a loss of key personnel; and 
shared services among affiliates.

d. Existing Regulatory Scrutiny

    As noted above, one of the considerations the Council is 
statutorily required to take into account in making a determination 
under section 113 of the Dodd-Frank Act is the degree to which the 
nonbank financial company is already regulated by one or more 
primary financial regulatory agencies.\15\ In its analysis of this 
statutory consideration, the Council will focus on the extent to 
which existing regulation of the company has mitigated the potential 
risks to financial stability identified by the Council. For example, 
factors that may be used to assess existing regulatory scrutiny 
include:
---------------------------------------------------------------------------

    \15\ Dodd-Frank Act section 113(a)(2)(H), 12 U.S.C. 
5323(a)(2)(H).
---------------------------------------------------------------------------

     The extent to which the company's primary financial 
regulator has imposed risk-management standards such as capital, 
liquidity, and reporting requirements, as relevant to the type of 
company, and has authority to supervise, examine, and bring 
enforcement actions, with respect to the company and its affiliates, 
including non-U.S. entities.
     Regulators' processes for inter-regulator coordination.
     For non-U.S. entities, the extent to which the company 
is supervised and subject to prudential standards on a consolidated 
basis in its home country that are administered and enforced by a 
comparable foreign supervisory authority.

e. Benefits and Costs of Determination; Likelihood of Material 
Financial Distress

    Determining whether the expected benefits of a potential Council 
determination justify the expected costs is necessary to ensure that 
the Council's actions are expected to provide a net benefit to U.S. 
financial stability and are consistent with thoughtful 
decisionmaking.\16\ Financial stability benefits may be difficult to 
quantify, and some of the costs may be difficult to forecast with 
precision, but the Council will make a determination under section 
113 only if the expected benefits to financial stability from 
Federal Reserve supervision and prudential standards justify the 
expected costs that the determination would impose. As part of this 
analysis, the Council will assess the likelihood of a firm's 
material financial distress, in order to assess the extent to which 
a determination may promote U.S. financial stability.
---------------------------------------------------------------------------

    \16\ See MetLife, Inc. v. Financial Stability Oversight Council, 
177 F. Supp.3d 219, 242 (D.D.C. 2016) (quoting 12 U.S.C. 
5323(a)(2)(K) and Michigan v. Environmental Protection Agency, 135 
S. Ct. 2699, 2707 (2015)).
---------------------------------------------------------------------------

    The key elements of regulatory analysis include (1) a statement 
of the need for the proposed action, (2) an examination of 
alternative approaches, and (3) an evaluation of the benefits and 
costs (quantitative and qualitative) of the proposed action and the 
main alternatives.\17\ The Council will quantify reasonable 
estimable benefits and costs (using ranges, as appropriate).\18\ The 
Council will conduct this analysis only in cases where the Council 
is concluding that the company meets one of the standards for a 
determination by the Council under section 113 of the Dodd-Frank 
Act, because in other cases doing so would not affect the outcome of 
the Council's analysis.
---------------------------------------------------------------------------

    \17\ See Office of Management and Budget Circular A-4 (Sept. 17, 
2003).
    \18\ The Council will also consider non-quantified benefits and 
costs. See Office of Management and Budget Circular A-4 (Sept. 17, 
2003), section (E)(Developing Benefit and Cost Estimates)(7).
---------------------------------------------------------------------------

