© 2015 International Monetary Fund 

IMF Country Report No. 15/172 

UNITED STATES 

FINANCIAL SECTOR ASSESSMENT PROGRAM 

SYSTEMIC RISK OVERSIGHT AND MANAGEMENT—

TECHNICAL NOTE 

This Technical Note on Systemic Risk Oversight and Management on the United States 

was prepared by a staff team of the International Monetary Fund. It is based on the 

information available at the time it was completed in June 2015. 

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International Monetary Fund 

Washington, D.C. 

July 2015 
UNITED STATES

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE

SYSTEMIC RISK OVERSIGHT AND MANAGEMENT

Prepared By

Monetary and Capital Markets 

Department

This Technical Note was prepared in the context of 

an IMF Financial Sector Assessment Program (FSAP) 

mission to the United States of America, led by 

Aditya Narain and overseen by the Monetary and 

Capital Markets Department, IMF. Further 

information on the FSAP can be found at 

http://www.imf.org/external/np/fsap/fssa.aspx

June 2015
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CONTENTS

GLOSSARY _______________________________________________________________________________________ 4

EXECUTIVE SUMMARY__________________________________________________________________________ 6

SYSTEMIC RISK OVERSIGHT AND MANAGEMENT OVERVIEW________________________________ 9

A. Overview_______________________________________________________________________________________ 9

B. Remit, Responsibilities and Organization of FSOC _____________________________________________ 9

C. Strengthening Systemic Risk Identification in the United States ______________________________ 16

D. Addressing Identified Threats to Financial Stability ___________________________________________ 22

E. Systemic Risks—A Closer Look at Some Key Concerns ________________________________________ 28

SYSTEMIC LIQUIDITY AND LIQUIDITY BACKSTOPS __________________________________________28

A. Introduction __________________________________________________________________________________ 28

B. Tri-party Repo Infrastructure__________________________________________________________________ 29

C. Repo Safe Harbors ____________________________________________________________________________ 30

D. Broker-dealers ________________________________________________________________________________ 31

E. Money Market Mutual Funds _________________________________________________________________ 32

F. Fed Exit and Financial Stability ________________________________________________________________ 35

G. Data Gaps ____________________________________________________________________________________ 37

H. Liquidity Backstops ___________________________________________________________________________ 38

INVESTMENT FUNDS AND SYSTEMIC RISK___________________________________________________42

A. Asset Managers and Market Liquidity Risks ___________________________________________________ 42

B. Securities Lending by Mutual Funds __________________________________________________________ 46

SYSTEMIC RISK OVERSIGHT OF FINANCIAL MARKET INFRASTRUCTURES__________________48

A. Overview of FMIs in the United States ________________________________________________________ 48

B. Regulation and Supervision of FMIs___________________________________________________________ 49

C. System-Wide Risks Identification and Management __________________________________________ 54

D. Crisis Management Arrangements____________________________________________________________ 56

HOUSING FINANCE ____________________________________________________________________________57
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BOXES

1. Summary of Major Authorities and Tasks of FSOC ____________________________________________ 11

2. Normalizing Monetary Policy, Reverse Repos and Financial Stability __________________________ 36

FIGURES

1. Intraday Credit as of May 2014________________________________________________________________ 30

2. MMMFs Funds by Type _______________________________________________________________________ 33

3. ONRRP and Selected Interest Rates ___________________________________________________________ 37

4. TPR Collateral _________________________________________________________________________________ 38

5. TPR Haircuts January 2015 ____________________________________________________________________ 38

6. Corporate Bonds Inventory ___________________________________________________________________ 44

7. Sold Assets under Stress and Dealers Inventories _____________________________________________ 44

8. Private Nonfinancial Sector Debt______________________________________________________________ 58

9. Mortgage Debt by Holder_____________________________________________________________________ 58

10. Residential Mortgage-Backed Security Issuance _____________________________________________ 59

TABLES

1. Organization, Role and Powers of FSOC and other Macroprudential Oversight Bodies _______ 15

2. Primary Supervisory Agency and Application of Enhanced Risk Management Standards for U.S. 

FMIs _____________________________________________________________________________________________ 51

APPENDICES

1. Remit and Organization of the Financial Stability Oversight Council __________________________ 63

2. The Office of Financial Research ______________________________________________________________ 66

3. Macroprudential Policy Tools in the United States ____________________________________________ 68

4. Risks and Interconnectedness In and Around TPR_____________________________________________ 71

5. Statistics on Financial Market Infrastructures__________________________________________________ 72

6. FMI Landscape ________________________________________________________________________________ 74

7. Cross-Margining Arrangements and CSD Links _______________________________________________ 75

8. Dependencies of Designated FMUs on Commercial Bank Services ____________________________ 76

APPENDIX TABLES

1. Statistics on FMIs, 2013 _______________________________________________________________________ 72

2. CCPs Offering OTC Derivatives Clearing_______________________________________________________ 73

3. CCP Size of Financial Resources, December 2013 _____________________________________________ 73
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Glossary

ACH Automated Clearing House

AuM Assets under Management

BHC Bank Holding Company

BD Broker-Dealer

CCAR Comprehensive Capital Analysis and Review

CCP Central Counterparty

CDS Credit Default Swap

CFPB Consumer Financial Protection Bureau

CFTC Commodity Futures Trading Commission

CHIPS Clearing House Interbank Payment System

CLS Continuous Linked Settlement

CME Chicago Mercantile Exchange

CPSS Committee on Payment and Settlement Systems (now: CPMI: Committee on Payments 

and Market Infrastructures)

CRA Credit Rating Agency

CSD Central Securities Depository

DIF Deposit Insurance Fund

DFA Dodd-Frank Wall Street Reform and Consumer Protection Act

DTC Depository Trust Company

DTCC Depository Trust & Clearing Company

ECN

EM

ESRB

Electronic Communication Network

Emerging Markets

European Systemic Risk Board 

ETF Exchange Traded Fund

FATF Financial Action Task Force

FBO Foreign Bank Organization

FDIC Federal Deposit Insurance Corporation

Fed Federal Reserve System

FHA

FHFA

Federal Housing Administration

Federal Housing Finance Agency

FHLBs Federal Home Loan Banks

FICC Fixed Income Clearing Corporation

FIO Federal Insurance Office

FMI Financial Market Infrastructure

FMU

FRA

Financial Market Utility

Federal Reserve Act

FRB Federal Reserve Board

FRBNY Federal Reserve Bank of New York

FSAP Financial Sector Assessment Program

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

FSSA Financial System Stability Assessment

FX

GAO

GCF

Foreign Exchange

Government Accountability Office

General Collateral Financing

GFC Global Financial Crisis of 2008–09 

GSE Government-Sponsored Enterprises
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GSIB Global Systemically Important Banks

GSIFI Global Systemically Important Financial Institutions

GSII

HUD

HY

Global Systemically Important Insurers

Housing and Urban Development

High Yield

IAIS International Association of Insurance Supervisors

GFSR Global Financial Stability Report (IMF)

IASB International Accounting Standards Board

ICE Intercontinental Exchange Clear Credit L.L.C

ICP Insurance Core Principles

ICPF Insurance Companies and Pension Funds

IOSCO International Organization of Securities Commissions

KA Key Attributes of Effective Resolution Regimes for Financial Institutions

LCR Liquidity Coverage Ratio

LEI

LIBOR

Legal Entity Identifier

London Interbank Offered Rate

LTV Loan-To-Value

MBS

MF

Mortgage Backed Securities

Mutual Fund

MMMF

MOU

Money Market Mutual Fund

Memorandum of Understanding

NAIC National Association of Insurance Commissioners

NAV Net Asset Value

NBFI

NCUA

Nonbank Financial Institution

National Credit Union Administration

NSCC National Securities Clearing Corporation

OCC Office of the Comptroller of the Currency

OFR

OIS

Office of Financial Research

Overnight Interest Rate Swap

OLA

ONRRP

Orderly Liquidation Authority

Overnight Reverse Repo

OTC Over-The-Counter

P&C Property and Casualty Insurance

PDCF Primary Dealer Credit Facility

PFMI

PLS

CPSS-IOSCO Principles for Financial Market Infrastructures

Private Label Securitization

PWG President’s Working Group on Financial Markets

QE

QM

QRM

Quantitative Easing

Qualified Mortgage

Qualified Residential Mortgage

RTGS Real Time Gross Settlement

SEC Securities and Exchange Commission

SEF

SIPA

Swap Execution Facility

Securities Investor Protection Act

SLHC Savings and Loans Holding Companies

SSS

TPR

Securities Settlement System

Tri-Party Repo

U.S. GAAP United States Generally Accepted Accounting Principles

U.S. United States
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EXECUTIVE SUMMARY1

The importance of enhancing systemic risk oversight and building effective macroprudential 

tools is widely recognized. In the United States, where the financial markets display a greater 

degree of heterogeneity than elsewhere, and supervision and regulation are split amongst a range 

of specialist agencies, the need to build structures that ensure interagency sharing of information, 

avoid regulatory gaps, obtain a good overview of systemic risks, and develop an effective, 

cooperative framework to address identified threats to financial stability is particularly evident. This 

paper reviews those processes in the United States, as well as examining progress to address several 

important areas of risk which have been identified, particularly in the non-banking sector.

The establishment of the Financial Stability Oversight Council (FSOC) in 2010 filled a major 

gap in the U.S. financial stability framework, and it is central to the regulatory response to the 

problems which hit the financial sector in 2007–2009.2The Dodd Frank Act (DFA) gives the 

Council a range of powers that enable it to respond to emerging threats to financial stability (see 

Box 1).

3

In practice the Council works primarily through enhanced communication, consultation, and

coordination of the work of the U.S. financial regulatory agencies; the effectiveness of FSOC relies 

extensively on the Council’s success in building and delivering a collective, common, purpose across 

the U.S. financial regulatory agencies to identify and address systemic risks and to work together to 

promote financial stability. The work which the FSOC has undertaken is welcome. However:

 The collective purpose and accountability of FSOC would be strengthened by providing to each 

member agency and member an explicit mandate to promote financial stability and thus to 

support the work of FSOC (subject to the mission and objectives of the member agencies and 

members). 4

 Further actions are needed to: address data gaps; resolve remaining impediments to data 

sharing; support coordination and consultation on prudential standards and regulations; 

enhance risk monitoring frameworks; provide additional clarity on the nature and scale of

identified emerging systemic threats; and strengthen the transparency and collective ownership 

of the actions needed to address identified risks by clarifying and publishing more specific 

follow-up actions, and outlining where responsibility for delivery lies, including the expected 

timeline for implementation and reporting of results.

 

1

This Technical Note was prepared in the context of the 2015 U.S. Financial Sector Assessment Program (FSAP) by 

Simon Gray, Deniz Igan, Nigel Jenkinson, Darryl King, Jay Surti, and Froukelien Wendt (all IMF), and Christine Sampic

(Banque du France). The FSAP missions took place in two phases between October 2014 and March 2015.

2

The Council is supported by the Office of Financial Research (OFR) which has responsibility to standardize the types 

and formats of data and develop tools for identifying risks, as well as to perform research.

3

The DFA also provides additional authorities to certain FSOC member agencies.

4

The DFA defines an FSOC member agency as an agency represented by a voting member of the Council (DFA 

Section 102).
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 The development of the macroprudential toolkit remains a work in progress; FSOC member 

agencies and members should continue to focus on measures to address the buildup of cyclical 

and sectoral risks and to strengthen the resilience of financial markets to run risks; as well as 

clarifying the framework for implementation of macroprudential policies. 

Significant steps have been taken by the U.S. authorities to reduce risks in a number of areas, 

but progress is most advanced in the area of banking sector resilience, and less so in other 

areas which play a major role in the financial system.

 In the area of Too-Big-to-Fail, progress has been made with FSOC designation, and with 

heightened prudential standards and enhanced supervision, which together with the 

development of ‘living wills’ and resolution legislation and procedures reduce the risk that the 

material financial distress or activities of an individual firm could pose a threat to U.S. financial 

stability. At the same time, the DFA restricts the authorities’ (and in particular the Fed’s) ability 

to provide a liquidity backstop to individual institutions. This clearly puts an onus on the 

effectiveness of strengthened prudential standards and recovery and resolution planning. In the 

transition, until they are fully embedded, the U.S. Treasury, the Fed and other regulatory 

agencies need to ensure that adequate plans are in place and legal authorities sufficiently clear, 

to allow for a timely and sufficient response to any problems that may arise in SystemicallyImportant Financial Institutions (SIFIs), as well as in systemically-important markets.

 Given their increased systemic importance, all risks related to financial market infrastructures 

(FMIs), in particular central counterparties (CCPs), need to be carefully addressed. Progress is 

continuing in this area: agencies have substantially increased staff, and regulatory frameworks 

governing designated Financial Market Utilities (FMUs)5provide for transparency, governance, 

and strong risk management. It will be important to promptly finalize implementation of the 

internationally agreed PFMI, through completion of rules and their implementation by FMIs,

and by further addressing the potential threat posed by the concentration of service provision 

by G-SIBs to FMIs. Providing designated FMUs with an account at a Federal Reserve Bank will 

be an important element of this. System wide risks related to interdependencies and 

interconnections in the U.S. FMI landscape could be further identified and managed. Finally, 

recovery and resolution plans for FMIs are at an early stage and authorities are encouraged to 

continue their efforts to further develop these in line with international guidance. 

In principle, there should be no impediment in designating any entity or identifying an 

activity as systemically important if the entity’s failure, distress or excesses or the nature of 

the activity could cause a major disruption in the financial markets, and consequently 

subjecting it to higher prudential standards of regulation and supervision or enhanced 

resolution regimes. In practice, the challenge lies in applying this principle to non-banks such as 

 

5

This report follows international usage with the term ‘financial market infrastructure (FMI)’ while the U.S., including 

in the DFA, tend to use the term ‘financial market utility’. FMIs that are designated as systemically important by the 

FSOC are referred to as ‘designated FMUs’ in line with the DFA.
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investment funds and to activities such as asset management, which are often managed by agents 

and where the focus of regulation has mainly been on conduct. The FSOC has been deliberating on 

this issue, as has the FSB at the international level. It is important that potential risks in these areas

are addressed, given the concerns in the present conjuncture about the build-up of systemic risks in

non-banks. It should be noted that under Section 112 of the DFA, FSOC can make recommendations 

in this regard to the primary regulators even in the absence of designation, and it should be 

prepared to use this authority.

Focusing particularly on the areas of liquidity risks, market based finance, and housing 

finance, important remaining weaknesses include:

6

 Reforms to the triparty repo infrastructure have reduced, though not eliminated, a number of 

risks; and consideration should be given to the use of a central counterparty (CCP) with access 

to central bank accounts to further reduce risks. 

 Money market mutual funds (MMMFs) have been made more resilient, but the use of stable 

Net Asset Values (NAVs) persists, and even after 2016 may apply to three quarters of the funds 

managed by MMMFs, allowing both institutional and retail investors to treat these investments 

as cash-equivalent despite the greater liquidity risks involved than with cash.

 More needs to be done: to strengthen broker-dealer (BD) regulation and supervision (especially 

since it cannot be assumed the large BDs will remain under Bank Holding Companies (BHCs)

forever); to review risk management practices related to securities lending and cash collateral 

reinvestment (improving data will be a necessary part of this); and to review the impact of 

coverage of the safe harbor provisions governing repo transactions.

 Expansion of open-ended mutual funds (MF) and exchange traded funds (ETF) in certain 

products has increased market liquidity risks. These funds’ holdings of high yield (HY) corporate 

bonds, emerging market (EM) debt and bank loans have increased substantially since 2008 

even as common metrics of trading liquidity have declined significantly in these products. 

Structural factors, including money-like investment shares, lack of balance-sheet capacity to 

meet investor redemption demand, and incentives for investors to herd give cause for concern.

 Important data gaps remain in some significant areas: there are shortfalls not only in the 

collection of data, but also in the availability and ease of manipulation of data across FSOC 

members and financial regulatory agencies. Steps taken to address these are welcome, though 

it is striking that in some—such as bilateral repo, securities lending and asset management—

data gathering is still at very early stages.

 

6

The FSAP elsewhere reviews in depth risks to, and the regulation of, the banking, insurance, and securities sectors. 

See the companion note on Stress Testing as well as the Detailed Assessment Reports of banking and insurance 

supervision and the regulation of securities markets. 
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 A comprehensive assessment of financial stability risks from MFs’ securities lending and 

embedded leverage is needed. The FSAP discussions suggest that MFs’ investment of cash 

collateral received in securities’ lending is increasingly directed by mandates to MMMFs. While 

this avoids maturity risks in term repo deals increasingly preferred by dealers, it does not 

eliminate liquidity risk given that redemptions from such MMMFs could be gated at times of 

stress.

 Not enough has been done to tackle the structural weaknesses in mortgage markets that were 

uncovered during the GFC. The legislative reforms of Fannie Mae and Freddie Mac have stalled.

It is essential to reinvigorate legislative momentum for comprehensive housing finance reform 

in line with recent proposals.

SYSTEMIC RISK OVERSIGHT AND MANAGEMENT 

OVERVIEW

A. Overview

1. Significant structural changes to the framework were introduced in the wake of the 

global financial crisis. Most substantially, the FSOC was established in 2010 by the DFA to bring 

together key U.S. financial regulators to support financial stability. The establishment of the Council 

was a major landmark. FSOC’s establishment also fulfilled a key recommendation of the 2010 FSAP. 

2. The note describes the role and operations of the Council and its member agencies to 

promote U.S. financial stability. In particular, it examines the approaches and capacity of FSOC 

and the member agencies to identify and respond effectively to evolving systemic risks, as well as 

the work underway to strengthen the approach to risk identification and enhance the 

macroprudential policy toolkit. It also explores several major financial stability risks and concerns in 

greater depth that are not addressed elsewhere in the FSAP: namely, systemic liquidity risks; market 

based financing issues; risks related to FMIs; and mortgage market risks and options for reform.

7

B. Remit, Responsibilities and Organization of FSOC

3. The establishment of the FSOC in 2010 filled a major gap in the U.S. financial stability 

framework. Under the Chairpersonship of the U.S. Treasury Secretary, FSOC brings together the 

heads of key U.S. financial regulatory agencies to work collaboratively to promote financial stability.8

FSOC has three primary purposes, as set out in the DFA: to identify risks to U.S. financial stability; to 

promote market discipline by eliminating expectations that the government will shield shareholders 

and counterparties from losses; and to respond to emerging threats to U.S. financial stability (see

Appendix 1 on the Remit and Organization of the FSOC).

 

7

These concerns have also been noted by the FSOC in the 2014 FSOC Annual Report. 

8

The FSOC is supported by a Secretariat and by the Office of Financial Research created by the DFA.
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4. FSOC was established as a remedy to well-documented institutional shortcomings and 

policy failures.9Prior to the creation of the FSOC, U.S financial regulation and policy was typically

focused narrowly on the safety and soundness of individual institutions. In common with failings of 

regulatory frameworks in other countries, insufficient attention was paid to the buildup of risk across 

the financial system as a whole through common and concentrated exposures and complex 

interconnections. Moreover, the complexity of the U.S. regulatory structure, gaps in regulatory 

frameworks and a weak institutional structure to encourage collaboration and coordination added

to the difficulties of developing an accurate picture of and responding to emerging systemic risk.

5. FSOC has been granted authorities and powers by the DFA to support the maintenance 

of financial stability. In particular, FSOC has authorities to undertake the following six main tasks: 

to facilitate regulatory coordination among the member agencies; to facilitate information sharing 

and data collection; to designate nonbank financial companies for consolidated supervision and 

enhanced prudential standards;to designate systemically important FMUs and payment, clearing or 

settlement activities for heightened oversight and supervision and to meet enhanced risk 

management standards; to recommend stricter standards for the largest, most interconnected firms 

and to make formal recommendations to primary regulators to apply new or heightened standards; 

and to play a significant role in any determination of whether actions should be taken to break up 

firms that pose a grave threat to financial stability (see Box 1 on Authorities and Tasks of FSOC).

6. The FSOC is accountable to Congress for the fulfillment of the remit. In particular, it 

must publish an Annual Report describing the activities of the Council, including an assessment of 

potential emerging threats to U.S. financial stability and recommendations to enhance the integrity, 

efficiency, competitiveness and stability of U.S financial markets, as well as recommendations to 

promote market discipline and maintain investor confidence.10,11 The voting members of the Council 

must individually sign off that that they agree that all reasonable steps are being taken to ensure 

financial stability, including additional actions described in the Annual Report; or if not, they must 

specify what further actions they believe should be taken.12

7. The Council is supported by a Deputies Committee of senior staff of Council members 

and member agencies, which meets on average every two weeks to direct and oversee the work of 

six Committees focused on different aspects of the Council’s responsibilities (Appendix Figure 1).

FSOC is also supported by a dedicated Secretariat of just over 20 staff currently located in the U.S. 

Treasury.

13 Bylaws or rules of organization of the Council and of the Deputies Committee have been

 

9

See the 2010 U.S. FSAP https://www.imf.org/external/pubs/ft/scr/2010/cr10247.pdf.

10 Requirements for material to be included in the Annual Report are specified in DFA Section 112. 

11 The Council also provides advice to Congress on legislative reforms. For example, it conducted a study on how 

best to implement the Volcker rule, and a study on application of the financial sector concentration limit set out by 

DFA.

12 To date, the 5 FSOC Annual Reports have each been signed off unanimously by the voting members. 

13 FSOC Secretariat staff is predominantly from the U.S. Treasury, with one or two on detail from time to time from 

other FSOC member agencies for short periods.
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published by FSOC.14 Work under way to supplement this information by publishing the governance 

arrangements and Charters for the individual Committees is helpful.15

Box 1. Summary of Major Authorities and Tasks of FSOC1/

 Facilitate Regulatory Coordination: The Council has a responsibility to facilitate information sharing and 

coordination among the member agencies regarding domestic financial services policy development, 

rulemaking, examinations, reporting requirements, and enforcement actions.

 Facilitate Information Sharing and Collection: By statute, the Council has a responsibility to facilitate the 

sharing of data and information. In instances where available data proves insufficient, the Council has the 

authority to direct the OFR to collect additional information in order to assess risks to the financial stability of the 

United States. Appendix 2 provides more information on the role of the OFR.

