Guidance on Nonbank Financial Company Determinations

Following a corresponding consultation (EventID 20857) and the issuance of a final guidance (EventID 23787) as to the determination by the Financial Stability Oversight Council (FSOC) whether or not a non-bank financial company should be supervised by the Federal Reserve Board and subject to prudential standards in accordance with section 113 of the Dodd-Frank Act, the Board of Governors of the Federal Reserve System (FED) has now published in the Federal Register this final guidance. Specifically, section 113 of the Act permits the FSOC to designate such firms, if
– the Council concludes that significant financial distress within the non-bank financial company could potentially threaten the stability of the U.S. financial system or
– the nature, scale, scope, size, concentration, interconnectedness, or the mix of activities undertaken by the non-bank financial company presents a potential threat to the stability of the U.S. financial system.
The final guidance now presents the process of evaluating a non-bank financial firm as to whether or not it shall be designated for FED prudential supervision.
#### The guidance involves a two-stage process for evaluating such companies:
In stage 1, a preliminary analysis based on available quantitative and qualitative information is conducted. The identified company receives a notice and may voluntarily submit relevant information. The Council also engages with the company’s primary financial regulatory agency or home country supervisor, discussing potential risks and enabling the regulator to provide information.
Stage 2 involves an in-depth evaluation where the Council reviews information gathered directly from the company, including information on a company’s „financial assets, terms of funding arrangements, counterparty exposure or position data, strategic plans, and interaffiliate transactions“. The company gets notified of this evaluation, providing it an opportunity to submit information and meet with Council representatives.
Upon completing these stages, the Council may make a proposed determination. If made, the company has the right to request a nonpublic hearing to contest it. Finally, the Council can make a final determination, which can also be challenged by the non-bank financial company in court.
The guidance also highlights the annual reevaluation process, emphasizing the company’s opportunity to present changes or mitigations to potential risks identified by the Council. If a company contests the determination during the annual reevaluation, the Council will vote on whether to rescind the determination.