    Benefits. With respect to the benefits of a Council 
determination, the Council will consider the benefits of the 
determination itself, both to (1) the U.S. financial system and the 
U.S. economy and (2) the nonbank financial company due to additional 
regulatory requirements resulting from the determination, 
particularly the prudential standards adopted by the Federal Reserve 
under section 165 of the Dodd-Frank Act.
    One of the Council's statutory purposes is to respond to 
emerging threats to the stability of the U.S. financial system.\19\ 
The primary intended benefit of a determination under section 113 of 
the Dodd-Frank Act is a reduction in the likelihood or severity of a 
financial crisis. Therefore, the Council will consider potential 
benefits to the U.S. financial system and the U.S. economy arising 
from a Council determination. To the extent that a Council 
determination reduces the likelihood or severity of a potential 
financial crisis, the determination could enhance financial 
stability and improve the functioning of financial markets. The 
Council may use various measures of systemic risk to assess any 
improvement in financial stability. Such measures include S-Risk 
(which attempts to quantify the amount of capital a financial firm 
would need to raise in order to function normally in the event of a 
severe financial crisis), conditional value at risk, and certain 
estimates of fire sale risk, among others. To assess the benefit to 
the U.S. financial system and the U.S. economy from a determination, 
the Council may also consider historical analogues to the nonbank 
under review. In addition, the Council may compare the risks to 
financial stability posed by a particular nonbank to the risks posed 
by large bank holding companies, in order to produce an assessment 
of the relative risks the company may pose. Further, the loss of any 
implicit ``too big to fail'' or similar subsidy would be considered 
a benefit to the economy, even if it increases the nonbank financial 
company's cost of capital.
---------------------------------------------------------------------------

    \19\ Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C. 
5322(a)(1)(C).
---------------------------------------------------------------------------

    Analysis of the benefits of a determination for the relevant 
nonbank financial company may include those arising directly from 
the

[[Page 9045]]

Council's determination as well as any benefits arising from 
anticipated new or increased requirements resulting from the 
determination, such as additional supervision and enhanced capital, 
liquidity, or risk-management requirements. For example, a nonbank 
financial company subject to a Council determination may benefit 
from a lower cost of capital or higher credit ratings upon meeting 
its post-determination regulatory requirements.
    Costs. With respect to the costs of a Council determination, the 
Council will consider the costs of the determination itself, both to 
(1) the nonbank financial company due to additional regulatory 
requirements resulting from the determination, including the costs 
of the prudential standards adopted by the Federal Reserve under 
section 165 of the Dodd Frank Act; and (2) the U.S. economy.
    The Council will consider costs to the company arising from 
anticipated new or increased regulatory requirements resulting from 
the determination related to:
     Risk-management requirements, such as the costs of 
capital planning and stress testing.
     Supervision and examination, such as compliance costs 
to the firm of additional examination and supervision.
     Increased capital requirements, after accounting for 
offsetting benefits to taxpayers and to the holders of the firm's 
other liabilities.
     Liquidity requirements, such as the opportunity cost 
from any requirement to hold additional high-quality liquid assets, 
relative to the company's current investment portfolio.
    Because the Federal Reserve is required to tailor prudential 
standards to a nonbank financial company subject to a Council 
determination after the Council has made a determination regarding 
the company, the new regulatory requirements that result from the 
Council's determination will not be known to the Council during its 
analysis of the company. In cases where the nonbank financial 
company under review primarily engages in bank-like activities, the 
Council may consider, as a proxy, the costs that would be imposed on 
the nonbank if the Federal Reserve imposed prudential standards 
similar to those imposed on bank holding companies with at least 
$250 billion in total consolidated assets under section 165 of the 
Dodd-Frank Act.\20\
---------------------------------------------------------------------------

    \20\ Dodd-Frank Act section 165, 12 U.S.C. 5365.
---------------------------------------------------------------------------

