[Federal Register Volume 88, Number 82 (Friday, April 28, 2023)]
[Notices]
[Pages 26305-26311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-08969]


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FINANCIAL STABILITY OVERSIGHT COUNCIL


Analytic Framework for Financial Stability Risk Identification, 
Assessment, and Response

AGENCY: Financial Stability Oversight Council.

ACTION: Proposed analytic framework; request for public comment.

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SUMMARY: The Financial Stability Oversight Council (Council) is 
proposing to adopt an analytic framework that describes the approach 
the Council expects to take in identifying, assessing, and responding 
to certain potential risks to U.S. financial stability.

DATES: Comment due date: June 27, 2023.

ADDRESSES: You may submit comments by either of the following methods. 
All submissions must refer to the document title and RIN 4030-[XXXX].
    Electronic Submission of Comments: You may submit comments 
electronically through the Federal eRulemaking Portal at https://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 https://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: 
Eric Froman, 1500 Pennsylvania Avenue NW, Room 2308, Washington, DC 
20220.
    All properly submitted comments will be available for inspection 
and downloading at https://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: Eric Froman, Office of the General 
Counsel, Treasury, at (202) 622-1942; Devin Mauney, Office of the 
General Counsel, Treasury, at (202) 622-2537; or Carol Rodrigues, 
Office of the General Counsel, Treasury, at (202) 622-6127.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 111 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act'') established the Financial 
Stability Oversight Council (Council), and section 112 sets forth its 
duties and purposes, which include identifying risks to U.S. financial 
stability and responding to emerging threats to the stability of the 
U.S. financial system.\1\
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    \1\ 12 U.S.C. 5321 & 5322.
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    The proposed Analytic Framework for Financial Stability Risk 
Identification, Assessment, and Response (Proposed Analytic Framework) 
describes the approach the Council expects to take in identifying, 
assessing, and responding to certain potential risks to U.S. financial 
stability. The Proposed Analytic Framework is not a binding rule,\2\ 
and does not establish rights or

[[Page 26306]]

obligations applicable to any person or entity, but is intended to help 
market participants, stakeholders, and other members of the public 
better understand how the Council expects to perform certain of its 
duties.
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    \2\ In a rule codified at 12 CFR 1310.3, the Council voluntarily 
committed that it would not amend or rescind certain interpretive 
guidance regarding nonbank financial company determinations set 
forth in Appendix A to 12 CFR part 1310 without providing the public 
with notice and an opportunity to comment in accordance with the 
procedures applicable to legislative rules under 5 U.S.C. 553. 
Section 1310.3 does not apply to the Council's issuance of rules, 
guidance, procedures, or other documents that do not amend or 
rescind Appendix A, and accordingly, it does not apply to the 
Proposed Analytic Framework. Nonetheless, in the interest of 
transparency and accountability, the Council has chosen to publish 
its Proposed Analytic Framework and provide an opportunity for 
public comment.
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II. Questions for Public Comment

    The Council seeks public comment on any aspect of the Proposed 
Analytic Framework, including the following questions:
    1. Will the Proposed Analytic Framework enable the Council to 
achieve its statutory purposes and perform its statutory duties? Should 
the Proposed Analytic Framework address additional topics? Are there 
topics the Proposed Analytic Framework addresses but should not?
    2. The Proposed Analytic Framework states that financial stability 
can be defined as the financial system being resilient to events or 
conditions that could impair its ability to support economic activity, 
such as by intermediating financial transactions, facilitating 
payments, allocating resources, and managing risks. Are there other 
definitions of ``financial stability'' the Council should consider?
    3. The Council's monitoring for potential risks to financial 
stability may cover an expansive range of asset classes, institutions, 
and activities, some of which are noted in the Proposed Analytic 
Framework. Are there asset classes, institutions, and activities not 
listed in the Proposed Analytic Framework the Council should monitor 
for potential risks to financial stability?
    4. The Proposed Analytic Framework lists certain vulnerabilities 
that most commonly contribute to risk to financial stability: leverage; 
liquidity risk and maturity mismatch; interconnections; operational 
risks; complexity and opacity; inadequate risk management; 
concentration; and destabilizing activities. Are the Council's 
descriptions of these vulnerabilities appropriate? Should the Proposed 
Analytic Framework address additional vulnerabilities?
    5. The Proposed Analytic Framework also provides sample metrics 
associated with the listed vulnerabilities. Are the proposed sample 
metrics appropriate for the purposes described in the Proposed Analytic 
Framework? Are there additional sample metrics that the Proposed 
Analytic Framework should incorporate?
    6. The Council has identified four channels as most likely to 
facilitate the transmission of the negative effects of a risk to 
financial stability: exposures; asset liquidation; critical function or 
service; and contagion. Do the transmission channels listed in the 
Proposed Analytic Framework capture the most likely ways in which the 
negative effects of a risk to financial stability could be transmitted 
to other firms or markets? Should the Council consider additional 
transmission channels?
    7. With respect to the vulnerabilities and transmission channels 
identified in the Proposed Analytic Framework, are there potential 
interactions between or among these vulnerabilities and transmission 
channels that the Proposed Analytic Framework should address?