 Designate Nonbank Financial Companies for Consolidated Supervision and enhanced prudential 

standards: The DFA gives the Council the authority to designate nonbank financial companies for consolidated 

supervision by the Federal Reserve, regardless of their corporate form. Designated companies are required to 

meet heightened prudential standards set by the Federal Reserve. To date, four nonbank financial companies 

have been designated by FSOC.2/

 Designate Systemic Financial Market Utilities (FMUs) and Systemic Payment, Clearing, or Settlement 

Activities: The DFA provides the Council with the responsibility to designate FMIs as systemically important. 

Under the DFA, designated FMUs have to comply with risk management standards prescribed by the Federal 

Reserve Board (FRB), the Securities and Exchange Commission (SEC), or the Commodity Futures Trading 

Commission (CFTC) as appropriate. Eight FMIs have so far been designated.3/The Act also authorizes the Council 

to designate systemically important payment, clearing or settlement activities. That power has not been used to 

date.

 Recommend Stricter Standards: The Council has the authority to recommend stricter standards for the largest, 

most interconnected firms, including designated nonbank financial companies, as described above. Moreover, 

where the Council determines that certain practices or activities pose a threat to financial stability, the Council 

may make formal recommendations to the primary financial regulatory agencies for new or heightened 

regulatory standards. The Council has taken steps to use the latter facility once—in relation to MMMFs.

4/

The 

Council also has the duty to monitor domestic and financial regulatory proposals and developments, as well as to 

identify gaps in regulation that could pose risks to U.S. financial stability.5/

 Break up Firms that Pose a Grave Threat to Financial Stability: The FSOC has a role in any determination 

whether action should be taken to break up (or take other mitigating actions on) firms that pose a “grave threat” 

to U.S. financial stability. No actions have so far been taken under this provision.6/

____________________________________

1/ See ‘Frequently Asked Questions on the FSOC’ at http://www.treasury.gov/initiatives/fsoc/about/Pages/default.aspx. This is 

not a comprehensive list.

2/ AIG, GE Capital, Prudential Financial, and MetLife.

3/ Designated FMUs are: the Clearing House Payments Company LLC; Continuous Linked Settlement Bank International (CLS); 

Chicago Mercantile Exchange (CME); Intercontinental Exchange Clear Credit LLC (ICE); Depository Trust Company (DTC); Fixed 

Income Clearing Corporation (FICC); National Securities Clearing Corporation (NSCC); and the Options Clearing Corporation.

4/ The Council undertook the first steps of the process (available under section 120 of DFA) in late 2012, issuing proposed 

recommendations for MMMF reform for consultation http://www.treasury.gov/press-center/press-releases/Pages/tg1764.aspx. 

The Council stated at the time that the SEC is best positioned to implement reforms to address the risks that MMMFs present to 

the economy. The SEC subsequently announced final proposals for reform following a round of public comments in July 2014. The

Council in July 2014 announced that it was examining the SEC’s rule and its potential impact on MMMFs and financial stability. 

5/ DFA Section 112.

6/ FSOC is tasked to provide an affirmative vote on such actions, following a determination by the Board of Governors of the 

Federal Reserve System that a firm poses a grave threat (section 121 of the DFA).

 

14 http://www.treasury.gov/initiatives/fsoc/governance-documents/Pages/default.aspx.

15 Apart from the Council and Deputies Committees which are chaired by the U.S Treasury Secretary and a senior 

Treasury staff member respectively, there are currently no chairs of the other 6 Committees. Meetings of these 

Committees are facilitated by the FSOC Secretariat. 
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8. The Council works primarily through enhanced coordination of the work of the U.S. 

regulatory agencies. A comparison of the structure, remit and powers of FSOC to financial stability 

oversight bodies in the U.K. and Europe reveals that FSOC has fewer direct powers and tools than in 

some other jurisdictions (see Table 1). In particular, FSOC does not have ownership and control of 

macroprudential tools, and while it has the capability of making formal recommendations to 

regulators under section 120 of DFA, there appear to be tighter restrictions on the use of the 

instrument than in other jurisdictions.16 In practice, the vast majority of FSOC recommendations, for 

example in the Annual Report, are ‘advisory’, although it does have the authority to issue formal 

(stronger) recommendations. The effectiveness of the Council consequently relies extensively on the 

Council’s success in building and delivering a collective, common purpose across the U.S. regulatory 

agencies to take the recommendations forward and to work together to promote financial stability.

17

Appendix 3 provides an overview of macroprudential policy tools in the United States.

9. The broad membership of FSOC reflects the complex web of regulatory bodies in the 

United States, which was little altered in response to the recent financial crisis.18 The voting 

members are the heads of nine authorities with national responsibilities for different aspects of 

financial regulation, together with an independent member with insurance expertise appointed by 

the President. Members are advised by the Directors of the OFR and the Federal Insurance Office 

(FIO)—new U.S. Treasury offices created by DFA—and by nominated representatives of state 

insurance commissioners, banking supervisors, and securities commissioners. 

10. Broad membership helps the Council to draw on input, insights, and expertise from 

across the complex regulatory structure to assess risks to the overall financial system. The 

heads of the principal federal banking and market regulatory agencies are voting members of FSOC, 

alongside the heads of the housing regulatory agency and consumer protection body, while a state 

banking regulator and a state securities regulator participate as non-voting observers. However, the 

representation of the insurance industry has had to be structured differently. Given the absence of a 

parallel federal or national regulatory body, the voting member is an independent member with 

insurance expertise appointed by the President (while the Federal Insurance Office—which does not 

have primary regulatory responsibilities—and a state insurance commissioner provide support as 

non-voting observers). The regulatory structure and representation could mean that insurance 

issues lack a voice congruent to the systemic importance of the sector. It is not clear how this could 

be improved without the creation of a federal/national insurance regulatory organization whose 

head could be a voting member.

 

16 The DFA provides a detailed framework governing the application of the power.

17 FSOC and its member agencies, taken together, have wide-ranging powers to take regulatory and macroprudential 

actions. The current structure and governance of U.S. financial regulatory agencies suggests that moving the balance 

of powers in favor of the Council—a solution used elsewhere with the aim of delivering a rapid response to emerging 

risks—may not be a straightforward option in the United States.

18 The principal structural changes were the abolition of the Office of Thrift Supervision (OTS) and creation of the 

Council, Consumer Financial Protection Bureau (CFPB), Office of Financial Research (OFR), and the Federal Insurance 

Office (FIO). Individual agencies were also granted additional responsibilities in some cases.
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11. There are some ambiguities in the role and responsibilities of individual Council 

members and of FSOC member agencies. Section 102 of DFA defines member agencies as 

agencies represented by a voting member of the Council. Section 111 of DFA lists the voting 

members of FSOC as the individuals fulfilling particular roles, such as the Comptroller of the 

Currency, and the members are assigned responsibilities for decision making and for signing off on 

the FSOC Annual Report. Section 111 of DFA also lists the non-voting members of FSOC as 

individuals fulfilling particular roles, such as the Director of OFR and the Director of FIO. Alternative 

views have been expressed as to whether members of FSOC should participate in an individual 

capacity or on behalf of the agencies that they head. Since a clear objective of FSOC is to strengthen 

coordination among the regulatory agencies to promote U.S. financial stability it would be helpful to 

resolve this ambiguity. 

12. A model where Council members act on behalf of the agencies they lead could offer 

stronger support for FSOC objectives and authority for FSOC work than one where the 

members act in an ex officio capacity. However, adoption of such an approach would require 

individual members to ensure the support of decision-making bodies within their agencies for key 

FSOC decisions. This would be complex given that some agencies’ governance structures involve a 

commission, and policy decisions require a consensus or majority vote.

13. Provision of an explicit financial stability objective to member agencies would also 

bolster coordination. The common purpose would be further strengthened by providing an 

additional statement of clarification that the member agencies themselves support the work of FSOC 

in maintaining U.S. financial stability. The Council brings together the heads of all the main U.S.

financial regulatory agencies and assigns the collective the task of identifying risks to financial 

stability and responding to threats. But at the same time, each member agency has an individual 

mandate and responsibility which has not been altered by the introduction of FSOC. The individual 

mandates do not typically include financial stability.19 As the duty of the agency is to meet the 

mandate provided by U.S. legislation and Congress, there is consequently no legal framework 

pulling the regulatory agencies together for a common purpose or objective. The lack of a formal 

mandate may complicate the role of their representatives on FSOC, and potentially undermines the 

agency response to FSOC recommendations. Providing an explicit financial stability mandate would 

give additional clarity on the role and duties of FSOC member agencies.20 It is therefore important 

 

19 The mission statement of the Federal Reserve is an exception and includes ‘maintaining the stability of the financial 

system and containing systemic risk that may arise in financial markets.’ The CFTC mission also refers to the role ‘to 

protect market participants from fraud, manipulation, abusive practices, and systemic risk related to derivatives.’ In 

addition, FIO has responsibility to identify issues or gaps in the regulation of insurers that could contribute to a 

systemic crisis in the insurance industry or the U.S. financial system.

20 See IMF Staff Guidance Note on Macroprudential Policy http://www.imf.org/external/np/pp/eng/2014/110614.pdf.

Such a proposal has also been supported by external commentators such as Donald Kohn (formerly Deputy 

Chairman of the Board of Governors of the Federal Reserve and currently a member of the Bank of England Financial 

Policy Committee). Stanley Fischer (current Deputy Chairman of the Board of Governors, and also Chair of the 

recently established Federal Reserve Financial Stability Committee) has noted that: “It may well be that adding a 

(continued)
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that the mandate of the member agencies, as enshrined in the respective laws, be amended to 

include an explicit financial stability objective, with a view to supporting the FSOC work. As an

immediate step, member agencies could also each voluntarily provide a clear statement that the 

agency fully supports the work of FSOC, subject to meeting the mission and objectives of the 

individual agency. 

14. It is crucial that the FSOC’s political independence not only be maintained, but should 

be seen to be maintained.

21 This issue has been raised in the U.S. context, given the strong role of 

the Treasury in the FSOC, and it is therefore crucial that the FSOC’s political independence not only 

be maintained, but should be seen to be maintained. The leadership and decision-making structure 

is relatively unusual by international standards. In particular, it is unusual for the finance ministry to 

play such a prominent role, as both the Chair of the Council, and in some cases—such as 

designation decisions—being assigned a ‘primus inter pares’ role, with a veto power.

22 Common 

international practice is for the central bank to act as the chair of financial stability or 

macroprudential policy councils to help insulate the councils from short-term political pressure and 

facilitate taking tough decisions necessary to maintain financial stability. Some counterweight 

against such pressure is provided in the U.S. structure by the one person, one vote framework 

applying for many decisions. Counterweight is also provided by virtue of the duties and 

responsibilities of individual members set out in the DFA and by the depth and breadth of 

representation across the complex regulatory structure. Moreover, since the Treasury is not a 

supervisory agency, the Treasury Secretary’s role as Chair may facilitate cooperation amongst the 

various regulatory agencies in the Council.

15. The governance structure of the Deputies Committee and other FSOC staff 

Committees is also important in ensuring appropriate checks and balances. As well as Chairing 

the Council, the U.S. Treasury also serves as the Chair of the important Deputies Committee. And 

FSOC Secretariat staff, drawn almost entirely from the U.S. Treasury, facilitates the operation of the 

other FSOC staff Committees in the absence of appointed Chairs. Consideration should be given to 

appointing Chairs to the FSOC staff Committees, drawing on the expertise of member agencies as 

appropriate. Increasing the proportion of FSOC Secretariat staff on detail from member agencies 

would also be helpful and could increase the buy-in by member agencies. 

 

financial stability mandate to the overall mandates of all financial regulatory bodies, and perhaps other changes that 

would give more authority to a reformed FSOC, would contribute to increasing financial and economic stability.”

http://www.federalreserve.gov/newsevents/speech/fischer20140710a.htm.

21 See for instance IMF Staff Discussion Note “Institutional Models for Macroprudential Policy”, November 2011.

22 A survey conducted by the IMF in 2013, revealed that out of 113 countries responding, only some 29 (26 percent) 

included an explicit role for the finance ministry in the collective institutional arrangements for macroprudential 

policy— typically alongside other bodies. That may be contrasted to the 110 (97 percent) of respondents where the 

central bank plays an explicit role (in 49 (43 percent) of cases alone). Among the 27 advanced economies responding, 

only 9 (33 percent) provide an explicit role for the finance ministry, in contrast to the 25 (92 percent) where the 

central bank plays an explicit role (in 10 cases (37 percent) alone).
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Table 1. Organization, Role and Powers of FSOC and other Macroprudential Oversight Bodies

Characteristics U.S. FSOC UK FPC European Systemic Risk Board 

(ESRB)

Summary Remit1Identify threats to 

financial stability.

Promote market 

discipline.

Respond to emerging 

threats.

Identification, 

monitoring, and taking 

actions to remove or 

reduce systemic risk.

Macroprudential oversight, to 

contribute to the prevention of 

systemic risks in the EU, and to 

contribute to smooth running of 

the internal market.

Membership 10 Voting members, 5 

nonvoting members2

10 Voting members338 Voting members4

Chair Treasury Secretary Central Bank Governor President ECB

Principal powers Designation of systemic 

nonbanks and FMIs.

Recommendations to 

regulatory agencies.

Recommendations to the 

FCA and other bodies.

Powers of direction to 

deploy specified tools. 

Recommendations for remedial 

action (in public and in confidence).

Warnings (in public and in 

confidence to the EU Council).

Responsibility for specific 

policy tools 

No Yes No

Power to give 

recommendations 

Yes Yes Yes

Use of formal 

recommendation powers

Once (proposed) On multiple occasions On multiple occasions 

Decision making Voting (generally 

majority or 2/3)

Voting Voting

Meeting frequency Approximately monthly5 Quarterly cycle of 

meetings

Quarterly meetings

Principal Communication 

tools 

Annual report. Readouts 

and subsequent 

minutes of meetings.

Financial Stability Report 

(twice a year).

Detailed minutes of 

meetings.

Annual report. 

Publication of a quarterly ESRB risk 

dashboard.

Publication of recommendations.

Accountability provisions U.S. Congress. 

Publication of an Annual 

Report. 

Members must 

individually sign off 

annually on the financial 

stability program.

U.K. Parliament.

Decision must be 

explained, meeting 

minutes published and a 

Financial Stability Report 

published twice a year. 

European Parliament. 

Publication of an Annual Report. 

1/ This is a summary of the formal remits of each body.

2/ Voting members are the heads of regulatory agencies, together with an independent member with insurance expertise. (See 

Appendix 1).

3/ Members are the Governor of the Bank of England, the CEO of the Financial Conduct Authority, 3 Deputy Governors and an 

Executive Director of the Bank of England, and 4 senior external experts.

4/ Voting members are the President and the Vice-President of the European Central Bank (ECB), the Governors of the national 

central banks of the Member States, one Member of the European Commission, the Chairperson of the European Banking Authority 

(EBA), the Chairperson of the European Insurance and Occupational Pensions Authority (EIOPA), the Chairperson of the European 

Securities and Markets Authority (ESMA), the Chair and the two Vice-Chairs of the Advisory Scientific Committee (ASC) and the Chair 

of the Advisory Technical Committee (ATC). The ESRB Board also has non-voting members. 

https://www.esrb.europa.eu/about/orga/board/html/index.en.html.

5/ FSOC must meet at least quarterly.
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 To underscore the independence of FSOC, it would be helpful to clarify the organization and 

governance arrangements for each of the Committees in the Charters that are under 

development, ensuring that the expertise of each of the member agencies is drawn on 

appropriately. Moreover, it would be helpful to appoint Chairs for each of the supporting staff 

Committees, drawing upon the expertise of the member agencies.23

16. Collaborative working and coordination across the FSOC member agencies in support 

of U.S. financial stability would be reinforced by implementation of the following 

recommendation:

 The mandates and mission statements of each of the FSOC member agencies should be 

supplemented by addition of an explicit financial stability mandate. As an immediate step 

towards this goal, member agencies are encouraged to publish voluntary statements that the 

agency fully supports the work of the Council, subject to meeting the mandate and mission of the 

individual agency.

C. Strengthening Systemic Risk Identification in the United States

17. A key initial task for FSOC has been to develop a robust framework for the 

identification of emerging threats to U.S. financial stability. Prior to the establishment of FSOC, 

no authority had the capacity or responsibility to undertake any monitoring or assessment of risks to 

the system as a whole. Regulators naturally focused on their individual mandates. Data collection 

and availability of information was itself piecemeal as a result of the fragmented regulatory 

structure. And no agency developed the necessary analytical tools to support the identification of 

disparate threats to financial stability in the United States. 

18. Notwithstanding progress in improving information sources, systemic risk analysis in 

the United States is hampered by continued data gaps. Deficiencies in the availability and quality 

of financial information in advance of the global financial crisis severely affected the authorities’ 

capacity to understand and analyze emerging financial stability risks and to plan and implement 

effective mitigation and crisis management measures. In recognition of the problems, the U.S. 

authorities have invested in a new structure (the OFR, structured as an Agency of the U.S. Treasury—

see Appendix 2), which was created by DFA to support the work of the Council by improving 

financial data. The OFR works actively with the financial regulatory agencies and expert members to 

improve the quality and scope of financial data, including through the FSOC Data Committee and 

through bilateral contacts. Following production of a stock-taking inventory of data collections 

undertaken by the member agencies, the OFR and FSOC member agencies are now working to close 

identified gaps. Notwithstanding improvements in recent years, gaps remain substantial. Indeed, as 

recently highlighted by the OFR: “Data available to regulators are not currently sufficient to evaluate 

many of the key risks and policy issues.”

24 Urgent priorities are to improve data on repo and 

 

23 Charters for each Committee were published in May 2015, but they do not provide for a Chairperson.

24 OFR Annual Report 2014 page 105.
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securities lending markets, on the asset management industry more generally and on other aspects 

of nonbank finance. Moreover, it would be very helpful to address the current data gaps on the 

connectedness between banks and the non-bank system, as well as on broader interconnections 

within the financial system. 25 The project to enhance the Financial Accounts of the United States

recently announced by the FRB with the support of the OFR is very welcome.26

19. Impediments remain to the effectiveness of data sharing arrangements among U.S. 

agencies. Data are collected by regulatory agencies under different legal and administrative 

arrangements. Given the importance of preserving the security of market sensitive information, the 

legal frameworks governing individual data collections sometimes place strong restrictions that 

inhibit the sharing of data, even with other regulatory agencies.27 That creates a barrier to the 

utilization of existing data sources to pull together a picture of emerging risks for the system as a 

whole. To satisfy the FSOC statutory duty to facilitate information sharing, the FSOC agencies have 

developed procedures to enable sharing under the general approach that every agency maintains 

authority and control over their own data. While welcome, such procedures appear, however, to be

cumbersome and relatively inflexible, requiring tailored application in each case. As a result, 

currently available data may not be used to their maximum effect. The ‘flash rally’ in the government 

securities market on October 15, 2014 provides an interesting example. Several regulatory agencies 

had information on different aspects of the market, and different actors; and one agency gave an 

initial report to the FSOC in early November—a rapid response. But in depth analysis required 

additional feedback from FSOC, and completing the legal access arrangements among the agencies

took additional time. Separately, there was uncertainty as to whether some data could be shared, for 

example, with the U.S. Treasury debt management unit (an interested party, but not a regulatory 

agency). Summarizing the current position on data availability, FRB Governor Brainard recently 

noted that: “no U.S. agency yet has access to complete data regarding bank and nonbank financial 

activities.”28 She emphasized the importance of the OFR making progress in: “facilitating the sharing 

of previously siloed data sets among the independent regulators.”

29

20. Improving the standardization of financial data remains an important priority. Data 

collections undertaken by different regulatory agencies are typically targeted and tailored to the 

policy question in hand. Such tailoring, however, leads to inconsistencies in data definitions and 

substantially lowers the ability of the authorities to aggregate different data sources and build an 

accurate picture of risks to the financial system as a whole. Moreover, a piecemeal approach to data 

 

25 The United States is one of the six FSB member jurisdictions that do not currently provide information on the 

interconnectedness between the banking sector and non-bank financial sector. 

http://www.financialstabilityboard.org/2014/11/global-shadow-banking-monitoring-report-2014/.

26 http://www.federalreserve.gov/econresdata/notes/feds-notes/2014/enhanced-financial-accounts-20140801.html.

27 For example, the 2014 FSOC Annual Report notes in respect of swaps data, that: “some U.S. authorities’ access to 

these data remains a challenge due to legal and other obstacles”. 

28 http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.

29 http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.
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collection adds to production costs.30 The OFR is consequently actively promoting the greater 

standardization of data at a granular level, which would support flexible data aggregation and thus 

enhance financial stability analysis. For example, the OFR advocates widespread use of the Legal 

Entity Identifier (LEI)—a unique global identification system for parties to financial transactions 

developed by the FSB and endorsed by the G-20.

31 Nevertheless, although the CFTC was the first 

adopter of the system within the global regulatory community—requiring use of the identifier for 

reporting derivatives transactions to swap data repositories—and the system was subsequently 

adopted by the NAIC32 and the SEC with respect to mandatory swaps reporting rules, take-up by 

other regulatory agencies in the United States has been relatively sluggish. A clear announcement 

from all member agencies that the LEI will provide the basis for future mandatory data collection

that requires entity identification would provide a welcome boost to data standardization initiatives.

21. The FSOC risk assessment structure facilitates the collective review of concerns and 

emerging risks identified by individual member agencies. In particular, the FSOC Systemic Risk 

Committee (SRC) brings together staff from all member agencies to support the identification of 

threats to financial stability by the Council. Member agencies consequently have the opportunity to 

recommend issues for review and consideration as potential system-wide threats, enabling FSOC to 

draw on the collective analysis and experience of the U.S regulatory community. To support this 

work it is important that member agencies take a comprehensive and rigorous approach to risk 

assessment.33

22. System-wide risk assessment must also look beyond the regulatory perimeter. As well 

as drawing on the insights and experience of regulatory agencies in identifying emerging risks 

within their areas of responsibility, it is essential to focus on the potential for risks to emerge beyond 

the regulatory frontier, including from the impact of regulatory arbitrage. FSOC has responsibility to 

identify risks to the system as a whole and thus to take account of risks building outside the 

combined regulatory perimeter; this is complemented by the OFR, which provides regular reports to 

FSOC committees on financial market developments and potential risks that may warrant further 

investigation. As individual regulatory agencies generally do not have the responsibility and thus 

incentive to undertake risk assessment beyond their statutory mandate, it would be helpful to spell 

out more clearly the collective framework and processes that FSOC has put in place to monitor and 

assess such risks and avoid gaps, including the assignment of responsibilities to member agencies 

and the OFR for risks that lie outside regulatory boundaries. While the FSOC and the independent 

OFR Annual Reports have included some risks from innovation and migration of intermediation 

 

30 For example, while the NAIC has initiated a collection of securities lending data from insurance companies, the 

FRB, SEC, and OFR are separately starting a pilot project on the collection of securities lending data, potentially with 

different data definitions.

