February 4, 2022

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FINANCIAL STABILITY OVERSIGHT COUNCIL STATEMENT ON NONBANK FINANCIAL 

INTERMEDIATION

Nonbank financial institutions (NBFIs) are an essential source of capital in financial markets and 

provide vital funding to the U.S. economy. In 2016, the Financial Stability Oversight Council 

(Council) issued a statement describing risks to financial stability that may arise from certain 

asset management products and activities.

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 The market dislocations of March 2020 

demonstrated that some NBFIs remain vulnerable to acute financial stresses and may amplify or 

transmit stress in the financial system. In 2021, the Council made it a priority to evaluate and 

address the risks to U.S. financial stability posed by three types of NBFIs: hedge funds, open-end 

funds, and money market funds (MMFs). At its meeting on February 4, 2022, the Council 

received updates from member agency staff on progress over the past year regarding these three

types of NBFIs through working groups and Council member agency rulemaking activity. The 

Council will continue to evaluate, monitor, and address these risks to financial stability in 2022.

Hedge Funds

In 2021, the Council reestablished its Hedge Fund Working Group. A primary objective of this 

interagency staff-level working group was to update the Council’s assessment of potential risks 

to U.S. financial stability from hedge funds, their activities, and their interconnections with other 

market participants. Recent market events have provided opportunities to assess how financial 

strain at hedge funds—particularly those with significant leverage—could create risks to 

financial stability, and how a reduction in financial intermediation by hedge funds during periods 

of market stress could exacerbate market impairment. Hedge funds were among the three largest 

sellers of Treasury securities by category in March 2020, and they materially contributed to the 

Treasury market disruption during this period, although they were not its sole cause. The 

working group also found that the failure of Archegos Capital Management—a family office 

employing leveraged strategies also used by hedge funds—transmitted material stress to large, 

interconnected financial institutions. 

The Council supports the Hedge Fund Working Group’s efforts to establish an interagency risk 

monitoring system to identify potential emerging financial stability risks posed by hedge funds 

and to promote interagency collaboration in understanding those risks. The Council also 

supports the working group’s efforts to consider options to mitigate the risks it has identified.

The Hedge Fund Working Group also ascertained that gaps exist in the availability of data 

related to hedge funds, and Council member agencies are taking steps to address these gaps. The 

Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission 

(CFTC) are developing amendments to Form PF, the primary regulatory data source on the 

private fund industry. The SEC has proposed a new requirement that certain advisers to hedge 

1 Financial Stability Oversight Council, “Update on Review of Asset Management Products and Activities” (April 

18, 2016), available at 

https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%2

0Management%20Products%20and%20Activities.pdf.
February 4, 2022

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funds report timely information about events that indicate significant distress at a fund. In 

addition, the Council supports the Hedge Fund Working Group’s recommendation that the 

Office of Financial Research (OFR) consider ways to obtain better data on the uncleared bilateral 

repurchase agreement market, an important source of leverage for hedge funds.

Open-end Funds

In 2021, the Council also established an interagency staff-level Open-end Fund Working Group

to assess potential risks to U.S. financial stability arising from open-end funds, particularly their 

liquidity and redemption features. This working group evaluated the role of open-end funds in 

the market stress that occurred during the early stages of the COVID-19 pandemic, when largescale investor redemptions prompted funds to liquidate assets. U.S. open-end funds were among 

the largest recorded sellers of U.S. Treasuries, U.S. municipal bonds, and possibly U.S. corporate 

debt during this period. The impact of these asset sales on U.S. fixed income markets, together 

with sales by other investors, was magnified by poor liquidity and stressed trading conditions. 

Open-end funds were not the sole or primary cause of market stress—there was no single, 

primary cause—but the size of their asset liquidations indicates that they were one of the 

significant contributors to this stress.

The Council supports the Open-end Fund Working Group’s continued analysis of the potential 

risks to financial stability that may arise from liquidity transformation at open-end funds. SEC 

staff is considering whether to make recommendations regarding potential reforms of open-end 

funds to enhance resiliency during stressed market conditions, and the Council is encouraged by 

the SEC’s continued engagement on this critical issue.

Money Market Funds

MMFs are significant participants in short-term funding markets, which are a substantial source 

of funding for businesses and local governments and liquidity for investors. As described in the 

Overview of Recent Events and Potential Reform Options for Money Market Funds released by 

the President’s Working Group on Financial Markets in December 2020,2 significant outflows 

from MMFs during the early stages of the COVID-19 pandemic destabilized short-term funding 

markets. As in 2008, taxpayer-backed government intervention was necessary to support MMFs 

and short-term funding markets more broadly and to restore market functioning. These events 

underscored that MMFs have structural vulnerabilities that can create or transmit stress to shortterm funding markets.

The SEC recently proposed reforms that would increase the minimum liquidity requirements for 

MMFs, require some MMFs to adopt swing pricing, and remove MMFs’ ability to impose 

liquidity fees and redemption gates when funds fall below certain liquidity thresholds. These 

measures should help reduce the financial stability risks posed by MMFs. The Council supports

the SEC’s efforts to reform MMFs and strengthen short-term funding markets. 

2 https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf