FSOC Makes Recommendations to Enhance Financial Stability

In its 2017 Annual Report, the Financial Stability Oversight Council ("FSOC") provided an overview of significant regulatory developments, identified potential threats to financial stability, and made recommendations to bolster financial stability going forward.

The FSOC recommendations included:

• Cybersecurity. The FSOC supports the creation of a private sector council of senior executives to (i) focus on ways that cybersecurity incidents impact business operations and market functioning, and (ii) work with government counterparts on cybersecurity issues.
• Asset management products and activities. The SEC should (i) continue to monitor implementation of rules on liquidity risk management, data reporting, and wing pricing to determine whether they adequately address potential risks, and (ii) consider the proposed rule on the use of derivatives by registered investment companies.
• Capital, liquidity, and resolution. Financial regulators should (i) ensure that large financial institutions have adequate capital and liquidity to reduce vulnerability to economic and financial shock, and (ii) monitor the effect that capital, liquidity, and resolution rules have on institutions and markets.
• Central counterparties. Regulators should (i) coordinate with domestic and international counterparts to ensure adequate supervision of systemically important financial market utilities, (ii) enhance stress testing policies and procedures, and (iii) consider improving disclosure requirements.
• Wholesale funding markets. Relevant authorities should monitor repo markets for potentially troubling liquidity conditions.
• Reference rates. Agencies should coordinate with market participants to monitor potential risks that may emerge during the transition process away from LIBOR.
• Rise in interest rates. Regulators and market participants should monitor risks that may arise as interest rates return towards historic norms.
• Changes in financial market structure. Regulators should (i) monitor changes which could negatively affect market functioning and trading liquidity, and (ii) undertake data collection efforts to enhance understanding of market structure.
• Financial innovation. Regulators should pay close attention to new and emerging products and services to gain a robust understanding of their effects on consumers, markets, and institutions, and make necessary regulatory adjustments.
• Regulatory efficiency and effectiveness. Regulators should look to (i) address regulatory overlap, (ii) modernize regulations, and (iii) tailor regulations based on size of institutions.