Monday, October 04, 2010

Financial Stability Oversight Council Begins Work of Identifying Systemically Important Financial Firms

The difficult and critical job of implementing Title I of the Dodd-Frank Act began Friday, Oct 1, 2010, with the first meeting of the Financial Stability Oversight Council, which has, among other things, a mandate to identify and monitor systemically risky non-bank financisl firms and hedge funds. Chaired by Treasury, the Council is composed of the primary federal financial regulators, such as the SEC, CFTC and the Fed.  The Council said that it would issue an Advanced Notice of Proposed Rulemaking as the first step in designing a framework to designate systemically important non-bank financial firms for heigtened supervision.

Broadly, it is the Council's  mandate from Dodd-Frank to designate systemically important nonbank financial firms for heightened supervision, in order to ensure that these institutions cannot escape tough oversight or threaten the stability of the broader financial sector. These systemically important hedge funds and other non-bank firms constitute the shadow banking system that the President's blueprint for reform and Volcker G-30 report identified as in need of systemic regulation. he FSOC has important new authorities to constrain excessive risk in the financial system.  For instance, the FSOC has authority to designate a nonbank financial firm for tough new supervision and therefore avoid the regulatory gaps that existed before the recent crisis.  Closing these gaps in supervision will help minimize the risk of a nonbank financial firm threatening the stability of the financial system. 
The ANPR is an initial step in the process by which the Council intends to develop a robust and disciplined framework for the designation of nonbank financial companies for heightened supervision.  The ANPR consists of fifteen questions to solicit public comment regarding the implementation of these provisions and will have a 30-day public comment period. The ANPR will inform development of a specific regulatory proposal expected to be published for comment near year-end, with Final Council action on the designation criteria and process is expected by March 31, 2011.