III. Legal Authority

    The Council has numerous authorities and tools under the Dodd-Frank 
Act to carry out its statutory purposes.\3\ As the agency charged by 
Congress with broad-ranging responsibilities under the Dodd-Frank Act, 
the Council has the inherent authority to promulgate interpretive 
guidance that explains the approach the Council expects to take in 
identifying, assessing, and responding to certain potential risks to 
U.S. financial stability.\4\ The Council also has authority to issue 
policy statements.\5\ The Proposed Analytic Framework describes how the 
Council intends to exercise its discretionary authority. The Proposed 
Analytic Framework does not have binding effect; does not impose duties 
on, or alter the rights or interests of, any person; and does not 
change the statutory conditions or standards for the Council's actions.
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    \3\ See, for example, Dodd-Frank Act sections 112(a)(2), 113, 
115, 120, 804, 12 U.S.C. 5322(a)(2), 5323, 5325, 5330, 5463.
    \4\ Courts have recognized that ``an agency charged with a duty 
to enforce or administer a statute has inherent authority to issue 
interpretive rules informing the public of the procedures and 
standards it intends to apply in exercising its discretion.'' See, 
for example, Production Tool v. Employment & Training 
Administration, 688 F.2d 1161, 1166 (7th Cir. 1982). The Supreme 
Court has acknowledged that ``whether or not they enjoy any express 
delegation of authority on a particular question, agencies charged 
with applying a statute necessarily make all sorts of interpretive 
choices.'' See U.S. v. Mead, 533 U.S. 218, 227 (2001).
    \5\ See Association of Flight Attendants-CWA, AFL-CIO v. Huerta, 
785 F.3d 710 (D.C. Cir. 2015).
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IV. Executive Orders 12866, 13563, 14094

    Executive Orders 12866, 13563, and 14094 direct certain agencies to 
assess costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Pursuant 
to section 3(f) of Executive Order 12866, the Office of Information and 
Regulatory Affairs within the Office of Management and Budget has 
determined that the Proposed Analytic Framework is not a ``significant 
regulatory action.''

Financial Stability Oversight Council

Analytic Framework for Financial Stability Risk Identification, 
Assessment, and Response

I. Introduction

    This document describes the approach the Financial Stability 
Oversight Council (Council) expects to take in identifying, assessing, 
and responding to certain potential risks to U.S. financial stability.
    The Council's practices set forth in this document are among the 
methods the Council uses to satisfy its statutory purposes: (1) to 
identify risks to U.S. financial stability that could arise from the 
material financial distress or failure, or ongoing activities, of 
large, interconnected bank holding companies or nonbank financial 
companies, or that could arise outside the financial services 
marketplace; (2) to promote market discipline, by eliminating 
expectations on the part of shareholders, creditors, and counterparties 
of such companies that the government will shield them from losses in 
the event of failure; and (3) to respond to emerging threats to the 
stability of the U.S. financial system.\6\ The Council's specific 
statutory duties include monitoring the financial services marketplace 
in order to identify potential threats to U.S. financial stability and 
identifying gaps in regulation that could pose risks to U.S. financial 
stability, among others.\7\
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    \6\ Dodd-Frank Act Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act) section 112(a)(1), 12 U.S.C. 5322(a)(1).
    \7\ Dodd-Frank Act section 112(a)(2), 12 U.S.C. 5322(a)(2).
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    Financial stability can be defined as the financial system being 
resilient to events or conditions that could impair its ability to 
support economic activity, such as by intermediating financial 
transactions, facilitating payments, allocating resources, and managing 
risks. Adverse events, or shocks, can arise from within the financial 
system or from external sources. Vulnerabilities in the financial 
system can amplify the impact of a shock, potentially leading to 
substantial disruptions in the provision of financial services. The 
Council seeks

