This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

9028 

Vol. 84, No. 49 

Wednesday, March 13, 2019 

1 ‘‘Primary financial regulatory agency’’ is defined 

in section 2(12) of the Dodd-Frank Act, 12 U.S.C. 

5301(12). 

2Section 113 of the Dodd-Frank Act, 12 U.S.C. 

5323, refers to a Council ‘‘determination’’ regarding 

a nonbank financial company. This proposal refers 

to ‘‘determination’’ and ‘‘designation’’ 

interchangeably for ease of reading. 

FINANCIAL STABILITY OVERSIGHT 

COUNCIL 

12 CFR Part 1310 

RIN 4030–ZA00 

Authority To Require Supervision and 

Regulation of Certain Nonbank 

Financial Companies 

AGENCY: Financial Stability Oversight 

Council. 

ACTION: Notification of proposed 

interpretive guidance; request for public 

comment. 

SUMMARY: This proposed interpretive 

guidance, which would replace the 

Financial Stability Oversight Council’s 

existing interpretive guidance on 

nonbank financial company 

determinations, describes the approach 

the Council intends to take in 

prioritizing its work to identify and 

address potential risks to U.S. financial 

stability using an activities-based 

approach, and enhancing the analytical 

rigor and transparency in the processes 

the Council intends to follow if it were 

to consider making a determination to 

subject a nonbank financial company to 

supervision by the Federal Reserve. 

DATES: Comment due date: May 13, 

2019. 

ADDRESSES: You may submit comments 

by either of the following methods. All 

submissions must refer to the document 

title and RIN 4030–AA00. 

Electronic Submission of Comments: 

You may submit comments 

electronically through the Federal 

eRulemaking Portal at http://

www.regulations.gov. Electronic 

submission of comments allows the 

commenter maximum time to prepare 

and submit a comment, ensures timely 

receipt, and enables the Council to make 

them available to the public. Comments 

submitted electronically through the 

http://www.regulations.gov website can 

be viewed by other commenters and 

interested members of the public. 

Commenters should follow the 

instructions provided on that site to 

submit comments electronically. 

Mail: Send comments to Financial 

Stability Oversight Council, Attn: Mark 

Schlegel, 1500 Pennsylvania Avenue 

NW, Room 2208B, Washington, DC 

20220. 

All properly submitted comments will 

be available for inspection and 

downloading at http://

www.regulations.gov. 

In general, comments received, 

including attachments and other 

supporting materials, are part of the 

public record and are available to the 

public. Do not submit any information 

in your comment or supporting 

materials that you consider confidential 

or inappropriate for public disclosure. 

FOR FURTHER INFORMATION CONTACT: 

Bimal Patel, Office of Domestic Finance, 

Treasury, at (202) 622–2850; Eric 

Froman, Office of the General Counsel, 

Treasury, at (202) 622–1942; or Mark 

Schlegel, Office of the General Counsel, 

Treasury, at (202) 622–1027. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The statutory purposes of the 

Financial Stability Oversight Council 

(the ‘‘Council’’) are to identify risks to 

U.S. financial stability, promote market 

discipline, and respond to emerging 

threats to the stability of the U.S. 

financial system. The Council’s 

authorities to accomplish these statutory 

purposes include authorities to facilitate 

information sharing and coordination 

among regulators, monitor the financial 

services marketplace, make 

recommendations to regulators, and 

require supervision by the Board of 

Governors of the Federal Reserve 

System (the ‘‘Federal Reserve’’) for 

nonbank financial companies that may 

pose risks to U.S. financial stability. 

Section 111 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5321) (the ‘‘Dodd-Frank 

Act’’) established the Council. The 

purposes of the Council under section 

112 of the Dodd-Frank Act (12 U.S.C. 

5322) are (A) to identify risks to the 

financial stability of the United States 

that could arise from the material 

financial 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; (B) to 

promote market discipline, by 

eliminating expectations on the part of 

shareholders, creditors, and 

counterparties of such companies that 

the Government will shield them from 

losses in the event of failure; and (C) to 

respond to emerging threats to the 

stability of the United States financial 

system. 

As a threshold matter, the Council 

emphasizes the importance of market 

discipline, rather than government 

intervention, as a mechanism for 

addressing potential risks to U.S. 

financial stability posed by financial 

companies. The Dodd-Frank Act gives 

the Council broad discretion to 

determine how to respond to potential 

threats to U.S. financial stability. The 

Council’s duties under section 112 of 

the Dodd-Frank Act include monitoring 

the financial services marketplace in 

order to identify potential threats to U.S. 

financial stability, and recommending to 

the Council member agencies general 

supervisory priorities and principles 

reflecting the outcome of discussions 

among the member agencies. The 

Council’s duties under section 112 also 

include making recommendations to 

primary financial regulatory agencies 1

to apply new or heightened standards 

and safeguards for financial activities or 

practices that could create or increase 

risks of significant liquidity, credit, or 

other problems spreading among 

financial companies and markets. The 

Council intends to seek to identify, 

assess, and address potential risks and 

emerging threats on a system-wide basis 

by taking an activities-based approach 

to its work, as further explained below. 

The Dodd-Frank Act also authorizes 

the Council to determine that certain 

nonbank financial companies will be 

subject to supervision by the Federal 

Reserve and prudential standards. The 

Federal Reserve is responsible for 

establishing the prudential standards 

that will be applicable, under section 

165 of the Dodd-Frank Act, to nonbank 

financial companies subject to a Council 

designation 2 under section 113 of the 

Dodd-Frank Act. The Council has 

previously issued rules, guidance, and 

other public statements regarding its 


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Federal Register / Vol. 84, No. 49 / Wednesday, March 13, 2019 / Proposed Rules 9029 

3The 2012 Final Rule and Interpretive Guidance 

added a new part 1310 to title 12 of the Code of 

Federal Regulations, consisting of final rules (12 

CFR 1310.1–1310.23) and interpretive guidance 

(Appendix A to Part 1310—Financial Stability 

Oversight Council Guidance for Nonbank Financial 

Company Designations). See 12 CFR part 1310, app. 

A (2012). The Proposed Guidance proposes to 

modify appendix A, but does not propose to modify 

the final rules added to title 12 by the 2012 Final 

Rule and Interpretive Guidance. 

4 12 U.S.C. 5323, 5463; 77 FR 31855 (May 30, 

2012). 

5 78 FR 22546 (April 16, 2013). 

6 83 FR 12010 (March 19, 2018). 

7Financial Stability Oversight Council 

Supplemental Procedures Relating to Nonbank 

Financial Company Determinations (February 4, 

2015), available at https://www.treasury.gov/ 

initiatives/fsoc/designations/Documents/

Supplemental%20Procedures%20Related%20

to%20Nonbank%20Financial%20Company%20

Determinations%20-%20February%202015.pdf. 

8See Council, Staff Guidance Methodologies 

Relating to Stage 1 Thresholds (June 8, 2015), 

available at https://www.treasury.gov/initiatives/ 

fsoc/designations/Documents/FSOC%20Staff%20

Guidance%20-%20Stage%201%20Thresholds.pdf. 

9Treasury, Report to the President of the United 

States in Response to the Presidential Memorandum 

Issued April 21, 2017: Financial Stability Oversight 

Council Designations (November 17, 2017), 

available at https://www.treasury.gov/press-center/

press-releases/documents/pm-fsoc-designationsmemo-11-17.pdf. 

process for evaluating nonbank financial 

companies for a potential designation. 

On April 11, 2012, the Council issued 

interpretive guidance (the ‘‘2012 

Interpretive Guidance’’) regarding the 

manner in which the Council makes 

designations under section 113 of the 

Dodd-Frank Act, as an appendix to a 

final rule (together, the ‘‘2012 Final Rule 

and Interpretive Guidance’’).3 On May 

22, 2012, the Council approved hearing 

procedures relating to the conduct of 

hearings before the Council in 

connection with proposed 

determinations regarding nonbank 

financial companies and financial 

market utilities and related emergency 

waivers or modifications under sections 

113 and 804 of the Dodd-Frank Act.4

The hearing procedures were amended 

in 2013,5 and again in 2018.6 On 

February 4, 2015, the Council adopted 

supplemental procedures (the ‘‘2015 

Supplemental Procedures’’) to the 2012 

Final Rule and Interpretive Guidance.7

In June 2015, the Council published 

staff guidance with details regarding the 

methodologies used in Stage 1 

thresholds in connection with the 

determination process under section 

113.8 On November 17, 2017, the 

Department of the Treasury issued a 

report to the President in response to a 

Presidential Memorandum directing the 

Secretary of the Treasury to conduct a 

thorough review of the determination 

and designation processes of the 

Council.9 The Council is proposing this 

interpretive guidance (the ‘‘Proposed 

Guidance’’), which incorporates certain 

provisions of the 2015 Supplemental 

Procedures, to revise and update the 

2012 Interpretive Guidance. The 

Proposed Guidance is intended to 

enhance the Council’s transparency, 

analytical rigor, and public engagement. 

If the Council issues final interpretive 

guidance based on this proposal, the 

final interpretive guidance will replace 

the 2012 Interpretive Guidance, the 

2015 Supplemental Procedures, and the 

2015 staff guidance regarding the Stage 

1 thresholds; the Council’s hearing 

procedures will remain in effect. 

The Council expects that the 

Proposed Guidance will better enable 

the Council to: 

• Leverage the expertise of financial 

regulatory agencies; 

• Promote market discipline; 

• Maintain competitive dynamics in 

affected markets; 

• Appropriately tailor regulations to 

cost-effectively minimize burdens; and 

• Ensure the Council’s designation 

analyses are rigorous and transparent. 

II. Overview of Proposed Guidance 

The Proposed Guidance would revise 

the 2012 Interpretive Guidance in order 

to ensure that the Council’s work is 

clear, transparent and analytically 

rigorous, and to enhance the Council’s 

engagement with companies, regulators, 

and other stakeholders. By issuing clear 

and transparent guidance, the Council 

seeks to provide the public with 

sufficient information to understand the 

Council’s concerns regarding risks to 

financial stability, while appropriately 

protecting information submitted by 

companies and regulators to the 

Council. 

A. Key Changes From 2012 Interpretive 

Guidance 

The Proposed Guidance would 

substantially transform the Council’s 

existing procedures. Following are highlevel descriptions of several of the most 

important changes, which are explained 

in greater detail below. 

First, under the Proposed Guidance, 

the Council will prioritize its efforts to 

identify, assess, and address potential 

risks and threats to U.S. financial 

stability through a process that 

emphasizes an activities-based 

approach. This approach is consistent 

with the Council’s priorities of 

identifying and addressing potential 

risks and emerging threats on a systemwide basis, in order to reduce the 

potential for competitive market 

distortions that could arise from entityspecific determinations, and allow 

primary financial regulatory agencies to 

address identified potential risks. The 

Council will pursue entity-specific 

determinations under section 113 of the 

Dodd-Frank Act only if a potential risk 

or threat cannot be addressed through 

an activities-based approach. This 

approach will enable the Council to 

more effectively identify and address 

the underlying sources of risks to 

financial stability, rather than 

addressing risks only at a particular 

nonbank financial company that may be 

designated. 

Second, in the event the Council 

considers a nonbank financial company 

for a potential determination under 

section 113, the Proposed Guidance 

includes a new proposal that the 

Council perform a cost-benefit analysis 

prior to making a determination. The 

Council will make a determination 

under section 113 only if the expected 

benefits to financial stability from the 

determination justify the expected costs 

that the determination would impose. 

Third, under the Proposed Guidance, 

the Council will assess the likelihood of 

a nonbank financial company’s material 

financial distress when evaluating the 

firm for a potential designation, in order 

to evaluate the extent to which a 

designation may promote U.S. financial 

stability. 

Fourth, the Proposed Guidance 

condenses the current three-stage 

process for a determination under 

section 113 into two stages, by 

eliminating current stage 1 (as 

established by the 2012 Interpretive 

Guidance). Under current stage 1, a set 

of uniform quantitative metrics is 

applied to a broad group of nonbank 

financial companies in order to identify 

nonbank financial companies for further 

evaluation and to provide clarity for 

other nonbank financial companies that 

likely will not be subject to evaluation 

for a potential designation. The 

Proposed Guidance eliminates current 

stage 1, because it generated confusion 

among firms and members of the public 

and is not compatible with the proposal 

to prioritize an activities-based 

approach. 

Fifth, the Proposed Guidance further 

enhances the new, two-stage 

determination process by making 

numerous procedural improvements 

and incorporating several provisions of 

the 2015 Supplemental Procedures, 

which were intended to facilitate the 

Council’s engagement and transparency. 

The Proposed Guidance would increase 

the Council’s engagement with 

companies and their existing regulators 

during the designation process. One of 

the goals of this enhanced engagement 

is to provide the company with greater 

visibility into the aspects of its business 

that may pose risks to U.S. financial 


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9030 Federal Register / Vol. 84, No. 49 / Wednesday, March 13, 2019 / Proposed Rules 

10See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 

5323(a)(2). 

11See section C(1) below for a list of the 10 

statutory considerations. 

12References in this preamble and guidance to 

‘‘relevant financial regulatory agencies’’ may 

encompass a broader range of regulators than those 

included in the statutory definition of ‘‘primary 

financial regulatory agency.’’ See Dodd-Frank Act 

section 2(12), 12 U.S.C. 5301(12). 

13For example, the Council’s 2018 annual report 

noted risks such as cybersecurity events associated 

with the increased use of information technology, 

the concentrations of activities and exposures in 

central counterparties, and transition issues related 

to the move away from LIBOR to an alternative, 

sustainable reference rate. 

14The Council has a statutory duty to monitor the 

financial services marketplace in order to identify 

potential threats to U.S. financial stability. See 

Dodd-Frank Act section 112(a)(2)(C), 12 U.S.C. 

5322(a)(2)(C). 

15The 2012 Final Rule and Interpretive Guidance 

did not define ‘‘risk to financial stability.’’ 

stability. Enhanced engagement will 

also allow a company under review to 

provide the Council with relevant 

information, which will help to ensure 

that the Council is making decisions 

based on a diverse array of data and 

rigorous analysis. By making a company 

aware early in the review process of the 

potential risks the Council has 

identified, the Council seeks to give the 

company more information and tools to 

mitigate those risks prior to any Council 

designation, thereby providing a 

potential pre-designation ‘‘off-ramp.’’ 

The Proposed Guidance also includes 

procedures intended to clarify the postdesignation ‘‘off-ramp.’’ The Proposed 

Guidance provides that in the event the 

Council makes a final determination 

regarding a company, the Council 

intends to encourage the company or its 

regulators to take steps to mitigate the 

potential risks identified in the 

Council’s written explanation of the 

basis for its final determination. Except 

in cases where new material risks arise 

over time, if a company adequately 

addresses the potential risks identified 

in writing by the Council at the time of 

the final determination and in 

subsequent reevaluations, the Council 

should generally be expected to rescind 

its determination regarding the 

company. By clarifying the ‘‘off-ramp’’ 

to rescission, and taking other steps to 

promote designated nonbank financial 

companies’ ability to reduce the risks 

they could pose to financial stability, 

the Council seeks to both protect the 

U.S. financial system and reduce the 

regulatory burden on the companies. 

Sixth, the Proposed Guidance 

eliminates the six-category framework 

described in the 2012 Interpretive 

Guidance. As noted in the 2012 

Interpretive Guidance, the Dodd-Frank 

Act requires the Council to take into 

account 10 considerations when 

evaluating a company for a potential 

designation, and authorizes the Council 

to consider ‘‘any other risk-related 

factors that the Council deems 

appropriate.’’ 10 The 2012 Interpretive 

Guidance established an analytic 

framework that groups all relevant 

factors, including the 10 statutory 

considerations 11 and any additional 

risk-related factors, into six categories 

(size, interconnectedness, 

substitutability, leverage, liquidity risk 

and maturity mismatch, and existing 

regulatory scrutiny). The six-category 

framework has not proven useful in 

guiding the Council’s evaluations, and 

unnecessarily complicates the 

framework for the Council’s analysis. As 

a result, the Proposed Guidance 

eliminates this six-category framework. 

The following sections provide 

detailed descriptions of (1) the proposed 

activities-based approach (section B); (2) 

the proposed analytic framework for the 

Council’s evaluation of nonbank 

financial companies for a potential 

designation under section 113 of the 

Dodd-Frank Act (section C); and (3) the 

process that the Council will generally 

follow when determining whether to 

designate, or rescind the designation of, 

a nonbank financial company (section 

D). 

B. Activities-Based Approach 

Under the Proposed Guidance, the 

Council would prioritize its efforts to 

identify, assess, and address potential 

risks and threats to U.S. financial 

stability through a process that 

emphasizes an activities-based 

approach. The Council will pursue 

entity-specific determinations under 

section 113 of the Dodd-Frank Act only 

if a potential risk or threat cannot be 

addressed through an activities-based 

approach. This approach reflects two 

priorities: (1) Identifying and 

addressing, in consultation with 

relevant financial regulatory agencies,12

potential risks and emerging threats on 

a system-wide basis, thereby reducing 

the potential for competitive distortions 

among companies and in markets that 

could arise from entity-specific 

regulation and supervision, and (2) 

allowing relevant financial regulatory 

agencies, which generally possess 

greater information and expertise with 

respect to company, product, and 

market risks, to address potential risks, 

rather than subjecting the companies to 

new regulatory authorities. The 2012 

Final Rule and Interpretive Guidance 

did not address the concept of an 

activities-based approach. 

The Dodd-Frank Act gives the Council 

broad discretion to determine how to 

respond to potential threats to U.S. 

financial stability. As part of its 

activities-based approach, the Council 

will examine a diverse range of financial 

products, activities, and practices that 

could pose risks to financial stability. 

The types of activities the Council will 

evaluate are often identified in the 

Council’s annual reports, and include 

activities related to the extension of 

credit, maturity and liquidity 

transformation, market making and 

trading, and other key functions critical 

to support the functioning of financial 

markets.13

The Proposed Guidance establishes a 

two-step process for the Council’s 

activities-based approach. In the first 

step, in an effort to identify potential 

risks to U.S. financial stability, the 

Council intends to monitor diverse 

financial markets and market 

developments, in consultation with 

relevant financial regulatory agencies, to 

identify products, activities, or practices 

that could pose risks to financial 

stability.14 The Council intends to 

continue to monitor a broad scope of 

financial markets and market 

developments, which may include 

corporate and sovereign debt and loan 

markets, equity markets, new or 

evolving financial products, activities, 

and practices, and developments 

affecting the resiliency of financial 

market participants. If the Council’s 

monitoring of markets and market 

developments identifies a product, 

activity, or practice that could pose a 

potential risk to U.S. financial stability, 

the Council, in consultation with the 

relevant financial regulatory agencies, 

will evaluate the potential risk to 

determine whether it merits further 

review or action. The Proposed 

Guidance defines a ‘‘risk to financial 

stability’’ as a risk of an event or 

development that could impair financial 

intermediation or financial market 

functioning to a degree that would be 

sufficient to inflict significant damage 

on the broader economy.15

In its analysis in the first step of the 

activities-based approach, the Council 

will evaluate the extent to which certain 

characteristics could amplify potential 

risks to U.S. financial stability arising 

from products, activities, or practices. 