31 http://www.financialstabilityboard.org/publications/#mt_page=14.

32 http://www.naic.org/Releases/2012_docs/naic_legal_entity_identifier.htm.

33 The U.S. FSAP 2015 Detailed Assessment Report on conformance with the IOSCO principles on the regulation of 

securities markets notes the scope for enhancements to the monitoring of market risks.
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beyond regulatory boundaries,34 additional reassurance that FSOC is focusing broadly on threats to 

overall financial stability would be provided by inclusion of a specific, focused section within the 

FSOC Annual Report assessing risks beyond the regulatory frontier.35 The current section reporting 

on areas the Council is monitoring is a helpful start.36

23. Responsibilities for identifying risks from international developments and the 

spillovers and spillbacks from U.S. policy actions should be clarified. Given the strong 

interconnections between the U.S. financial system and global financial markets, it is important that 

FSOC closely monitors international financial developments and market risks. The FSOC Annual 

Report identifies risks from international markets as a threat to U.S. financial stability and describes 

the principal concerns and threats. It would be helpful to set out the responsibilities for monitoring 

such risks across the member agencies and the OFR on a continuing basis to avoid the possibility of 

any gaps. As developments and policies pursued by the U.S. regulatory authorities also have an 

important impact on other countries, and risks may spillback to the United States, it would also be 

helpful if FSOC provides a regular assessment of the potential impact of major U.S. policy 

developments on global financial market risks in the FSOC Annual Report.

24. FSOC member agencies have developed new analytical tools to monitor system-wide 

risks. The OFR has developed a Financial Stability Monitor, which provides a traffic-light summary of 

five categories of system-wide risk (macro, market, credit, funding/liquidity, and contagion) 

combining information from a wider range of indicators to signal financial stress.37 And OFR staff is

developing a suite of additional monitoring tools. Economists at the FRB are deepening monitoring 

frameworks to support the work of the recently established FRB Financial Stability Committee, which 

oversees internal FRB responsibilities for financial stability. Staff at other FSOC member agencies, 

such as the FDIC and the OCC has also introduced new monitoring tools and frameworks to support 

strengthened systemic risk monitoring and the agencies’ contribution to FSOC risk discussions. It is 

important to continue the work to develop systemic monitoring tools to support a rigorous and 

systematic assessment of systemic risks by FSOC. Transparency of the risk assessment process would 

be enhanced by publication of a chapter in the 2016 FSOC Annual Report describing the procedures 

and principal monitoring tools and techniques adopted to support the process.

 

34 See FSOC Annual Report 2014, and OFR Annual Reports for 2013 and 2014.

35 Such a recommendation has been proposed by Donald Kohn 

http://www.bankofengland.co.uk/publications/Pages/speeches/2014/726.aspx. The U. S. Treasuries market, together 

with spillovers from this market to other parts of the financial sector, would be an obvious candidate for such 

monitoring by the FSOC.

36 See section 7.2 of the 2014 FSOC Annual Report.

37 OFR Annual Reports 2013 and 2014. 
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25. Current threats to U.S. financial stability are highlighted each year in the FSOC Annual 

Report. Nine areas are identified in the 2014 report for continued attention and possible action, as 

summarized below.38,39,40

1) Short-term wholesale funding markets: Regulatory agencies and market participants 

should continue to take action to reduce vulnerabilities in wholesale funding markets, 

including tri-party repo and MMMFs that can lead to destabilizing fire sales.

2) Housing market reform: Regulators should continue to work with policymakers to 

implement the significant structural reforms needed to reduce taxpayers’ exposure to risk in 

the housing market. 

3) Operational risks: Cybersecurity threats, infrastructure vulnerabilities, and other operational 

risks remain a top priority for the Council, and regulators should continue to take steps to

improve financial institutions’ ability to prevent operational failures and improve resiliency. 

4) Developments in financial products, services, and business practices: As the financial 

system evolves in response to technological, competitive, and regulatory changes, regulators 

should remain attentive to financial innovation and the migration of certain activities outside 

of traditional financial intermediaries that could create financial stability risks.

5) Reforms in reference rates: U.S. regulators should continue to cooperate with foreign 

counterparts to address concerns about benchmark reference rates such as LIBOR.

6) Financial system vulnerability to interest rate volatility: Regulators and institutions 

should remain vigilant in monitoring and assessing risks related to interest rate volatility, 

particularly as investors seek higher yields in a low interest rate environment. 

7) Data gaps and data quality: Financial regulatory agencies should continue to work with the 

OFR to fill financial data gaps and address related issues of data quality and 

comprehensiveness.

8) Risk-taking incentives of large, complex, financial institutions: Regulators should 

continue implementation of DFA reforms to reduce risk-taking incentives of large, complex, 

interconnected financial institutions.

 

38 Summary taken from remarks of Treasury Deputy Assistant Secretary (and Executive Director of FSOC), Patrick 

Pinschmidt, before the ABS East Conference September 2014: http://www.treasury.gov/press-center/pressreleases/Pages/jl2644.aspx.

39 These concerns encompass the four areas studied in greater depth in the following sections. 

40 The 2015 FSOC Annual Report published in May 2015 after the conclusion of the mission added two new topics 

that have received increased regulatory attention: changes in financial market structure, and central counterparties 

(CCPs).
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9) Foreign markets risks: There is a need for continued monitoring of adverse financial 

developments abroad and their potential impact on the U.S. financial system.

26. Identified threats span a very broad spectrum of potential risks to the U.S. financial 

system and publishing a fuller assessment of the relative importance attached to each of the 

identified threats (such as their likelihood and impact) would be helpful. Although the areas 

outlined each warrant monitoring as part of the continuous assessment of financial stability risks, 

systemic risk oversight and follow up would be sharpened by provision of a clearer assessment of 

the relative importance attached by FSOC to each area of threat.

41 Moreover, the areas highlighted 

vary in specificity and scale. Some are relatively tightly defined, such as addressing concerns about 

benchmark reference rates, e.g. LIBOR. But others are relative broad and generic, such as the need 

to remain attentive to financial innovation and migration of financial activity beyond the regulatory 

frontier. While avoiding the straitjacket and drawbacks of attempts at precise codifications, a clearer

statement of the emphasis attached to each identified threat, and perhaps an indication of 

perceived likelihood and materiality, would nonetheless help to sharpen the focus, ownership and 

accountability of the collective risk oversight by FSOC member agencies, as well as providing 

additional guidance and clarity to follow up work, as outlined in the following section.42 FSOC clearly 

needs to retain the flexibility to respond to new developments, such as the October 15 Flash Rally. 

The credibility of the FSOC should be strengthened by publishing the Council’s understanding of the 

cause(s) of the incident, its analysis, and proposals to address any systemic weaknesses identified—

in particular those, such as interactions between liquidity, high-frequency trading and rapid price 

movements, that may have implications for other market sectors.

43

27. Systemic risk identification in the U.S. financial system has been significantly enhanced 

by the establishment of the FSOC. Specific recommendations to strengthen the framework are:

 FSOC should set a clear short-term deadline to address outstanding obstacles to data sharing, 

and to agree a flexible, data sharing protocol across member agencies to support collective 

systemic risk oversight.

 FSOC should continue to direct the OFR to prioritize work to address data gaps in short-term 

wholesale funding markets, in nonbank financial intermediation (such as asset management) and 

in interconnectedness indicators across the financial system.

 

41 For example, assigning different threats as high, medium, low likelihood, and high, medium or low impact, 

together with an explanation for the judgment. The assessment could also indicate an assessment of whether risks 

are increasing or decreasing. The OFR is developing analytical tools such as the Financial Stability Monitor which 

could provide useful input into the assessment by FSOC (See OFR Annual Reports for 2013 and 2014).

42 The GAO has supported such a recommendation. http://www.gao.gov/assets/670/665851.pdf.

43 While recognizing the causes of this particular incident are not yet fully understood, it would be helpful for the 

FSOC to provide some public feedback at an early stage.
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 FSOC should publish additional information on the monitoring framework underpinning systemic 

risk identification and on the work of the SRC, to aid transparency and accountability. The 

monitoring framework should set out the responsibilities for monitoring risks beyond the 

regulatory perimeter and risks from global financial developments. 

 FSOC should publish additional guidance in each Annual Report on the materiality the Council 

attaches to each of the identified threats to U.S. financial stability, including a judgment on their

likelihood and impact.

D. Addressing Identified Threats to Financial Stability

28. To ensure that systemic risks are addressed and thus financial stability is preserved, 

FSOC has responsibility for responding to emerging threats to financial stability—the third 

primary purpose set out in the DFA. The effectiveness of the response depends on the strength of 

the policy framework, including: the responsibilities and powers assigned to the authorities; the 

availability and development of appropriate policy tools; and the readiness and willingness to 

deploy them.

29. Primary responsibility for designing and applying prudential standards and 

macroprudential tools remains with the member agencies. FSOC is not a regulatory agency. 

FSOC has specified powers prescribed under the DFA, for example to designate nonbank companies 

for consolidated supervision by the FRB and heightened prudential standards. In this case, the 

higher standards are, however, set by the FRB, although FSOC may make recommendations to the 

FRB for consideration.

44 Similarly, the Council may provide for more stringent regulation of a 

particular activity by issuing recommendations to the primary regulatory agency to apply new or 

heightened standards and safeguards on a comply or explain basis.45 Although a powerful backstop 

provision, even in this case the ultimate responsibility rests with the primary regulatory agency. This 

differs from experience in some countries where the authority most equivalent to FSOC has been 

assigned direct responsibilities for the deployment of certain macroprudential tools.46

30. The key role of FSOC is to strengthen collective ownership of the actions needed to 

address identified risks and to promote, encourage and consider the actions taken by the 

member agencies. FSOC is the coordination agency rather than the decision making body in each 

case. But by bringing together the key decision makers under an overarching framework where they 

are charged to collaborate to respond to emerging financial threats, FSOC has the scope to play a 

powerful role. In particular, the Council provides a structure where members can explain the views 

and proposed actions of their individual member agencies and can coordinate to ensure that actions 

taken are consistent and effective and that there are no gaps. And although FSOC generally has no 

 

44 Section 115 of DFA.

45 Section 120 of DFA.

46 See, for example, Table 11 in the June 2014 report of the European Systemic Risk Board for a discussion of the 

arrangements in Europe: https://www.esrb.europa.eu/pub/html/index.en.html.
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formal powers for decisions on regulatory rules and for the deployment of macroprudential tools, 

the Council may provide valuable guidance and advice to individual regulatory agencies, 

underpinned by the ability to make formal recommendations to regulatory agencies. Adopting a 

policy whereby members agree to formalize the consultation of FSOC as standard practice during 

the consultation process on major new regulatory rules that could impact financial stability47 and on 

the potential new application of macroprudential tools (or tools with a macroprudential impact)48

would further strengthen the collaborative framework and consistency of approach, while respecting 

the current responsibilities of member agencies. 

31. Clarifying and publishing the agreed assignment of objectives, responsibilities and 

timelines for follow up of identified threats would strengthen the effectiveness of risk 

reduction policies. As noted above, the FSOC Annual Report provides a relatively detailed survey of 

identified threats to financial stability. And the Council publishes recommendations of policy actions 

to address the risks. Such recommendations are helpful. But, as highlighted by the GAO,49 the 

current public recommendations often lack specificity and sharpness in respect of the actions 

expected to be taken, the agency or agencies responsible for implementation, and the expected 

timeline for delivery.

50 Although the FSOC Secretariat maintains an internal monitoring system, there 

is no clear public process for tracking the risks or for ensuring follow up. However, FSOC Annual 

Reports include a description of whether progress has been made since the previous Annual Report,

and FSOC minutes and webcasts of open meetings describe follow-up work on a number of the 

recommendations. While recognizing the need to retain flexibility and to strive for ambitious 

objectives that may sometimes be difficult to attain, the force and impact of the policy 

recommendations would be strengthened by sharpening the specificity and focus of the actions 

FSOC recommends to address each identified priority threat, by stating clearly which agency is (or 

agencies in collaboration are) responsible to deliver them, and by clear specification of the expected 

timeline for implementation and reporting of the results to guard against slippage and delay. The 

recommendations should be published in the FSOC Annual Report and followed up in the 

subsequent meeting minutes and Annual Report. 

32. Actions are continuing to strengthen the macroprudential policy framework and 

toolkit to address emerging systemic threats. In general, macroprudential policy pursues three 

interlocking objectives: to increase the resilience of the system to aggregate shocks by building 

additional buffers; to address structural vulnerabilities or points of weakness in the financial system, 

 

47 Some proposed rules have been presented to FSOC for consultation in advance of finalization, for example the 

Federal Reserve Foreign Banking Organization (FBO) rule and the CFPB QM rule. In addition, outside of FSOC, 

member agencies have coordinated on key rulemakings including the Volcker rule, risk retention rule, and OTC 

derivatives rule, as well as capital, liquidity and bank stress testing requirements.

48 The QM is not a macroprudential tool, but has a macroprudential read-across. 

49 See http://www.gao.gov/assets/650/648064.pdf and http://www.gao.gov/assets/670/665851.pdf.

50 In a review published in September 2014, the GAO stated that the office “maintains that action is needed as its past 

work has shown that the lack of clear roles and coordination can lead to duplication, confusion, and regulatory gaps.”

http://www.gao.gov/assets/670/665851.pdf.
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arising from interlinkages and the critical role of certain financial institutions or infrastructure; and to 

contain the systemic vulnerabilities arising from procyclical links between credit provision and asset 

prices, and from the buildup of leverage and funding weaknesses.51 Policy tools to support these 

goals are typically separated into two broad categories: 1) structural measures which address points 

of weakness and focus on building additional resilience and buttresses against a range of potential 

shocks; and 2) counter-cyclical measures which act to limit the cyclical buildup of systemic risks. A 

summary of the main tools in place, under preparation, and under review in the United States is 

provided in Appendix 3.

33. The United States is making good progress to raise the structural resilience of the 

banking system to weather shocks. As set out in the DFA, the U.S. authorities are introducing 

stronger prudential standards as well as more intense supervision for large, banking institutions, to 

address the greater risks that they pose to the overall financial system.52 In particular, the largest 

banks will be subject to additional capital requirements, enhanced leverage and liquidity standards,

and additional restrictions on single counterparty exposure limits. The rules build on international 

standards but in many cases have been reinforced53—for example, under a notice of proposed 

rulemaking provided for comment in December 2014, the implementation of additional capital 

surcharges for the 8 largest U.S. globally systemic banks (G-SIBs) will be altered to include a specific 

element for short-term wholesale funding risks,

54 and under rules set out in 2014, the supplementary 

leverage ratio and liquidity standards for G-SIBs have been enhanced above the Basel III standard. 

Large banking organizations must also participate in regular, intense stress testing exercises, both in 

relation to capital and liquidity,55 which are applied ‘macroprudentially’ to take specific account of 

size and connectedness across the system, and to assess the preparedness of firms to address 

potential systemic risks.56 And large BHCs must also prepare resolution plans for scrutiny by the FRB

and FDIC.

34. The United States’ ability to assess systemic risk related to designated FMUs, ensure 

consistent application of international risk management standards across the designated 

FMUs, and coordinate policy actions has improved substantially. The DFA entails major 

 

51 See IMF ‘Key aspects of macroprudential policy’ June 2013.

52 The U.S. framework categorizes banks according to size (such as assets >$10bn; >$50bn; >250bn or >$10bn in 

foreign assets). In addition, a category of global systemically important banks (G-SIBs) is proposed by the FRB based 

on methods drawing on indicators of size, interconnectedness, cross-jurisdictional activity, complexity, substitutability 

and use of short-term funding. Under the proposed methodology, 8 large U.S. bank holding companies would 

currently be identified as G-SIBs. Regulatory standards toughen as size grows. 

53 In some cases the rules are at the proposal stage. The stronger regulatory standards will be phased in over the 

next 2-3 years.

54 The proposed framework for capital surcharges would be phased in from January 2016 to the end of 2018, being 

fully effective from January 2019. http://www.federalreserve.gov/newsevents/press/bcreg/20141209a.htm.

55 The Dodd-Frank stress tests, the Comprehensive Capital Assessment Review (CCAR) and the Comprehensive 

Liquidity Assessment Review (CLAR) http://www.federalreserve.gov/newsevents/speech/tarullo20140508a.htm.

56 See the companion Technical Note on Stress Testing. 
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INTERNATIONAL MONETARY FUND 25

improvements that should help to reduce systemic risks related to U.S. FMIs. In addition to

providing FSOC with the responsibility to designate systemically important FMUs that have to 

comply with enhanced risk management standards prescribed by the FRB, SEC or CFTC, as 

applicable, the DFA also significantly improves cooperation among domestic supervisory agencies. It

expands the FRB’s role, in coordination with the CFTC and the SEC, in supervision, examination, and 

rule review, establishing a more consistent framework across supervisory authorities (see section 

below).

35. Progress on developing stronger standards for systemic nonbank financial institutions 

(NBFIs) remains work in progress. As noted above, the FSOC has responsibility and powers to 

designate NBFIs for consolidated supervision by the FRB and the application of higher prudential 

standards. The Council has published detailed information on the process, procedures and criteria 

adopted for the rules underpinning the systemic designation of nonbank financial companies and 

for financial market utilities, as well as the assessments of individual cases.57,58 Three rounds of public 

consultation were held in advance of the publication of the final rule on systemic designation for 

NBFIs.

59 Four NBFIs have been designated so far (AIG, GE Capital and Prudential Financial in 2013 

and MetLife in 2014).

60,61 Designated nonbanks will be subject to enhanced prudential requirements, 

as well as to intense stress tests. The Federal Reserve is currently developing proposals for review 

and consultation—FSOC will review the proposals to judge whether it wishes to make a 

recommendation to the FRB.

 

57 The DFA requires the Council to assess ten considerations when evaluating NBFIs. FSOC has grouped these into a 

six category framework—three elements which support the Council’s assessment of the potential impact of a 

company’s financial distress on the broader economy (size, substitutability, and interconnectedness), and three that 

support the Council’s assessment of a company’s vulnerability to financial distress (leverage, liquidity risk and 

maturity mismatch, and existing regulatory authority). FSOC has defined and published quantitative criteria to 

identify companies for evaluation under the procedure, as the first in a three-stage process for the assessment. At the 

end of step 3, FSOC may propose a determination (based on a two-thirds majority of voting members, including an 

affirmative vote by the Chair) and provide that to the company in writing. The company may request a hearing to 

contest the determination. For a final determination, the Council must then vote again subject to the same threshold. 

58 The first step of the three-stage process identifies candidates for possible designation for deeper review. The 

second stage provides an initial assessment. The third stage is a detailed in-depth review to support a determination. 

Given the timelines involved, it is important to proceed expeditiously with each case, to resolve uncertainty and 

support rapid decisions under stressed conditions in particular.

59 FSOC announced changes in the designation process in February 2015 to increase transparency to the general 

public and to strengthen engagement with companies under consideration for designation. This addressed a number 

of previous GAO recommendations encouraging FSOC to publish additional material to support the designation 

process. The GAO has also recommended that FSOC sets out the framework that it will apply to assess the impact of 

the designation process, which is required every 5 years (the first study is due by January 2016).

http://www.treasury.gov/initiatives/fsoc/designations/Documents/Supplemental%20Procedures%20Related%20to%2

0Nonbank%20Financial%20Company%20Determinations%20-%20February%202015.pdf.

60 MetLife has recently applied to the U.S. courts contesting the designation decision. 

61 The cases are reviewed annually—the designations of AIG, GE Capital, and Prudential Financial were not rescinded 

based on the 2014 review. 
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26 INTERNATIONAL MONETARY FUND

36. Stronger prudential standards for systemically important banks and nonbanks will 

increase the resilience of the U.S financial system. And together with the application of a robust 

resolution regime,62 the stronger standards will help to promote market discipline and lower moral 

hazard, the second primary purpose of FSOC. Although they promote resilience of key institutions 

against a wide range of shocks, the measures are not designed to address risks to the system from a 

concentrated buildup in sectoral exposures, such as to the housing market or commercial real 

estate, or from rapid credit growth, or from the potential for herding behavior in particular financial 

markets that can precipitate fire sales and a sudden evaporation of market liquidity.

37. The United States currently has a relatively limited set of “time varying” tools to 

address a build-up of cyclical and sectoral pressures on financial stability. To implement the 

agreed international standard, the FRB, OCC, and FDIC have introduced rules to implement a 

countercyclical capital buffer for the largest banks in the U.S system.

63 Triggers and standards for 

implementation of the tool are under design, but are not yet in place, however. Moreover, currently, 

the United States has few additional tools to contain a cyclical build-up of risk.

64 This is a deficiency 

in the current framework which is important for FSOC member agencies to remedy. For example, the 

United States does not have the flexible tools that have been applied in other jurisdictions to 

address a build-up of risks in housing markets or property markets, such as loan to value ratios or 

debt to income ratios.65,66 And while tools such as increases in sectoral risk weights on mortgage 

market exposures or on other areas of identified risk could be applied in principle either directly by 

regulators or indirectly through stress testing, such instruments would be slow to implement 

(requiring perhaps upward of a year to adjust) and may not be particularly effective.

67 Moreover, 

they would apply only to banks rather than to overall credit intermediation. CFPB rules apply to the 

market as a whole, but the CFPB does not currently have a financial stability mandate that would 

allow for a macroprudential usage. Similarly, FHA guarantees could, in principle, be structured for 

macroprudential purposes. (A review of housing finance risks and issues is contained in the final 

section of this note).