    The Council also will consider the cost of a determination under 
section 113 of the Dodd-Frank Act to the U.S. economy by assessing 
the impact of the determination on the availability and cost of 
credit or financial products in relevant U.S. markets. To the extent 
that the markets in which the relevant nonbank participates have low 
concentration, the impact that the determination regarding one firm 
would have on credit conditions would generally be immaterial. 
However, if the relevant markets are concentrated, a Council 
determination regarding a significant market participant could have 
a material impact on credit conditions in that market. As part of 
this analysis, the Council may also consider the extent to which any 
reduction in financial services provided by the nonbank financial 
company under review would be offset by other market participants.
    Likelihood of Material Financial Distress. As part of the 
assessment of the overall impact of a Council determination for any 
company under review under the First Determination Standard, the 
Council will assess the likelihood of the company's material 
financial distress, applying quantitative and qualitative factors. 
There are a number of widely known measures for assessing the risk 
of default of financial institutions. These include market-based 
measures (e.g., distance-to-default measures, default probabilities 
implied by credit-default swap prices); accounting-based measures 
(e.g., statistical models using capital adequacy, portfolio quality, 
profitability and other institution-specific characteristics to 
predict failure); and market- and accounting-based measures (e.g., 
academic models, credit ratings). In addition, the Council may 
evaluate a nonbank financial company's resiliency to asset or 
capital shocks. The Council's analysis of the likelihood of a 
nonbank financial company's material financial distress will be 
conducted taking into account a period of overall stress in the 
financial services industry and a weak macroeconomic environment. 
The Council may also consider the results of any stress tests that 
have previously been conducted by the company or by its primary 
financial regulatory agency.
    Nonetheless, the Council recognizes the difficulty of accurately 
forecasting firm failures, particularly for any period beyond a very 
short time horizon. Therefore, the assessment of likelihood may not 
be based on any individual model, and the Council may not seek to 
produce a quantitative estimate of the probability of a company's 
material financial distress. The Council will attempt to quantify 
the likelihood of material financial distress where doing so is 
possible. If doing so is not possible with respect to a specific 
firm, as an alternative, the Council will generally take into 
account quantitative and qualitative factors related to (1) the 
types of market-based or accounting-based measures described above 
and (2) historical examples regarding the characteristics of 
financial companies that have experienced financial distress. In 
particular, relevant factors in this analysis may include the 
company's leverage; its liquidity risk (including reliance on short-
term funding) or maturity mismatch; its risk-management practices; 
its existing regulation; and any rapid growth in its business (which 
may indicate a concentration in high-risk activities).

IV. The Determination Process

    As described in section II of this appendix, the Council will 
prioritize an activities-based approach for identifying, assessing, 
and addressing potential risks to financial stability. However, if a 
potential risk or threat to U.S. financial stability cannot be 
addressed through an activities-based approach,\21\ the Council may 
subject a nonbank financial company to review for an entity-specific 
determination under section 113 of the Dodd-Frank Act. The Council 
expects generally to follow a two-stage process of evaluation and 
analysis for determinations under section 113.
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    \21\ The Council would be most likely to consider a 
determination under section 113 only in rare instances such as an 
emergency situation or if a potential threat to U.S. financial 
stability is outside the jurisdiction or authority of financial 
regulatory agencies.
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    In the first stage of the process (``Stage 1''), nonbank 
financial companies identified as potentially posing risks to U.S. 
financial stability will be notified and subject to a preliminary 
analysis, based on quantitative and qualitative information 
available to the Council primarily through public and regulatory 
sources. During Stage 1, the Council will permit, but not require, 
the company to submit relevant information. The Council will also 
consult with the primary financial regulatory agency or home country 
supervisor, as appropriate. This approach will enable the Council to 
fulfill its statutory obligation to rely whenever possible on 
information available through the Office of Financial Research (the 
``OFR''), Council member agencies, or the nonbank financial 
company's primary financial regulatory agencies before requiring the 
submission of reports from any nonbank financial company.\22\
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    \22\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
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    Following Stage 1, nonbank financial companies that are selected 
for additional review will receive notice that they are being 
considered for a proposed determination that the company could pose 
a threat to U.S. financial stability (a ``Proposed Determination'') 
and will be subject to in-depth evaluation during the second stage 
of review (``Stage 2''). Stage 2 will involve the evaluation of 
additional information collected directly from the nonbank financial 
company. At the end of Stage 2, the Council may consider whether to 
make a Proposed Determination with respect to the nonbank financial 
company. If a Proposed Determination is made by the Council, the 
nonbank financial company may request a hearing in accordance with 
section 113(e) of the Dodd-Frank Act and Sec.  1310.21(c) of the 
Council's rule.\23\ After making a Proposed Determination and 
holding any written or oral hearing if requested, the Council may 
vote to make a final determination.
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    \23\ See 12 CFR 1310.21(c).
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a. Stage 1: Preliminary Evaluation of Nonbank Financial Companies

    Stage 1 involves a preliminary analysis of nonbank financial 
companies to assess the risks they could pose to U.S. financial 
stability.