While these characteristics may not 

themselves present risks to U.S. 

financial stability, the Council will 

consider whether the combination or 

prominence of such characteristics in 

the products, activities, or practices 

under evaluation, warrants further 

scrutiny. Such characteristics include 

asset valuation risk or credit risk; 


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16The Council has a statutory duty to 

‘‘recommend to the member agencies general 

supervisory priorities and principles reflecting the 

outcome of discussions among the member 

agencies’’ and to ‘‘make recommendations to 

primary financial regulatory agencies to apply new 

or heightened standards and safeguards for 

financial activities or practices that could create or 

increase risks of significant liquidity, credit, or 

other problems spreading among bank holding 

companies, nonbank financial companies, and 

United States financial markets.’’ See Dodd-Frank 

Act section 112(a)(2)(F), (K), 12 U.S.C. 5322(a)(2)(F), 

(K). 

17 Dodd-Frank Act section 120(a), 12 U.S.C. 

5330(a). 

leverage, including leverage arising from 

debt, derivatives, off-balance sheet 

obligations, and other arrangements; 

and the transparency of financial 

markets, such as growth in financial 

transactions occurring outside of 

regulated sectors, among others. When 

evaluating the potential risks associated 

with a product, activity, or practice, the 

Council will take into account these 

characteristics and various other factors 

that may exacerbate or mitigate the 

risks. For example, activities may pose 

greater risks if they are complex or 

opaque, are conducted without effective 

risk-management practices, are 

significantly correlated with other 

financial products, or are either highly 

concentrated or significant and 

widespread. A trading activity in a 

market subject to a significant amount of 

asset valuation risk, for instance, may 

pose a greater threat to financial 

stability if the activity is also complex. 

In contrast, regulatory requirements or 

market practices may mitigate risks by, 

for example, limiting exposures or 

leverage, enhancing risk-management 

practices, or restricting excessive risktaking. Regulatory requirements 

associated with a lending activity, such 

as an asset concentration limit or 

repayment test, may reduce the 

potential risk to financial stability 

stemming from the activity. Council 

members can, at their discretion, raise 

potential risks for consideration by the 

Council, including with respect to risks 

that are, or are migrating, outside a 

particular regulator’s jurisdiction. 

The Council’s analysis in the first step 

of the activities-based approach will 

generally focus on four framing 

questions, which analyze: (1) Triggers of 

potential risks (for example, sharp 

reductions in the valuation of particular 

classes of financial assets or significant 

credit losses); (2) how adverse effects of 

the potential risk may be transmitted to 

financial markets or market participants 

(for example, through direct or indirect 

exposures in financial markets to the 

potential risk or funding or trading 

pressures that may result from 

associated declines in asset prices); (3) 

the effects the potential risk could have 

on the financial system (for example, 

the scale and magnitude of adverse 

effects on other companies and markets, 

and whether such effects could be 

concentrated or diffused among market 

participants); and (4) whether the 

adverse effects of the potential risk 

could impair the financial system in a 

manner that could harm the nonfinancial sector of the U.S. economy (for 

example, through curtailed or 

interrupted provision of credit to nonfinancial companies). As part of this 

analysis, the Council will engage in a 

collaborative discussion with relevant 

regulators. 

If the Council identifies a potential 

risk to U.S. financial stability in step 

one of the activities-based approach, 

then in the second step, the Council will 

work with the relevant financial 

regulatory agencies at the federal and 

state levels to seek the implementation 

of actions to address the identified 

potential risk.16 The Council will 

coordinate among its members and 

member agencies and will follow up on 

supervisory or regulatory actions to 

ensure the potential risk is adequately 

addressed. The goal of this step is for 

existing regulators to take appropriate 

action, such as modifying their 

regulation or supervision of companies 

or markets under their jurisdiction in 

order to mitigate potential risks to U.S. 

financial stability identified by the 

Council. Measures that existing 

regulators can take to address a 

particular risk may vary widely, based 

on their authorities and the urgency of 

the risk. The Council would seek to take 

advantage of existing regulators’ 

expertise and regulatory authorities to 

address the potential risk identified by 

the Council. 

The Council anticipates that 

appropriate measures it may take to 

address an identified potential risk will 

typically take the form of relatively 

informal actions, such as information 

sharing among regulators, but as 

deemed appropriate could also include 

more formal measures, such as the 

Council’s public issuance of 

recommendations to regulators or the 

public. Such recommendations could be 

made in the Council’s annual report, 

which includes the Council’s 

recommendations to enhance the 

integrity, efficiency, competitiveness, 

and stability of U.S. financial markets, 

to promote market discipline, and to 

maintain investor confidence. 

Alternatively, if after engaging with 

relevant financial regulatory agencies, 

the Council finds that those regulators’ 

actions are insufficient to address the 

identified potential risk to U.S. financial 

stability, the Council has authority 

under section 120 of the Dodd-Frank 

Act to ‘‘provide for more stringent 

regulation of a financial activity’’ by 

publicly issuing nonbinding 

recommendations to primary financial 

regulatory agencies to apply new or 

heightened standards and safeguards for 

a financial activity or practice 

conducted by bank holding companies 

or nonbank financial companies under 

their jurisdictions.17 This transparent 

process includes consultation with the 

primary financial regulatory agency and 

public notice inviting comments. The 

Council intends to make 

recommendations under section 120 of 

the Dodd-Frank Act only to the extent 

that its recommendations are consistent 

with the statutory mandate of the 

relevant primary financial regulatory 

agency. 

The Council expects that much of its 

initial identification and assessment of 

risks, and engagement with regulators, 

will be informal and nonpublic in 

nature. The staffs of Council members 

and member agencies will likely be 

responsible for much of the market 

monitoring, risk identification, 

information sharing, and analysis in the 

activities-based approach. This 

engagement may yield a range of diverse 

outcomes, including the sharing of data, 

research, and analysis among the 

Council and regulators, or the public 

issuance of recommendations by the 

Council in its annual report. Potential 

risks that merit further attention may be 

raised at meetings of the Council 

members or with other stakeholders, 

and, as appropriate, may result in public 

statements or recommendations by the 

Council, as described above. 

Questions for Comment on ActivitiesBased Approach: 

General Questions: 

1. Does the Council’s proposal 

described above to prioritize its efforts 

to identify, assess, and address potential 

risks and threats to U.S. financial 

stability through a process that 

emphasizes an activities-based approach 

allow the Council to achieve its 

statutory purposes? Should the 

Council’s proposed approach to the 

activities-based approach be modified 

for other considerations? 

2. When undertaking the activitiesbased approach, are there specific 

categories of risks to U.S. financial 

stability that should be examined by the 

Council? 

Step One of Activities-Based 

Approach: Identifying Potential Risks 


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18See Dodd-Frank Act section 102(a)(4), 12 U.S.C. 

5311(a)(4). 

19See Dodd-Frank Act section 102(a)(6), 12 U.S.C. 

5311(a)(6). 

20See Dodd-Frank Act section 102(b), 12 U.S.C. 

5311(b). The Federal Reserve published a final rule 

in April 2013 establishing the requirements for 

determining if a company is ‘‘predominantly 

engaged in financial activities.’’ See 12 CFR 242.3. 

21See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 

5323(a)(2). This list reflects the statutory 

considerations applicable to a determination with 

respect to a U.S. nonbank financial company. The 

Council is required to consider corresponding 

factors in making a determination with respect to 

a foreign nonbank financial company. 

from Products, Activities, or Practices 

(Appendix, s. II(a)): 

3. Are the proposed financial markets 

and market developments examples 

(including corporate and sovereign debt 

and loan markets, equity markets, 

markets for other financial products, 

including structured products and 

derivatives, and short-term funding 

markets) for identifying products, 

activities, or practices that could pose 

risks to financial stability appropriate? 

4. What specific, consistent analyses 

should the Council perform to monitor 

markets generally or specific types of 

markets? 

5. The Proposed Guidance identifies 

certain characteristics that may amplify 

potential risks to U.S. financial stability 

arising from products, activities, or 

practices. Are the proposed 

characteristic examples (including asset 

valuation risk or credit risk, leverage, 

and liquidity risk or maturity mismatch) 

appropriate? Are there additional 

characteristics that the Council should 

consider, or are any of the identified 

criteria inappropriately specified? 

6. Are the four framing questions 

described in the Proposed Guidance for 

evaluating potential risks appropriate? 

Step Two of Activities-Based 

Approach: Working with Regulators to 

Address Identified Risks (Appendix, s. 

II(b)): 

7. Should the Council make any 

changes to step two of the activitiesbased approach, as described in the 

Proposed Guidance? 