 

62 See companion note for assessment review of the U.S. resolution framework against the FSB Key Attributes for 

Resolution Regimes. 

63 The buffer applies only to firms with assets >$250 bn or >$10bn in foreign assets. The framework will be phased in 

over the 2016 to 2019 period. One year notification of application is required in normal circumstances (there is 

provision for agencies to require faster implementation if required).

64 See the OFR 2014 Annual Report and speech by FRB Governor Brainard. 

http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.

78 The criteria for Qualifying Residential Mortgages (QRM) governing risk retention requirements in respect of 

securitization agreed by 6 regulatory agencies (Federal Reserve, OCC, FDIC, FHFA, SEC and HUD) aligns the QRM 

standard with that for Qualifying Mortgages (QM) set by the CFPB to meet consumer protection goals. The QRM 

standards will be reviewed after 5 years (or earlier at the request of one of the agencies). The CFPB QM standard 

includes a requirement that debt service to income ratios must be 43 percent or less. There is no current plan or 

intention to use the QM or QRM instruments as potential time-varying counter-cyclical macroprudential tools. 

66 Banking agencies’ residential real estate standards do establish supervisory LTV limits for commercial and 

construction loans, but these do not vary in the light of response to the credit cycle.

67http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.
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INTERNATIONAL MONETARY FUND 27

38. Developing additional tools to strengthen market resilience should be a continuing 

high priority. The U.S. financial system is heavily dependent on capital markets and on nonbank 

intermediation. Notwithstanding the very welcome measures to strengthen the banking system, the 

authorities recognize the importance of additional policy actions to improve the monitoring and 

containment of risks arising in the ‘shadow banking’ (or market-based) financing system, and to 

address weaknesses in market financing structures that give rise to systemic liquidity risks. As 

highlighted in the OFR 2014 Annual Report: “although supervisors have firm-specific tools...they have 

few system-wide tools to address market and credit excesses.” In recent years, as outlined in the 

subsequent sections, policy actions have been taken to reduce vulnerabilities in triparty repo 

markets and to agree and finalize new regulations for MMMFs following the proposed 

recommendation from FSOC. Further work is underway to reconsider minimum margin 

requirements on secured credit,

68 potentially extending beyond the international proposals currently 

under consultation to introduce minimum margin requirements for non-centrally cleared securities 

financing transactions.69 Detailed reviews of systemic liquidity risks and of risks in market-based 

financing together with recommendations to address them are contained in the following sections 

of this note.

39. In sum, the U.S. authorities have made significant advances in developing new tools 

and implementing an improved framework for addressing identified threats to financial 

stability. But some gaps remain in the toolkit and readiness to deploy macroprudential policies. The 

following recommendations are put forward:

 For each identified material threat to financial stability highlighted in the Annual Report, FSOC 

should publish specific follow up actions to address each identified priority threat, stating clearly 

where responsibility for delivery of the actions lies, and specifying an agreed timeline for 

implementation and reporting of the results.

 To strengthen coordination and collective ownership of the risk mitigation actions, members 

should consult FSOC as standard practice on the development and implementation of major new 

regulatory rules that could impact financial stability.

 At a point in the conjuncture where financial stability risks appear to be building, FSOC and its 

member agencies should prioritize the development of the U.S. macroprudential toolkit, focusing 

particularly on developing new time-varying measures to address the buildup of cyclical and 

sectoral risks and to strengthen the resilience of financial markets to run risks and fire sales. 

 FSOC and its member agencies should ensure that the instruments are ready to use, and that the 

appropriate legal authorities are in place. Members should consult FSOC as standard practice on 

the potential new application of macroprudential tools. 

 

68 http://www.federalreserve.gov/newsevents/speech/tarullo20131122a.htm and 

http://www.federalreserve.gov/newsevents/speech/tarullo20150130a.htm .

69 http://www.financialstabilityboard.org/2014/10/pr_141013/.
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28 INTERNATIONAL MONETARY FUND

 To provide clarity on the toolkit and on the readiness to deploy the instruments (as well as 

identifying remaining gaps), FSOC is encouraged to publish a summary of the U.S. toolkit 

identifying which tools are available to address particular types of risk and which agency/ 

agencies have responsibility to deploy them, including the definition of triggers and the 

framework/approach to implementation. Updates should be published periodically as the toolkit 

is enhanced.

E. Systemic Risks—A Closer Look at Some Key Concerns

40. An evaporation of market liquidity was a key amplifier and transmission channel in the 

global financial crisis, as highlighted in the previous FSAP. The mission consequently reviewed

several key elements linked to liquidity provision in greater depth; namely the infrastructures and 

markets that channel liquidity and funds through the financial system, together with the U.S. system 

of housing finance that was one of the focal points of the crisis. The assessment below covers in 

turn: systemic liquidity and liquidity backstops; market-based finance; financial market infrastructure; 

and housing finance. 70

SYSTEMIC LIQUIDITY AND LIQUIDITY BACKSTOPS

A. Introduction 

41. Freezing of liquidity was a key trigger for the crisis. Liquidity that is traded freely 

between banks and between key non-bank financial institutions is the cornerstone of a wellfunctioning financial sector. During the crisis, uncertainty about the financial health of counterparties 

led to a sharp drop in fed funds volumes traded and a significant widening in the OIS-LIBOR spread 

(a measure of bank credit risk). Non-bank activity also suffered as BDs at times had difficulty 

transacting even in the safest form of repos (backed by U.S. Treasuries). 

42. Progress has been made in addressing these fault-lines though vulnerabilities may be 

masked by extraordinary liquidity conditions in the context of Quantitative Easing (QE).

Although volumes in the fed funds market remain low, that is because of the substantially-increased 

reserve balances held by banks as a consequence of QE. Bank balance sheet repair, including more 

capital and liquidity, has helped address vulnerabilities, although it is hard to be sure how the 

interbank markets will function post-exit from QE or in another crisis. Repo markets too have 

recovered though activity remains lower than pre-crisis.

43. A focal point of liquidity stress was the tri-party repo market where deficiencies were 

identified in the operations, and in the regulation of some major participants (Appendix 4).

BDs, the main borrowers through the tri-party repo market, were unable to obtain funding, there 

was a run on MMMFs, significant losses were incurred in a number of securities-lending cash 

 

70 See IMF Global Financial Stability Reports: April 2015 and October 2014 for additional discussion of the risks to the 

global financial system.
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INTERNATIONAL MONETARY FUND 29

collateral reinvestments and the tri-party operational architecture was recognized as posing large 

risks through the massive intra-day exposures being run at the two clearing banks.

44. Flexible measures put into place quickly ameliorated liquidity strains, while some 

underlying features of the financial sector architecture also helped. A wide variety of programs 

were offered, targeted at different market segments and in some cases to overcome perceived 

stigma attached to use of the discount window. Further, a unique feature of the U.S. financial 

architecture—the Federal Home Loan Banks (FHLBs)—eased liquidity strains because the member 

banks were able increase borrowing from the FHLBs by some $500 billion during the early part of 

the crisis at rates lower than those available from the Fed’s discount window and without any 

accompanying stigma. The FHLBs are able to tap funding markets during times of stress largely 

because of their status as GSEs, which carries with it the perception by market participants of implicit 

support from the U.S. Government. 

45. Considerable progress has been made in a number of areas. Reform of MMMFs has 

reduced the systemic risks posed by this sector, BD risks are better contained and the revised triparty operational architecture has all but eliminated intra-day credit exposures. This section looks 

more closely at this progress and further steps that could be taken to address systemic liquidity 

vulnerabilities.

B. Tri-party Repo Infrastructure

46. A major achievement is the reduction in intra-day credit provided by the clearing 

banks. With the Federal Reserve Bank of New York (FRBNY) having taken the lead, the tri-party repo 

reform process has addressed the major risk identified during the crisis: intra-day credit extended by 

clearing banks has fallen from 100 percent of the repo activity down to less than five percent (Figure 

1).

71 This reduction was achieved by reengineering the settlement cycle and improving the collateral 

allocation processes. By end-March 2015 the clearing banks met the set objective of limiting intraday credit to a maximum of 10 percent of a dealer’s notional tri-party book, through pre-committed 

lines (which incur a capital charge). One final piece of the reform process, integration of the General 

Collateral Financing (GCF) segment (for inter-dealer activity), is however yet to be completed.72

47. Firesale risk was highlighted as a major concern by the FRBNY. Pre-default risks have 

been reduced through the regulatory impacts on MMMFs and BDs. Post-default firesale risks remain 

but may be manageable because systemically important BDs designated at the time of failure (DFA 

Title II) could come under the FDIC’s Orderly Liquidation Authority. Other BDs may be subject to the 

 

71 A Taskforce on Tri-Party Repo Infrastructure was formed in 2009. This private sector body, sponsored by the 

FRBNY, produced its final report in February 2012. The Fed then took direct oversight over implementation of the 

reforms highlighting three areas of concern; excessive intra-day risks to the clearing banks, weak liquidity and credit 

management practices, and lack of planning for the orderly liquidation of a defaulted dealer’s collateral (i.e., firesale 

risks).

72 The total amount of GCF repo net cash settled on March 10, 2015 was $130 billion compared to the tri-party repo 

market of $1.6 trillion. 
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30 INTERNATIONAL MONETARY FUND

Securities Investor Protection Act (SIPA) which allows for a stay of four to five days for repos, but the 

interactions between the DFA and SIPA are complex, with uncertain implications.

48. The tri-party repo market relies on two clearing banks while alternative private sector 

models are being considered. Failure of either clearer would have a major impact of U.S. financial 

markets and measures should be considered to reduce this reliance. Some private sector initiatives 

involving the use of CCPs are under development and might have benefits including risk reduction 

through netting, improved risk management with a transparent risk waterfall, and with a centralized 

liquidation processing in the event of participant default. Nevertheless, the benefits of any such 

scheme would be limited if ultimately the transactions are settled through the same clearing banks 

as are currently used in the tri-party repo market.

 An important next step to reducing the risks around tri-party repo is to reduce reliance on the two 

clearing banks, for example by developing options that might allow settlement in central bank 

funds.

Figure 1. Intraday Credit as of May 2014

Source: Federal Reserve Bank of New York.

C. Repo Safe Harbors 

49. Just prior to the financial crisis, ‘safe harbor’ for repo collateral was significantly 

expanded. Privileges accorded to cash lenders in repo transactions that allow immediate possession 

and sale of securities in the event of borrower default provide a safe harbor from bankruptcy 

proceedings. The securities afforded safe harbor in such transactions were expanded in 2005 to 

include mortgage loans, mortgage-related securities, interests in mortgage-related securities and 

mortgage loans and qualified foreign securities. This move pre-dated a major crisis with mortgagerelated securities and repos at its center, by around three years. While numerous factors that 
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INTERNATIONAL MONETARY FUND 31

contributed to the severity of the crisis have been addressed, the consequences of the 2005 

expansion of the safe harbor provisions should be assessed. 73 The intermediation and liquidity 

benefits of such a move may be outweighed by the increased risks to financial stability—arising 

from the increased use of relatively illiquid collateral and higher levels of balance sheet 

encumbrance. If a wider pool of repo collateral is to maintain safe harbor status, it is important that 

structures are put in place to mitigate the increased risks of operating with weaker collateral. 

 The authorities are encouraged to consider reviewing the financial stability impact of allowing 

mortgage-backed securities and other illiquid loans and securities safe harbor from bankruptcy 

proceedings.

D. Broker-dealers

50. Many BDs—important users of tri-party repo funding—now operate within BHC 

structures subject to enhanced prudential regulation, thereby reducing vulnerabilities in the 

tri-party repo market. Leading up to the crisis many large BDs were outside of BHC structures and, 

more generally, securities intermediaries including affiliates of large banking organizations displayed

lax credit and liquidity risk management practices and utilized excessive leverage. During the crisis

some incurred substantial losses and faced major funding difficulties. Motivated by a desire to

bolster market confidence in them and with industry consolidation resulting from the financial crisis, 

essentially all the largest independent securities firms reorganized themselves as BHCs or were 

acquired by BHCs during the crisis. The post-crisis regulatory response, with strengthened liquidity 

regulation (the liquidity coverage ratio) and supervisory standards, has markedly improved liquidity

risk management practices of borrowers. The degree of maturity transformation has reduced, with

tri-party repo books termed out. Systemic liquidity risks are therefore reduced, in large part because 

much short-term financing activity is now contained within the much-tightened regulatory 

framework where newly-strengthened capital and liquidity standards apply.74

51. The regulatory framework at the BD level has not been adequately addressed, leaving

some risk of regulatory arbitrage in the future. The moves by BDs to operate within BHC 

structures were voluntary, and conceivably entities not regulated as BHCs could again increase their 

liquidity and maturity transformation activities to pose a systemic risk.75 Regulation at the BHC level, 

while already having had a clear impact, is no substitute for appropriate regulation at the BD level.

 

73 Since in the event of default, safe harbor permits the cash provider to sell the asset immediately, rather than being 

caught by a bankruptcy stay, in a time of market stress the securities could be dumped on the market (asset firesales), exacerbating market stress.

74 Basel III capital rules, LCR and recent FRB proposal on capital charge on STF.

75 This is perhaps a small risk at this juncture given heightened counterparty scrutiny and with the prospect of FSOC 

designation should an entity grow to be of sufficient size and importance.
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32 INTERNATIONAL MONETARY FUND

The SEC is considering new rules on capital, liquidity and leverage, yet seven years on from the crisis 

little has changed in this area.76

 Completion of the review of regulation at the BD level is a priority. The SEC should move to 

finalize and implement rule changes to contain risk taking thereby reducing the prospect of 

regulatory arbitrage in the future.

E. Money Market Mutual Funds

52. MMMFs—important providers of funding to the tri-party repo market, issue moneylike investment shares, undertaking liquidity and maturity transformation (a ‘bank-like’ 

activity) while not being subjected to reserve requirements and deposit insurance levies.77

During the crisis this sector suffered a run, with the Treasury responding by providing a credit

guarantee.

78 The Fed also instituted several liquidity facilities intended to help stabilize the sector.

Changes to the law may mean, however, that a similarly speedy response to stress would be 

considerably more difficult in the future. Pending implementation of the SEC’s 2014 rule 

amendments, all MMMFs enjoy regulatory features that allow amortized cost accounting treatment 

and stable net asset values (NAVs) for reporting and redemption—a practice that supports the 

appearance of money-like liabilities while simplifying the tax treatment for investors. Assets under 

management (AuM) have stabilized at around $2.7 trillion although when measured as a percentage 

of depository institutions’ deposits, they have declined from a peak of 43 percent in 2008 to 

22 percent at the end of 2014 (Figure 2).

53. Several changes were introduced in 2010 to reduce systemic risks. Liquidity rules 

implemented in 2010 were calibrated at a level that the SEC estimate would have been sufficient to 

meet approximately 90 percent of redemptions in retail and institutional funds during the week of 

the greatest redemption pressure during the crisis. These rules now require funds to hold 10 percent 

of the portfolio in overnight cash and U.S. Treasuries, with 30 percent maturing within five days. A 

maximum of five percent can be held in illiquid securities and the maximum weighted average 

maturity of the portfolio is 60 days. Credit quality standards were also tightened, requiring the fund 

to ascertain the creditworthiness of the repo counterparty—previously the collateral had to be 

highly rated with no requirement with respect to the creditworthiness of the counterpart when the 

MMMF looked to the issuer of collateral to meet credit quality standards.

79 Funds must also perform 

 

76 The SEC is reviewing capital, liquidity and leverage rules with three specific provisions under consideration: 

1) a minimum capital requirement of $5 billion, 2) a requirement that liquidity rules be met at the broker-dealer level, 

and 3) a maximum leverage ratio for broker-dealers.

77 The SEC’s rule 2a-7 under the Investment Company Act 1940 defines the criteria that funds must meet to qualify as 

money market mutual funds.

78 The Treasury guaranteed the whole $3.3 trillion market and a series of liquidity facilities were subsequently 

introduced by the Fed. 

79 Reportedly much of the tri-party repo business was conducted on the basis of the creditworthiness of the 

counterpart since MMMFs were undertaking repos with collateral that they could not hold outright if the counterpart 

defaulted. 
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INTERNATIONAL MONETARY FUND 33

regular stress tests to ascertain their ability to maintain a stable $1 NAV in the event of changes in 

interest rates and credit spreads, defaults, and redemptions.

54. MMMFs are able to collateralize repos with securities that they cannot own outright.

Funds are allowed to ‘look through’ repo collateral providing they evaluate the creditworthiness of 

the counterparty. MMMFs could be in breach of SEC rules—notably those governing maturity of 

assets—where they take possession of the collateral after a counterpart failure, perhaps leading to 

forced sales and broader market disruption. General ex ante guidance on how funds should act, 

should such an event occur, has not been published. 

 The authorities should consider reducing the risks of forced sales by restricting the repo collateral 

to securities that the MMMFs are able to hold outright.80

Figure 2. MMMFs Funds by Type

Sources: Investment Company Institute and IMF estimates.

55. The SEC will implement new rules in 2016 requiring some funds to move to variable 

NAVs. Funds will be classified as: 1) government funds—if at least 99.5 percent of the assets are in 

‘cash’ and treasury securities, 2) retail funds—where beneficial ownership is limited to natural 

persons, or 3) institutional funds—all other funds. While the first two categories can continue to use 

constant NAVs, institutional funds will be required to move to a variable NAV. The SEC is able to 

determine the definition of ‘cash equivalent’ under GAAP and they have continued to include all 

MMMFs, including those that will move to a variable NAV, within the ‘cash equivalent’ definition. 

 

80 U.S. Treasury securities form the bulk of the collateral taken by MMMFs. While there is no credit risk, there could 

be substantial interest rate risk. For instance, a sharp increase in term yields could bring down a leveraged brokerdealer and leave MMMFs owning 30 year bonds whose value had fallen by 10–20 percent, and that they would have 

to sell immediately. 

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Non-taxable Prime Government Total Funds / Deposits (RHS) USD Trillions
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34 INTERNATIONAL MONETARY FUND

Importantly, the reforms will also require private liquidity funds that operate like MMMFs to report 

monthly, thereby allowing for close monitoring of activities moving outside of the regulatory 

perimeter. 

56. Other changes to come into effect in 2016 give all MMMFs the ability to impose fees 

and gates in a stress event. For all funds except Government funds, redemption fees of up to 

2 percent will be allowed if the weekly liquid assets fall below 30 percent. Where weekly liquid assets 

fall below 10 percent, a fee of at least one percent is mandatory.

81 Redemptions can be suspended 

(i.e., gated) where the weekly liquid assets fall below 30 percent. The gate must be lifted within 

10 days and cannot be used for more than 10 days in a 90-day period. The existence of redemption 

gates may however lead to damaging pre-emptive runs. When investors perceive an increased risk 

of the MMMF becoming illiquid, they are likely to try to run before the gates are imposed. Further, a 

fund seeking to maximize value for its own investors would likely not consider the externalities of 

imposing gates, and once it had imposed gates, contagion to other MMMFs is possible given the 

similarity of portfolios across the industry.82 Government funds are not covered by these provisions 

but may include the use of redemption fees and gates provided such use is properly disclosed in the 

prospectus.

57. Given the three newly established categories of MMMFs, it is not clear what 

proportion of the current funds under management would fall into each category, but what is 

clear is that fund managers will modify their product suite in response to the new regulations.

The Investment Company Institute estimated that less than a quarter of funds would be required to 

move to a variable NAV. But seemingly more important than the NAV is the potential imposition of 

gates and fees. Some managers provide sweep arrangements into MMMFs where the potential use 

of gates is inconsistent with investors’ primary objective which is liquidity. A leading fund manager 

has already announced a repositioning of its funds in favor of Government MMMFs so that it can 

continue to offer a product that is free from redemption restrictions. Industry sources suggested 

that there could be a sizeable shift towards Government funds in the lead up to the implementation 

of the new rules. Such a shift is unlikely to be disruptive given recent publicity about the changes 

and in an environment of still abundant liquidity. However longer-term, the structural shift away 

from credit product will mean that private sector borrowers will likely have to pay relatively more for 

funds as compared to the Government at a time when other regulatory initiatives (e.g., LCR) have 

also increased the demand for high quality liquid assets. The impact could also be felt beyond the 

United States given that MMMFs have in the past been buyers of commercial paper issued by 

foreign banks (notably from Europe and Australasia). 

58. While progress has been made, the fundamental flaws in MMMFs have not been 

addressed: a key element in addressing this should be the imposition of variable NAVs. The 

 

81 An exception is possible if the directors believe that such a fee is not in the best interest of the fund. 

82 The FRBNY (Staff Report April 2014: Gates, Fees and Preemptive Runs) assessed the impact of gates and concluded 

that they could cause a pre-emptive run from funds; SEC Commissioner Aguilar (Public Statement July 23, 2014) 

rejected the conclusion.
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recent reform proposals by the U.S. authorities considered two tacks—to regulate them more like 

banks (with a capital buffer), or more like traditional mutual funds (with a variable NAV)—yet the 

government and retail funds have neither a capital buffer nor a variable NAV. And while retail funds 

can impose fees and gates during times of stress, Government funds—which it seems will account 

for a significant portion of total MMMFs assets—have neither a variable NAV nor any mechanism to 

manage redemption pressures during periods of stress. Although risks with Government MMMFs 

are low, recent history provides an example how even this seemingly safest of all short-term assets 

could give rise to redemption pressures. For example, in October 2013 as debt ceiling negotiations 

were prolonged there was a real prospect that some Treasury securities were not going to be 

redeemed on their due dates. With investors treating their units in the funds as money-like liabilities, 

together with a commitment to a constant NAV and with no mechanism to manage redemption 

risks, the scene could again be set for an investor run, albeit under quite different circumstances 

than in 2008. 

 Variable NAVs should be applied to all MMMFs thereby aligning the treatment with other openended mutual funds. 

 FSOC could consider promoting commonly-agreed definitions of ‘cash’ and ‘cash equivalent,’ and 

metrics for judging the liquidity of assets.83

F. Fed Exit and Financial Stability

59. The Fed has ended QE and has signaled a tightening in monetary conditions in 2015 

(Box 2). To ensure control over monetary conditions in the tightening phase the Fed has introduced 

new instruments and expanded its eligible counterparts much beyond its traditionally short list of 

primary dealers to include banks, MMMFs and certain GSEs. Potentially this approach increases 

financial stability risks, especially where the supply of safe assets is unconstrained and is offered at a 

fixed interest rate (i.e., a fixed-rate full-allotment mechanism). The risks arise because the MMMF 

segment is a major cash-provider in short-term funding markets and a sudden shift in investment by 

these institutions into the Fed’s Overnight Reverse Repo (ONRRP) instrument could exacerbate 

liquidity pressures for their traditional borrowers.

60. Minor stresses could more readily escalate into financial disruption if investors run 

into MMMFs perceived as offering safe assets. Such action could result in an abrupt drop in the 

supply of short-term funding together with a run of non-insured deposits from the banking sector.

The Fed has recognized these risks indicating that it will cap access to instruments targeted at the 

nonbank sector both at the counterparty and aggregate levels. The caps will keep the banking 

sector more liquid for longer than might otherwise have been the case during the tightening phase. 

This approach lessens the risk of disruption that could have arisen with a more active reduction in 

liquidity, but may increase the challenge of controlling short-term money market rates given the 

uncertainty about the functioning of the fed funds market after the prolonged period of abundant 

 

83 This would inter alia support the monitoring of risk management by some financial intermediaries.
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36 INTERNATIONAL MONETARY FUND

liquidity and in light of the new regulatory environment (i.e., LCR). While the Fed has conducted a 

considerable amount of testing of its new instruments, there is some uncertainty about the demand 

for these instruments once interest rates move away from the zero lower bound. 

Box 2. Normalizing Monetary Policy, Reverse Repos and Financial Stability1/

The Fed’s operating target for monetary policy is the fed funds rate—a market rate of transactions 

between entities that have accounts at the Fed, not all of which are depository institutions. The Fed 

remunerates only depository institutions for reserve balances. The rate it pays (interest on excess reserves, or 

IOER) is one instrument used to align the Fed funds rate with the announced target rate (currently 0–25 

basis points). Fed funds trades below the IOER primarily because some entities do not have access to IOER, 

and banks face an array of balance sheet costs that may be an impediment to arbitrage in the funds market.

QE involved the Fed purchasing assets—U.S. Treasury and agency securities—mainly from non-banks. 

The purchase program increased the amount of securities held on the Fed’s balance sheet, with the 

counterpart being an increase in excess reserves; from around $2 billion pre-crisis to $2.6 trillion in October 

2014 (at the conclusion of the program). An implementation risk during normalization is that an increase in 

the fed funds target might not translate one-for-one into a tightening in short-term money-market rates 

more generally—that is, some short rates get left behind, there is poor transmission along the yield curve, 

and the credibility in the Fed’s ability to control monetary conditions is undermined.

Accordingly, the Fed has modified its operating framework by: 1) introducing new instruments to 

strengthen the interest rate floor and drain reserves—overnight reverse repos (ONRRP), term-reverse repos, 

and term-deposits (for depository institutions only), and 2) expanding the market operations counterparts 

that it deals with beyond the pre-crisis primary dealer category (21 dealers) to 164, made up of 106 MMMFs, 

22 broker-dealers, 24 depository institutions, and 12 GSEs. With no precedent for tightening commencing 

from such a large balance sheet, the Fed has conducted tests to better understand the demand for each 

instrument and the impact on interest rates (Figure 3).

An expanded list of counterparts and new instruments potentially increases financial stability risks, in 

particular: 1) disruption to short-term funding markets—MMMFs as the main providers of funds through 

repo markets could abruptly switch to the Fed’s facilities causing dislocation in funding and asset markets 

and 2) disintermediation of the banking system—where uninsured deposits flowed out of banks to MMMFs 

in a flight to safety event where investors perceived MMMFs as being safer (because of their access to safe 

assets).

The Fed has signaled that it will manage the financial stability risks through the use of caps on the 

ONRRP (by counterparty and in aggregate). Limiting non-bank flows to the Fed through quantitative 

limits on its instruments will mitigate the financial stability risks. The extended period of testing of the new 

instruments should allow for adequate control over monetary conditions during the normalization period 

and importantly the Fed has stated that the ONRRP will be phased out when no longer needed to control 

the fed funds rate.2/

______________________________________

1/ See also IMF: USA Selected Issues Paper: The Operational Framework for Monetary Policy: July 2014, and FRB: Overnight RRP 

Operations as a Monetary Policy Tool: Some Design Considerations 2015-010.

2/ Board of Governors of the Federal Reserve System: Press Release September 17, 2014.
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INTERNATIONAL MONETARY FUND 37

Figure 3. ONRRP and Selected Interest Rates

Sources: Bloomberg and IMF estimates. 

G. Data Gaps

61. The repo and securities lending markets are large and highly interconnected. In the 

United States, three segments are relevant: tri-party repo, bi-lateral repo and securities lending. Triparty repo volumes are known, having fallen from a peak of $2.8 trillion pre-crisis to $1.5 trillion. But 

it is widely expressed that there is considerable uncertainty about the scale and nature of activity in 

the bi-lateral repo and securities lending markets. The Fed publishes weekly data on dealer activity 

with volumes outstanding at February 25, 2015 for repos of $1.7 trillion and for reverse repos 

$2.1 trillion but these numbers include both tri-party and bi-lateral activity and need to be adjusted

for activity between the dealers to avoid double counting. Further some private firms publish data 

on securities lending transactions. U.S. Treasuries and government agency securities make up 

around 80 percent of the collateral provided in tri-party repo transactions (Figure 4) with haircuts 

generally higher than those recommended by the FSB (Figure 5), particularly with regard to 

Treasuries given that the FSB recommendations exclude sovereign debt.84

 

84 FSB: Regulatory framework for haircuts on centrally cleared securities financing transactions—October 2014.

0

50

100

150

200

250

300

350

400

0

0.05

0.1

0.15

0.2

0.25

0.3

ONRRP volume (RHS) DTCC GCF Repo Index

Fed Funds Effective Rate US ONRRP Rate

IOER Percent Billions
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38 INTERNATIONAL MONETARY FUND

Figure 4. TPR Collateral Figure 5. TPR Haircuts January 2015

Sources: FRBNY and IMF calculations. Sources: FRBNY and IMF calculations.

62. The U.S. authorities recognize that data limitations prevent a consolidated assessment 

of trends and risks across repo and securities lending markets. The OFR together with the Fed

and the SEC are working on pilot surveys for bi-lateral and securities lending activity which initially 

cover a selection of BDs and agent lenders. These initiatives are encouraging, and could be 

complemented by:

 Publishing more granular data on tri-party repos—including on cash providers, repo maturities 

and collateral type and maturity.

H. Liquidity Backstops

63. Official sector liquidity assistance played a vital role in preserving financial system 

functioning during the crisis. Financial system safety nets nonetheless may have an impact on risktaking incentives and so require very careful design. The current U.S. arrangements and the changes 

introduced since the crisis were reviewed.

64. Post-crisis the discount window, accessible by depository institutions, is unaltered 

while the Fed’s ability to provide assistance to non-banks has changed. During the crisis the Fed 

introduced ten programs as well as providing support on a bi-lateral basis to mitigate an array of 

liquidity-related risks, dealing beyond its usual counterparts of primary dealers and depository

institutions. This section assesses the liquidity backstops 1) for banks suggesting a better alignment 

of policy instruments with objectives; 2) the role of FHLBs; and 3) for nonbanks in the context of the 

DFA and FSOC designation; and 4) with regard to financial market infrastructures.

0%

5%

10%

15%

20%

25%

10th Percentile 90th Percentile Median

0

500

1,000

1,500

2,000

2,500

Other Equities Other Agencies Agency MBS US Treasuries ONRRP Millions
UNITED STATES

INTERNATIONAL MONETARY FUND 39

Depository Institutions

65. The Fed’s discount window was reorganized in 2003 into monetary instrument-type 

and lender of last resort (LOLR) components.85 A wide range of securities and loan collateral is 

eligible to secure discount window borrowings with haircuts ranging from 1 percent to 72 percent. 

Discount window operations are conducted by the regional Federal Reserve Banks. The two main 

components of the discount window currently are:86

 The Primary Credit Program (PCP)—The Fed offers overnight funds to adequately-capitalized 

banks meeting a minimum supervisory rating (Camels ratings 1–3 or equivalent) at 50 basis 

points above the FOMC’s Fed funds target (was 100bps pre-crisis) and with ‘generally no 

restrictions’. The program is intended to be the ‘principal safety valve’ to ensure adequate liquidity 

in the banking system, limiting divergence in the fed funds rate from the policy target, and 

thereby meeting an operational objective with regard to monetary policy. Ordinarily there are no 

questions asked or restrictions. However lending under this program is ultimately at the discretion 

of the Fed.

 The Secondary Credit Program (SCP)—Banks that do not meet the minimum capital and 

supervisory standards (that is, banks that have Camels ratings 4 and 5) may be able to access 

funds, overnight or for a longer period to facilitate a return to market funding, through the SCP—

priced at 50 basis points above the PCP. Funds obtained under this program may be provided as a 

short-term bridge to a return to market funding, or to facilitate resolution, and cannot be used for 

arbitrage or balance sheet expansion.

66. More clearly defined objectives with better aligned instruments could help overcome 

stigma, improve operational outcomes and support financial stability. The discount window

spans operations with two materially different objectives, while there is a history of reluctance to 

access the window due to perceived stigma. Though liquidity-providing operations are less in need 

at the moment, well understood and better targeted instruments will become more important postexit from QE. Recognizing that a number of components of the monetary operational framework are 

likely to change post-exit, modifying the discount window operations sooner could be useful. One 

possible approach would be for the Fed to create a separate facility intended specifically to ensure 

adequate liquidity, particularly towards the end of the day, in support of smooth functioning of the 

payment system and the alignment of market rates with the operating target. By changing the 

financial instrument (e.g., to repo) and using only high quality assets the stigma issue should be 

reduced: the fact that an entity has high quality assets available for use in short-term operations 

should convey a sense that it is generally sound.

87

 

85 The authority for Fed lending to depository institutions is contained in the FRA 10A and 10B.

86 In addition, a seasonal credit facility is offered but minimally used.

87 Some central banks take the philosophical view that most collateral is potentially acceptable in monetary 

operations with liquidity and credit risks equalized through the application of margins. Other central banks, however,

(continued)
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40 INTERNATIONAL MONETARY FUND

 The Fed could create a facility open to well-capitalized depository institutions that are direct 

members of Fedwire, available from 3pm onwards to address an institution’s unexpected shortfall 

in receipts that may have arisen because of an overall shortage of reserves, with collateral limited 

to Treasury and agency securities. 

The Federal Home Loan Banks: Liquidity Recyclers in Times of Stress

67. The Federal Home Loan Banks (FHLBs) provide approximately 8,000 members with 

short and long-term funding through secured lending programs.88 Each of the 12 privately 

owned co-operative FHLBs is jointly and severally liable for the Consolidated Obligations issued on 

behalf of any of the FHLBs. This co-operative arrangement together with an implicit Government 

guarantee enables the FHLBs to access markets on terms that members’ individually cannot. Further,

the collateral requirements are stringent and the FHLBs have a super lien over the assets of 

borrowers in the event of resolution under federal receivership—another factor contributing to their

ability to access market funding on good terms. No FHLB has suffered a credit loss on its secured 

loans (“advances”) to members. By virtue of this ability to raise funds during times of stress, the 

FHLBs are able to recycle liquidity to their members that may otherwise have been frozen out of 

interbank and other short-term funding markets. Lending to members must be secured against 

performing loans and high-quality collateral at a rate which is a function of a number of factors 

including the size of the haircut, a requirement to purchase stock (and the right to receive 

dividends), and a term premium—each regional bank can set its own rate. 

68. The FHLBs were an important source of funding during the crisis, complementing the 

Fed’s programs. When funding markets tighten, members can turn to the FHLBs or to the Fed. In 

the initial period of the last crisis, members first used the FHLBs rather than the Fed’s Discount 

Window because it was cheaper and without the stigma associated with the latter. FHLB advances 

peaked at over $1 trillion in September 2008 (c.f. $536 billion at June 2014), but as the Fed quickly 

reduced its policy rates and introduced a range of facilities, borrowing from FHLBs diminished.

69. Official sector incentives are increasingly shaping banks’ interactions with the FHLBs,

with heightened systemic liquidity risks should the FHLBs lose preferential access to bond 

markets. FHLB loans of less than 30-days are treated more favorably in the LCR than other 

wholesale funding, allowing an assumption of 75 percent rollover, rather than as a full outflow. 

Therefore 30-day funding drawn from the FHLBs and fully reinvested in level one high quality liquid 

assets provides a substantial boost to a bank’s LCR. And banks appear to be responding to these 

incentives with four of the largest banks increasing their funding by 150 percent between March 

2012 and December 2013.89 This activity increases the interconnectedness of the banks and the 

 

take the view that different collateral pools should be used for different operations, with more liquid assets being 

used for regular operations. Policy choices here should not unduly impact financial asset pricing.

88 The FHLB membership comprises banks, thrifts, credit unions and insurance companies.

89 OFR Annual Report 2014 noted that much of this funding was used to acquire high quality liquid assets that can 

include GSE (including FHLBs) debt. 
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INTERNATIONAL MONETARY FUND 41

FHLBs and it is not clear whether FHFA prudential standards for FHLBs are calibrated appropriately 

to meet the increased liquidity risks of such interconnectedness. The U.S. authorities should consider 

the systemic implications of the FHLB funding arrangements:

 The calibration of the LCR which allows for preferential treatment of FHLB funding; and 

 The adequacy of FHFA liquidity and capital requirements imposed on the individual FHLBs, in 

light of the apparent increase in interconnectedness with banks.

Liquidity Backstops: the DFA and FSOC Designation

70. The adoption of the DFA introduced new constraints for the Fed to provide liquidity 

backstops to non-bank firms.

90 In addition to the ‘unusual and exigent circumstances’ 

requirement, programs must involve broad-based eligibility, be pre-approved by the Treasury and

with ex-post reporting to Congress.91 While the DFA now limits the Fed’s response in a crisis, it is 

likely that most of the programs offered during the crisis would meet the broad-based eligibility 

criteria.92 Still, the question is whether the DFA undermines the Fed’s ability to respond to 

developments in the non-bank financial sector which if left unaddressed, could spillover into a 

systemic event.

71. Designation of NBFIs is not linked to potential Fed liquidity support in unusual and 

exigent circumstances. FSOC designation of a NBFI means that the FSOC has determined that the 

company’s material financial distress, or activities, could pose a threat to U.S. financial stability—and 

as result it may be required to have increased buffers against certain risks. But the Fed cannot 

provide liquidity support to a troubled systemically important NBFI. The following recommendation 

is guided by the principle that any such backstop should be designed to minimize moral hazard risks 

to taxpayer resources.

 The broad-based eligibility criteria should be reviewed, with consideration given to allowing the 

Fed, at its discretion, to extend liquidity support to any solvent individual institution that is 

designated by the FSOC (DFA Title I) as being systematically important. The Fed would need to

ascertain solvency before extending any such lending, and is encouraged to complete the 

proposals and subsequently establish heightened prudential standards for designated non-banks 

as required by DFA. 

 

90 Federal Reserve Act s13.3.

91 Within seven days of assistance being granted the Fed must report to the Committee on Banking, Housing, and 

Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives. 

92 Exceptions here are the Transitional Credit Extension which was targeted at U.S. and London broker-dealer 

subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch, and liquidity facilities offered to AIG and Bear 

Stearns.
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42 INTERNATIONAL MONETARY FUND

Liquidity Backstops: Financial Market Infrastructures 

72. In extreme circumstances, if no other funding is available, central banks should stand 

ready to provide liquidity backstops to solvent, systemically important FMIs.93 Private sector 

liquidity must constitute the first line of defense for CCPs against liquidity shortfalls, in a way that 

ensures that a CCP has adequate liquidity self-insurance. There could, nevertheless, be extreme 

circumstances in which a CCP’s liquid resources turn out to be insufficient or unavailable, and yet its 

continued operation might be vital to sustaining financial stability. Providing solvent CCPs with 

access to emergency central bank liquidity, against collateral, ensures that the CCP can continue to 

make payments to counterparties and would thereby maintain the stability of the market. A CCP 

should not assume the availability of emergency central bank credit as part of its liquidity plan. 

73. Under the DFA the Fed may now provide liquidity backstopping to all designated 

FMUs under certain conditions. The FRB may authorize a Federal Reserve Bank to provide

emergency credit to designated FMUs in unusual or exigent circumstances and subject to certain 

statutory conditions and any additional conditions set by the FRB. The DFA does not require a 

designated FMU to be a bank or bank holding company. However, emergency credit can only be 

provided upon majority vote of the FRB after consultation with the Treasury (section 806b). The 

designated FMU would have to show that it is unable to secure adequate credit accommodations 

from other banking institutions. Preparing contingency plans for the provision of emergency 

liquidity to designated FMUs, without pre-committing to such support, should be considered.

INVESTMENT FUNDS AND SYSTEMIC RISK

A. Asset Managers and Market Liquidity Risks

74. Liquidity management tools available to U.S. open-ended mutual funds (MFs) equip 

them well to handle normal cyclical volatility. A combination of factors allows MFs to maintain 

thin liquidity (cash) buffers during their normal course of business, relying instead on market 

liquidity in the assets they hold. Indeed, passive (index) funds may not be able to hold significant 

cash buffers as they would then deviate from their benchmark portfolio and violate constraints on 

tracking error deriving from their investment mandates.94

 First, large investors in particular need to take account of the price impact of their sales, 

especially in stressed market conditions, which could act as a disincentive against runs.

 

93 See April 2010 International Monetary Fund Global Financial Stability Report.

94 Market liquidity of assets into which MF investors’ holdings are invested can be significantly eroded when these 

markets are under stress (“bad weather liquidity”) relative to normal times (“fair weather liquidity”). Such funds can 

potentially raise cash buffers without increasing tracking error by using derivatives markets (e.g., total return swaps) 

but this strategy would raise counterparty credit and market risks which is unlikely to be consistent with such funds’ 

investment mandates.
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INTERNATIONAL MONETARY FUND 43

 Second, individuals’ and households’ defined contribution retirement plans and individual 

retirement accounts represent a major investor class which, as of December 2013, constituted 

close to 50 percent of assets of equity, bond and hybrid MFs. These investors are a source of 

stability for asset markets since a review of their strategic asset allocation is undertaken at a 

lower frequency: a fall in relative prices of specific assets would normally induce purchases of 

these securities by these investors through their mutual funds. Target date MFs, offering a 

long-term investment strategy to households and retirement plans, are a good example and 

have been cited as an important factor in tempering outflows from bond funds in 2013.

 Third, MFs are allowed by regulation to borrow up to 33 percent of the market value of their 

(net) assets under management and can do so to meet unanticipated increases in redemption 

demand.

75. MFs could be susceptible to runs during severe market stress that could exert adverse 

knock-on impact on the asset markets in which they operate. MFs have a regulatory obligation 

to meet redemption demand in cash within 7 days which, at times of stress, they may be unable to 

meet.

95 As noted above, cash and other liquidity buffers are limited, at least for passive MFs by their 

need to minimize tracking error, and alternate means of expanding liquidity buffers such as repos 

and bank credit lines may be subject to wrong-way risk, or become unavailable during times of 

severe market stress when they are most needed.

96 Moreover, during such episodes, the 

equilibrating effect of retirement plans may be insufficient or absent, leaving MFs with no recourse 

but to sell assets in the open market at a steep discount.

76. The rapid expansion of MFs into certain markets has brought these concerns into 

sharper relief.

97 The significant recent rise in MFs’ investments into (high yield) corporate bonds, 

emerging market (EM) debt, bank loans, and municipal bonds has coincided with a notable decrease 

in liquidity in some of these markets, particularly for corporate bonds.98 Stress tests undertaken by 

the mission illustrate that for corporate and municipal bonds, a spike in redemptions by MF 

 

95 The obligation to settle claims of exiting investors in 7 days is required under Section 22(e) of the Investment 

Company Act of 1940 except under exceptional circumstances as determined by the SEC. It is supported by the 

requirement that such funds hold at least 85 percent of their assets in instruments that the asset manager 

determines can be liquidated within a week.

96 Use of bank credit lines is also limited by desire to avoid portfolio composition changes that may interfere with the 

funds’ ability to track its investment mandate and also, during market stress events, by reputation concerns.

97 The quantitative information cited in this paragraph is sourced from BlackRock’s “Who Owns the Assets? A Closer 

Look at Bank Loans, High Yield Bonds, and Emerging Markets Debt” (September 23, 2014). An increase in open-end 

MFs’ total (net) assets (TNA) held can arise due to two factors, net inflows into the funds or an increase in the market 

value of the funds’ assets. For the markets discussed in this paragraph, detailed examination of data suggests that 

net inflows represent the primary factor driving the increase in TNA for bond funds since the start of the global 

financial crisis.

98 The inventory held by dealers represents one commonly-used metric of market (trading) liquidity as it provides an 

indicator of the volume of assets that these key market makers are willing to hold and the volume of sales orders 

that may be smoothly absorbed by the market (see figures 6 and 7— for further details see the accompanying 

Technical Note on Stress Testing).
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44 INTERNATIONAL MONETARY FUND

investors corresponding to a tail event could be problematic for the market to absorb given reduced 

dealer capacity and willingness to act as market makers in all conditions.

 Bank loans: U.S. MFs held over $150 billion (25 percent of total held by non-banks) as of 

December 2013. Bank loans have longer settlement periods than for securities, potentially 

causing liquidity mismatches for funds when they offer daily liquidity.

 HY corporate bonds: MFs and ETFs held $555 billion (over a third of the $1.5 trillion 

outstanding as of December 2013) of which the bulk ($477 billion) was held by dedicated HY 

bond funds. The average cash ratio of dedicated HY funds, at around 3 percent, was close to a 

four year low as of June 2014. HY funds’ AuM has grown by over 14 percent on an annual basis 

since 2008 as large institutional investors have increased their asset allocation to the underlying 

assets under pecuniary incentives generated by the low-for-long rates environment.