Identification of Company for Review in Stage 1

    If, as described in section II, the Council's consultation with 
and any recommendations to a nonbank financial company's primary 
financial regulatory agency do not adequately address a potential 
risk identified by the Council, the Council may evaluate one or more 
individual nonbank financial companies for an entity-specific

[[Page 9046]]

determination under section 113 of the Dodd-Frank Act. The Council 
or its Deputies Committee \24\ will vote to commence review of a 
nonbank financial company in Stage 1. When evaluating the potential 
risks associated with a nonbank financial company, the Council may 
consider the company and its subsidiaries together. This approach 
enables the Council to consider potential risks arising across the 
consolidated organization, while retaining the ability to make a 
determination regarding either the parent or any individual nonbank 
financial company subsidiary (or neither), depending on which entity 
the Council determines could pose a threat to financial stability.
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    \24\ The Council's Deputies Committee is composed of senior 
officials from each Council member and member agency. It coordinates 
and oversees the work of the Council's other interagency staff 
committees.
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Engagement With Company and Regulators in Stage 1

    The Council will provide a notice to any nonbank financial 
company under review in Stage 1. In Stage 1, the Council will 
consider available public and regulatory information; in addition, a 
company under review in Stage 1 may submit to the Council any 
information it deems relevant to the Council's evaluation and may, 
upon request, meet with staff on the Council's analytical team. In 
order to reduce the burdens of review on the company, the Council 
will not require the company to submit information during Stage 1. 
In addition, staff on the analytical team will, upon request, 
provide the company with a list of the primary public sources of 
information being considered during the Stage 1 analysis, so that 
the company has an opportunity to understand the information the 
Council may rely upon during Stage 1.
    During the discussions in Stage 1 with the company, the Council 
intends for staff of Council members and member agencies to explain 
to the company the key risks that have been identified in the 
analysis. Because the review of the company is preliminary and 
continues to change until the Council makes a final determination, 
these identified risks may shift over time.
    The Council will also consider in Stage 1 information available 
from relevant existing regulators of the company. Under the Dodd-
Frank Act, the Council is required to consult with the primary 
financial regulatory agency, if any, for each nonbank financial 
company or subsidiary of a nonbank financial company that is being 
considered for a determination before the Council makes any final 
determination with respect to such company.\25\ For any company 
under review in Stage 1 that is regulated by a primary financial 
regulatory agency or home country supervisor, the Council will 
notify the regulator or supervisor that the company is under review 
no later than such time as the company is notified. As part of that 
consultation process, the Council will consult with the primary 
financial regulatory agency, if any, of each significant subsidiary 
of the nonbank financial company, to the extent the Council deems 
appropriate in Stage 1, before the Council votes on whether to 
advance the company to Stage 2. The Council will actively solicit 
the regulator's views regarding risks at the company and potential 
mitigants. In order to enable the regulator to provide relevant 
information, the Council will share its preliminary views regarding 
potential risks at the company, and request that the regulator 
provide information regarding those specific risks, including 
whether the risks are adequately mitigated by factors such as 
existing regulation or the company's business practices. During the 
determination process, the Council will continue to encourage the 
regulator to address any risks to U.S. financial stability using the 
regulator's existing authorities; if the Council believes the 
regulator's actions adequately address the potential risks to U.S. 
financial stability the Council has identified, the Council may 
discontinue its consideration of the firm for a potential 
determination under section 113 of the Dodd-Frank Act.
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    \25\ Dodd-Frank Act section 113(g), 12 U.S.C. 5323(g).
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    Based on the preliminary evaluation in Stage 1, the Council may 
begin a more detailed analysis of the company by advancing the 
company to Stage 2, or it may decide not to evaluate the company 
further. If the Council determines not to advance a company that has 
been reviewed in Stage 1 to Stage 2, the Council will notify the 
company in writing of the Council's decision. The notice will 
clarify that a vote not to advance the company from Stage 1 to Stage 
2 at that time does not preclude the Council from reinitiating 
review of the company in Stage 1. For example, the Council may 
reinitiate review of the company if material changes affecting the 
firm merit further evaluation.

b. Stage 2: In-Depth Evaluation

    Stage 2 involves an in-depth evaluation of any company that the 
Council has determined merits additional review.
    In Stage 2, the Council will review the relevant company using 
information collected directly from the nonbank financial company, 
as well as public and regulatory information. The review will focus 
on whether the nonbank financial company could pose a threat to U.S. 
financial stability because of the company's material financial 
distress or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the company. The 
Council expects that the transmission channels discussed above, and 
other appropriate factors, will be used to evaluate a nonbank 
financial company's potential to pose a threat to U.S. financial 
stability.