C. Analytic Framework for Nonbank 

Financial Company Determinations 

The Council expects to advance 

beyond the activities-based approach, 

and evaluate a nonbank financial 

company for a potential determination 

under section 113 of the Dodd-Frank 

Act, only in a limited set of 

circumstances—namely, if (1) the 

Council’s collaboration and engagement 

with the relevant financial regulatory 

agencies does not adequately address 

the potential risk identified by the 

Council, or if the potential threat to U.S. 

financial stability is outside the 

jurisdiction or authority of financial 

regulatory agencies, and (2) the 

potential threat identified by the 

Council is one that could be addressed 

by a Council determination regarding 

one or more companies. Following is a 

description of the substantive analysis 

the Council would undertake regarding 

any nonbank financial company under 

review for a potential determination. 

1. Statutory Standards and 

Considerations 

Title I of the Dodd-Frank Act defines 

a ‘‘nonbank financial company’’ as a 

domestic or foreign company that is 

‘‘predominantly engaged’’ in ‘‘financial 

activities,’’ other than bank holding 

companies and certain other types of 

firms.18 The Dodd-Frank Act provides 

that a company is ‘‘predominantly 

engaged’’ in financial activities if either 

(1) the annual gross revenues derived by 

the company and all of its subsidiaries 

from financial activities, as well as from 

the ownership or control of insured 

depository institutions, represent 85 

percent or more of the consolidated 

annual gross revenues of the company; 

or (2) the consolidated assets of the 

company and all of its subsidiaries 

related to financial activities, as well as 

related to the ownership or control of 

insured depository institutions, 

represent 85 percent or more of the 

consolidated assets of the company.19

The Dodd-Frank Act requires the 

Federal Reserve to establish the 

requirements for determining whether a 

company is ‘‘predominantly engaged in 

financial activities’’ for this purpose.20

Section 113 of the Dodd-Frank Act 

authorizes the Council to subject a 

nonbank financial company to 

supervision by the Federal Reserve and 

prudential standards if the Council 

determines that (1) material financial 

distress at the nonbank financial 

company could pose a threat to U.S. 

financial stability (the ‘‘First 

Determination Standard’’), or (2) the 

nature, scope, size, scale, concentration, 

interconnectedness, or mix of the 

activities of the nonbank financial 

company could pose a threat to U.S. 

financial stability (the ‘‘Second 

Determination Standard’’). The analytic 

framework in the Proposed Guidance 

focuses primarily on the First 

Determination Standard, because risks 

to financial stability (such as asset fire 

sales or financial market disruptions) 

are most commonly propagated through 

a nonbank financial company when it is 

in distress. 

The Council is statutorily required to 

take into account the following 

considerations in making a 

determination under section 113 of the 

Dodd-Frank Act: 21

• The extent of the leverage of the 

company; 

• The extent and nature of the offbalance-sheet exposures of the 

company; 

• The extent and nature of the 

transactions and relationships of the 

company with other significant nonbank 

financial companies and significant 

bank holding companies; 

• The importance of the company as 

a source of credit for households, 

businesses, and State and local 

governments and as a source of liquidity 

for the U.S. financial system; 

• The importance of the company as 

a source of credit for low-income, 

minority, or underserved communities, 

and the impact that the failure of such 

company would have on the availability 

of credit in such communities; 

• The extent to which assets are 

managed rather than owned by the 

company, and the extent to which 

ownership of assets under management 

is diffuse; 

• The nature, scope, size, scale, 

concentration, interconnectedness, and 

mix of the activities of the company; 

• The degree to which the company 

is already regulated by one or more 

primary financial regulatory agencies; 

• The amount and nature of the 

financial assets of the company; 

• The amount and types of the 

liabilities of the company, including the 

degree of reliance on short-term 

funding; and 

• Any other risk-related factors that 

the Council deems appropriate. 

The Proposed Guidance clarifies 

several terms used in the Determination 

Standards that are not defined in the 

Dodd-Frank Act, including ‘‘company,’’ 

‘‘material financial distress,’’ and 

‘‘threat to the financial stability of the 

United States.’’ The Proposed Guidance 

would define ‘‘threat to the financial 

stability of the United States’’ by 

reference to the potential for ‘‘severe 

damage on the broader economy,’’ in 

contrast to the definition in the 2012 

Interpretive Guidance, which refers to 

‘‘significant’’ damage. 

2. Transmission Channels 

The Proposed Guidance explains that 

the Council’s evaluation of a nonbank 

financial company for a potential 

designation will focus primarily on how 


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the negative effects of the company’s 

material financial distress, or of the 

nature, scope, size, scale, concentration, 

interconnectedness, or mix of the 

company’s activities, could be 

transmitted to or affect other firms or 

markets, thereby causing a broader 

impairment of financial intermediation 

or of financial market functioning. The 

Council has identified three 

transmission channels as most likely to 

facilitate the transmission of these 

negative effects. These transmission 

channels are: (1) The exposure 

transmission channel; (2) the asset 

liquidation transmission channel; and 

(3) the critical function or service 

transmission channel. While these 

transmission channels were also 

described in the 2012 Interpretive 

Guidance, the Proposed Guidance 

would substantially enhance and clarify 

the Council’s analyses under these three 

channels. 

a. Exposure Transmission Channel 

Under the exposure transmission 

channel, the Council will evaluate 

whether a nonbank financial company’s 

creditors, counterparties, investors, or 

other market participants have direct or 

indirect exposure to the nonbank 

financial company that is significant 

enough to materially and adversely 

affect those or other creditors, 

counterparties, investors, or other 

market participants and thereby pose a 

threat to U.S. financial stability. Among 

other factors, the Council expects to 

evaluate the amounts of exposures, the 

degree of protection for the counterparty 

under the terms of transactions, whether 

the largest counterparties include large 

financial institutions, and the 

company’s leverage and size. The 

Council will also consider the exposures 

that counterparties and other market 

participants have to a nonbank financial 

company arising from the company’s 

capital markets activities. The Council 

expects to consider a variety of factors 

in connection with this analysis, such as 

the amount and nature of, and 

counterparties to, the company’s 

outstanding debt (regardless of term) 

and other liabilities, derivatives 

transactions (which may be measured 

on the basis of gross notional amount, 

net fair value, or potential future 

exposures), and securities financing 

transactions, among others. The Council 

will also consider factors that mitigate 

the potential risks posed by exposures 

to the nonbank financial company, such 

as whether exposures of a company’s 

counterparties arising from capital 

markets activities are collateralized by 

high-quality, highly liquid securities. 

The Proposed Guidance notes that the 

Council will consider the extent to 

which assets are managed rather than 

owned by the company, in recognition 

of the distinct nature of exposure risks 

when the company is acting as an agent 

rather than as principal. In particular, in 

the case of a nonbank financial 

company that manages assets on behalf 

of customers or other third parties, the 

third parties’ direct financial exposures 

are often to the issuers of the managed 

assets, rather than to the nonbank 

financial company managing those 

assets. Finally, the Council will evaluate 

the potential for contagion in 

conjunction with other factors 

summarized above when evaluating risk 

under this channel. As part of this 

assessment, the Council will consider 

relevant industry-specific historical 

examples, the scope of the company’s 

interconnectedness with large financial 

institutions, and market-based or 

regulatory factors that may mitigate the 

risk of contagion, among other factors. 

b. Asset Liquidation Transmission 

Channel 

Under the asset liquidation 

transmission channel, the Council will 

consider whether a nonbank financial 

company holds assets that, if liquidated 

quickly, could cause a fall in asset 

prices and thereby significantly disrupt 

trading or funding in key markets or 

cause significant losses or funding 

problems for other firms with similar 

holdings. The Council may also 

consider whether a deterioration in 

asset pricing or market functioning 

could pressure other financial firms to 

sell their holdings of affected assets in 

order to maintain adequate capital and 

liquidity, which, in turn, could produce 

a cycle of asset sales that could lead to 

further market disruptions. The 

Council’s analysis of the asset 

liquidation transmission channel will 

focus on three central factors: (1) 

Liquidity of the company’s liabilities; 

(2) liquidity of the company’s assets; 

and (3) potential fire sale impacts. 

When analyzing the liquidity of the 

company’s liabilities, the Council will 

assess the company’s liquidity risk by 

reviewing factors such as the company’s 

short-term financial obligations, 

financial arrangements that can be 

terminated by counterparties and 

therefore become short-term, and longterm liabilities that may come due in a 

short-term period, among other factors. 

The Council will also evaluate the 

company’s leverage (for example, by 

assessing total assets and total debt 

measured relative to total equity, and 

derivatives liabilities and off-balance 

sheet obligations relative to total 

equity), as well as the company’s shortterm debt ratio. When analyzing the 

liquidity of the company’s assets, the 

Council will consider which assets the 

company could rapidly liquidate, if 

necessary, to satisfy its obligations. The 

Council expects to focus on the size and 

liquidity characteristics of the 

company’s investment portfolio, 

grouping the assets into categories based 

on liquidity. Finally, when analyzing 

potential fire sale impacts, the Council 

will consider the potential effects of the 

company’s asset liquidation on markets 

and market participants. The Council 

will apply quantitative models to assess 

how the company could satisfy the 

identified range of potential liquidity 

needs, identified in the previous step of 

the Council’s analysis, by rapidly selling 

its identified liquid assets. 

c. Critical Function or Service 

Transmission Channel 

Finally, under the critical function or 

service transmission channel, the 

Council will consider the potential for 

a nonbank financial company to become 

unable or unwilling to provide a critical 

function or service that is relied upon 

by market participants and for which 

there are no ready substitutes. This 

analysis considers the extent to which 

other firms could provide similar 

financial services in a timely manner at 

a similar price and quantity if a 

nonbank financial company withdraws 

from a particular market, a factor 

commonly known as ‘‘substitutability.’’ 

