Financial Stability Oversight Council Open Meeting
Financial Stability Oversight Council
Open Meeting
Thursday, December 18, 2014
Key Topics & Takeaways
- Review of Asset Managers: The FSOC voted to move forward with a request for public comment on its review of asset management activities and products as it looks into whether the industry poses risks to the broader financial system.
- Cybersecurity: A Treasury Department staffer spoke of the FSOC’s efforts on cybersecurity, specifically in the development of three areas: 1) information sharing; 2) best practices; and 3) incident response.
- Swaps Pushout:Treasury Secretary Lew was critical of the amendment of the swaps pushout in the omnibus appropriations bill for 2015 and said he and the President are committed to defending the Dodd-Frank Act.
Financial Stability Oversight Council:
-
Jacob Lew, Secretary, U.S. Treasury Department
- Janet Yellen, Chair, Federal Reserve Board of Governors
- Thomas Curry, Comptroller of the Currency
- Richard Cordray, Director, Consumer Financial Protection Bureau
- Mary Jo White, Chair, Securities and Exchange Commission
- Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
- Timothy Massad, Chairman, Commodity Futures Trading Commission
- Mel Watt, Director, Federal Housing Finance Agency
- Debbie Matz, Chairman, National Credit Union Administration
- S. Roy Woodall, Jr., Independent Member of the FSOC with Insurance Expertise
In his opening statement, Treasury Secretary Jacob Lew was critical of the inclusion by Congress of an amendment of the swaps push-out rule in the fiscal 2015 spending bill. He called the provision “a step in the wrong direction” and declared that he and President Obama are “committed to defending the Dodd-Frank Act and nothing has changed that resolve.” Lew said the financial crisis demonstrated why regulators must always be vigilant of threats, and must continue implementing Dodd-Frank and protecting taxpayers.
FSOC Annual Report
Staffers from the regulatory agencies spoke to give updates on Financial Stability Oversight Council’s (FSOC) initiatives in the areas of cybersecurity and interest rate risk, which were identified as areas of concern in the Council’s 2014 Annual Report.
Cybersecurity
A Treasury staff member noted that the FSOC Annual Report identified cyber-related vulnerabilities as a significant threat to financial stability since 2012. He said awareness and resiliency are improving as the Treasury Department continues to work with both the private sector and law enforcement agencies, but that cyber incidents continue to happen.
The staffer also noted three responses to cybersecurity identified by the annual report: 1) information sharing; 2) best practices; and 3) incident response. He said he is encouraged by progress on information sharing and explained that the government is continuing to identify threats and share the information with the private sector. To encourage the development of best practices, he highlighted the National Institute of Standards and Technologies’ (NIST) cybersecurity framework, which also considers the management of third-party service providers, and also mentioned SIFMA’s efforts to promote cybersecurity. On incident response, the staffer stated that regulators are working to conduct a series of cyber threat simulation exercises to identify gaps in current response frameworks.
Comptroller of the Currency Thomas Curry said his office and the other banking regulators are taking a multi-pronged approach that involves ongoing communication with institutions about emerging risks, supervising policy standards, and ongoing supervision to assess compliance. He also spoke of the work of the Federal Financial Institutions Examination Council’s (FFIEC) to strengthen cybersecurity protocols at community banks.
Interest Rate Risk
Treasury Department staff next gave an update on interest rate risk, noting that protecting firms against rate shocks has been an important issue for the FSOC. He cautioned that there are signs of investors reaching for yield, and that continued monitoring by regulators is crucial to evaluate the resilience of institutions to interest rate risk.
Federal Reserve Board Chair Janet Yellen said the Fed recognizes that low interest rates can lead to reach for yield, and has accordingly been paying close attention to potential risks. She said the Fed periodically estimates the effects of a variety of interest rate scenarios in its stress tests. She also noted that the Federal Open Markets Committee (FOMC) has a goal of communicating its actions as clearly as possible to avoid unnecessary surprises on interest rates.
OFR Financial Stability Monitor
Staff from the Office of Financial Research (OFR) identified three groups of threats determined by its Financial Stability Monitor, a forward looking tool used to identify systemic risks: 1) activities related to interest rates; 2) a persistent decline in market liquidity that could create adverse shocks; and 3) the migration of financial activity to non-traditional venues that are less resilient and more opaque.