[[Page 26307]]

to identify and respond to risks to financial stability that could 
impair the financial system's ability to perform its functions to a 
degree that could harm the economy. Risks to financial stability can 
arise from widely conducted activities or from the activities of 
individual entities, and from long-term vulnerabilities or from sources 
that are new or evolving.
    This document describes the Council's analytic framework for 
identifying, assessing, and responding to potential risks to financial 
stability. The Council seeks to reduce the risk of a shock arising from 
within the financial system, to improve resilience against shocks that 
could affect the financial system, and to mitigate financial 
vulnerabilities that may increase risks to financial stability. The 
actions the Council may take depend on the nature of the vulnerability; 
for example, vulnerabilities originating from activities that may be 
widely conducted in a particular sector or market over which a 
regulator has adequate existing authority may be addressed through an 
activity-based or industry-wide response; in contrast, in cases where 
the financial system relies on the ongoing financial activities of a 
small number of entities, such that the impairment of one of the 
entities could threaten financial stability, or where a particular 
financial company's material financial distress or activities could 
pose a threat to financial stability, an entity-based action may be 
appropriate. The Council's authorities, some of which are described in 
section II.c, are complementary, and the Council may select one or more 
of those authorities to address a particular risk.
    Among the many lessons of financial crises are that risks to 
financial stability can be diverse and build up over time, dislocations 
in financial markets and failures of financial companies can be sudden 
and unpredictable, and regulatory gaps can breed risk. The Council was 
created in the aftermath of the 2007-2009 financial crisis and is 
statutorily responsible for identifying and pre-emptively acting to 
address potential risks to financial stability. Many of the same 
factors, such as leverage, liquidity risk, and operational risk, 
regularly recur in different forms and under different conditions to 
generate risks to financial stability. At the same time, the U.S. 
financial system is large, diverse, and continually evolving, so the 
Council's analytic methodologies adapt to address evolving developments 
and risks.
    This document is not a binding rule, but is intended to help market 
participants, stakeholders, and other members of the public better 
understand how the Council expects to perform certain of its duties. 
The Council may consider factors relevant to the assessment of a 
potential risk or threat to U.S. financial stability on a case-by-case 
basis, subject to applicable statutory requirements. The Council's 
annual reports describe the Council's work in implementing its 
responsibilities.

II. Identifying, Assessing, and Addressing Potential Risks to Financial 
Stability

a. Identifying Potential Risks

    To enable the Council to identify potential risks to U.S. financial 
stability, the Council, in consultation with relevant U.S. and foreign 
financial regulatory agencies, monitors financial markets, entities, 
and market developments to identify potential risks to U.S. financial 
stability.
    In light of the Council's broad statutory mandate, the Council's 
monitoring for potential risks to financial stability may cover an 
expansive range of asset classes, institutions, and activities, such 
as:
     markets for debt, loans, short-term funds, equity 
securities, commodities, digital assets, derivatives, and other 
institutional and consumer financial products and services;
     central counterparties and payment, clearing, and 
settlement activities;
     financial entities, including banking organizations, 
broker-dealers, asset managers, investment companies, insurance 
companies, mortgage originators and servicers, and specialty finance 
companies;
     new or evolving financial products and practices; and
     developments affecting the resiliency of the financial 
system, such as cybersecurity and climate-related financial risks.
    Sectors and activities that may impact U.S. financial stability are 
often described in the Council's annual reports. The Council reviews 
information such as historical data, research regarding the behavior of 
financial markets and financial market participants, and new 
developments that arise in evolving marketplaces. The Council relies on 
data, research, and analysis including information from Council member 
agencies, the Office of Financial Research, primary financial 
regulatory agencies, industry participants, and other sources.\8\
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    \8\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
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b. Assessing Potential Risks

