Tuesday, November 17, 2015

FSOC Focused on Asset Management and Reaching a Broader Audience

During their most recent meeting, the Financial Stability Oversight Council revealed that the asset management sector remains an area of concern to the super-regulator. According to minutes of the November 2, 2015 meeting, the FSOC has identified six categories of potential risk arising from the asset management sector and is conducting ongoing analyses with an eye toward more regulation.  

The asset management risk areas being analyzed by the FSOC are: 

  1. liquidity and redemption risk;
  2. leverage; securities lending;
  3. data and disclosure;
  4. operational risks of service provider concentrations; and
  5. resolvability and transition planning.

Treasury Secretary and Chairman of the FSOC, Jack Lew, indicated that updates on the Council's analysis of these risk areas and perhaps regulatory recommendations could be expected early in 2016.  

As the US super-regulator charged by the Dodd-Frank Act with identifying risks and responding to emerging threats to financial stability, the FSOC has remained a focal point for those seeking to weaken or repeal the Dodd-Frank legislation.  At present, there are four separate bills recently approved by the House Financial Services Committee (H.R. 1550H.R. 3340H.R. 3557, and H.R. 2857) intended to limit the power of the FSOC or tinker with its voting processes.  Consequently, some FSOC members have been pushing back against these legislative efforts to micromanage the operations of the Council.  

In a November 2, 2015 op-ed, the Treasury Department’s Deputy Assistant Secretary for the FSOC Patrick Pinschmidt argued that the proposed bills would “hamstring the FSOC, threatening to turn back the clock and potentially pave the way for a future crisis.”  Referring specifically to legislation that would dictate how the FSOC designates financial actors as "systemically important," Pinschmidt said the bill “would take the council's methodical process and mire it in a series of protracted, bureaucratic steps that would require the council to spend as many as four years studying a company before it could take any action.”  Pinschmidt also pushed back against the notion that the FSOC has been "overzealous" in carrying out its mission to protect financial stability. He argued that the facts simply do not support these criticisms, and that the entire process is a data-driven give-and-take.

"Of the thousands of U.S. nonbank financial companies, the council has designated just four. And in each case, the council has taken a deliberative and data-driven approach that evaluates the facts on a company-specific basis. Under the council's current procedures, this multi-stage process relies on careful analysis of all available information, and includes intensive engagement with the company and its regulators to evaluate how the firm's distress could affect the financial system. The FSOC then provides the company with hundreds of pages of analysis detailing its findings, and an opportunity to rebut the Council's findings before any final decision is made.  

"Armed with this information, a company can act at any time to address the risks that the FSOC has identified. The council reviews its designation of each company annually, and it works closely with companies to evaluate whether they continue to pose risks to financial stability. Throughout this entire process, the council maintains an open-door policy so that companies and their regulators can make informed decisions about potential changes as they see fit."

Pinschmidt warns that as the memory of the latest financial crisis fades, "the voices of those trying to roll back reform will only grow louder. But we remember the costs of the last crisis, and we remember how we got there. We must remain vigilant. We need a body with a single-minded focus on protecting U.S. financial stability and identifying new threats on the horizon – and that's exactly what the council is doing."