 EM debt: MF holdings total $380 billion.99 Holdings are concentrated in internationally-issued 

EM debt rather than the more liquid local-currency denominated debt. Besides the lower 

secondary market liquidity, repo agreements are typically not available in these markets. Funds 

usually manage liquidity risk through a combination of asset diversification within their 

benchmark, holding cash—albeit cash ratios were at historic lows prior to the taper tantrum—

and allocating a small share to developed market debt.

 

99 Besides US mutual funds and ETFs, this figure also includes investments made by EU and retail mutual funds.

Figure 6. Corporate Bonds Inventory 

(In million dollars)

Source: Federal Reserve Bank of New York.

Figure 7. Sold Assets under Stress and Dealers 

Inventories (In million dollars)

Sources: CRSP, Federal Reserve Bank of New York, Staff calculations.

0

50,000

100,000

150,000

200,000

250,000

300,000 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 1/1/2013 4/1/2013 7/1/2013 10/1/2013 1/1/2014 4/1/2014 7/1/2014 10/1/2014

0

20,000

40,000

60,000

80,000

100,000

120,000

MBSs Munis Corporate bonds

Sold Assets Dealers' inventory
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INTERNATIONAL MONETARY FUND 45

77. Liquidity risks have also increased in the ETF space since the global financial crisis.

 The traditional U.S. ETFs, offering passive equity indexation with physical replication, are 

liquidity-enhancing investment vehicles. The tiering of the market provides a two-fold 

cushion against redemption spikes feeding into negative asset price spirals. First, when a 

redemption spike causes the ETF shares to trade at a discount to NAV in the secondary market, 

it provides an incentive to market makers and authorized participants to arbitrage the 

difference by offering exiting investors the desired liquidity. Second, redemption-in-kind stops 

the automatic translation of redemptions to asset sales.

 Asset managers have taken advantage of the search-for-yield triggered by the low 

interest rate environment by offering ETFs tracking HY bonds, EM assets, municipal 

bonds, and bank loans, where the perception of enhanced liquidity could be seriously 

misplaced. This concern was crystallized during the taper tantrum by the widening discount of 

municipal bonds’ ETF share prices to ETF NAV and the inability of a prominent market maker to 

continue providing liquidity to investors in the secondary market for EM ETF shares. 

Redemption-in-kind is the structural feature of ETFs that normally prevents redemption spikes 

from directly hitting the underlying asset markets. But it can be expensive for ETF market 

makers and/or authorized participants to exploit arbitrage opportunities by providing liquidity 

in the secondary market (due to higher prudential capital and liquidity charges of warehousing 

these assets on their balance sheets) if the underlying assets are difficult to liquidate in a short 

period of time. This means that, under stressed market conditions, ETF investors may only be 

able to liquidate shares at a very steep discount to the NAV or not at all, belying the liquidity 

assumptions investors may have made while entering this market.

78. Market liquidity risks are also increased by a combination of factors that raises U.S. MF 

investors’ incentives to run with the herd.

 First, regulation compels MFs to pay exiting investors the NAV prevailing on the day they 

demand redemption, rather than the NAV on the day when the corresponding sale of assets 

takes place.100 Any difference between these NAVs is absorbed by the MF and thus its 

remaining investors. This likely makes no difference in normal times when trades are almost 

always settled within a short period of time without a material movement in NAV. But it could 

be very costly to the remaining MF investors during periods of stress when sales are delayed 

and prices are falling fast.

 Second, while MFs’ ability to borrow to meet redemption demand provides a liquidity 

management tool, the leverage assumed becomes an obligation of investors remaining 

 

100 Regulation 2a-4 allows up to next day redemption, but it can be and often is same day.
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46 INTERNATIONAL MONETARY FUND

invested in the MF. During periods of sustained outflows, extensive use of this strategy could 

result in an acceleration of NAV erosion, and hence, exacerbate the incentive to run.101

 Third, MFs often apply single pricing to inflows and outflows instead of the prevailing bid and 

offer prices. Hence, they transfer value from the MF to exiting investors, also exacerbating the 

incentive to exit when the NAV is falling rapidly.

79. Options to reduce the incentive to run should be explored. The following proposals are 

suggested:

 Settlement to exiting investors should accurately reflect sales prices of assets liquidated where 

asset sales are made to redeem the claims. This could include a change in settlement to salesdate NAV instead of redemption-date NAV, and to actual sales price (the bid price) from midprice. Where leverage is used to settle redemption claims, redemption fees could be increased to 

reflect the expected cost to the MF.

B. Securities Lending by Mutual Funds

80. Many MFs are actively engaged in securities lending and corresponding (cash) 

collateral reinvestment. In the event of a redemption run, especially if in the context of a risk-off

event or general funding shock, recall of cash and securities lent out to meet investor demand could 

exacerbate existing pressures and shortfalls in these critical capital markets. Strong risk management 

practices are paramount to avoiding securities lending businesses becoming an excessive source of 

risk to the fund and its investors, and hence, to avoid panics and runs should securities borrowers 

seek to exit transactions in large volumes.

Why lend securities?

81. Subject to the oversight of a funds’ board of directors, a MF may lend securities.

 For index MFs that use physical replication, income from securities lending and (cash) 

collateral reinvestment covers shortfalls between fund returns and benchmark returns that arise 

from tracking error.

 For asset managers whose revenues rely exclusively or principally on AuM volume, 

securities lending income allocated to investors could, when in excess of tracking error shortfall, 

provide incentives to attract more AuM and, hence, more income going forward.

 For asset managers whose MFs contract with affiliates for managing their securities 

lending and collateral reinvestments, this business may be an important source of income.

 

101 It is doubtful that funds could meet redemptions over a longer period of time with credit lines.
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INTERNATIONAL MONETARY FUND 47

Regulatory treatment

82. Securities lending. MFs and ETFs that lend securities are subject to various regulatory 

constraints. These include lending limits of no more than 33 percent of total assets. The loans must 

be collateralized at least 100 percent and marked-to-market daily.

83. Cash collateral reinvestment. Cash collateral reinvestment generally is limited to “shortterm highly-liquid instruments as determined by the fund’s adviser subject to the oversight of the 

funds’ board of directors.” Certain fund cash collateral investments in joint accounts with affiliated 

entities or in affiliated pooled investment vehicles are subject to specific regulatory constraints on 

eligible classes of instruments and on the liquidity and maturity of instruments.

Risk management

84. Securities lending and the reinvestment of collateral can, in principle, add to the 

portfolio management and operational risks for funds and their investors. Since the two legs of 

this business involve the transformation of one portfolio of assets into another and contracting with 

potentially risky counterparties, it can entail increases in credit, liquidity, and maturity risks which 

need to be contained and managed. The experience of AIG’s securities lending and reinvestment 

activities during the financial crisis suggests that, absent adequate risk controls and supervision, 

considerable liquidity and credit risks could be accumulated by investing in assets that can become 

illiquid and difficult to price during times of stress but which had passed the prudential criteria for 

collateral reinvestment in normal times. A more typical example in the present day could be a MF 

lending on-the-run 10 year U.S. treasury bonds, renegotiated on a daily basis, and using the cash 

raised to reverse-in off-the-run 10 year U.S. treasury notes (liquidity transformation) with a term of 

31 days (maturity transformation).

85. Where agents’ services are required to conduct securities lending, it is important for 

funds and their boards to manage agency incentives to limit moral hazard risks. Agent lenders, 

who may be custodians or, in some cases, affiliated with the funds’ asset manager typically manage 

the securities lending and sometimes the collateral reinvestment legs of the business and indemnify 

the fund against losses on the first leg (but normally not for the second). Agent lenders are 

compensated by a fee and share in the income from the securities lending program including 

income from reinvestment of cash collateral. Agent lenders’ contracts need to be structured in a 

manner that aligns the agent lenders’ interests with those of the lender.

86. Data gaps are substantial, making comprehensive assessment of financial stability 

risks arising from funds’ securities lending activities difficult, albeit available information 

does not suggest cause for alarm. Agent lenders’ pay contracts are structured as two-part tariffs 

and their share in funds’ income from securities lending can be substantial, at 25 percent or higher. 

While in principle this can increase their risk taking incentives, in practice, investors have reportedly 

been proactive in securing safer mandates from asset managers after the crisis. This combined with 

BDs’ desire to term out repos has reportedly redirected funds’ cash collateral towards investments in 
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MMMFs. While this contains credit and maturity risks, MMMFs’ ability to impose redemption gates 

may create liquidity risks to mutual funds during times of stress.102

87. There is considerable merit in imposing more comprehensive disclosure requirements 

on funds with respect to their securities lending activities. Information on the amount of 

securities lent, investment portfolio of cash collateral received, maturity mismatches across these 

two transactions legs, counterparties, and income sharing between the funds and their agent 

lenders, is not disclosed.103 This makes it difficult to understand the nature of financial risks to funds 

and markets of their activities. The experience of AIG and the NAIC’s subsequent enhanced 

disclosure rules on insurers’ securities lending activities strongly suggests that imposition of similar 

disclosure requirements on players active in this market more broadly would bring considerable 

benefits for the oversight of financial stability.

 The pilot survey of the OFR, FRB, and SEC to collect and examine data on securities lending 

activities and the FSOC Request for Comments on Asset Management Products and Activities are 

very welcome. It is recommended to use insights from this exercise to extend data disclosure 

requirements on securities lending activities across the industry.

SYSTEMIC RISK OVERSIGHT OF FINANCIAL MARKET

INFRASTRUCTURES

A. Overview of FMIs in the United States

88. U.S. FMIs are amongst the largest in the world. Clearing and settlement volumes position 

U.S. FMIs at the top of international rankings as illustrated by the tables in Appendix 5. The value of 

transactions for designated FMUs, Fedwire Funds and Fedwire Securities was in the trillions of U.S. 

dollars during 2013. The Fixed Income Clearing Corporation (FICC) topped the list with a value of 

transactions of $1,155 trillion, followed by the Fedwire Funds system with $713 trillion. The United 

States also provides a home to two of the largest OTC derivatives CCPs in the world, i.e. the Chicago 

Mercantile Exchange (CME), with an outstanding amount of $27 trillion in interest rate swaps (IRS), 

and ICE Clear Credit (ICC), with an outstanding amount of $928 billion in credit default swaps (CDS). 

Daily exposures of CCPs are in billions of dollars.

89. Some U.S. FMIs are systemically important at a global level, and the importance of the 

CCPs amongst them is expected to grow.104 FMIs provide the central infrastructure to clear and 

settle payments, as well as securities and derivatives transactions and therefore lie at the core of the 

 

102 Of course, to the extent that MFs reinvest cash collateral in MMMFs that are not subject to gates e.g., government 

MMMFs, they would avoid risk of their holdings being gated.

103 MFs disclose some of this information in their periodic reports. The reporting forms and technology do not, 

however, allow for systematic industry-wide analysis by regulators.

104 See the FSOC Annual Report 2012, Appendix A.
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functioning of interbank, money, and capital markets. Most G-SIFIs participate in U.S. FMIs. These 

participants represent thousands of customers, including correspondent banks, investment 

companies, and nonfinancial corporations, both domestic and foreign. Multiple memberships of U.S. 

banks in CCPs around the world further interlink the U.S. and global financial system. U.S. FMIs are 

crucial to U.S. dollar clearing, for example the Fedwire Funds and CHIPS. CCPs that clear OTC 

derivatives are of key importance to the safe and efficient functioning of global OTC derivatives 

markets. Their importance is growing due to the G-20 mandate to clear standardized OTC 

derivatives through CCPs. Disruption of critical operations at one of the U.S. FMIs may spread to

their participants, other FMIs, markets, and throughout the U.S. and global financial systems. 

90. The U.S. FMI landscape is highly interconnected and interdependent. All FMIs directly or 

indirectly depend on the Fedwire Funds system to settle large value interbank payments as 

illustrated in Appendix 6. The FICC and NSCC are dependent on DTC to facilitate settlement of 

securities transactions in government and corporate securities transactions, respectively. Almost all 

systemically important CCPs are linked to other CCPs through cross-margining arrangements.105

Appendix 7 illustrates and describes the different cross-margining arrangements. Although ICE is 

not linked to another CCP, ICE Clear U.S., which is also a subsidiary of International Exchange Inc., 

has a cross-margining arrangement with the Options Clearing Corporation.

B. Regulation and Supervision of FMIs

91. In July 2012, FSOC designated eight FMIs as systemically important FMUs, based on 

the criteria provided by DFA Title VIII. Designation, among other things, allows the appropriate 

supervisory agency to impose enhanced risk management standards and supervision on the 

designated FMU. The designated FMUs comprise The Clearing House (as operator of CHIPS), CLS, 

the central securities depository (CSD) and securities settlement system (SSS) DTC, and five CCPs, 

which are the CME, FICC, ICE, the National Securities Clearing Corporation (NSCC) and the Options 

Clearing Corporation. The outcome of the designation was made public through the 2012 FSOC 

report, including a description of each designated FMU and a detailed rationale of its systemic 

importance.106

92. Designated FMUs are primarily regulated, supervised and overseen by the FRB, SEC, or 

CFTC, depending on their activities. DFA Title VIII generally defines a supervisory agency as the 

federal agency that has primary jurisdiction over a designated FMU under federal banking, 

securities, or commodity futures laws. In the case of a CCP that is subject to the jurisdictional

supervision of more than one agency (for example, the SEC and the CFTC), the agencies agree which

is the supervisory agency authorized to prescribe and implement the enhanced risk management 

 

105 A cross-margining arrangement is an agreement among CCPs to consider positions and supporting collateral at 

their respective organizations as a common portfolio for participants that are members of two or more of the CCPs. 

This reduces collateral requirements for clearing participants and helps to improve their liquidity and capital 

efficiencies.

106 See Appendix A of the 2012 FSOC report.
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standards under Title VIII, or if the agencies cannot agree, the FSOC will decide. Title VIII of the DFA 

provides the FRB with enhanced authority over all designated FMUs in several areas, for example, 

the FRB may determine that the existing prudential requirements of the CFTC and SEC with respect 

to their designated FMUs are insufficient to prevent or mitigate significant liquidity, credit, 

operational, or other risks to the financial markets or to the financial stability of the United States 

and report its concerns to FSOC. Also, the FRB has the right to participate on Title VIII examinations 

led by other supervisory agencies and has certain back-up supervisory authorities in emergency 

circumstances (it may take enforcement actions directly when necessary and with the Council’s 

approval). Table 2 outlines the primary responsibilities of the different authorities for designated 

FMUs as well as for other U.S. FMIs.

93. There is room to increase transparency on the applicable regulatory regimes for U.S. 

FMIs, including on the designation of systemically important FMUs. For certain FMIs, including 

but not limited to those which have been designated as systemically important by the FSOC, the 

applicable risk management standards are intended to be consistent with the PFMI. Other FMIs that 

have not been designated as systemically important have nevertheless opted to comply with the 

PFMI to be classified as qualifying CCPs.107 There are also CCPs that have not been designated as 

systemically important and that are not subject to the enhanced risk management standards derived 

from the PFMI. In addition, no FMI organized outside of the United States has been designated by 

FSOC.108 Increased clarity on the applicable regulatory and supervisory regimes for the different 

FMIs, for example through an explanation on the website of the appropriate authority, may 

contribute to sound decision making of the FMI’s participants, authorities and the public. 

Explanations on the identification process for designation of FMUs could allow, for example, for

external replication of the decisions, improving the transparency of the designation process of 

systemically important FMUs.

109 Careful drafting of these explanations would be necessary to limit 

legal and political risks.

 Given the complex framework of FMIs in the United States more robust disclosure of the 

applicable regulatory and supervisory framework for different FMIs, including an explanation for 

the different determinations, would bring additional transparency.

94. The regulatory and supervisory framework for systemically important FMUs prescribed 

by the DFA entails major improvements that should help reduce systemic risks. Prior to the 

DFA the supervision and oversight of FMIs was spread across several regulators depending on the 

system’s charter or the markets it cleared for. The DFA in Title VIII expands the FRB’s role, in 

coordination with the CFTC and the SEC, in the supervisory examination planning, participation in 

 

107 Clearing members may apply reduced capital requirements for their exposures to qualifying CCPs; see BCBS 

Capital requirements for bank exposures to central counterparties, April 2014.

108 Such as ICE Clear Europe LLC (ICEEU), LCH Clearnet Limited, LCH Clearnet SA, and Singapore Exchange Derivatives 

Clearing.

109 This might be as simple as noting that the DFA only envisages designating U.S. incorporated private-sector FMIs, 

and that designation of the systems operated by the Fed would make no practical difference.
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examinations and consideration of material rule changes helping to establish a consistent 

framework across supervisory authorities for systemically important FMIs. In cooperation with other 

agencies and complementary to existing supervisory and regulatory provisions, this should assist the 

FRB in addressing systemic risk consistently, and strengthen its ability to induce change where 

necessary. The DFA also allows the FRB to authorize a Federal Reserve Bank to offer accounts and 

services for designated FMUs.

Table 2. Primary Supervisory Agency and Application of Enhanced Risk Management 

Standards for U.S. FMIs

Federal Reserve CFTC SEC

Application 

of enhanced 

risk 

management 

standards

By FSOC 

designation

 The Clearing House 

Payments 

Company, L.L.C., on 

the basis of its role 

as operator of the 

Clearing House 

Interbank Payments 

System (CHIPS) 

 CLS Bank 

International (CLS) 

 Chicago Mercantile 

Exchange (CME)

 ICE Clear Credit L.L.C. 

(ICE)

 Depository Trust 

Company (DTC)

 Fixed Income Clearing 

Corporation (FICC)

 National Securities 

Clearing Corporation 

(NSCC)

 Options Clearing 

Corporation

By policy  Fedwire Funds 

Service

 Fedwire Securities 

Service

By FMI opt-in  ICE Clear U.S.

 LCH.Clearnet L.L.C.

 Minneapolis grain 

exchange

 Depends on final SEC 

rules

Other FMIs not subject to

enhanced risk management 

standards

 FedACH1 The Clearing 

Corporation

 Cantor Clearinghouse

 North American 

Derivatives Exchange

 Omgeo

 Depends on final SEC 

rules

Sources: Federal Reserve, CFTC, SEC.

1/ Other retail payment systems, such as EPN, SVPCo, Viewpointe and several card networks are examined as a bank service 

company by Federal Financial Institutions Examination Council (FFIEC) agencies.

95. The DFA also provides the agencies with additional tools to supervise designated 

FMUs, which contributes further to consistent and strengthened supervision and oversight.

The two major tools are annual examinations and prior review of material changes to a designated 

FMU’s rules, procedures or operations. Designated FMUs must submit for enhanced prior review to 

their supervisory agencies proposed changes that could materially affect the nature or level of risks 

presented by the utility. And the relevant supervisory agency is required to examine each designated 

FMU at least annually to determine: (1) the nature of its operations and risks it bears; (2) the financial 

and operational risks it presents to financial institutions, critical markets, or the broader financial 

system; (3) its resources and capabilities to monitor and control such risks; (4) its safety and 
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soundness; and (5) its compliance with DFA Title VIII (the risk-management standards prescribed by 

its supervisory agency under Title VIII). Such examinations are conducted in consultation with the 

FRB as to the scope and methodology of the examination. The FRB also may participate, at its 

discretion, in such examinations.

96. The U.S. authorities have officially considered the PFMI in the development of their 

rulemaking under the DFA and are making progress towards completely and consistently 

implementing them, which is expected to further decrease systemic risk. Under the DFA, 

designated FMUs have to comply with enhanced risk management standards prescribed by their 

supervisory agencies, taking into consideration relevant international standards. The CFTC and FRB 

issued final rules, implementing the enhanced risk management standards for designated FMUs, in 

2013 and 2014 respectively. The SEC final enhanced standards are yet to be promulgated, with no 

publicly defined deadline. The February 2015 CPMI/IOSCO Level 2 assessment concluded that the 

U.S. jurisdiction had made good progress towards completely and consistently implementing the 

majority of the Principles applicable to systemically important CCPs and identified a few areas in 

which the relevant authorities could improve the completeness of the existing and proposed 

regimes and their consistency with the Principles.110

97. It is important that SEC rules for covered clearing agencies are finalized soon. The FMIs 

subject to the CFTC’s supervision, i.e., CME and ICC, had to apply the CFTC enhanced regulatory 

regime as from December 2013. FMIs subject to oversight by the FRB, i.e., CLS and CHIPS, are 

currently implementing the new requirements and need to comply by the end of 2014, with a oneyear transition period for a subset of requirements. SEC rules on enhanced standards for covered 

clearing agencies are not yet final. Those are expected to cover the following areas, which are highly 

relevant in terms of risk management: (1) general organization (including requirements for legal 

basis, governance, and a comprehensive risk management framework); (2) financial risk 

management (including requirements for credit risk, collateral, margin, and liquidity risk);

(3) settlement (including requirements for settlement finality, money settlements, and physical 

deliveries); (4) default management (including requirements for default rules and procedures and 

segregation and portability); (5) business and operational risk management (including requirements 

for general business risk, custody and investment risks, and operational risk management); (6) access 

(including requirements for access and participation, tiered participation arrangements, and links); 

and (7) transparency.

 It is recommended to promptly finalize implementing the PFMI standards, through completion of 

rules by the SEC and implementation of these rules by the relevant FMIs. 

 

110 Title VIII provides that the CFTC and the SEC “may each prescribe regulations, in consultation with the Council and 

the Board of Governors, containing risk management standards, taking into consideration relevant international 

standards and existing prudential requirements, for those designated clearing entities and financial institutions 

engaged in designated activities for which each is the Supervisory Agency or the appropriate financial regulator...” 

Relevant international national standards include the PFMI. See CPMI/IOSCO Implementation monitoring of PFMIs: 

Level 2 assessment report for central counterparties and trade repositories—United States, February 2015.
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98. The three agencies have been increasing the level of their human resources in light of 

their expanded mandates and should ensure that they get the appropriate levels, both in 

quantity and quality. As a result of the DFA, the work load of the agencies has substantially 

increased in rule making, supervision, data gathering and cooperation activities. Consequently, the 

internal teams are being reinforced by additional staff, either through external hiring or internal 

reallocation, budget permitting. In addition, training efforts are under way to align staff 

competencies to their new responsibilities. Supervisory efforts have developed substantially and 

should continue to evolve as supervisors gain experience assessing firms against new regulations.

 Ensuring sufficient number of qualified staff will allow adequate enforcement of the enhanced 

rules.