    The Council works with relevant financial regulatory agencies \9\ 
to evaluate potential risks to financial stability to determine whether 
they merit further review or action. The evaluation of any potential 
risk to financial stability will be highly fact-specific, but the 
Council has identified certain vulnerabilities that most commonly 
contribute to such risks. The Council has also identified certain 
sample quantitative metrics that are commonly used to measure these 
vulnerabilities, although the Council may assess each of these 
vulnerabilities using a variety of quantitative and qualitative 
factors. The following list is not exhaustive, but is indicative of the 
vulnerabilities and metrics the Council expects to consider.
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    \9\ References in this document to ``relevant financial 
regulatory agencies'' may encompass a broader range of regulators 
than those included in the statutory definition of ``primary 
financial regulatory agency'' under Dodd-Frank Act section 2(12), 12 
U.S.C. 5301(12).
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     Leverage. Leverage can amplify risks by reducing market 
participants' ability to satisfy their obligations and by increasing 
the potential for sudden liquidity strains. Leverage can arise from 
debt, derivatives, off-balance sheet obligations, and other 
arrangements. Leverage can arise broadly within a market or at a 
limited number of firms in a market. Metrics relevant for assessing 
leverage may include ratios of assets, risk-weighted assets, debt, 
derivatives liabilities or exposures, and off-balance sheet obligations 
to equity.
     Liquidity risk and maturity mismatch. A shortfall of 
sufficient liquidity to satisfy short-term needs, or reliance on short-
term liabilities to finance longer-term assets, can subject market 
participants to rollover or refinancing risk. These risks may force 
entities to sell assets rapidly at stressed market prices, which can 
contribute to broader stresses. Relevant metrics may include the ratio 
of short-term debt to unencumbered short-term high-quality liquid 
assets, and amounts of funding available to meet unexpected reductions 
in available short-term funding.
     Interconnections. Direct or indirect financial 
interconnections, such as exposures of creditors, counterparties, 
investors, and borrowers, can increase the potential negative effect of 
dislocations or financial distress. Relevant metrics may include total 
assets, off-balance-sheet assets or liabilities, total debt, 
derivatives exposures, values of securities financing transactions, and 
the size of potential requirements to post margin or

[[Page 26308]]