Substitutability also captures situations 

in which a nonbank financial company 

is the primary or dominant provider of 

services in a market that the Council 

determines to be essential to U.S. 

financial stability. When evaluating this 

transmission channel, the Council may 

consider the nonbank financial 

company’s activities and critical 

functions and the importance of those 

activities and functions to the U.S. 

financial system, including how those 

activities and functions would be 

performed by the company or other 

market participants in the event of the 

company’s material financial distress; 

the competitive landscape for markets 

in which a nonbank financial company 

participates and for the services it 

provides; the company’s market share in 

specific product lines; and the ability of 

substitutes to replace a service or 

function provided by the company, 

among other factors. 

In addition to the three transmission 

channels, the Proposed Guidance 

explains that the Council also intends to 

consider a nonbank financial company’s 

complexity, opacity, and resolvability 

when evaluating whether the company 

poses a risk to U.S. financial stability. 


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22See MetLife, Inc. v. Financial Stability 

Oversight Council, 177 F. Supp.3d 219, 242 (D.D.C. 

2016) (quoting 12 U.S.C. 5323(a)(2)(K) and 

Michigan v. Environmental Protection Agency, 135 

S. Ct. 2699, 2707 (2015)). 

23See Office of Management and Budget Circular 

A–4 (Sept. 17, 2003). 

As part of this analysis, the Council may 

assess the complexity of the nonbank 

financial company’s legal, funding, and 

operational structure, and any obstacles 

to the rapid and orderly resolution of 

the company. In addition, consistent 

with section 113 of the Dodd-Frank Act, 

the Proposed Guidance explains that the 

Council will consider the degree to 

which a nonbank financial company is 

already regulated by one or more 

primary financial regulatory agencies. 

When considering existing regulatory 

scrutiny, the Council may weigh factors 

such as the extent to which the 

company’s primary financial regulator 

has imposed risk-management standards 

as relevant to the type of company, as 

well as regulators’ processes for interregulator coordination. 

Questions for Comment on Analytic 

Framework for Nonbank Financial 

Company Determinations: 

General Questions: 

8. The Proposed Guidance describes a 

uniform analytic framework for 

determinations that would be applied 

across industries; are there industryspecific factors that should be addressed 

in the Proposed Guidance? 

9. The Proposed Guidance defines 

‘‘material financial distress’’ as a 

nonbank financial company being in 

imminent danger of insolvency or 

defaulting on its financial obligations. 

Should the Council consider alternative 

interpretations of this term or apply 

additional metrics or criteria when 

interpreting this term? 

10. The Proposed Guidance defines 

‘‘threat to the financial stability of the 

United States’’ as the threat of an 

impairment of financial intermediation 

or of financial market functioning that 

would be sufficient to inflict severe 

damage on the broader economy. What 

criteria or metrics should the Council 

consider when evaluating whether a 

threat is sufficient to inflict ‘‘severe’’ 

damage on the broader economy? 

11. Are the Council’s proposed three 

transmission channels (appendix, s. 

III(b)) appropriate for evaluating 

whether a nonbank financial company 

under section 113 of the Dodd-Frank 

Act meets one of the Determination 

Standards? 

a. Do the three transmission channels 

capture the ways in which the negative 

effects described in the Determination 

Standards could be transmitted to or 

affect other firms or markets? 

b. Are there ways in which the three 

transmission channels (or the three 

factors that the Council will focus on in 

the asset liquidation channel) may 

interact that would compound the 

negative effects of a single channel? 

Exposure Transmission Channel 

(Appendix, s. III(b)): 

12. The Council may consider various 

types of exposures that counterparties 

and other market participants have to a 

nonbank financial company, which the 

Proposed Guidance notes are highly 

dependent on the nature of the 

company’s business. Are there other 

unique types of exposures that such 

parties may have to a nonbank financial 

company, or factors that may mitigate 

the risks posed by these exposures? 

How should the Council take into 

account any such mitigating factors in 

its analysis? 

Asset Liquidation Transmission 

Channel (Appendix, s. III(b)): 

13. The Council may consider a 

company’s liquidity risk, based on a set 

of proposed factors (short-term financial 

obligations. financial arrangements that 

can be terminated by counterparties and 

therefore become short-term, etc.) when 

evaluating the asset liquidation channel. 

Are there other factors the Council 

should consider, in addition to those 

proposed? Is there an appropriate time 

period during which the Council should 

evaluate a company’s liquidity risk, 

tailored for specific types of financial 

products? 

14. The Council may also evaluate a 

company’s leverage when evaluating 

this transmission channel, based on a 

set of proposed factors (including total 

assets and total debt measured relative 

to total equity, and derivatives liabilities 

and off-balance sheet obligations 

relative to total equity). Are there other 

factors the Council should consider, in 

addition to those proposed? How should 

the Council assess the effects of a 

company’s leverage in this channel? 

15. When evaluating potential fire 

sale impacts as part of this channel, 

what quantitative models should the 

Council consider? 

Critical Function or Service 

Transmission Channel (Appendix, s. 

III(b)): 

16. Are there relevant quantitative 

metrics for measuring risks under the 

critical function or service transmission 

channel? Should the Council consider 

additional factors under this channel 

when evaluating the activities and 

functions of a company in order to 

measure its substitutability? 

17. What metrics can be used to 

measure whether a service or function is 

critical to financial stability? 

Complexity and Resolvability; 

Existing Regulatory Scrutiny (Appendix, 

s. III(c)–(d)): 

18. Is the Council’s proposed 

framework appropriate for assessing the 

complexity and resolvability of a 

nonbank financial company and its 

existing regulatory scrutiny (appendix, 

s. III(c)–(d)) when considering a 

potential designation? 

3. Other Considerations 

Under the Proposed Guidance, the 

Council will perform a cost-benefit 

analysis before making any designation 

under section 113. The Council 

proposes to make a designation under 

section 113 only if the expected benefits 

justify the expected costs that the 

determination would impose.22 The key 

elements of regulatory analysis include 

(1) a statement of the need for the 

proposed action, (2) an examination of 

alternative approaches, and (3) an 

evaluation of the benefits and costs of 

the proposed action and the main 

alternatives.23 The Council will quantify 

reasonable estimable benefits and costs 

(using ranges, as appropriate), and will 

also consider non-quantified benefits 

and costs, in assessing the net benefits 

of a designation. The Council will 

conduct this analysis only in cases 

where the Council is concluding that 

the company meets one of the standards 

for a determination by the Council 

under section 113 of the Dodd-Frank 

Act, because in other cases doing so 

would not affect the outcome of the 

Council’s analysis. 

The Council will consider the benefits 

of a designation to the U.S. financial 

system, the U.S. economy, and the 

nonbank financial company due to 

additional regulatory and supervisory 

requirements resulting from the 

determination, including the benefits of 

the prudential standards adopted by the 

Federal Reserve under section 165 of the 

Dodd-Frank Act. When evaluating 

potential benefits to the U.S. financial 

system and the U.S. economy arising 

from a designation, the Council may 

consider whether the designation 

enhances financial stability and 

improves the functioning of markets by 

reducing the likelihood or severity of a 

potential financial crisis, among other 

factors. With respect to companyspecific benefits, a company subject to 

a designation may derive benefits from 

anticipated new or increased 

requirements, including, for example, a 

lower cost of capital or higher credit 

ratings upon meeting its postdesignation regulatory and supervisory 

requirements. 

When evaluating the costs of a 

designation, the Council will consider 


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24 177 F. Supp.3d 219 (D.D.C. 2016). 

25The Council would be most likely to consider 

a determination under section 113 only in rare 

instances such as an emergency situation or if a 

potential threat to U.S. financial stability is outside 

the jurisdiction or authority of financial regulatory 

agencies. 

26As discussed in section II(A) above, the 

Proposed Guidance eliminates the six-category 

framework described in the 2012 Interpretive 

Guidance. 

not only the cost to the nonbank 

financial company from anticipated new 

or increased regulatory requirements in 

connection with a designation, but also 

costs to the U.S. economy. Relevant 

costs to the company will likely include 

costs related to risk-management 

requirements, supervision and 

examination, and liquidity 

requirements. When evaluating the costs 

of a determination to the U.S. economy, 

the Council will assess the impact of the 

determination on the availability and 

cost of credit or financial products in 

relevant U.S. markets, among other 

factors. 

Consistent with sound risk regulation, 

the Council will consider not only the 

impact of an identifiable risk, but also 

the likelihood that the risk will be 

realized. The Council will therefore 

assess the likelihood of a company’s 

material financial distress, applying 

qualitative and quantitative factors, 

when evaluating the overall impact of a 

Council designation for any company 

under review under the First 

Determination Standard. To assess the 

risk of material financial distress, the 

Council may consider a range of factors, 

including market-based measures (e.g., 

distance-to-default measures), 

accounting-based measures (e.g., 

statistical models using capital 

adequacy), and market- and accountingbased measures (e.g., academic models). 

The Council’s analysis of the likelihood 

of a nonbank financial company’s 

material financial distress will be 

conducted taking into account a period 

of overall stress in the financial services 

industry and a weak macroeconomic 

environment. When possible, the 

Council will attempt to quantify the 

likelihood of material financial distress; 

as an alternative, when doing so is not 

possible with respect to a specific firm, 

the Council will generally consider 

quantitative and qualitative factors 

related to the types of market-based or 

accounting-based measures noted above, 

and historical examples regarding the 

characteristics of financial companies 

that have experienced financial distress. 