99. Given the distribution of FMI supervision among several agencies, domestic 

cooperation is key to achieve consistency and avoid loopholes. Post DFA, supervisory 

arrangements remain quite complex, involving three agencies. In some cases, a particular FMI is 

supervised by more than one agency. In particular, the CFTC, the SEC, and the FRB, have 

responsibilities regarding CCPs depending in part on the activities of the CCP (i.e., products cleared),

and in part on whether the CCP has been designated as systemically important. The DFA has 

substantially improved cooperation between and among domestic supervisory agencies, providing a 

new cooperative supervisory framework for designated FMUs. Coordination and cooperation is 

furthered by the fact that the agency heads are voting members of the FSOC, which meets monthly,

and staff of the three agencies routinely interact through participation in various FSOC committees,

in particular the FMU and the Systemic Risk Committees.

100. The U.S. agencies are among the frontrunners in shaping international reforms. Public 

reporting by the FSB and standard setting bodies indicates that the United States is among the 

frontrunners in shaping international reforms. Enhanced consultation, cooperation, and data sharing 

at the international level would further promote the safety and efficiency of cross-border or 

multicurrency FMIs, while sharing macroprudential information from FMIs can be useful for 

detecting emerging risks to financial stability. This is particularly relevant given the global 

importance of U.S.-based FMIs and the increasing reliance of some U.S.-based market participants 

on FMIs in other jurisdictions and vice versa. International cooperation is also key to minimize extra 

territoriality issues. The global regulatory reforms for OTC derivatives clearing potentially expose the 

CCPs and some of their participants to legal risk due to conflicting requirements. 

 U.S. authorities should continue their discussions with relevant foreign authorities to address

conflicts of law and help level playing-field concerns.
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C. System-Wide Risks Identification and Management

101. Identification of system wide risks is important to address potential threats to the 

financial stability. Risks are identified and managed by FMIs and their primary supervisory 

agencies. Given that the U.S. financial landscape is a tight, interdependent, interconnected network 

of FMIs, banks, financial institutions and service providers, and that regulatory, supervisory and 

oversight responsibilities for FMIs are divided among several agencies, it is important, given the size 

and scope of U.S. FMIs, to take an additional system-wide perspective in identifying risks that have 

an overarching nature, and that may not be necessarily identified within the scope of the risk 

management activities of the individual FMIs and their primary authorities. 

102. Cybercrime is one of the system-wide risks identified by the FSOC that is relevant for 

FMIs. Under the umbrella of the FSOC, the Treasury, regulators, other government agencies, and 

private sector financial entities work together to improve insights on cyber security. This is expected 

to contribute to the awareness and assessments of cyber risks and the quality of oversight of the 

financial sector, including FMIs.111 In its 2014 Annual Report, the FSOC recommends further actions 

to improve crisis coordination mechanisms and testing of crisis communication protocols, including 

with international regulators. In addition, the FSOC recognizes the importance of removing legal 

barriers to information sharing between public and private sector entities. 

103. While identification of system-wide risks in relation to FMIs is currently underway, it

would benefit from a more systematic approach. Identification of these risks, within authorities 

as well as within the FSOC structure, could further contribute to the effectiveness of the systemic risk 

oversight within the United States. Among the issues meriting further analysis are: 

 FMIs’ dependency on banking services of only a few G-SIBs: U.S. FMIs are highly dependent on 

services of a few commercial banks and the failure of such a service provider would pose severe 

distress on all or a large majority of the FMIs in the United States (see also next paragraph).

 Membership of banks in multiple FMIs: Various financial entities participate in several or all FMIs. 

The default of such a participant may cause severe distress at one or more FMIs and exacerbate 

stressed market conditions.

112

 Pro-cyclicality of margin calls: Collateral requirements imposed on clearing members can 

increase abruptly in times of sudden market volatility and exacerbate market pressures.

 Cross-margining arrangements: U.S. CCPs manage the risks related to their cross-margining 

arrangements as part of their regular credit and liquidity risk management framework. Although 

 

111 In February 2014, the U.S. National Institute of Standards and Technology (NIST) released the Framework for 

Improving critical Infrastructure Cybersecurity, with the objective to enhance the security and resilience of the U.S. 

critical infrastructure, and referencing global standards for cyber security.

112 In case of a participant’s default CCPs may try to dispose of collateral to cover their losses. If several CCPs try to 

sell the same type of assets, collateral markets might in extreme circumstances exhibit high volatility and price peaks.
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exposures of cross-margining arrangements are currently modest, risks may build up and be a 

channel through which credit and liquidity shocks can be distributed. 

104. Findings can feed into macroprudential tools as well as support the development of 

recovery and resolution plans. The OFR has started analyzing the use of network analysis to 

further improve the understanding of the FSOC in relation to exposures among financial firms and 

potential channels of contagion.

113 Inclusion of FMIs in the network analysis efforts could be useful.

 It is recommended to develop a systematic approach for identifying and responding to systemwide risks related to interdependencies and interconnections among FMIs, within individual 

supervisory authorities and the FSOC structure. 

105. Concentration of service provision by G-SIBs to FMIs poses a potential threat to the 

financial stability in the United States. In the case of CHIPS, CLS and DTC, settlement activity is 

highly concentrated amongst their largest members.

114 CHIPS and CLS have liquidity and funding 

arrangements with the same large members. In the case of CLS these large members also provide 

third party services to financial institutions that are not a direct member of CLS. In the case of CCPs, 

a few commercial banks and their affiliates fulfill roles of settlement bank, custodian, depository 

banks, liquidity provider and general clearing member (clearing for clients). FMIs are operationally 

dependent on these commercial banks to access Fed services, such as Fedwire Funds and Fedwire 

Securities Services. The commercial banks also act as depositories for cash collateral and custodians 

for securities collateral. As liquidity providers they grant credit lines to the FMIs to draw upon in case 

they face liquidity strains. As general clearing members they and/or their affiliates provide access to 

the CCPs and CSD for clients that cannot become a direct member of the FMIs themselves. Last but 

not least these commercial banks and/or their affiliates may be of critical importance during a 

default of a clearing member to help the CCP liquidate and hedge the defaulter’s positions and take 

over the positions of the defaulter’s clients. The dependencies of systemically important FMIs on 

commercial bank services are described in Appendix 8. At least two G-SIBs are crucial to stable 

operations of nearly all U.S. FMIs.

106. Concentration risks should be actively mitigated. Designated FMUs and their authorities 

are aware of these risks and are further increasing the number of service providers. Still, given the 

current system-wide concentration of service provision by only a very few G-SIBs, the default of one 

of these banks can have system wide repercussions. For example, all CCPs will have to manage the 

default of the G-SIB as clearing member, and in addition, may temporarily or permanently lose 

access to collateral that is kept by the G-SIB in its role as custodian.115 The CCPs may lose access to 

their credit lines and face operational problems due to the loss of one of their settlement banks. The 

 

113 The OFR has discussed this work in its annual reports and in working papers looking at network analysis and 

agent-based modeling. 

114 See Appendix A of the 2012 FSOC report.

115 A legal determination may need to be made as to whether access is permanently lost.
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recovery and resolution planning of banks may help reduce the risk of their failure, but does not 

ensure there would not be any disruption in the services provided to FMIs. As all FMIs will be hit 

simultaneously by the default of a G-SIB that fulfills services to a multitude of FMIs, it is important 

that this risk is further mitigated. 

107. The provision of Fed accounts and services to systemically important FMUs has the 

potential to reduce their dependency on commercial banks’ services. The Federal Reserve is 

encouraged to provide accounts and services to designated FMUs in line with the DFA and the

relevant final rule of December 2013, which also recognizes the need to avoid undue credit, 

settlement, or other risk to the Federal Reserve Bank.

116 Access to Fed accounts and services would 

enable CCPs to keep cash and securities collateral at the central bank, reducing their dependence on 

commercial banks. The account may also be used for settlement purposes. Extension of settlement 

in central bank money to systemically important CCPs, in particular the FICC, OCC, CME and ICE 

Clear Credit, will indeed further reduce credit and liquidity risks related to the use of settlement 

banks.

 It is recommended that central bank services be offered to designated FMUs, i.e., access to Fed

accounts and settlement in central bank money, consistent with avoiding undue credit, settlement 

or other risk to the Fed. 

108. Given the increased systemic importance of CCPs, it is crucial to pursue work on 

further risk mitigation. Much has been done during recent years to increase the robustness of the 

CCPs, in particular the adoption and implementation of the PFMI. Indeed, implementing adequate 

risk management requirements for CCPs is important to ensure that CCPs are robust enough not to 

become the next too-big-to-fail financial institutions. However, increased awareness of additional 

risks, both in the public and private sector, warrant further analysis, such as stress testing pursuant 

to the PFMIs, harmonized margin requirements pursuant to the PFMIs, recovery planning that 

addresses system wide risks, the adequacy of CCPs’ loss absorbing capacity pursuant to the PFMIs, 

and continued coordination between the supervisors of CCPs and their main clearing members.

 U.S. authorities are therefore encouraged to continue efforts toward and monitoring of CCP

robustness, through enhanced risk management standards and robust supervision.

117

D. Crisis Management Arrangements

109. U.S. authorities should ensure appropriate crisis management arrangements for FMIs, 

both domestically and internationally. Crisis arrangements are formalized only for a few FMIs. It is 

important to ensure that such crisis arrangements are formalized and tested at least for each of the 

 

116 Regulation HH sets out the conditions and requirements for a Federal Reserve Bank to open and maintain 

accounts for and provide financial services to designated FMUs.

117 See also SEC’s Regulation Systems Compliance and Integrity, Exchange Act Release No. 34-73639 (Nov. 19, 2014). 

79 CFR 72251 (Dec. 5, 2014).
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FMUs. This would include a description of rules and procedures defining the role and responsibilities 

of each agency in a crisis, and a comprehensive overview of possible crisis management measures, 

both for operational and financial disruptions. This includes also regular contingency planning 

exercises, in close consultation with the various U.S. supervisory agencies, to focus on issues 

spanning across institutions and sectors, in particular because a large participant’s default would 

impact most U.S. FMIs simultaneously. MOUs with foreign authorities should also include crisis 

management arrangements when appropriate, as well as macroprudential information sharing. 

 U.S. authorities are encouraged to formalize and test crisis management arrangements for 

designated FMUs, where appropriate both domestically and internationally. 

110. Recovery and resolution work for FMIs is at an early stage. As a first step, recovery plans 

need to be finalized as soon as possible, aiming at enabling the FMI to sustain critical operations 

and services. Despite enhanced risk management and recovery planning, the risk that a CCP defaults 

cannot be entirely eliminated. A resolution framework aiming at maintaining financial stability while 

avoiding bail-out in the event of a default of a CCP is therefore important. U.S. agencies are 

currently discussing how FMIs would be resolved in the event of a failure. The U.S. authorities are 

encouraged to further develop a resolution framework for FMIs in line with the work led by the 

Financial Stability Board (in particular through the FSB Key Attributes).

118

 Recovery and resolution planning for FMIs should be further developed in line with international 

guidance. 

HOUSING FINANCE

111. Mortgage markets are integral to the overall stability of the U.S. financial system, and 

were at the epicenter of the 2008–09 crisis. While a number of important steps have been taken 

to address the structural weaknesses exposed by the crisis, GSE reform remains the largest piece of 

unfinished business. Nearly a decade after the crisis’s onset, there remains no clarity of when Fannie 

Mae and Freddie Mac will exit conservatorship or consensus on the shape of a reformed housing 

finance system. This creates not only fiscal but also financial risks: moral hazard from coverage of 

credit losses by the government, a distorted competitive landscape due to the big footprint of these

GSEs, and large subsidies for debt-financed homeownership generate incentives for excessive risk 

taking by investors and lenders and high levels of household indebtedness.

 

118 See FSB, Key attributes for resolution, 2014, with specific guidance for FMIs and their participants in Annex 1 of 

Appendix II.
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112. The systemic importance of the U.S. housing market stems from several of its features.

Home mortgages, at some $10 trillion, are the largest component of nonfinancial private sector debt

(Figure 8), and most are securitized, generating strong interconnections not only with the rest of the 

U.S. financial system but also with the rest of the world.119 Implicit (and explicit) government 

guarantees are an important part of the U.S. 

mortgage securitization market. Governmentbacked securitization is important in transferring 

the risk of 30-year fixed-rate mortgages to 

private investors worldwide, who often do not 

want to engage in credit valuations of U.S. 

mortgages. Securitization also provides small 

depository institutions with a mechanism 

through which to gain access to liquidity, avoid 

overexposure to regional housing markets, and 

transfer interest rate risk. And the system 

facilitates continued provision of 30-year fixedrate mortgage with no prepayment penalty—which is unusual by international standards and 

imposes both costs and risks that seem unnecessary given that most borrowers do not need to fix 

the rate for that long and typically refinance in less than 10 years.120

113. The federal government dominates the market. It stands behind more than 60 percent of 

the stock of loans and backs almost 80 percent 

of new single-family loan originations through 

FHA insurance, VA guarantees, and the activities 

of Fannie Mae, Freddie Mac, and Ginnie Mae 

(Figure 9).

114. Private label securitization (PLS) has 

largely disappeared (Figure 10). Deficiencies in 

the mechanisms for mitigating asymmetric 

information and conflicts of interest were 

exposed during the crisis and have alienated the 

investor community. Several steps have been 

taken to improve disclosure and better align the 

interests of different parties involved (see below). Adjustment to new regulations and rebuilding of 

confidence in the market will inevitably take some time but there are various other factors related to 

 

119 The United States is an outlier in the use of securitization in housing finance. Deposit funding dominates 

mortgage lending in most countries—see, for instance, Figure 11 in Lea et al (2010), available at 

http://www.housingamerica.org.

120 The fixed-rate mortgage share also has implications for monetary policy transmission. When house prices decline 

rapidly, fixed-rate mortgage holders that are under water find it difficult to refinance at lower rates. Home Affordable 

Refinancing Program (HARP) was initiated to address this problem.

Figure 8. Private Nonfinancial Sector Debt

(2014Q3)

Sources: Flow of Funds; staff calculations.

Figure 9. Mortgage Debt by Holder

(Percent of total outstanding)

Sources: Federal Reserve Board; staff calculations.
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the private securitization market—in particular, private sector mortgage insurance—that warrant a 

more proactive stance. Government insurance and guarantees are at times priced based on social 

policy objectives rather than long-term cost recovery, and the high-loan limits for qualifying 

mortgages mean that government cover is available to most new loans, making it difficult for the 

private sector to enter the market.

Figure 10. Residential Mortgage-Backed Security Issuance

(In billion dollars)

Sources: SIFMA, Federal Reserve Board; staff calculations. 

115. The current system continues to generate both costs and systemic risks:

 Distorting competition. The special status of Fannie Mae and Freddie Mac includes the ability to 

borrow cheaply owing to implicit government support (which became explicit at the onset of 

the crisis), lower capital requirements (which were suspended during the conservatorship), and 

exemption from state and local taxes. Similarly, insurance provided by the FHA may be priced, 

in part, on the basis of social goals rather than the risk of the loans, which discourages private 

mortgage insurance.

 Moral hazard. In addition, prior to entering conservatorship, Fannie Mae and Freddie Mac may 

have discouraged proper underwriting and monitoring due to weaknesses in quality control 

processes and ‘reps and warrants’ frameworks. The FHFA, under the conservatorship, has 

pushed Fannie Mae and Freddie Mac to strengthen these processes. Until these rules are fully 

embedded, the fear that loan originators may be forced to take back nonperforming loans onto 

their balance sheet and possible reputation (and litigation) risks associated with what may later 

be perceived as inappropriate lending practices, are dampening willingness to lend.

 Risks to public balance sheet. The crisis demonstrated the fiscal risks from the implicit 

guarantee: on a fair-value basis, the estimated cost of federal subsidies over the coming 

10 years on new loan guarantees is $19 billion (CBO, 2014). 

 Costly cross-subsidization of social policy. Housing affordability and homeownership rates in the 

United States are broadly in line with other OECD countries, but are achieved at a significantly 

higher cost in terms of implicit fiscal subsidies—including through mortgage interest 
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deductions in the personal income tax and the quasi-fiscal costs borne by Fannie Mae and 

Freddie Mac.

121

 Supervisory and regulatory complexity. The existing construct leaves the FHFA in the role of 

both conservator and regulator of Fannie Mae and Freddie Mac, exposing it to the appearance 

of a conflict of interest. Oversight of nonbank mortgage servicers—which may be posing 

increasing risk—appears to be, in large part, exercised indirectly by FHFA guidance to Fannie 

Mae and Freddie Mac and by the consumer-protection standards issued by the CFPB.

122

116. In the past few years, there has been progress in a number of areas. Spearheaded by 

Title XIV (Mortgage Reform and Anti-Predatory Lending) of the DFA with an important role for the 

newly-established CFPB, this progress has also involved actions by the other agencies:

 Ability to repay and QM: The CFPB requires lenders to make a reasonable and good-faith 

determination that the borrower can meet their obligations. A loan that meets certain criteria is 

deemed to be a Qualified Mortgage (QM) and enjoys a safe harbor from legal challenges. 

These rules went into effect in January 2014.123

 Consumer protection: Rules to curb certain practices have been issued by the CFPB. These 

include loan originator compensations requirements, high-cost mortgage provisions (effective 

January 2014), and integration of mortgage disclosure requirements (effective August 2015). 

 National mortgage servicing standards: CFPB servicing rules govern how servicers are to 

process payments, notify borrowers of interest rate changes, resolve errors, and provide 

monthly statements, and treat loan modification applications, among other servicing functions. 

Compared to pre-crisis, servicing rules have been strengthened. These rules went into effect in 

January 2014.

 Risk retention and QRM: The risk retention rule to implement Title IX of the DFA includes 

definition of a Qualified Residential Mortgage (QRM). Mortgage loans eligible for sale to the 

secondary market for securitization must include either a 5 percent risk retention requirement 

or meet standards exempting loans from risk retention. QRMs are those loans meeting the new 

 

121 The benefits of these implicit fiscal costs for the most part accrue to the upper-income households and have little 

effect on promoting homeownership.

122 Servicers must continue advancing payments to lenders and investors for a period even after a borrower defaults. 

Hence, failure of a servicer could clog the system and generate problems for other participants in mortgage markets. 

Capital and liquidity requirements provide a buffer to this risk in the case of bank servicers, but the requirements for 

appropriate buffers in the case of nonbank servicers are not clear.

123 However, under its own underwriting guidelines, FHFA has adopted some but not all QM requirements, A ‘patch’ 

to the QM exempts loans purchased by Fannie Mae and Freddie Mac from the QM rule until January 10, 2021 or the 

end of conservatorship, whichever happens first. 
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standard and exempt from risk retention. The definition of QRM is aligned with that of QM.124

The QRM definition will be reviewed four years after it becomes effective (December 2015), and

every five years thereafter.

 Credit rating agency (CRA) reform: CRAs play a crucial role in the securitization process. The 

crisis has revealed deficiencies not only in CRA models but also the inherent conflicts of 

interest. The SEC issued new rules in August 2014 to boost ratings quality and increase CRA 

accountability. CRAs must erect strict boundaries between sales staff and employees handing 

out ratings to the securities, have procedures to conduct look-back reviews, review annually the 

internal controls in place and disclose credit rating performance statistics. Many of the rules 

became effective in late 2014 and January 2015, with the remainder in June 2015.

 FHFA actions: Under the conservatorship, the agency has reduced the retained portfolios of 

Fannie Mae and Freddie Mac, strengthened the regulatory oversight of the GSEs, promoted 

credit-risk sharing transactions, provided clarity on ‘reps and warrants’—which govern the putback decisions—and has been working on mortgage data standardization, a common 

securitization platform, and standards for nonbank servicers and private mortgage insurers.

117. Nonetheless, further actions are needed in some areas to address the systemic risks 

that were exposed during the crisis. For example, although foreclosures and delinquencies have 

decreased significantly, some banks are still saddled with large legacy loans. Reducing litigation risks 

(e.g., by expediting remaining PLS cases and settlements) and continuing the progress with loan 

workouts could help. In addition, and notwithstanding FHFA steps since 2012 to address concerns 

about put-back risk that have mitigated banks’ reluctance to get back in the mortgage origination 

and securitization business, further steps could be contemplated. These could include providing 

alternative dispute resolution processes and cure mechanisms for non-material mistakes and lowerseverity defects that do not directly affect mortgage default probability (FHFA is working to provide 

clarity on these issues).

118. It is essential that the authorities move swiftly to complete the reform of the U.S. 

housing market. Several legislative proposals have been introduced in Congress to complete the 

reform of Fannie Mae and Freddie Mac, and these share most of the broad goals that were 

recommended in the 2010 FSAP:

 Winding down Fannie Mae and Freddie Mac investment portfolios within a well-defined time 

period;

125

 

124 Originally proposed QRM rules imposed a down payment requirement but this was dropped in the final version 

based on the determination that the benefits of aligning the rule with QM would outweigh the incremental benefit of 

including an LTV on expected default rates.

125 From March 31, 2009 through December 31, 2014, Freddie Mac’s retained portfolio has decreased from $867 

billion to $408 billion, while Fannie Mae’s has decreased from $784 billion to $413 billion. Agreements with the 

Treasury require each portfolio to be below $250 billion by December 31, 2018.
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 Leveraging the government’s role in the market (including via Fannie Mae and Freddie Mac) to 

support standardization and computerization of mortgage data;

 A sizeable first-loss risk borne by private capital and a public backstop that is strictly limited to 

catastrophic losses and is funded by risk-based guarantee fees;

 Clear separation of roles for promoting access to credit and ensuring the stability and safety of 

the mortgage market; 

 Reducing cross-subsidization and market distortion by charging separately and appropriately

for prepayment of fixed-rate mortgages.

119. Emerging risks—including those stemming from the regulatory environment—should 

be monitored carefully. In particular:

 More clarity is needed in the regulatory framework for non-bank mortgage servicers. There has 

been a notable increase in nonbanks’ share of mortgage servicing. The increased regulatory 

burden and legal liabilities associated with the CFPB’s new servicing rules, combined with 

Basel III’s capital treatment of mortgage servicing assets, appears to be resulting in a shift of 

this function to nonbank servicers. More banks now elect to sell mortgages into the secondary 

market “servicing released” or to divest their servicing portfolios. The FHFA has started work on 

revision and alignment of servicer eligibility requirements. 

 Steps are needed to enhance the capacity of the private sector to deliver mortgage insurance, if 

the government sector is to step back. Although mortgage guarantees play an important role 

in the U.S. housing finance market (and provides an important alternative to FHA guarantees), 

only 3 percent of the private insurance industry is involved in mortgage insurance. The industry 

was hit hard by the crisis: of the eight insurers writing private mortgage insurance in 2000, only 

five remain active and, because of credit rating downgrades, they have been operating under 

waivers for the counterparty standards. It is encouraging that recently the industry has attracted 

new capital both through the formation of two new mortgage insurers and through capital 

raised by the legacy mortgage insurers. State insurance regulators and the FHFA are in the 

process of developing new capital standards and market regulations that aim to enhance the 

long-term viability of this insurance line.

 As noted earlier, there is scope for a stronger role for the FSOC in the discussion and analysis of 

macroprudential policies relating to the housing market, in order to maximize coordinated

actions by separate agencies. This could include the possible use of QM and QRM standards for 

macroprudential purposes as well as consideration as to how other possible tools such as LTV

ratios might be used.

 Especially in the light of the prospect of the normalization of monetary conditions, continued 

work on assessing and ameliorating interest rate risk by relevant supervisory agencies is 

essential. 
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Appendix 1. Remit and Organization of the Financial Stability 

Oversight Council

Remit: The FSOC was established by the DFA in 2010 with three primary purposes:

 To identify risks to the financial stability of the United States that could arise from the material 

distress or failure, or ongoing activities, of large, interconnected bank holding companies or 

nonbank financial companies, or that could arise outside the financial services marketplace.

 To promote market discipline, by eliminating expectations on the part of shareholders, 

creditors, and counterparties of such companies that the U.S. government will shield them from 

losses in the event of failure.

 To respond to emerging threats to the stability of the U.S. financial system. 

Membership: The Council has 10 voting members, and 5 non-voting members who serve in an 

advisory capacity:

Voting members:

 Secretary of the Treasury (who serves as Chair of the Council);

 Chair, Board of Governors of the Federal Reserve System;

 Chairperson, Federal Deposit Insurance Corporation (FDIC );

 Chair, Securities and Exchange Commission (SEC);

 Chair, Commodity Futures Trading Commission (CFTC);

 Director, Consumer Financial Protection Bureau (CFPB);

 Director, Federal Housing Finance Agency (FHFA);

 Comptroller of the Currency (OCC);

 Chair, National Credit Union Administration (NCUA);

 Independent Member with Insurance Expertise.

Non-Voting members:

 Director, Office of Financial Research, Department of the Treasury (OFR);

 Director, Federal Insurance Office, Department of the Treasury (FIO);
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64 INTERNATIONAL MONETARY FUND

 A state insurance commissioner designated by the state insurance commissioners;

 A state banking supervisor designated by the state banking supervisors;

 A state securities commissioner (or officer performing like functions) designated by the state 

securities commissioners.

Committees: The FSOC is supported by a Deputies Committee of senior staff from member 

agencies. In turn, the Deputies Committee directs and oversees the work of six Committees 

addressing: Systemic Risk; Designation of Nonbank Financial Companies; Designation of FMUs and 

Payment, Clearing and Settlement Activities; Heightened Prudential Standards; Orderly Liquidation 

Authority and Resolution Plans; and Data (see Figure 11).

Secretariat: The Council is supported by a dedicated Secretariat of just over 20 staff at the U.S. 

Treasury. 

Meetings: The Council must meet at least quarterly, but in practice has met approximately monthly 

on average since inception. Public notice of meetings is provided at least 7 days in advance. 

Summary readouts of meetings are provided immediately after each meeting. Minutes are 

approved and published immediately after the subsequent meeting.

1

Decision making: The base case for FSOC votes is a general majority of voting members. For

several specific decisions tighter criteria are applied. In particular, votes on designation of nonbank 

companies and FMIs require a vote of no fewer than 2/3 of the voting members then serving, 

including an affirmative vote of the Chair. Other criteria require different voting majorities. For 

example, section 121 of DF on actions to mitigate threats to financial stability when there is a ‘grave 

threat’ and section 119 on resolution of disputes among agencies both require an affirmative vote 

of no fewer than 2/3 of the voting members then serving (i.e., there is no requirement for an 

affirmative vote of the Chair).

Accountability: The FSOC is accountable to Congress through the publication of an Annual Report 

and through testimony to Congress on the FSOC’s activities and emerging threats to financial 

stability.

___________________________________

1 No transcripts of meetings are prepared for release at a later date. 
Appendix Figure 1. Organizational Structure of FSOC







FSOC

Deputies

Systemic Risk 

Committee

Designation –

Nonbank 

Financial 

Companies

Designation of 

FMUs and 

Payment, 

Clearing and 

Settlement 

Activities

Heightened 

Prudential 

Standards

Orderly 

liquidation 

authority, 

resolution plans

Data

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Appendix 2. The Office of Financial Research

The Office of Financial Research was established by the DFA within the Treasury Department 

to serve the Council, its member agencies and the public by improving the quality, 

transparency, and accessibility of financial data and information. Particular tasks include:

 Collecting data on behalf of the Council, and providing such data to the Council and member 

agencies;

 Standardizing the types and format of data reported and collected;

 Performing applied research and essential long-term research;

 Developing tools for risk measurement and monitoring.

A major task of the OFR is to develop and improve information and data by promoting 

standards and addressing data gaps. To take this forward, the Office has compiled and maintains 

an inventory describing the data that Council member agencies purchase or collect. Drawing on this 

and an assessment of gaps, the OFR is currently particularly focusing on: filling gaps in secured 

funding markets, including securities lending and repo markets,1/as well as exploring gaps in areas 

such as captive reinsurance, mortgages and other markets, and asset management activities. In 

relation to standards, the OFR has actively supported the advancement of the global LEI system, and 

is also working on a strategy to develop a unique mortgage loan-level identifier, as well as 

supporting the CFTC in the global discussions on the alignment and standards for derivatives 

reporting. The Office is also leading the work across FSOC member agencies to develop protocols 

and procedures for securely sharing data for monitoring and analysis. 

The OFR is also heavily involved in research and development of improved tools for financial 

stability analysis. The Office has developed a Financial Stability Monitor to address five 

components of financial stability risk (macroeconomic, market, credit, funding and liquidity, and 

contagion) in the form of a snapshot or ‘heat map’, and is building a suite of monitoring tools to 

assess risks to the financial system.

2/ Outputs from these tools will be presented regularly to FSOC 

and its Systemic Risk Committee—a version of a Financial Markets Monitor summarizing major 

developments and trends in global capital markets is already in regular use. The Monitor will be 

published monthly—the first public release was in February 2015.

_________________________________

1/

A pilot project to collect information on bilateral repo markets have recently been announced. The project is 

taken forward jointly by the OFR, FRB and FRBNY.

2/

See: OFR Annual Reports for 2013 and 2014.
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The OFR has some operational independence from FSOC. OFR is charged with preparing an 

independent annual report to Congress on the state of the U.S. financial system, including an 

analysis of any potential threats to financial stability. Such reports are timed to be issued mid-way

between the FSOC Annual reports. The OFR also has specific statutory responsibilities to evaluate

and report on stress tests and on the impact of policies related to systemic risk. Because of these 

responsibilities and because it is not charged with setting policy, the OFR may provide an objective 

appraisal of financial stability tools.

The OFR has grown rapidly from some 30 staff in Fiscal Year 2011, to nearly 225 in December 

2014. The steady state staffing level is expected to be around 300.
Appendix 3. Macroprudential Policy Tools in the United States

Policy tool Within planned 

U.S. framework

Implementation Date 

(if applicable)

Implementing 

Agencies

Trigger / Threshold Comment

Structural resilience1/

Additional capital surcharge for GSIBsYes Phased in over Jan 2016 

to Dec 2018

FRB 8 US G-SIBs2/Strengthening of FSB Standard. 

Includes funding risks element

Enhanced supplementary leverage 

ratio

Yes Jan 2018 FRB, FDIC and 

OCC

8 US G-SIBs Enhancement of Basel III 

standard (5 percent for G-SIBs)

Enhanced liquidity standards for 

systemic banks

Yes Phased in over Jan 

2015 to Dec 2016

FRB, FDIC and 

OCC

8 US G-SIBs + banks 

>$250 billion apply full U.S.

LCR

Full US LCR enhancement from 

Basel. LISCC firms subject to 

CLAR3/

Enhanced single counterparty 

exposure rules for systemic banks

Yes To be decided U.S. rules to be finalized

Designation and heightened 

prudential standards (nonbank 

SIFIs)

Yes Higher prudential 

standards to be decided 

—implementation date 

uncertain

FSOC, FRB FSOC designations. FRB to 

apply heightened prudential 

standards

Designation and heightened 

prudential standards (FMIs)

Yes 8 designations so far FSOC, FRB, SEC, 

CFTC

FSOC designations

Standards applied by FRB, 

SEC, CFTC

Rules adopted by the CFTC and 

the FRB, but not yet the SEC

1/ Stress testing also provides an important tool to support structural resilience. (See http://www.federalreserve.gov/bankinforeg/stress-tests-capitalplanning.htm) See also the accompanying Technical Note on stress testing.

2/ See: Tarullo (2014) “Rethinking the aims of Prudential Regulation.” 

3/ LISCC (Large Institutions Supervision Coordinating Committee)—A Federal Reserve committee to oversee supervision of the largest financial institutions 

(currently 16). CLAR (Comprehensive Liquidity Assessment Review).

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Appendix 3. Macroprudential Policy Tools in the United States (continued)

4/ See Governor Tarullo. http://www.federalreserve.gov/newsevents/testimony/tarullo20140909a.htm.

5/ The rule includes provision for faster implementation if an agency determines this is required.

6/ See Governor Brainard. http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.

Policy tool Within planned 

U.S. framework

Implementation Date 

(If applicable)

Implementing 

Agencies

Trigger / Threshold Comment

Systemic Liquidity and Run 

Risks

Enhanced liquidity standards 

for banks4/

See above for 

LCR. The United 

States will also 

propose and 

implement NSFR 

rules 

Uncertain FRB

NAV amendments and fees 

and gate amendments for 

MMMFs

Yes 2016 Q3 SEC

Haircuts and margins Yes Initial and variation 

margin for repos and 

SFT available (last used 

in 1970s)

FRB FRB reconsidering minimum 

margin requirements on 

additional form of securities 

credit5/

Tools to address cyclical 

buildup of risks

Countercyclical buffers Yes 2016 onwards (phased 

in Jan 2016 – Jan 2019)

FRB, OCC, FDIC Firms >$250 billion in assets 

or >$10 billion in foreign 

assets. Application triggers 

under research

Normally requires 1 year 

notification of implementation6/

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Appendix 3. Macroprudential Policy Tools in the United States (concluded)

7/ See Governor Brainard. http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.

8/ See Governor Brainard. http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.

9/ See OFR Annual Report 2014 and Governor Brainard. http://www.federalreserve.gov/newsevents/speech/brainard20141203a.htm.

Policy tool Within planned 

U.S. framework

Implementation Date 

(if applicable)

Implementing 

Agencies

Trigger / Threshold Comment

Altering capital risk weights 

on sectors / products

In principle7/Available in principle May require upwards of a year to 

implement8/

Other tools9/ Not at present

Others – supervisory guidance Yes Implemented Banking 

regulators

Applied recently in relation to 

leveraged loans 

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Appendix 4. Risks and Interconnectedness In and Around TPR

Vulnerabilities

Response Further 

Actions

1. Tri-party

Infrastructure

Intra-day 

credit 

exposures.

Reliance on 

two clearing 

banks.

Reengineering 

of the 

operations 

with intra-day 

credit virtually 

eliminated. 

Reduce 

reliance on the 

two clearing 

banks.

2. Broker 

Dealer

Regulation

Excessive 

leverage and 

maturity 

transformation.

Supervisory 

pressure to 

term out repo 

books.

Brokerdealers now 

largely 

captured 

within Basel III 

perimeter.

Complete 

review of 

broker-dealer 

rules.

3. MMMF

Regulation

Inadequate 

regulations 

resulting in a 

run on the 

industry.

Investment 

tightened.

New liquidity 

rules.

Stress testing 

requirements.

Variable NAVs 

and gates and 

fees for some 

funds.

Tighten rules 

on repo 

collateral.

Move all funds 

to variable 

NAV.

Tri-party 

Infrastructure

2 clearing 

banks

Money 

Market 

Mutual Funds

Investors 

Retail and 

Institutional 

Agent Lenders

[custodians, 

broker-dealers]

BrokerDealers

Securities 

Lenders

MFs/

Insurance 

Companies

Prime 

Brokerage 

Activity

Other 

Investments 

1

3

2

This diagram illustrates the TPR–related vulnerabilities exposed during the last crisis and does not 

attempt to show exhaustively all participant activities and interconnections.

Flow of funding

Flow of collateral

[Note: collateral does not actually leave the system]

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Appendix 5. Statistics on Financial Market Infrastructures

Appendix Table 1. Statistics on FMIs, 2013

System Number of 

transactions

(In million)

Value of 

transactions

(In billion

dollars) 

Number of 

participants

Rank worldwide (based 

on value of 

transactions)

Payment systems

CHIPS 103 379,984 50 3

CLS 205 1,291 65 1 (in FX transactions)

Fedwire Funds 134 713,310 6,930 2

Federal Reserve 

check clearings

6,171 8,137 na na

Central securities depositories

DTC 319 123,100 353, of which 

89 banks and 

264 other

8

Fedwire Securities 

Service

19 295,186 2,084, all banks 4

Central counterparties

FICC 40 1,155,200 161, of which 

37 banks and 

124 other

1 (in government 

securities)

NSCC 17,723 207,220 173, of which 

11 banks and 

162 other 

1 (in corporate securities)

Number of 

contracts 

traded 

(In billion)

Value of 

transactions

(In billion

dollars) 

Number of 

participants

OCC 4.17 na +/- 120 na

CME na 15,092 (IRS)

227 (CDS)

69 2 (in OTC IRS)

ICE Clear Credit na 7,645 (CDS) 30 1 (in OTC CDS)

Sources: BIS, Futures Industry Association, disclosure frameworks OCC, CME and ICC.
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Appendix Table 2. CCPs Offering OTC Derivatives Clearing 

(Notional amount outstanding, April 2014)

CCP IRS IRS Futures CDS FX

U.S.

ICE Clear Credit $928 billion

CME $27 trillion $11 billion $54 billion

Eris $10 billion

LCH.Clearnet LLC (U.S. (SwapClear 

service))

$26 billion

Europe

ICE Clear Europe $349 billion

CME Not public

Eurex $29.5 billion

LCH.Clearnet Ltd. $401 trillion $40 billion $117 billion

Asia

Singapore Exchange $32.1 billion $214 million

Hong Kong Exchange $700 million

Japan SCC $14 trillion $8 billion

CCIL India Small

Shanghai Clearing House $1 billion

Source: OTC Space.

Appendix Table 3. CCP Size of Financial Resources, December 2013 

(In billion dollars)

CCP Size of margin Size of clearing fund Comments

FICC 19.71/ Data as of June 30, 2014. Of the total deposits 

11.1 is in cash and 8.5 in securities. 

NSCC 4.42/ Data as of June 30, 2014. Of the total deposits 

4.2 is in cash and 0.2 in securities.

OCC 102 4 Data as of December 31, 2013

CME na CME has 3 guarantee funds:

Base 3.2

CDS 0.7 / IRS 1.2

Data as of December 31, 2013

The data concern the calculated guarantee fund. 

Actual deposits are higher.

ICE Clear 

Credit

16 1.9 Data as of September 30, 2014 

The clearing fund consists of 1.86 contributions 

from clearing members and 50 million of ICC. 

The data includes excess collateral.

Source: Disclosure frameworks of individual CCPs available on their website.

1/ FICC collects margin and other deposits and refers to them collectively as the clearing fund. 

2/ NSCC collects margin and other deposits and refers to them collectively as the clearing fund.
Appendix

6. FMI Landscape

UNITED STATES

OTC Source of 

transfers: Credit transfers, 

cards and cheques

Clearing 

systems:

Securities / FX 

settlement 

systems:

Fedwire Funds (RTGS) 

Cash 

settlement 

systems:

Payments 

FX Trading venues

(NYSE, NASDAQ and 

other U.S. markets)

OTC, 

SEFs

DTC

(SSS/CSD)

Exchange traded 

derivatives 

Government securities 

and MBS 

NSCC

(CCP)

Commercial banks 

Designated FMUs operated in the U.S.

CLS

ACHs

CME 

Group

FICC

(CCP)

OCC

(CCP)

CME

(CCP)

ICE CC 

(CCP)

OTC derivatives 

OTC, 

SEFs

Derivatives 

exchanges

OTC,

ECNs 

FSS

(SSS/CSD)

CHIPS 

Check

clearing

systems

NSS 

Card 

net

works

Interbank 

(USD)

Commercial 

banks

2 

Commercial 

banks 

Other 

CCPs

Corporate and municipal 

bond securities

Fed accounts 

Fedwire Funds (RTGS) 

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Appendix 7. Cross-Margining Arrangements and CSD Links

FMIs involved Description

1. FICC, CME Cross-margining arrangement

2. CME, OCC Cross margining arrangement

3. CME, Singapore Exchange Mutual Offset System Agreement, which enables traders to open a futures position on one exchange and liquidate it on the other.

4. OCC, ICE U.S. Cross margining arrangement

5. OCC, DTC Disbursement Program, which facilitates the payment of stock settlement obligations of common OCC clearing members and NSCC 

participants resulting from exercised and assigned equity options.

6. OCC, NSCC Disbursement Program, which facilitates the payment of stock settlement obligations of common OCC clearing members and NSCC 

participants resulting from exercised and assigned equity options.

7. NSCC, CDS CDS Clearing and Depository Services Inc. (“CDS”), the Canadian CSD and CCP, is a full service Member of NSCC

8. DTC, CDS CDS is a participant of DTC.

9. DTC, Sega Intersettle DTC is a participant of Sega Intersettle, the Swiss CSD

10. DTC, Clearstream Bank Frankfurt AG DTC and Clearstream Banking Frankfurt are participant in each other’s CSD

11. DTC, other Other CSDs are a participant of DTC, i.e. Investor CSDs that have DTC participant accounts with DVP settlement services are CAVALI, 

Peru; Merval, Argentina; and Depósito Central de Valores, Chile. Other Investor CSDs that have DTC accounts for free of payment 

transaction only, with no cash services other than corporate actions and billing are CREST International Nominees Ltd., UK and Ireland; 

Caja de Valores, S.A., Argentina; Tel Aviv Stock Exchange Clearing House (TASECH), Israel; Monte Titoli, S.p.A., Italy; Japan Securities 

Depository Center, Inc.; Central Depository (Pte.) Ltd., Singapore; and Hong Kong Securities Clearing Company Limited.

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Appendix 8. Dependencies of Designated FMUs on Commercial Bank Services

Designated

FMU

Settlement bank Collateral services Liquidity/Funding services Other

Payment systems

CHIPS Not applicable Not applicable Small group of funding 

agents acting on behalf of 

non-funding participants.

A relatively large percentage of the 

value of the payment messages is 

concentrated within a small number 

of participants.

CLS Not applicable Not applicable CLS has committed credit 

lines in US dollar, provided by 

a few CLS members.

In 2011, the three largest US-based 

third party service providers account 

for more than 48 percent of total 

third-party activity.

Central securities depository

DTC For cash settlement DTC 

relies on settlement banks 

to make the payments from 

and to DTC's account at the 

FRBNY, with a high 

concentration at the top five 

settlement banks.

Cash collateral is held at the 

FRBNY. Securities collateral is 

held at accounts in DTC.

DTC’s line of credit, 

established with a syndicate 

of 31 banks, totaled 2 billion 

USD at December 31, 2011. 

Canadian settlement is 

supported by a credit line of 

CAN$150 million of a DTC 

participant.

-

Central counterparties

CME Settlement is concentrated 

in three large settlement 

banks.

The largest settlement banks 

are also the largest custodians. 

Overnight collateral kept as 

repos.

Credit facility is relatively 

evenly dispersed over 

22 banks, including the 

settlement banks. Total value 

of credit lines was several 

billion U.S. dollars in 2011.

Some banks also act as general 

clearing member and/or help the 

CCP to liquidate and hedge the 

positions of a defaulting clearing 

member.

76UNITED STATES

INTERNATIONAL MONETARY FUND
Appendix 8. Dependencies of Designated FMUs on Commercial Bank Services (concluded)

Designated

FMU

Settlement bank Collateral services Liquidity/Funding services Other

FICC Two settlement banks settle 

cash and securities 

transactions. 

The two settlement banks also 

keep the collateral.

Credit lines provided by a 

consortium of 30 banks, the 

majority of which are also 

clearing members.

Some banks also act as general 

clearing member and/or help the 

CCP to liquidate and hedge the 

positions of a defaulting clearing 

member.

ICE Two settlement banks settle 

cash transactions.

The two settlement banks keep 

the collateral. Overnight 

collateral kept as repos.

ICE receives credit line from 

ICE Inc that receives credit 

from a syndicate of banks 

(10-12).

Some banks also act as general 

clearing member and/or help the 

CCP to liquidate and hedge the 

positions of a defaulting clearing 

member.

NSCC Settlement is concentrated 

in a few settlement banks.

Cash collateral is held at the 

FRBNY through the DTC 

account. Securities collateral is 

held at accounts in DTC.

Credit line provided by a 

consortium of 15 banks.

Some banks also act as general 

clearing member and/or help the 

CCP to liquidate and hedge the 

positions of a defaulting clearing 

member.

OCC Nine settlement banks, with 

volumes concentrated in 

three settlement banks.

The three settlement banks 

keep the collateral. 

Credit lines of $2 billion from 

a bank syndicate (some are 

also member) and $1 billion 

repos from a pension fund.

Some banks also act as general 

clearing member and/or help the 

CCP to liquidate and hedge the 

positions of a defaulting clearing 

member.

Source: Based on FSOC Annual Report 2012—Appendix A and discussions with FMIs.

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