collateral. Metrics related to the concentration of holdings of a class 
of financial assets may also be relevant.
     Operational risks. Risks can arise from the impairment or 
failure of financial market infrastructures, processes, or systems, 
including due to cybersecurity vulnerabilities. Relevant metrics may 
include statistics on cybersecurity incidents or the scale of critical 
infrastructure.
     Complexity or opacity. A risk may be exacerbated if a 
market, activity, or firm is complex or opaque, such as if financial 
transactions occur outside of regulated sectors or if the structure and 
operations of market participants cannot readily be determined. In 
addition, risks may be aggravated by the complexity of the legal 
structure of market participants and their activities; unavailability 
of data due to lack of regulatory or public disclosure requirements and 
by obstacles to the rapid and orderly resolution of market 
participants. Factors that generally increase the risks associated with 
complexity or opacity may include a large size or scope of activities, 
a complex legal or operational structure, activities or entities 
subject to the jurisdiction of multiple regulators, and complex funding 
structures. Relevant metrics may include the number of jurisdictions in 
which activities are conducted, and numbers of affiliates.
     Inadequate risk management. A risk may be exacerbated if 
it is conducted without effective risk-management practices, including 
the absence of appropriate regulatory authority and requirements. In 
contrast, existing regulatory requirements or market practices may 
reduce risks by, for example, limiting exposures or leverage, 
increasing capital and liquidity, enhancing risk-management practices, 
restricting excessive risk-taking, providing consolidated prudential 
regulation and supervision, or increasing regulatory or public 
transparency. Relevant metrics may include amounts of capital and 
liquidity.
     Concentration. A risk may be amplified if financial 
exposures or important services are highly concentrated in a small 
number of entities, creating a risk of widespread losses or the risk 
that the service could not be replaced in a timely manner at a similar 
price and volume if existing providers withdrew from the market. 
Relevant metrics may include market shares in segments of applicable 
financial markets.
     Destabilizing activities. Certain activities, by their 
nature, particularly those that are sizeable and interconnected with 
the financial system, can destabilize markets for particular types of 
financial instruments or impair financial institutions. This risk may 
arise even when those activities are intentional and permitted by 
applicable law, such as trading practices that substantially increase 
volatility in one or more financial markets, or activities that involve 
moral hazard or conflicts of interest that result in the creation and 
transmission of significant risks.
    The vulnerabilities and metrics listed above identify risks that 
may arise from broadly conducted activities or from a small number of 
entities; they do not dictate the use of a specific authority by the 
Council. Risks to financial stability can arise from widely conducted 
activities or from a smaller number of entities, and the Council's 
evaluations and actions will depend on the nature of a vulnerability. 
While risks from individual entities may be assessed using these types 
of metrics, the Council also evaluates broader risks, such as by 
calculating these metrics on an aggregate basis within a particular 
financial sector. For example, in some cases, risks arising from 
widespread and substantial leverage in a particular market may be 
evaluated or addressed on a sector-wide basis, while in other cases 
risks from a single company whose leverage is outsized relative to 
other firms in its market may be considered for an entity-specific 
response.
    In addition, in most cases the identification and assessment of a 
potential risk to financial stability involves consideration of 
multiple quantitative metrics and qualitative factors. Therefore, the 
Council uses metrics such as those cited above individually and in 
combination, as well as other factors, as appropriate, in its analyses.
    The Council considers how the adverse effects of potential risks 
could be transmitted to financial markets or market participants and 
what impact the potential risk could have on the financial system. Such 
a transmission of risk can occur through various mechanisms, or 
channels. The Council has identified four transmission channels that 
are most likely to facilitate the transmission of the negative effects 
of a risk to financial stability. These transmission channels, which 
are non-exhaustive, are:
     Exposures. Direct and indirect exposures of creditors, 
counterparties, investors, and other market participants can result in 
losses in the event of a default or decreases in asset valuations. In 
particular, market participants' exposures to a particular financial 
instrument or asset class could impair those market participants if 
there is a default on or other reduction in the value of the instrument 
or assets. The potential threat to U.S. financial stability will 
generally be greater if the amounts of exposures are larger; if 
transaction terms provide less protection for counterparties; if 
exposures are correlated, concentrated, or interconnected with other 
instruments or asset classes; or if significant counterparties include 
large financial institutions.
     Asset liquidation. A rapid liquidation of financial assets 
can pose a threat to U.S. financial stability when it causes a 
significant fall in asset prices that disrupts trading or funding in 
key markets or causes losses or funding problems for market 
participants holding those assets. Rapid liquidations can result from a 
deterioration in asset prices or market functioning that could pressure 
firms to sell their holdings of affected assets to maintain adequate 
capital and liquidity, which, in turn, could produce a cycle of asset 
sales that lead to further market disruptions. The potential risk is 
greater, for example, if leverage or reliance on short-term funding is 
higher, if assets are riskier and would experience a reduction in 
market liquidity in times of broader market stress, and if asset price 
volatility could lead to significant margin calls.
     Critical function or service. A risk to financial 
stability can arise if there could be a disruption of a critical 
function or service that is relied upon by market participants and for 
which there are no ready substitutes that could provide the function or 
service at a similar price and quantity. This channel is more prominent 
when the critical function or service is interconnected or large, when 
operations are opaque, when the function or service uses or relies on 
leverage to support its activities, or when risk management practices 
related to operational risks are not sufficient.
     Contagion. Even without direct or indirect exposures, 
contagion can arise from the perception of common vulnerabilities or 
exposures, such as business models or asset holdings that are similar 
or highly correlated. Such contagion can spread stress quickly and 
unexpectedly, particularly in circumstances where there is limited 
transparency into investment risks, correlated markets, or greater 
operational risks. Contagion can also arise when there is a loss of 
confidence in financial instruments that are treated as substitutes for 
money. In these