The Monitor, staff explained, measures risks that are more or less closely-aligned with services that a well-functioning financial system would provide and allows the OFR to track risks across the system. Overall, they said, threats are not as high as compared to levels seen before the financial crisis, but market liquidity remains a concern and credit risks among non-financial institutions warrant scrutiny. They added that the Monitor was introduced last year, and was updated this year to expand the metrics used. He noted that all indicators were tested to gauge reliability.
Lew then turned the Council’s attention to the asset management industry. He said the Council has been working to assess risks stemming from asset management, and has directed staff to focus on industry-wide products and services. He listed four areas of emphasis: 1) liquidity and redemption; 2) leverage; 3) operational functions; and 4) resolution.
Lew explained that the Council is still assessing whether the structure of the asset management industry presents risks that could threaten U.S. financial stability. To assist the Council in this process, the FSOC is proposing to collect public comment to ask questions related to the four areas of emphasis. Lew clarified, however, that there are no pre-determined outcomes to the analysis. He added that the proposed request for comments is just one step in the process, and that high-quality data will be needed in order for the FSOC to better understand the industry.
Securities and Exchange Commission (SEC) Mary Jo White expressed her support for FSOC’s decision to seek public comment, saying asset management is a constantly-evolving space that presents new challenges and risks that must be addressed by regulators. She highlighted that the SEC is also looking at aspects of the asset management industry through initiatives such as enhanced data reporting and stress testing. White added that the FSOC’s request for comment is a “constructive complement” to SEC initiatives.
Yellen agreed and pointed out that the SEC’s initiatives are critically important in light of increased demand for credit market debt, which has flowed into this sector in the past few years. She suggested evaluating whether financial stability risks could arise from liquidity, interconnectivity, and leverage risks, and added that these risks may exist even if there are policies in place to protect investors in funds. Yellen added that she is particularly interested in how investment funds use derivatives to obtain leverage, and how funds manage liquidity and redemption requests.
Curry and Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad underscored that the FSOC is not concerned about how asset managers perform in the ordinary course of business, but rather how the industry’s potential interconnectedness or layering of risks could cause a systemic issue during periods of financial distress.
The Council unanimously approved to move forward with its request for public comment on its review of asset management activities and products, which will now be open for public comment for sixty days from the date of publication in the Federal Register.
For more information on this meeting, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:FSOC,Publish Year:2014
Financial Stability Oversight Council
Open Meeting
Thursday, December 18, 2014
Key Topics & Takeaways
- Review of Asset Managers: The FSOC voted to move forward with a request for public comment on its review of asset management activities and products as it looks into whether the industry poses risks to the broader financial system.
- Cybersecurity: A Treasury Department staffer spoke of the FSOC’s efforts on cybersecurity, specifically in the development of three areas: 1) information sharing; 2) best practices; and 3) incident response.
- Swaps Pushout:Treasury Secretary Lew was critical of the amendment of the swaps pushout in the omnibus appropriations bill for 2015 and said he and the President are committed to defending the Dodd-Frank Act.
Financial Stability Oversight Council:
-
Jacob Lew, Secretary, U.S. Treasury Department
- Janet Yellen, Chair, Federal Reserve Board of Governors
- Thomas Curry, Comptroller of the Currency
- Richard Cordray, Director, Consumer Financial Protection Bureau
- Mary Jo White, Chair, Securities and Exchange Commission
- Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
- Timothy Massad, Chairman, Commodity Futures Trading Commission
- Mel Watt, Director, Federal Housing Finance Agency
- Debbie Matz, Chairman, National Credit Union Administration
- S. Roy Woodall, Jr., Independent Member of the FSOC with Insurance Expertise
In his opening statement, Treasury Secretary Jacob Lew was critical of the inclusion by Congress of an amendment of the swaps push-out rule in the fiscal 2015 spending bill. He called the provision “a step in the wrong direction” and declared that he and President Obama are “committed to defending the Dodd-Frank Act and nothing has changed that resolve.” Lew said the financial crisis demonstrated why regulators must always be vigilant of threats, and must continue implementing Dodd-Frank and protecting taxpayers.
FSOC Annual Report
Staffers from the regulatory agencies spoke to give updates on Financial Stability Oversight Council’s (FSOC) initiatives in the areas of cybersecurity and interest rate risk, which were identified as areas of concern in the Council’s 2014 Annual Report.
Cybersecurity
A Treasury staff member noted that the FSOC Annual Report identified cyber-related vulnerabilities as a significant threat to financial stability since 2012. He said awareness and resiliency are improving as the Treasury Department continues to work with both the private sector and law enforcement agencies, but that cyber incidents continue to happen.