As noted below, the Council will 

consult with the company’s primary 

financial regulatory agency (if any) 

when assessing the company, including 

regarding the company’s resolvability, 

complexity, and the likelihood of its 

material financial distress. 

Questions for Comment on Other 

Considerations (Benefits and Costs of 

Determination; Likelihood of Material 

Financial Distress): 

Benefits and Costs of Determination 

(Appendix, s. III(e)): 

19. Is the proposed framework for 

assessing the benefits and costs of a 

potential determination appropriate? 

How should the Council assess benefits 

and costs that are difficult to monetize 

or quantify? 

20. Should the Council consider other 

benefits or costs than those proposed in 

section III.e of the Proposed Guidance? 

21. How should the Council estimate 

the costs of any new regulatory 

requirements that would result from the 

Council’s designation? What sources 

should the Council rely upon when 

estimating such costs? 

22. Should the Council consider 

additional factors when considering the 

benefits or costs of a designation to the 

U.S. economy? 

23. Should the Council consider any 

additional benefits to the company 

subject to a designation, or additional 

benefits to the U.S. financial system and 

the U.S. economy arising from a Council 

designation other than those listed in 

section III.e of the Proposed Guidance? 

How should the Council quantify any 

such benefits? What sources should the 

Council rely upon when estimating such 

benefits? 

24. How should the Council address 

uncertainty (for example, using alternate 

baselines or sensitivity analyses)? 

25. Are there additional approaches 

the Council should consider when 

measuring potential threats to financial 

stability in order to assess any 

improvement in financial stability 

following a determination? 

26. Should the Council interpret its 

authority under section 113 of the 

Dodd-Frank Act in a manner that is 

consistent with the opinion of the U.S. 

District Court for the District of 

Columbia in MetLife, Inc. v. Financial 

Stability Oversight Council? 24

Likelihood of Material Financial 

Distress (Appendix, s. III(e)): 

27. Is the proposed framework for 

assessing the likelihood of material 

financial distress when evaluating the 

impact of a potential determination 

appropriate? 

28. What metrics or factors should the 

Council consider when attempting to 

quantify the likelihood of a company’s 

material financial distress? If such 

quantification is not possible with 

respect to a specific company, what 

additional factors should the Council 

consider? What are the appropriate 

methodologies or models (including 

appropriate time horizons and 

assumptions) to assess the likelihood of 

a nonbank financial company’s material 

financial distress? 

29. After the Council assesses the 

likelihood of a company’s material 

financial distress, what should be the 

threshold for the Council taking further 

action regarding a potential 

determination with respect to the 

company? 

D. Determination and Annual 

Reevaluation Process 

As noted above, the Council will 

prioritize an activities-based approach 

for identifying, assessing, and 

addressing potential risks to financial 

stability. The Council, may, however, 

subject a nonbank financial company to 

review for an entity-specific 

determination under section 113 of the 

Dodd-Frank Act if the activities-based 

approach would not adequately address 

potential risks to U.S. financial 

stability.25

The Proposed Guidance condenses 

the current three-stage determination 

process into two stages by eliminating 

current stage 1, makes other procedural 

improvements, and incorporates certain 

provisions of the 2015 Supplemental 

Procedures.26 Following is a description 

of the processes set forth in the 

Proposed Guidance for the Council’s 

evaluation of a nonbank financial 

company for a potential determination 

under section 113 and the Council’s 

annual reevaluations of any such 

determinations. 

1. Stage 1: Preliminary Evaluation of 

Nonbank Financial Companies 

In the first stage of the determination 

process, the Council will notify 

nonbank financial companies identified 

as potentially posing risks to U.S. 

financial stability. The Council or its 

Deputies Committee will vote to 

commence review of a nonbank 

financial company in Stage 1. Under the 

Proposed Guidance, the Council would 

engage extensively with the relevant 

company and its existing financial 

regulators during Stage 1. 

The Council’s preliminary analysis 

will be based on quantitative and 

qualitative information available to the 

Council primarily through public and 

regulatory sources. In addition, a 

company under review in Stage 1 may 

voluntarily submit to the Council any 

information it deems relevant to the 

Council’s evaluation and may, upon 

request, meet with staff on the Council’s 

analytical team. In order to reduce the 

burdens of review on the company, the 


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Council will not require the company to 

submit information during Stage 1. The 

Council may consider the company and 

its subsidiaries together, to enable the 

Council to consider potential risks 

arising across the consolidated 

organization. 

For any company under review in 

Stage 1 that is regulated by a primary 

financial regulatory agency or home 

country supervisor, the Council will 

consult with the regulator, as 

appropriate, before the Council votes on 

whether to advance the company to 

Stage 2. In consideration of the benefits 

that the Council will derive from 

extensive engagement with a company’s 

primary financial regulatory agency, the 

Council will actively solicit the 

regulator’s views regarding risks at the 

company and potential means to 

mitigate those risks, and will share its 

preliminary views regarding potential 

risks at the company with the regulator. 

The Council will continue to encourage 

the regulator to address relevant risks 

using the regulator’s existing 

authorities. 

Enhanced engagement in Stage 1 is 

intended to allow a company under 

review to provide the Council with 

relevant information, which will help to 

ensure that the Council is making 

decisions based on a diverse array of 

data and rigorous analysis, and to 

provide the company with greater 

visibility into the aspects of its business 

that may pose risks to U.S. financial 

stability. Another goal of the enhanced 

engagement in Stage 1 is to enable the 

company to take actions in response to 

the Council’s concerns, thereby 

providing a pre-designation ‘‘off-ramp,’’ 

while not burdening a company with 

the relatively higher costs that may be 

incurred during a Stage 2 evaluation. By 

making a company aware of the 

potential risks the Council has 

identified during its preliminary review, 

the Council seeks to give the company 

more information and tools to mitigate 

those risks prior to any Council 

designation. Following the preliminary 

evaluation in Stage 1, the Council may 

decide not to evaluate the company 

further, or it may begin a more detailed 

analysis of the company by advancing it 

to Stage 2. 

2. Stage 2: In-Depth Evaluation 

In Stage 2, the Council will conduct 

an in-depth evaluation of any company 

that the Council has determined in 

Stage 1 merits additional review. Under 

the Proposed Guidance, the Council 

would continue in Stage 2 to engage 

extensively with the relevant company 

and its existing regulators. 

In Stage 2, the Council will request 

that the company provide information 

that the Council deems relevant to its 

evaluation, which will involve both 

qualitative and quantitative data. The 

Council will take certain preliminary 

steps before requiring the submission of 

reports from any nonbank financial 

company that is regulated by a Council 

member agency or any primary financial 

regulatory agency; acting through the 

Office of Financial Research (OFR), the 

Council will coordinate with these 

agencies and, whenever possible, rely 

on information available from the OFR 

or these agencies. 

The Council will also take steps to 

facilitate a transparent review process 

with the company during Stage 2. 

During Stage 2, the company may 

submit any other information that it 

deems relevant to the Council’s 

evaluation, and the Council will make 

staff on the Council’s analytical team 

available to meet with the 

representatives of the company, to 

explain the evaluation process and the 

framework for the Council’s analysis. If 

the analysis in Stage 1 has identified 

specific aspects of the company’s 

operations or activities as the primary 

focus for the evaluation, staff will notify 

the company of those issues. The 

Proposed Guidance also provides for the 

Council’s Deputies Committee to meet 

with a company in Stage 2, to allow the 

company to present any information or 

arguments it deems relevant to the 

Council’s evaluation. In addition, the 

Council will seek to continue its 

consultation with the company’s 

primary financial regulatory agency or 

home country supervisor in a timely 

manner before the Council makes any 

proposed or final determination, 

encouraging the relevant regulator to 

address relevant risks using the 

regulator’s existing authorities. The 

Council will notify the company when 

the Council believes that the evidentiary 

record regarding the company is 

complete, before the Council makes any 

proposed determination regarding the 

company, or alternatively notifies the 

company that it is no longer being 

considered for a designation at that 

time. 

3. Proposed Determination; Hearing 

The procedural steps related to the 

Council’s proposed determinations, 

subsequent hearings, and final 

determinations are largely specified in 

section 113 of the Dodd-Frank Act. The 

Proposed Guidance reflects and expands 

on those mandatory procedures. 

A nonbank financial company may be 

considered for a proposed 

determination based on the analysis 

performed in Stage 2. In the event the 

Council votes to make a proposed 

determination, the Council will issue a 

written notice and explanation of the 

proposed determination to the 

company, and will also provide the 

company’s primary financial regulatory 

agency or home country supervisor 

(subject to appropriate protections for 

confidential information) with the 

nonpublic written explanation of the 

basis for the proposed determination. In 

accordance with section 113(e) of the 

Dodd-Frank Act, a nonbank financial 

company that is subject to a proposed 

determination may request a nonpublic 

hearing before the Council to contest the 

proposed determination. 

4. Final Determination 

After making a proposed 

determination and holding any 

requested written or oral hearing, the 

Council may make a final determination 

in accordance with the Dodd-Frank Act 

that the company will be subject to 

supervision by the Federal Reserve and 

prudential standards. If the Council 

makes a final determination regarding 

the company, the Council will provide 

the company with a written notice of 

the Council’s final determination, 

including an explanation of the basis for 

the Council’s decision, and will also 

provide the company’s primary 

financial regulatory agency or home 

country supervisor with the nonpublic 

written explanation of the basis of the 

Council’s final determination, subject to 

appropriate protections for confidential 

information. Under the Proposed 

Guidance, the Council expects that its 

explanation of the final basis for any 

determination will highlight the key 

risks that led to the determination and 

include clear guidance regarding the 

factors that were most important in the 

Council’s determination. The final 

determination process also incorporates 

several procedural steps in the 2015 

Supplemental Procedures. For example, 

the Council will provide each 

designated nonbank financial company 

with an opportunity for an oral hearing 

before the Council once every five years 

at which the company can contest the 

designation. 