[[Page 26309]]

circumstances, market dislocations or fire sales may result in a loss 
of confidence in other financial market sectors or participants, 
propagating further market dislocations or fire sales.
    The presence of any of the vulnerabilities listed above may 
increase the potential for risks to be transmitted to financial markets 
or market participants through these or other transmission channels. 
The Council may consider these vulnerabilities and transmission 
channels, as well as others that may be relevant, in identifying 
financial markets, activities, and nonbank financial companies that 
could pose risks to U.S. financial stability.
    The Council may assess risks as they could arise in the context of 
a period of overall stress in the financial services industry and in a 
weak macroeconomic environment, with market developments such as 
increased counterparty defaults, decreased funding availability, and 
decreased asset prices, because in such a context, the risks may have a 
greater effect on U.S. financial stability.
    The Council's work often includes efforts such as sharing data, 
research, and analysis among Council members and member agencies and 
their staffs; consulting with regulators and other experts regarding 
the scope of potential risks and factors that may mitigate those risks; 
and collaboratively developing analyses for consideration by the 
Council. As part of this work, the Council may also engage with market 
participants and other members of the public as it assesses potential 
risks. In its evaluations, the Council takes into account existing laws 
and regulations that have mitigated a potential risk to U.S. financial 
stability. The Council also takes into account the risk profiles and 
business models of market participants. Empirical data may not be 
available regarding all potential risks. The type and scope of the 
Council's analysis will be based on the potential risk under 
consideration. In many cases, the Council provides information 
regarding its work in its annual reports.

c. Addressing Potential Risks

    In light of the varying sources of risk described above (such as 
activities, entities, exogenous circumstances, and existing or emerging 
practices or conditions), the Council may take different approaches to 
respond to a risk, and may use multiple tools to mitigate a risk. These 
approaches may include acting to reduce the risk of a shock arising 
from within the financial system, to mitigate financial vulnerabilities 
that may increase risks to financial stability, or to improve the 
resilience of the financial system to shocks. The actions the Council 
takes may depend on the circumstances. When a potential risk to 
financial stability is identified, the Council's Deputies Committee 
will generally direct one or more of the Council's staff-level 
committees or working groups to consider potential policy approaches or 
actions the Council could take to assess and address the risk. Those 
committees and working groups may consider the utility of any of the 
Council's authorities to respond to risks to U.S. financial stability, 
including but not limited to those described below.
    Interagency coordination and information sharing. In many cases, 
the Council works with the relevant financial regulatory agencies at 
the federal and state levels to seek the implementation of appropriate 
actions to ensure a potential risk is adequately addressed.\10\ If they 
have adequate authority, existing regulators could take actions to 
mitigate potential risks to U.S. financial stability identified by the 
Council. There may be different approaches existing regulators could 
take, based on their authorities and the urgency of the risk, such as 
enhancing their regulation or supervision of companies or markets under 
their jurisdiction; restricting or prohibiting the offering of a 
product; or requiring market participants to take additional risk-
management steps. If existing regulators can address a risk to 
financial stability in a sufficient and timely way, the Council 
generally encourages those regulators to do so.
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    \10\ See Dodd-Frank Act sections 112(a)(2)(A), (D), (E), (F).
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    Recommendations to agencies or Congress. The Council may also make 
formal public recommendations to primary financial regulatory agencies 
under section 120 of the Dodd-Frank Act. Under section 120, the Council 
may provide for more stringent regulation of a financial activity by 
issuing nonbinding recommendations to the primary financial regulatory 
agencies to apply new or heightened standards and safeguards for a 
financial activity or practice conducted by bank holding companies or 
nonbank financial companies under their jurisdiction.\11\ In addition, 
in any case in which no primary financial regulatory agency exists for 
the markets or companies conducting financial activities or practices 
identified by the Council as posing risks, the Council can consider 
reporting to Congress on recommendations for legislation that would 
prevent such activities or practices from threatening U.S. financial 
stability.\12\ The Council will make these recommendations only if it 
determines that the conduct, scope, nature, size, scale, concentration, 
or interconnectedness of the activity or practice could create or 
increase the risk of significant liquidity, credit, or other problems 
spreading among bank holding companies and nonbank financial companies, 
U.S. financial markets, or low-income, minority, or underserved 
communities.\13\ The new or heightened standards and safeguards for a 
financial activity or practice will take costs to long-term economic 
growth into account, and may include prescribing the conduct of the 
activity or practice in specific ways (such as by limiting its scope, 
or applying particular capital or risk management requirements to the 
conduct of the activity) or prohibiting the activity or practice.\14\ 
In its recommendations under section 120, the Council may suggest broad 
approaches to address the risks it has identified. When appropriate, 
the Council may make a more specific recommendation. Prior to issuing a 
recommendation under section 120, the Council will consult with the 
relevant primary financial regulatory agency and provide notice to the 
public and opportunity for comment as required by section 120.\15\
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    \11\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
    \12\ Dodd-Frank Act section 120(d)(3), 12 U.S.C. 5330(d)(3).
    \13\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
    \14\ Dodd-Frank Act section 120(b)(2), 12 U.S.C. 5330(b)(2).
    \15\ The Council also has authority to issue recommendations to 
the Board of Governors of the Federal Reserve System (Federal 
Reserve Board) regarding the establishment of prudential standards 
and reporting and disclosure requirements applicable to large bank 
holding companies and nonbank financial companies subject to Federal 
Reserve Board supervision (Dodd-Frank Act section 115, 12 U.S.C. 
5325); recommendations to regulators, Congress, or firms in its 
annual reports (Dodd-Frank Act section 112(a)(2)(N), 12 U.S.C. 
5322(a)(2)(N)); and other recommendations to Congress or Council 
member agencies (Dodd-Frank Act section 112(a)(2)(D), (F), 12 U.S.C. 
5322(a)(2)(D), (F)).
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    Nonbank financial company determinations. In certain cases, the 
Council may evaluate one or more nonbank financial companies for an 
entity-specific determination under section 113 of the Dodd-Frank Act. 
Under section 113, the Council may determine, by a vote of not fewer 
than two-thirds of the voting members of the Council then serving, 
including an affirmative vote by the Chairperson of the Council, that a 
nonbank financial company will be supervised by the

