Tuesday, February 18, 2014

FSB Extends SIFI Framework to Certain Non-Banks

Creating a system of enhanced monitoring of systematic risk and supervision of systematically important financial institutions (SIFIs) is a key objective of global regulatory reform in the aftermath of the financial crisis. Having established criteria for determining the SIFI players in the banking and insurance sectors, the FSB and IOSCO have moved on to determining which non-banks and non-insurance companies may be considered SIFIs. In a January 8, 2014 consultative document, the FSB and IOSCO proposed a methodology for the identification of nonbank, noninsurance financial institutions (NBNI) that pose systemic risks to the global economy.  The consultation document extends the framework already established to identify bank and insurance company SIFIs to all other financial entities.

The framework employs preliminary sector-specific criteria in identifying non-bank SIFISs, and on its face appears likely to affect only a small number of non-bank institutions (finance companies, securities firms, regulated funds and hedge funds) with total assets exceeding very high thresholds. In addition to proposing a general, high-level framework and operational approach, which would apply across the board to all NBNIs, the consultation paper proposes specific methodologies for identifying globally significant NBNIs (G-SIFIs) in three broad sectors – finance companies, market intermediaries (securities broker-dealers) and investment funds. The consultation paper does not propose that any specific entity be designated as a NBNI G-SIFI, or describe any policy that might apply to them.  Such a proposal is expected to be published at a later date.

The framework's proposed treatment of large asset managers is a focal point for some potential controversy.  Some voices in the industry believe that applying the same SIFI criteria to asset managers as they do to banks is misguided and based on flawed analysis and a fundamental misconception of how securities markets actually work.  No doubt there will be a major push amongst asset managers to submit comments requesting more clarity in this area.

The comment period on the consultation paper closes on April 7, 2014.