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FSOC Recommends Additional Steps to Ensure U.S. Financial Stability

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

In a 2018 Annual Report, the Financial Stability Oversight Council ("FSOC") recommended that financial regulatory agencies take additional steps to ensure U.S. financial stability.

In the Report, the FSOC made the following observations and recommendations:

  • Cybersecurity: The FSOC supported efforts by regulators to harmonize cybersecurity examinations and continue collaboration between the private and public sectors to understand and detect cyber threats.

  • Central Counterparties: The FSOC encouraged regulators to (i) evaluate the effectiveness of current rules and standards for central counterparties ("CCPs") and clearing members, (ii) work with international standard-setting bodies to study and evaluate CCP activities, and (iii) continue evaluating the performance of CCPs under stress scenarios.

  • Reference Rates: The FSOC praised the progress of the Alternative Reference Rates Committee (ARRC) in transitioning away from LIBOR and recommended that market participants consider potential uses of the Secured Overnight Financing Rate (SOFR) in new transitions.

  • Capital, Liquidity and Resolution: The FSOC stated that regulators (i) must ensure that the largest financial institutions hold the necessary capital and liquidity in the event of economic or financial shocks and (ii) should review the effect of their rules on financial institutions and markets.

  • Wholesale Funding Markets: The FSOC recommended that (i) regulators continue to monitor wholesale funding markets and (ii) the SEC study the effects of its 2016 money market mutual funds reforms.

  • Financial Innovation: The FSOC noted that regulators should continue to study the potential effects of new financial products and services on consumers, regulated entities, financial markets and financial stability.

  • Data Quality, Collection and Sharing: The FSOC advocated for regulators and market participants to collaborate to enhance the "coverage, quality, and accessibility of financial data, as well as data sharing."

  • Managing Vulnerabilities amid Prolonged Credit Expansion: The FSOC said that regulators should continue to study the "levels of nonfinancial business leverage, trends in asset valuations, and potential implications for the entities they regulate."

  • Housing Finance Reform: The FSOC affirmed that housing finance should be reformed to "address the present conservatorships of [Fannie Mae and Freddie Mac], codify existing reforms, and implement a more durable and vibrant housing financial system that enhances financial stability."

  • Changes in Financial Market Structure: The FSOC urged regulators to assess the use of coordinated tools across interdependent markets.

  • Asset Management Products and Activities: The FSOC advised (i) the SEC to monitor the implementation of its amended rules for registered investment companies regarding liquidity risk management and enhanced data reporting and (ii) other regulators to review and assess whether their data collections are for private funds.

Commentary

A number of FSOC's suggestions relate to expanded data collection. While "information is good," in theory, data collection is expensive and so much of what Congress and the regulators have mandated to date has been of little value. By way of example, nothing ever came of the requirement that firms report information to the regulators on their pre-Dodd-Frank swaps. Form PF for private advisers has been an extended and expensive exercise in the collection of useless data.

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