[[Page 26310]]

Federal Reserve Board and be subject to prudential standards if the 
Council determines that (1) material financial distress at the nonbank 
financial company could pose a threat to the financial stability of the 
United States or (2) the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the nonbank financial 
company could pose a threat to the financial stability of the United 
States. The Council has issued a procedural rule and interpretive 
guidance regarding its process for considering a nonbank financial 
company for potential designation under section 113.\16\ The Dodd-Frank 
Act requires the Council to consider 10 specific considerations, such 
as the company's leverage, relationships with other significant 
financial companies, and existing regulation by primary financial 
regulatory agencies, when determining whether a nonbank financial 
company satisfies either of the determination standards.\17\ Due to the 
unique threat that each nonbank financial company could pose to U.S. 
financial stability and the nature of the inquiry required by the 
statutory considerations set forth in section 113, the Council expects 
that its evaluations of nonbank financial companies under section 113 
will be firm-specific and may include an assessment of quantitative and 
qualitative information that the Council deems relevant to a particular 
nonbank financial company. The factors described above are not 
exhaustive and may not apply to all nonbank financial companies under 
evaluation.
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    \16\ See 12 CFR part 1310.
    \17\ Dodd-Frank Act section 113(a)(2) and (b)(2), 12 U.S.C. 
5323(a)(2) and (b)(2).
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    Payment, clearing, and settlement activity designations. The 
Council also has authority to designate certain payment, clearing, and 
settlement (PCS) activities ``that the Council determines are, or are 
likely to become, systemically important'' under Title VIII of the 
Dodd-Frank Act. PCS activities are defined as activities carried out by 
financial institutions to facilitate the completion of financial 
transactions such as funds transfers, securities contracts, futures, 
forwards, repurchase agreements, swaps, foreign exchange contracts, and 
financial derivatives. Under the Dodd-Frank Act, PCS activities may 
include (1) the calculation and communication of unsettled financial 
transactions between counterparties; (2) the netting of transactions; 
(3) provision and maintenance of trade, contract, or instrument 
information; (4) the management of risks and activities associated with 
continuing financial transactions; (5) transmittal and storage of 
payment instructions; (6) the movement of funds; (7) the final 
settlement of financial transactions; and (8) other similar functions 
that the Council may determine.\18\ Before designating a PCS activity, 
the Council must consult with certain regulatory agencies and must 
provide financial institutions with advanced notice of the proposed 
designation by Federal Register publication. A financial institution 
engaged in the PCS activity may request an opportunity for a written 
or, at the sole discretion of the Council, oral hearing before the 
Council to demonstrate that the proposed designation is not supported 
by substantial evidence. The Council may waive the notice and hearing 
requirements in certain emergency circumstances.\19\ Following any 
designation of a PCS activity, the appropriate federal regulator will 
establish risk-management standards governing the conduct of the 
activity by financial institutions.\20\ The objectives and principles 
for these risk-management standards will be to promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system.\21\ The risk-