Engagement With Company and Regulators in Stage 2

    Each nonbank financial company to be evaluated in Stage 2 will 
receive a notice (a ``Notice of Consideration'') that the nonbank 
financial company is under consideration for a Proposed 
Determination. The Council also will submit to the company a request 
that the company provide information that the Council deems relevant 
to the Council's evaluation, and the nonbank financial company will 
be provided an opportunity to submit written materials to the 
Council.\26\ This information will generally be collected by the 
OFR. Before requiring the submission of reports from any nonbank 
financial company that is regulated by a Council member agency or 
any primary financial regulatory agency, the Council, acting through 
the OFR, will coordinate with such agencies and will, whenever 
possible, rely on information available from the OFR or such 
agencies. Council members and their agencies and staffs will 
maintain the confidentiality of such information in accordance with 
applicable law. During Stage 2, the company may also submit any 
other information that it deems relevant to the Council's 
evaluation. Information considered by the Council includes details 
regarding the company's financial activities, legal structure, 
liabilities, counterparty exposures, resolvability, and existing 
regulatory oversight.
---------------------------------------------------------------------------

    \26\ See 12 CFR 1310.21(a).
---------------------------------------------------------------------------

    Information requests likely will involve both qualitative and 
quantitative data. Information relevant to the Council's analysis 
may include confidential business information such as detailed 
information regarding financial assets, terms of funding 
arrangements, counterparty exposure or position data, strategic 
plans, and interaffiliate transactions.
    The Council will make staff on the Council's analytical team 
available to meet with the representatives of any company that 
enters Stage 2, to explain the evaluation process and the framework 
for the Council's analysis. If the analysis in Stage 1 has 
identified specific aspects of the company's operations or 
activities as the primary focus for the evaluation, staff will 
notify the company of those issues, although the issues will be 
subject to change based on the ongoing analysis. In addition, the 
Council expects that its Deputies Committee will grant a request to 
meet with a company in Stage 2 to allow the company to present any 
information or arguments it deems relevant to the Council's 
evaluation.
    During Stage 2 the Council will also seek to continue its 
consultation with the company's primary financial regulatory agency 
or home country supervisor in a timely manner before the Council 
makes any proposed or final determination with respect to such 
nonbank financial company. The Council will continue to encourage 
the regulator during the determination process to address any risks 
to U.S. financial stability using the regulator's existing 
authorities; as noted above, if the Council believes the regulator's 
actions adequately address the potential risks to U.S. financial 
stability the Council has identified, the Council may discontinue 
its consideration of the firm for a potential determination under 
section 113 of the Dodd-Frank Act.
    Before making a Proposed Determination regarding a nonbank 
financial company, the Council will notify the company when the 
Council believes that the evidentiary record regarding such nonbank 
financial company is complete. The Council will notify any nonbank 
financial company in Stage 2 if the nonbank financial company ceases 
to be

[[Page 9047]]

considered for a determination. Any nonbank financial company that 
ceases to be considered at any time in the Council's determination 
process may be considered for a Proposed Determination in the future 
at the Council's discretion, consistent with the processes described 
above.

