Systemic Risk Regulation

Broadly speaking, the term “systemic risk” refers to the concern that the failure of a significant market participant could threaten the financial stability of the United States.

Lawmakers and regulators in the U.S. and Europe are seeking to reduce the threat of system-wide failure through the adoption of rules aimed to identify and govern Systemically Important Financial Institutions (SIFIs).  In the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act  [Dodd-Frank] established the Financial Stability Oversight Council (FSOC) to identify and respond to emerging threats to the U.S. financial system.  The FSOC is currently working with other regulatory bodies to identify the institutions that will be labeled systemically important.

According to a proposed rule released by the FSOC, the framework for assessing systemic importance of non-bank entities will be structured around the following six criteria:

  • Size;
  • Lack of substitutes for the financial services and products the company provides;
  • Interconnectedness with other financial firms;
  • Leverage;
  • Liquidity risk and maturity mismatch; and
  • Existing regulatory scrutiny

Once the guidelines are adopted, entities deemed systemically important will be subject to additional regulation and internal protocols, including the implementation of a workable resolution plan to reduce the level of systemic risk they pose to the greater financial marketplace.

 

Further Resources

MFA Submits Letter and White Paper on Protection of Non-Public, Sensitive, and Proprietary Information by FSOC Members

MFA Submits Letter to SEC Regarding Computer Trading and Risk Management Issues

MFA Files Comments to CFTC on Position Limits Aggregation Proposal

MFA Signs Joint Trade Association Letter to CFTC to Request SDR Public Roundtable

MFA Submits Comments to SEC Supporting ICE Clear Credit’s Portfolio Margining Petition

MFA Submits Comments to the CFTC on ICE Clear Europe Portfolio Margining Petition

MFA Submits Comment Letter to SEC in Response to its Order Instituting Proceedings to Determine Whether to Approve or Disapprove of FINRA Proposed Rule 5123 on Private Placements

MFA comment letter on SEC’s notice of a proposal by FINRA to adopt new Rule 5123, Private Placements of Securities

Comment Letter to FINRA on Rule 5131(b), New Issue Allocations and Distributions — ‘Spinning’

Comment Letter to FSOC on Proposed Rules and Related Guidance on the Criteria for Designating Systemically Significant Nonbank Financial Institutions

Comment Letter to SEC on FINRA Rulemakings Regarding the Imposition of Trading Halts by SROs

Comment Letter to SEC on Proposed Rules for Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

Comment Letter on FINRA Rule 5131, New Issue Allocations and Distributions

MFA Comment Letter on Significant Nonbank Financial Companies

MFA Comment Letter on FSOC FOIA rules

MFA Comment Letter on Implementation of “Volcker Rule”

MFA Systemic Risk Survey Comparison

MFA Comment Letter to the FSOC on Systemically Significant Institutions