FSOC Recommends Policy Changes to Address Digital Assets, Private Funds and Climate-related Risks

In its 2022 Annual Report, the Financial Stability Oversight Council ("FSOC") offered recommendations touching on (i) digital assets, (ii) climate-related financial risks, (iii) investment fund disclosure, (iv) Treasury markets, (v) cybersecurity and (vi) LIBOR transitions.

The annual report highlighted the U.S. financial system's resiliency during the past year, despite its significant challenges. FSOC also highlighted potential threats that may serve to undermine the financial system's overall stability. The organization provided numerous recommendations.

Recommendations

On digital assets, FSOC recommended:

  • enacting legislation to provide regulatory agencies with rulemaking authority for crypto-assets in spot markets that do not qualify as securities;

  • bringing service providers for crypto-assets under regulations used for similarly situated service providers;

  • assessing whether vertically integrated market structures can or should be accommodated under existing regulations; and

  • building systems to analyze, monitor, supervise and regulate digital asset activities.

On investment fund disclosure, FSOC noted the SEC's disclosure enhancements to Form PF and its proposals to address liquidity mismatches in open-end and money market funds.

On climate-related financial risks, FSOC recommended (i) increasing climate-related financial risk data availability, (ii) coordination between state and federal governments to identify, prioritize and procure this data, (iii) advancing supervisory expectations of risk management practices, and (iv) the promotion of consistent, comparable and decision-useful disclosures for investors.

On the Treasury markets, FSOC recommended that:

  • agencies review market structures and liquidity challenges presented by new technologies and the counterparties involved;

  • policies should serve to improve market intermediation resiliency, evaluate expanded central clearing and enhance trading venue transparency and oversight; and

  • Treasury should aim to enhance data collection and transparency in post-trade transactions in the cash market for Treasuries.

On cybersecurity, FSOC recommended that firms and agencies continue to partner in evaluating vulnerabilities. While significant strides have been made in 2022, FSOC said that agencies must continue to gather additional information to monitor and assess cyber-related risks to financial stability.

On LIBOR, FSOC noted that large volumes of legacy LIBOR contracts are still outstanding, and recommended that firms take advantage of any opportunities to renegotiate or transition before LIBOR is finally phased out (see also FSOC's 2021 Annual Report).

See statements responding to the 2022 Annual Report linked below.

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