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Wednesday, June 22, 2016

Financial Stability Oversight Council Releases Sixth Annual Report

The Financial Stability Oversight Council has unanimously approved its 2016 annual report, which was developed collaboratively by the members of the Council and their agencies and staffs. The Council’s findings are organized around the following 12 themes that warrant continued attention and, in many cases, further action from the Council’s members or member agencies:

  • Cybersecurity: Government agencies and the private sector should continue to work to improve and enhance information sharing, baseline protections such as security controls and network monitoring and response and recovery planning.
  • Risks Associated with Asset Management Products and Activities: The asset management industry’s increasing significance to financial markets and to the broader economy underscores the Council’s ongoing consideration of potential risks to U.S. financial stability from products and activities in this sector, including further analysis of the activities of hedge funds.
  • Capital, Liquidity and Resolution: Regulators should continue working to ensure that there is enough capital and liquidity at financial institutions to reduce systemic risk, including finalizing rules setting standards for the minimum levels of total loss-absorbing capacity and long-term debt maintained by certain large banking organizations operating in the United States.
  • Central Counterparties (CCPs): Member agencies should continue to evaluate whether existing rules and standards for CCPs and their clearing members are sufficiently robust to mitigate potential threats to financial stability, and should also continue working with international standard-setting bodies to implement more granular guidance with respect to international risk management standards in order to enhance the safety and soundness of CCPs.
  • Reforms of Wholesale Funding Markets: Counterparty risk exposure has been significantly reduced in the tri-party repurchase agreement, or repo, market, though the potential for fire sales of collateral by creditors of a defaulted broker-dealer remains an important risk. Better data are needed to assist policymakers’ understanding of how the aggregate repo market operates. Furthermore, regulators should continue to monitor and evaluate the effectiveness of structural reforms of money market mutual funds.
  • Reforms Relating to Reference Rates: Regulators and market participants should continue their efforts to develop alternative benchmark interest rates and implementation plans to achieve a smooth transition to these new rates.
  • Data Quality, Collection and Sharing: While Council members have made progress in filling gaps in the scope, quality and accessibility of data available to regulators, regulators and market participants should continue to work together to improve the scope, quality and accessibility of financial data.
  • Housing Finance Reform: While regulators and supervisors have taken great strides to work within the constraints of conservatorship to promote greater investment of private capital and improve operational efficiencies with lower costs, federal and state regulators are approaching the limits of their ability to enact wholesale reforms that are likely to foster a vibrant, resilient housing finance system. Housing finance reform legislation is needed to create a more sustainable system that enhances financial stability.
  • Risk Management in an Environment of Low Interest Rates and Rising Asset Price Volatility: Depressed energy and metals commodities prices, large swings in equity valuations and upward movement in high-yield debt spreads underscore the need for supervisors, regulators and managers to remain vigilant in ensuring that firms and funds maintain robust risk management standards.
  • Changes in Financial Market Structure and Implications for Financial Stability: The growing importance in certain markets of propriety trading firms and automated trading systems may introduce new vulnerabilities, including operational risks associated with the very high speed and volume of trading activity. Increased coordination among regulators is needed to evaluate and address these risks.
  • Financial Innovation and Migration of Activities: Financial regulators will need to continue to be vigilant in monitoring new and rapidly growing financial products and business practices, even if those products and practices are relatively nascent and may not constitute a current risk to financial stability.
  • Global Economic and Financial Developments: Market participants and regulators should be vigilant to potential foreign shocks that could disrupt financial stability in the United States.

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