Consistent with the 2012 Interpretive 

Guidance, when practicable and 

consistent with the purposes of the 

determination process, the Council will 

provide a nonbank financial company 

with a notice of a final determination at 

least one business day before publicly 

announcing the determination. As a 

result, the Council generally would not 

issue any public notice regarding its 

determination vote on the day of the 

vote; instead, to enable the company 


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27 In a reevaluation of a determination, the 

Council may choose to consider only one 

Determination Standard, because changes that 

address the potential risks previously identified by 

the Council under one Determination Standard may 

also address potential risks relevant to the other 

Determination Standard. 

28See, for example, Dodd-Frank Act sections 

112(a)(2), 113, 115, 120, 804, 12 U.S.C. 5322(a)(2), 

5323, 5325, 5330, 5463. 

adequately to prepare its public 

disclosures regarding the Council’s 

determination, the first public 

announcement by the Council will 

generally be the day after the Council’s 

vote. 

5. Annual Reevaluations of Nonbank 

Financial Company Determinations 

For any nonbank financial company 

that is subject to a final determination, 

the Council is required by statute to 

reevaluate the determination at least 

annually, and to rescind the 

determination if the Council determines 

that the company no longer meets the 

statutory standards for a designation. 

The Proposed Guidance proposes to 

incorporate a number of additional 

procedural steps for annual 

reevaluations to enhance engagement 

with companies and their regulators, 

and to increase transparency. One of the 

goals of these changes is to clarify the 

‘‘off-ramp’’ process for a designated 

company, which would enable the 

company to identify changes it could 

consider making to address the potential 

threat to financial stability identified by 

the Council, and receive feedback 

regarding whether those changes may 

address the Council’s concerns. The 

Council intends that this process should 

be flexible and tailored to the risks 

posed by designated companies, rather 

than hard-wired or overly prescriptive. 

The process is intended to incentivize 

designated companies to address the 

key factors that led to designation, 

which would promote the Council’s 

goal of reducing risks to U.S. financial 

stability. 

As an example, the Proposed 

Guidance provides that in the event the 

Council makes a final determination 

regarding a company, the Council 

intends to encourage the company and, 

if appropriate, its regulators to take 

steps to mitigate the potential risks 

identified in the Council’s written 

explanation of the basis for its final 

determination. Except in cases where 

new material risks arise over time, if a 

company adequately addresses the 

potential risks identified in writing by 

the Council at the time of the final 

determination and in subsequent 

reevaluations, the Council should 

generally be expected to rescind its 

determination regarding the company. 

To facilitate this process, companies are 

encouraged during annual reevaluations 

to submit information regarding any 

changes related to the company’s risk 

profile that mitigate the potential risks 

identified in the Council’s final 

determination of the company and in 

reevaluations of the determination. If 

the company explains in detail potential 

changes it could make to its business to 

address the potential risks previously 

identified by the Council, staff of 

Council members and Council member 

agencies will endeavor to provide their 

feedback on the extent to which those 

changes may address the potential risks. 

The Proposed Guidance also 

underscores that the Council applies the 

same standards of review in its annual 

reevaluations as the standard for an 

initial determination regarding a 

nonbank financial company: Either the 

company’s material financial distress, or 

the nature, scope, size, scale, 

concentration, interconnectedness, or 

mix of the company’s activities, could 

pose a threat to U.S. financial stability. 

If the Council determines that the 

company no longer meets those 

standards, the Council will rescind its 

determination. The Proposed Guidance 

also stresses that, while the Council’s 

annual reevaluation of a company 

subject to a final determination will 

generally focus on changes since the 

Council’s previous review, the ultimate 

question the Council will seek to assess 

is whether changes in the aggregate 

since the company’s designation have 

caused the company to cease meeting 

the Determination Standards.27

Questions for Comment on 

Determination Process and Annual 

Reevaluations: 

General Questions: 

30. Do the proposed changes to the 

determination and reevaluation process 

achieve the intended purposes of 

improving the Council’s engagement 

with companies, regulators, and other 

stakeholders and incorporating various 

due process and other procedural 

improvements designed to foster a fair, 

more transparent, and more robust 

engagement with companies under 

review? 

31. In certain circumstances, a 

company’s regulator may be willing to 

share confidential information with the 

Council only if the Council commits, to 

the extent permissible under applicable 

law, to maintain the confidentiality of 

the information and not to share the 

information with the subject company. 

How should the Council balance 

regulators’ need for confidentiality with 

the need to be transparent with 

companies under review? 

Stage 1: Preliminary Evaluation of 

Nonbank Financial Companies 

(Appendix, s. IV(a)): 

32. Are there specific factors or 

considerations that the Council should 

discuss with a primary financial 

regulatory agency or home country 

supervisor of a company under review 

in Stage 1? What types of information 

should the Council solicit from the 

agency or supervisor? 

Stage 2: In-Depth Evaluation 

(Appendix, s. IV(b)): 

33. Should the Council follow 

additional procedural steps or steps for 

outreach to a company that has entered 

Stage 2? 

34. Should the Council take 

additional steps to work with the 

primary financial regulatory agency or 

home country supervisor of a company 

that has entered Stage 2 before making 

a designation? 

Annual Reevaluations of Nonbank 

Financial Company Determinations 

(Appendix, s. V): 

35. Is the Council’s proposed process 

for annual reevaluations of nonbank 

financial company determinations 

appropriate? 

36. Should the Council follow 

additional procedural steps, or provide 

additional opportunities for a company 

to provide information to the Council, 

before the Council conducts its annual 

reevaluation of the company? 

37. How should the Council narrow 

the amount of information evaluated 

during the annual reevaluation process, 

given the compressed timeframe for 

annual reviews? What issues should the 

Council focus on, given this compressed 

timing? 

38. If the Council does not rescind a 

determination with respect to a 

company, should the Council provide 

additional explanation to the company, 

or additional procedural steps for the 

company to respond to the Council’s 

decision? 

III. Legal Authority of Council and 

Status of the Proposed Guidance 

The Council has numerous authorities 

and tools under the Dodd-Frank Act to 

carry out its statutory purposes.28 The 

Council expects that its response to any 

potential risk or threat to U.S. financial 

stability will be based on an assessment 

of the circumstances. As the agency 

charged by Congress with broad-ranging 

responsibilities under sections 112 and 

113 of the Dodd-Frank Act, the Council 

has the inherent authority to promulgate 

interpretive guidance under those 

provisions that explains and interprets 

the statutory factors that the Council 

will consider when employing the 


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29Courts have recognized that ‘‘an agency 

charged with a duty to enforce or administer a 

statute has inherent authority to issue interpretive 

rules informing the public of the procedures and 

standards it intends to apply in exercising its 

discretion.’’ See, for example, Production Tool v. 

Employment & Training Administration, 688 F.2d 

1161, 1166 (7th Cir. 1982). The Supreme Court has 

acknowledged that ‘‘whether or not they enjoy any 

express delegation of authority on a particular 

question, agencies charged with applying a statute 

necessarily make all sorts of interpretive choices.’’ 

See U.S. v. Mead, 533 U.S. 218, 227 (2001). 

30See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 

5321(e)(2). 

31See Association of Flight Attendants-CWA, 

AFL–CIO v. Huerta, 785 F.3d 710 (D.C. Cir. 2015). 

32See 5 U.S.C. 553(b)(A). 33See note 3 above. 

activities-based approach and 

undertaking the determination 

process.29 The Council also has 

authority to issue procedural rules 30

and policy statements.31 The Proposed 

Guidance describes the Council’s 

interpretation of the statutory factors 

and provides transparency to the public 

as to how the Council intends to 

exercise its statutory grant of 

discretionary authority. Except to the 

extent that the Proposed Guidance sets 

forth rules of agency organization, 

procedure, or practice, the Council has 

concluded that the Proposed Guidance 

does not have binding effect; does not 

impose duties on, or alter the rights or 

interests of, any person; does not change 

the statutory standards for the Council’s 

decision making; and does not relieve 

the Council of the need to make entityspecific determinations in accordance 

with section 113 of the Dodd-Frank Act. 

The Proposed Guidance also does not 

limit the ability of the Council to take 

emergency action under section 113(f) 

of the Dodd-Frank Act if the Council 

determines that such action is necessary 

or appropriate to prevent or mitigate 

threats posed by a nonbank financial 

company to U.S. financial stability. As 

a result, the Council has concluded that 

the notice and comment requirements of 

the Administrative Procedure Act do 

not apply.32 Nonetheless, the Council 

invites interested persons to submit 

comments regarding the Proposed 

Guidance. Furthermore, 

contemporaneous with the publication 

of this proposed interpretive guidance, 

the Council is separately publishing, 

elsewhere in this issue of the Federal 

Register, a final rule, RIN 4030–AA03, 

stating that the Council shall not amend 

or rescind its interpretive guidance on 

nonbank financial company 

determinations without providing the 

public with notice and an opportunity 

to comment under the Administrative 

Procedure Act. 

