[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
________________________________________________________________________
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;
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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.
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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\
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\24\ 177 F. Supp.3d 219 (D.D.C. 2016).
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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.
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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.
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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.
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\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\
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\33\ See note 3 above.
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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.
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\1\ See Dodd-Frank Act section 113, 12 U.S.C. 5323.
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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.
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\2\ ``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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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.
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\3\ Dodd-Frank Act section 112(a)(1), 12 U.S.C. 5322(a)(1).
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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\
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\4\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515
(2009).
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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.
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\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).
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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.
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\7\ Dodd-Frank Act section 112(a)(2), 12 U.S.C. 5322(a)(2).
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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\
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\8\ Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
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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).
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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.
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\10\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
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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).
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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.
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\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).
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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).
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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.
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\14\ Dodd-Frank Act section 113(a)(2)(F), 12 U.S.C.
5323(a)(2)(F).
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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:
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\15\ Dodd-Frank Act section 113(a)(2)(H), 12 U.S.C.
5323(a)(2)(H).
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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.
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\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)).
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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.
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\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).
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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.
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\19\ Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C.
5322(a)(1)(C).
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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\
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\20\ Dodd-Frank Act section 165, 12 U.S.C. 5365.
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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.
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\26\ See 12 CFR 1310.21(a).
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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