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Systemically Important Nonbank Institutions

The Financial Stability Oversight Council ("FSOC") recently issued final rules and interpretive guidance regarding how nonbank financial companies will be evaluated to determine whether these institutions should be subject to supervision by the Board of Governors of the Federal Reserve Board and additional prudential standards.

The rules outline a 3 stage process that the FSOC will use to evaluate financial companies. 

  • The first step in the process is the application of a quantitative test.  The test requires the company to have at least $50 billion in assets and (a) $30 billion in gross notional credit default swaps outstanding for which the company is the reference entity; (b) $3.5 billion in derivatives liabilities; (c) $20 billion in debt outstanding; (d) a 15 to 1 leverage ratio; or (e) a 10% ratio of short-term debt to total consolidated assets.
  • Then, the FSOC will evaluate those companies that meet the threshold outlined in step 1 using additional information, including public and regulatory data.
  • Following its evaluation, the FSOC will contact each company that it believes merits further review to collect information not available in step 1 or 2.

Following the information gathering, a vote of at least 2/3 of the voting members, including the vote of the chair, is required to make a proposed determination.  Once the proposed determination is made, the company is provided with a written explanation and may request a hearing.  A vote of a 2/3 majority, including the vote of the chair, is necessary to make a final determination.

The final rule does not rule out designating asset managers or funds as systemically important.  For example, the release states that with respect to the quantitative test, the FSOC "may consider the aggregate risks posed by separate funds that are managed by the same adviser, particularly if the funds' investments are identical or highly similar."

The text of the release is available at: http://www.treasury.gov/initiatives/fsoc/Documents/Nonbank%20Designations%20-%20Final%20Rule%20and%20Guidance.pdf

A press release with highlights from the release is available at: http://www.treasury.gov/press-center/press-releases/Documents/Nonbank%20Financial%20Company%20Designations%20Final%20Rule%20and%20Interpretive%20Guidance%20Fact%20Sheet.pdf