Systemic Risk / Resolution Authority

The following issues are MFA’s priorities regarding systemic risk/resolution authority as congressional oversight and regulatory implementation of the Dodd-Frank Act continues:

 

Systemic Risk

The Dodd-Frank Act created and authorized the Financial Stability Oversight Council (FSOC) to subject a nonbank financial company to supervision by the Federal Reserve and prudential standards if the FSOC determines the firm is “systemically relevant.”

 

MFA View:

MFA supports regulators taking an “intelligent” approach to the issues of systemic risk prudential supervision and believes that it is highly unlikely that any hedge fund is systemically important at this time, if regulators measure systemic relevance by quantitative metrics including account size, concentration, and leverage on a fund-by-fund basis.

MFA strongly supports the goals of the Dodd-Frank Act and establishing FSOC to address potential systemic risks before they arise. MFA supports an efficient approach to the collection, by regulators, of data from different types of market participants, including investment advisers and the funds they manage, which we believe is a critical component of effective systemic risk monitoring and regulation. MFA also supports the protection of confidential and proprietary information once it is reported to regulators.

Resolution Authority

The Dodd-Frank Act created an “orderly liquidation authority,” a new federal receivership process pursuant to which the Federal Deposit Insurance Corporation (FDIC) may serve as receiver for financial companies whose failure threatens the financial stability of the United States.

Outside of a threat to the financial stability of the United States, Congress directed the FDIC to allow a company to enter normal bankruptcy proceedings in all other cases, and the Bankruptcy Code has been highly successful in resolving insolvencies in a fair and transparent manner.

The Dodd-Frank Act also directs that similarly situated creditors should be treated the same and that the exception to this rule – the circumstances in which the FDIC can make additional payments to particular creditors – should be narrow and invoked only when necessary either to maximize value in the receivership or to continue operations that are essential to the receivership or to a bridge financial company.

 

MFA View:

MFA supports a resolution authority, bankruptcy proceedings, or other appropriate proceedings for making an orderly liquidation through the authority to unwind failing firms or distressed funds that could collapse or pose a threat to the integrity and stability of the financial system.  MFA believes the orderly liquidation authority should, to the greatest extent possible, mirror bankruptcy law and provide for transparency and participation of affected parties.  MFA is concerned by the FDIC’s proposal that would allow it to make additional payments to certain creditors based on the length of the financing provided.