Fed Approves Process for Designating Nonbanks for Stricter Oversight

The U.S. Federal Reserve said on Wednesday that it had approved a final rule to clarify the process the new U.S. risk council will follow when it begins designating nonbank financial firms for heightened oversight.

A group of regulators known as the Financial Stability Oversight Council is responsible for determining which nonbank firms are so critical that their failure could threaten the financial system.

The rule sets requirements for determining when a company is “predominantly engaged in financial activities,” part of the process laid out by the 2010 Dodd-Frank financial oversight law.

The final rule largely mirrors an earlier proposal, with the change that engaging in physically settled derivatives transactions will not count as a financial activity, the Fed said.

Regulators have not yet designated nonbank firms as systemically important, although three firms are said to be in the final stages of consideration.

Mary Miller, Treasury undersecretary for domestic finance, said at a conference in March that she hoped the council would vote on designations in “the next few months.”

Business groups argued last year that the risk council could face lawsuits if it tried to designate firms without finishing the “predominantly engaged” rule.

A person familiar with the matter, however, said the Fed’s adoption of the rule will not affect ongoing talks over designating certain firms.

In addition, the FSOC has previously disagreed with the business groups’ position, saying the rulemaking was not “essential” to the FSOC’s designation process.

The stability council is set to meet in a closed-door session on Thursday. The new rule takes effect on May 6.

More from the Fed’s announcement:

The final rule defines the terms “significant nonbank financial company” and “significant bank holding company.” Among the factors the FSOC must consider when determining whether to designate a nonbank financial company for consolidated supervision by the Federal Reserve is the extent and nature of the company’s transactions and relationships with other significant nonbank financial companies and significant bank holding companies. If designated, those nonbank financial companies will be required to submit reports to the Federal Reserve, the FSOC, and the Federal Deposit Insurance Corporation on the company’s credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company. Consistent with the proposal, a firm will be considered significant if it has $50 billion or more in total consolidated assets or has been designated by the FSOC as systemically important.