c. Proposed and Final Determination

    Proposed Determination
    Based on the analysis performed in Stage 2, a nonbank financial 
company may be considered for a Proposed Determination. A proposed 
determination requires a vote of two-thirds of the voting members of 
the Council then serving, including an affirmative vote by the 
Chairperson of the Council.\27\ Following a Proposed Determination, 
the Council will issue a written notice of the Proposed 
Determination to the nonbank financial company, which will include 
an explanation of the basis of the Proposed Determination.\28\ 
Promptly after the Council votes to make a proposed determination 
regarding a company, the Council will provide the company's primary 
financial regulatory agency or home country supervisor (subject to 
appropriate protections for confidential information) with the 
nonpublic written explanation of the basis of the Council's proposed 
or final determination. The Council also will publish the 
explanation of the basis of the Proposed Determination, subject to 
redactions to protect confidential information from the company or 
its regulators.
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    \27\ 12 CFR 1310.10(b).
    \28\ Dodd-Frank Act section 113(e)(1), 12 U.S.C. 5323(e)(1).
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Hearing

    A nonbank financial company that is subject to a Proposed 
Determination may request a nonpublic hearing to contest the 
Proposed Determination in accordance with section 113(e) of the 
Dodd-Frank Act. If the nonbank financial company requests a hearing 
in accordance with the procedures set forth in Sec.  1310.21(c) of 
the Council's rule,\29\ the Council will set a time and place for 
such hearing. The Council has published hearing procedures on its 
website.\30\ In light of the short statutory timeframe for 
conducting a hearing, and the fact that the purpose of the hearing 
is to benefit the company, if a company requests that the Council 
waive the statutory deadline for conducting the hearing, the Council 
may do so in appropriate circumstances.
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    \29\ See 12 CFR 1310.21(c).
    \30\ Financial Stability Oversight Council Hearing Procedures 
for Proceedings Under Title I or Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, available at https://www.treasury.gov/initiatives/fsoc/designations/Pages/Hearing-Procedures.aspx.
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Final Determination

    After making a Proposed Determination and holding any requested 
written or oral hearing, the Council may, 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), 
make a final determination that the company will be subject to 
supervision by the Federal Reserve and prudential standards. If the 
Council makes a final determination, it will provide the company 
with a written notice of the Council's final determination, 
including an explanation of the basis for the Council's 
decision.\31\ The Council will also provide the company's primary 
financial regulatory agency or home country supervisor (subject to 
appropriate protections for confidential information) with the 
nonpublic written explanation of the basis of the Council's final 
determination. The Council expects that its explanation of the final 
basis for any determination will highlight the key risks that led to 
the determination and include clear guidance regarding the factors 
that were most important in the Council's determination. When 
practicable and consistent with the purposes of the determination 
process, the Council will provide a nonbank financial company with a 
notice of a final determination at least one business day before 
publicly announcing the determination pursuant to Sec.  
1310.21(d)(3), Sec.  1310.21(e)(3), or Sec.  1310.22(d)(3) of the 
Council's rule.\32\ In accordance with section 113(h) of the Dodd-
Frank Act, a nonbank financial company that is subject to a final 
determination may bring an action in U.S. district court for an 
order requiring that the determination be rescinded.
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    \31\ Dodd-Frank Act section 113(e)(3), 12 U.S.C. 5323(e)(3); see 
also 12 CFR 1310.21(d)(2) and (e)(2).
    \32\ See 12 CFR 1310.21(d)(3) and (e)(3) and 1310.22(d)(3).
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    The Council does not intend to publicly announce the name of any 
nonbank financial company that is under evaluation prior to a final 
determination with respect to such company. However, if a company 
that is under review in Stage 1 or Stage 2 publicly announces the 
status of its review by the Council, the Council intends, upon the 
request of a third party, to confirm the status of the company's 
review. In addition, the Council will publicly release the 
explanation of the Council's basis for any nonbank financial company 
determination or rescission of a determination. The Council is 
subject to statutory and regulatory requirements to maintain the 
confidentiality of certain information submitted to it by a nonbank 
financial company or its regulators.\33\ In light of these 
confidentiality obligations, such confidential information will be 
redacted from the materials that the Council makes publicly 
available.
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    \33\ See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5); 
see also 12 CFR 1310.20(e).
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V. Annual Reevaluations of Nonbank Financial Company Determinations

