The Financial Stability Oversight Council (FSOC), which is charged under the Dodd-Frank Act to provide "comprehensive monitoring to ensure the stability of our nation's financial system," met earlier this week to discuss, among other things, the criteria of how "Certain Nonbank Financial Companies," (including presumably some or all money market funds) would be designated as systematically important financial institutions (SIFIs) subject to additional regulations. FSOC's website explains, "The Council is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system. The Council consists of 10 voting members and 5 nonvoting members and brings together the expertise of federal financial regulators, state regulators, and an insurance expert appointed by the President."
The Council explains, "The Dodd-Frank Act mandated that the FSOC ensure that all financial companies whose failure could pose a threat to the financial stability of the United States -- not just banks -- will be subject to strong oversight. Using the considerations set forth in the Dodd-Frank Act, as well as taking into account public comments on a previously issued Advance Notice of Proposed Rulemaking, the FSOC today approved a proposed rule outlining the criteria that will inform the FSOC's designation of such firms and the procedures the FSOC will use in the designation process. Under the FSOC's proposed rule, if designated, the largest, most interconnected and highly-leveraged companies would face stricter prudential regulation, including higher capital requirements and more robust consolidated supervision. The NPR will have a 30-day public comment period, with FSOC action on the final designation criteria and process expected later this year."
The FSOC published several new documents, including an updated "NPR Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies." The Council says, "Section 113 of the Dodd-Frank Act authorizes the Council to require a nonbank financial company to be supervised by the Board of Governors of the Federal Reserve System and be subject to prudential standards if the Council determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States. The proposed rule describes the criteria that will inform, and the processes and procedures established under the DFA for, the Council's designation of nonbank financial companies under the DFA. The Council, on October 6, 2010, issued an advance notice of proposed rulemaking regarding the designation criteria in section 113."
The FSOC's Notice continues, "The proposed rule lays out the framework that the Council proposes to use to determine whether a nonbank financial company could pose a threat to the financial stability of the United States. It also implements the process set forth in the DFA that the Council would use when considering whether to subject a firm to supervision by the Board of Governors and prudential standards.... As discussed in Part I, there were several themes in the ANPR commentary regarding how the Council should analyze these factors in the designation process.... With respect to the criteria for designation, one theme was that that the Council should give significant weight to the following factors in making a determination: leverage, liquidity risk, interconnectedness, degree of primary regulation, and substitutability. Further, responses emphasized the importance of looking at the scope, size and scale of nonbank financial companies through a variety of lenses to best understand the underlying risk."
It adds, "Commenters also noted leverage for its importance and encouraged the Council to distinguish between different types and sources of leverage. Commenters viewed both the degree to which a firm is already subjected to regulation or consolidated regulation, as well as the substitutability of an institution and its activities, as important factors in making a determination. It was generally argued that firms already subject to prudential regulation are less likely to pose systemic risk than those that operate outside a formal regulatory umbrella."
While we're not clear on whether some or all money funds are more or less likely to be deemed systematically important following this update, a $50 billion threshold is clearly one factor. Currently, a list of the 10 largest taxable money fund portfolios includes just 6 that clear this hurdle. The 10 largest portfolios are: Fidelity Cash Reserves ($119.3 Billion); Vanguard Prime MMF ($114.3B); JPMorgan Prime MM ($108.3B); JPMorgan US Govt MM ($62.9B); Fidelity Instit MM: MM Port ($61.1B); Fidelity Instit MM: Prime MMP ($54.7B); Federated Prime Obligations ($47.5B); BlackRock Lq TempFund ($45.7B); Wells Fargo Adv Heritage ($36.9B); and Federated Government Obl ($36.4B).
For an attempt at deciphering the FSOC's deliberations, see also yesterday's New York Times article "Fed Oversight of Nonbank Financial Companies Is Weighed". It says, "Financial companies that are not banks but have more than $50 billion in assets and $20 billion in debt could be regulated by the Federal Reserve and required to meet tougher standards, according to a proposed rule issued Tuesday by the nation's top financial regulatory board."
