On May 13 MFA, AIMA and the Alternative Credit Council submitted a joint comment letter in response to the Financial Stability Oversight Council’s proposed interpretive guidance on the process to establish activities-based regulation as the primary approach to regulating systemic risk and to establish a modified process for designating a nonbank financial company as systemically important. The Association’s expressed support for a number of the changes the proposed guidance would make to the designation process. In particular, the Association’s believe that the proposals to (1) focus on activities-based regulation, instead of entity designations, to address identified financial stability risk concerns, (2) increase coordination with primary financial regulators, and (3) provide an “off-ramp” for nonbank firms both pre- and post-designation are significant improvements compared to prior guidance.
The letter also responds to several questions in the proposed guidance regarding leverage and how the Council and its member agencies should assess leverage in connection with the potential for risks that pose a threat to financial stability. The letter outlines the Associations’ belief that it is important for regulators to asses leverage in a manner consistent with three major principles:
- It is important to acknowledge that leverage by itself does not equal risk.
- Because leverage can decrease risk, it is important for regulators to develop an analytical approach that distinguishes between leverage that increases risk and leverage that decreases risk.
- It also is important for regulators, as they assess leverage and risks arising from leverage, to distinguish
“investment risk” or “counterparty risk” from any risk that poses a “threat to financial stability.”