    After the Council makes a final determination regarding a 
company, the Council intends to encourage the company or its 
regulators to take steps to mitigate the potential risks identified 
in the Council's written explanation of the basis for its final 
determination. Except in cases where new material risks arise over 
time, if a company adequately addresses the potential risks 
identified in writing by the Council at the time of the final 
determination and in subsequent reevaluations, the Council should 
generally be expected to rescind its determination regarding the 
company.
    For any nonbank financial company that is subject to a final 
determination, the Council is required to reevaluate the 
determination at least annually, and to rescind the determination if 
the Council determines that the company no longer meets the 
statutory standards for a determination. The Council may also 
consider a request from a company for a reevaluation before the next 
required annual reevaluation, in the case of an extraordinary change 
that materially decreases the threat the nonbank financial company 
could pose to U.S. financial stability.
    The Council applies the same standards of review in its annual 
reevaluations as the standard for an initial determination regarding 
a nonbank financial company: either the company's material financial 
distress, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the company's activities, could pose a 
threat to U.S. financial stability. If the Council determines that 
the company no longer meets those standards, the Council will 
rescind its determination.
    The Council's annual reevaluations generally assess whether any 
material changes since the previous reevaluation and since the 
determination justify a rescission of the determination, based on 
the same transmission channels and other factors that are considered 
during a determination decision. The Council expects that its 
reevaluation process will focus on whether any material changes--
including changes at the company, changes in its markets or its 
regulation, changes in the Council's own analysis, or otherwise--
result in the company no longer meeting the standard for a 
determination. In light of the frequent reevaluations, the Council's 
analyses will generally focus on changes since the Council's 
previous review, but the ultimate question the Council will seek to 
assess is whether changes in the aggregate since the Council's 
determination regarding the company have caused the company to cease 
meeting the Determination Standards. The Council expects that its 
analysis in its annual reevaluations will generally be organized 
around the three transmission channels described above as well as 
existing regulatory scrutiny and the company's complexity and 
resolvability.
    Before the Council's annual reevaluation of a determination 
regarding a nonbank financial company, the Council will provide the 
company with an opportunity to meet with staff of Council members 
and member agencies to discuss the scope and process for the review 
and to present information regarding any change that may be relevant 
to the threat the company could pose to financial stability. Staff 
of Council members and member agencies will also be available to 
meet with the company during the annual reevaluation, at the 
company's request. In addition, during an annual reevaluation, a 
company may submit any written information to the Council the 
company considers relevant to the Council's analysis. During annual 
reevaluations, companies are encouraged to submit information 
regarding

[[Page 9048]]

any changes related to the company's risk profile that mitigate the 
potential risks previously identified by the Council. Such changes 
could include updates regarding company restructurings, regulatory 
developments, market changes, or other factors. If the company has 
taken steps to address the potential risks previously identified by 
the Council, the Council will assess whether those risks have been 
adequately mitigated to merit a rescission of the determination 
regarding the company. If the company explains in detail potential 
changes it could make to its business to address the potential risks 
previously identified by the Council, staff of Council members and 
member agencies will endeavor to provide their feedback on the 
extent to which those changes may address the potential risks.
    If a company contests the Council's determination during the 
Council's annual reevaluation, the Council will vote on whether to 
rescind the determination and provide the company, its primary 
financial regulatory agency, and the primary financial regulatory 
agency of its significant subsidiaries with a notice explaining the 
primary basis for any decision not to rescind the determination. If 
the Council does not rescind the determination, the written notice 
provided to the company will address each of the material factors 
raised by the company in its submissions to the Council contesting 
the determination during the annual reevaluation. The written notice 
from the Council will also explain in detail why the Council did not 
find that the company no longer met the standard for a determination 
under section 113 of the Dodd-Frank Act. In general, due to the 
sensitive nature of its analyses in annual reevaluations, the 
Council may not in all cases publicly release the written findings 
that it provides to the company.
    Finally, the Council will provide each nonbank financial company 
subject to a Council determination with an opportunity for an oral 
hearing before the Council once every five years at which the 
company can contest the determination.

    Dated: March 6, 2019.
Bimal Patel,
Deputy Assistant Secretary for the Financial Stability Oversight 
Council, Department of the Treasury.
[FR Doc. 2019-04488 Filed 3-12-19; 8:45 am]
 BILLING CODE 4810-25-P-P