management standards may address areas such as risk management policies 
and procedures, margin and collateral requirements, participant or 
counterparty default policies and procedures, the ability to complete 
timely clearing and settlement of financial transactions, and capital 
and financial resource requirements for designated financial market 
utilities, among other things.\22\
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    \18\ Dodd Frank Act section 803(7)(C), 12 U.S.C. 5462(7)(C).
    \19\ Dodd Frank Act section 804(c), 12 U.S.C. 5463(c).
    \20\ Dodd Frank Act section 805(a), 12 U.S.C. 5464(a).
    \21\ Dodd Frank Act section 805(b), 12 U.S.C. 5464(b).
    \22\ Dodd Frank Act section 805(c), 12 U.S.C. 5464(c).
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    Financial market utility designations. In addition, the Council has 
authority to designate financial market utilities (FMUs) that it 
determines are, or are likely to become, systemically important.\23\ An 
FMU is defined as any person that manages or operates a multilateral 
system for the purpose of transferring, clearing, or settling payments, 
securities, or other financial transactions among financial 
institutions or between financial institutions and the person.\24\ The 
Council has issued a procedural rule regarding its authority to 
designate FMUs.\25\ In determining whether designation of a given FMU 
is warranted, the Council must consider (1) the aggregate monetary 
value of transactions processed by the FMU; (2) the FMU's aggregate 
exposure to its counterparties; (3) the relationship, 
interdependencies, or other interactions of the FMU with other FMUs or 
with PCS activities; (4) the effect of the FMU's failure or disruption 
on critical markets, financial institutions, or the broader financial 
system; and (5) any other factors that the Council deems 
appropriate.\26\ Once designated as an FMU, the FMU is subject to the 
supervisory framework of Title VIII of the Dodd-Frank Act. Section 
805(a)(1)(A) requires the Federal Reserve Board to prescribe risk-
management standards governing the FMU's operations related to its PCS 
activities unless the FMU is a derivatives clearing organization or 
clearing agency.\27\ Specifically, section 805(a)(2) grants the 
Commodity Futures Trading Commission or the Securities and Exchange 
Commission, respectively, the authority to prescribe such risk-
management standards for a designated FMU that is either a derivatives 
clearing organization registered under section 5b of the Commodity 
Exchange Act or a clearing agency registered under section 17A of the 
Securities Act of 1934.\28\ Such standards are intended to promote 
robust risk management, promote safety and soundness, reduce systemic 
risks, and support the stability of the broader financial system. In 
addition, the Federal Reserve Board may authorize a Federal Reserve 
Bank to establish and maintain an account for a designated FMU or 
provide the designated FMU with access, in unusual or exigent 
circumstances, to the discount window.\29\ A designated FMU is subject

[[Page 26311]]

to annual examinations by the relevant federal supervisory agency.\30\
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    \23\ Dodd-Frank Act section 804(a)(1).
    \24\ Dodd Frank Act section 803(6)(A), 12 U.S.C. 5462(6)(A).
    \25\ 12 CFR part 1320.
    \26\ Dodd Frank Act section 804(a)(2), 12 U.S.C. 5463(a)(2). See 
also 12 CFR 1320.10.
    \27\ Dodd-Frank Act section 805(a)(1)(A), 12 U.S.C. 5464(a)(1).
    \28\ Dodd-Frank Act section 805(a)(2), 12 U.S.C. 5464(a)(2).
    \29\ Dodd-Frank Act section 806(a)-(b), 12 U.S.C. 5465(a)-(b).
    \30\ Dodd-Frank Act section 807, 12 U.S.C. 5466.

Kayla Arslanian,
Executive Secretary.
[FR Doc. 2023-08969 Filed 4-27-23; 8:45 am]
BILLING CODE 4810-AK-P-P