The staffer also noted three responses to cybersecurity identified by the annual report: 1) information sharing; 2) best practices; and 3) incident response. He said he is encouraged by progress on information sharing and explained that the government is continuing to identify threats and share the information with the private sector. To encourage the development of best practices, he highlighted the National Institute of Standards and Technologies’ (NIST) cybersecurity framework, which also considers the management of third-party service providers, and also mentioned SIFMA’s efforts to promote cybersecurity. On incident response, the staffer stated that regulators are working to conduct a series of cyber threat simulation exercises to identify gaps in current response frameworks.
Comptroller of the Currency Thomas Curry said his office and the other banking regulators are taking a multi-pronged approach that involves ongoing communication with institutions about emerging risks, supervising policy standards, and ongoing supervision to assess compliance. He also spoke of the work of the Federal Financial Institutions Examination Council’s (FFIEC) to strengthen cybersecurity protocols at community banks.
Interest Rate Risk
Treasury Department staff next gave an update on interest rate risk, noting that protecting firms against rate shocks has been an important issue for the FSOC. He cautioned that there are signs of investors reaching for yield, and that continued monitoring by regulators is crucial to evaluate the resilience of institutions to interest rate risk.
Federal Reserve Board Chair Janet Yellen said the Fed recognizes that low interest rates can lead to reach for yield, and has accordingly been paying close attention to potential risks. She said the Fed periodically estimates the effects of a variety of interest rate scenarios in its stress tests. She also noted that the Federal Open Markets Committee (FOMC) has a goal of communicating its actions as clearly as possible to avoid unnecessary surprises on interest rates.
OFR Financial Stability Monitor
Staff from the Office of Financial Research (OFR) identified three groups of threats determined by its Financial Stability Monitor, a forward looking tool used to identify systemic risks: 1) activities related to interest rates; 2) a persistent decline in market liquidity that could create adverse shocks; and 3) the migration of financial activity to non-traditional venues that are less resilient and more opaque.
The Monitor, staff explained, measures risks that are more or less closely-aligned with services that a well-functioning financial system would provide and allows the OFR to track risks across the system. Overall, they said, threats are not as high as compared to levels seen before the financial crisis, but market liquidity remains a concern and credit risks among non-financial institutions warrant scrutiny. They added that the Monitor was introduced last year, and was updated this year to expand the metrics used. He noted that all indicators were tested to gauge reliability.
Lew then turned the Council’s attention to the asset management industry. He said the Council has been working to assess risks stemming from asset management, and has directed staff to focus on industry-wide products and services. He listed four areas of emphasis: 1) liquidity and redemption; 2) leverage; 3) operational functions; and 4) resolution.
Lew explained that the Council is still assessing whether the structure of the asset management industry presents risks that could threaten U.S. financial stability. To assist the Council in this process, the FSOC is proposing to collect public comment to ask questions related to the four areas of emphasis. Lew clarified, however, that there are no pre-determined outcomes to the analysis. He added that the proposed request for comments is just one step in the process, and that high-quality data will be needed in order for the FSOC to better understand the industry.
Securities and Exchange Commission (SEC) Mary Jo White expressed her support for FSOC’s decision to seek public comment, saying asset management is a constantly-evolving space that presents new challenges and risks that must be addressed by regulators. She highlighted that the SEC is also looking at aspects of the asset management industry through initiatives such as enhanced data reporting and stress testing. White added that the FSOC’s request for comment is a “constructive complement” to SEC initiatives.
Yellen agreed and pointed out that the SEC’s initiatives are critically important in light of increased demand for credit market debt, which has flowed into this sector in the past few years. She suggested evaluating whether financial stability risks could arise from liquidity, interconnectivity, and leverage risks, and added that these risks may exist even if there are policies in place to protect investors in funds. Yellen added that she is particularly interested in how investment funds use derivatives to obtain leverage, and how funds manage liquidity and redemption requests.
Curry and Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad underscored that the FSOC is not concerned about how asset managers perform in the ordinary course of business, but rather how the industry’s potential interconnectedness or layering of risks could cause a systemic issue during periods of financial distress.
The Council unanimously approved to move forward with its request for public comment on its review of asset management activities and products, which will now be open for public comment for sixty days from the date of publication in the Federal Register.
For more information on this meeting, please click here.