IV. Paperwork Reduction Act 

The collection of information 

contained in the Proposed Guidance has 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control 1505–0244. An 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a valid control number 

assigned by the Office of Management 

and Budget. 

The collection of information under 

the Proposed Guidance is found in 12 

CFR 1310.20–1310.23, which were 

added pursuant to the 2012 Final Rule 

and Interpretive Guidance.33

The hours and costs associated with 

preparing data, information, and reports 

for submission to the Council constitute 

reporting and cost burdens imposed by 

the collection of information. The 

estimated total annual reporting burden 

associated with the collection of 

information in the Proposed Guidance is 

20 hours, based on an estimate of one 

respondent. We estimate the cost 

associated with this information 

collection to be $9,000. These estimates 

are significantly lower than those in the 

Paperwork Reduction Act discussion in 

the 2012 Final Rule and Interpretive 

Guidance, because the Council expects 

that, notwithstanding any additional 

reporting burden that financial 

companies participating in the 

activities-based approach may incur, the 

aggregate reporting burden on 

companies will be significantly reduced 

as a result of the Council’s proposal to 

pursue entity-specific determinations 

under section 113 of the Dodd-Frank 

Act only if a potential risk or threat 

cannot be addressed through an 

activities-based approach. 

In making this estimate, the Council 

estimates that due to the nature of the 

information likely to be requested, 

approximately 75 percent of the burden 

in hours will be carried by financial 

companies internally at an average cost 

of $400 per hour, and the remainder 

will be carried by outside professionals 

retained by financial companies at an 

average cost of $600 per hour. In 

addition, in determining these 

estimates, the Council considered its 

obligation under 12 CFR 1310.20(b) to, 

whenever possible, rely on information 

available from the OFR or any Council 

member agency or primary financial 

regulatory agency that regulates a 

nonbank financial company before 

requiring the submission of reports from 

such nonbank financial company. The 

Council expects that its collection of 

information under the Proposed 

Guidance would be performed in a 

manner that attempts to minimize 

burdens for affected financial 

companies. The aggregate burden will 

be subject to the number of financial 

companies that participate in the 

activities-based approach or are 

evaluated in the determination process, 

the extent of information regarding such 

companies that is available to the 

Council through existing public and 

regulatory sources, and the amount and 

types of information that financial 

companies provide to the Council. 

Interested persons are invited to 

submit comments regarding the 

estimates provided in this section. 

Comments on the collection of 

information should be sent to the Office 

of Management and Budget, Attn: Desk 

Officer for the Financial Stability 

Oversight Council, Office of Information 

and Regulatory Affairs, Washington, DC 

20503, with copies to Samantha 

MacInnis, Department of the Treasury, 

Washington, DC 20220. Comments on 

the collection of information must be 

received by May 13, 2019. 

Comments are specifically requested 

concerning: 

(1) Whether the proposed collection 

of information is necessary for the 

proper performance of the functions of 

the Council, including whether the 

information will have practical utility; 

(2) The accuracy of the estimated 

burden associated with the proposed 

collection of information; 

(3) How the quality, utility, and 

clarity of the information to be collected 

may be enhanced; 

(4) How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

(5) Estimates of capital or start-up 

costs and costs of operation, 

maintenance, and purchase of services 

to provide information. 

V. Executive Orders 12866 and 13563 

Executive Orders 12866 and 13563 

direct certain agencies to assess costs 

and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 


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1See Dodd-Frank Act section 113, 12 U.S.C. 5323. 

2 ‘‘Primary financial regulatory agency’’ is defined 

in section 2(12) of the Dodd-Frank Act, 12 U.S.C. 

5301(12). 

3 Dodd-Frank Act section 112(a)(1), 12 U.S.C. 

5322(a)(1). 

4See FCC v. Fox Television Stations, Inc., 556 

U.S. 502, 515 (2009). 

5For example, the Council has authority to make 

recommendations to the Federal Reserve 

concerning the establishment and refinement of 

prudential standards and reporting and disclosure 

requirements applicable to nonbank financial 

companies supervised by the Federal Reserve; make 

recommendations to primary financial regulatory 

agencies to apply new or heightened standards and 

safeguards for a financial activity or practice 

conducted by certain financial companies if the 

Council determines that such activity or practice 

could create or increase certain risks; and designate 

financial market utilities and payment, clearing, 

and settlement activities that the Council 

determines are, or are likely to become, 

systemically important. Dodd-Frank Act sections 

115, 120, 804, 12 U.S.C. 5325, 5330, 5463. 

6References in this appendix to ‘‘relevant 

financial regulatory agencies’’ may encompass a 

broader range of regulators than those included in 

the statutory definition of ‘‘primary financial 

regulatory agency.’’ See Dodd-Frank Act section 

2(12), 12 U.S.C. 5301(12). 

and of promoting flexibility. The Office 

of Information and Regulatory Affairs 

within the Office of Management and 

Budget has designated this interpretive 

guidance as a ‘‘significant regulatory 

action’’ under section 3(f) of Executive 

Order 12866. 

List of Subjects in 12 CFR Part 1310 

Brokers, Investments, Securities. 

The Financial Stability Oversight 

Council proposes to amend 12 CFR part 

1310 as follows: 

PART 1310—AUTHORITY TO REQUIRE 

SUPERVISION AND REGULATION OF 

CERTAIN NONBANK FINANCIAL 

COMPANIES 

■ 1. The authority citation for part 1310 

continues to read as follows: 

Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 

12 U.S.C. 5323. 

■ 2. Appendix A is revised to read as 

follows: 

Appendix A to Part 1310—Financial 

Stability Oversight Council Guidance 

for Nonbank Financial Company 

Determinations 

I. Introduction 

Section 113 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (the 

‘‘Dodd-Frank Act’’) 1 authorizes the Financial 

Stability Oversight Council (the ‘‘Council’’) 

to determine that a nonbank financial 

company will be supervised by the Board of 

Governors of the Federal Reserve System (the 

‘‘Federal Reserve’’) and be subject to 

prudential standards in accordance with 

Title I of the Dodd-Frank Act if either of two 

standards is met. Under the first standard, 

the Council may subject a nonbank financial 

company to supervision by the Federal 

Reserve and prudential standards if the 

Council determines that material financial 

distress at the nonbank financial company 

could pose a threat to the financial stability 

of the United States. Under the second 

standard, the Council may determine that a 

nonbank financial company will be 

supervised by the Federal Reserve and 

subject to prudential standards if the nature, 

scope, size, scale, concentration, 

interconnectedness, or mix of the activities of 

the nonbank financial company could pose a 

threat to U.S. financial stability. Section 113 

of the Dodd-Frank Act also lists 

considerations that the Council must take 

into account in making a determination. 

Section II of this document describes the 

approach the Council intends to take in 

prioritizing its work to identify and address 

potential risks to U.S. financial stability 

using an activities-based approach. This 

approach reflects the Council’s priorities of 

identifying potential risks on a system-wide 

basis, reducing the potential for competitive 

distortions that could arise from entityspecific determinations, and allowing 

primary financial regulatory agencies 2 to 

address identified potential risks. First, the 

Council will monitor markets to identify 

potential risks to U.S. financial stability and 

to assess those risks on a system-wide basis. 

Second, the Council will then work with 

relevant regulators to seek the 

implementation of actions intended to 

address identified potential risks to financial 

stability. 

Section III of this appendix describes the 

manner in which the Council intends to 

apply the statutory standards and 

considerations in making determinations 

under section 113 of the Dodd-Frank Act, if 

the Council determines that potential risks to 

U.S. financial stability are not adequately 

addressed through the activities-based 

approach. Section III defines key terms used 

in the statute, including ‘‘threat to the 

financial stability of the United States.’’ 

Section III also includes a detailed 

description of the analysis that the Council 

intends to conduct during its reviews, 

including a discussion of channels through 

which risks from a company may be 

transmitted to other companies or markets, 

and the Council’s assessment of the 

likelihood of the company’s material 

financial distress and the benefits and costs 

of a determination. 

Section IV of this appendix outlines a twostage process that the Council will follow in 

non-emergency situations when determining 

whether to subject a nonbank financial 

company to Federal Reserve supervision and 

prudential standards. In the first stage of the 

process, the Council will notify the company 

and its primary financial regulatory agency 

and conduct a preliminary analysis to 

determine whether the company should be 

subject to further evaluation by the Council. 

During the second stage of the evaluation 

process, the Council will conduct an indepth evaluation if it determines in the first 

stage that the nonbank financial company 

merits additional review. 

The Council’s practices set forth in this 

guidance to address potential risks to U.S. 

financial stability are intended to comply 

with its statutory purposes: (1) To identify 

risks to U.S. financial stability that could 

arise from the material financial 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; (2) to promote market 

discipline, by eliminating expectations on 

the part of shareholders, creditors, and 

counterparties of such companies that the 

government will shield them from losses in 

the event of failure; and (3) to respond to 

emerging threats to the stability of the U.S. 

financial system.3 Council actions seek to 

foster transparency and to avoid any 

government intervention that could create 

competitive distortions in markets for 

financial services and products. Further, 

nonbank financial companies should not 

benefit from an implicit federal financial 

safety net. Therefore, the Council emphasizes 

the importance of market discipline as a 

mechanism for addressing potential risks to 

U.S. financial stability posed by financial 

companies. 

This interpretive guidance is not a binding 

rule, except to the extent that it sets forth 

rules of agency organization, procedure, or 

practice. This guidance is intended to assist 

financial companies and other market 

participants in understanding how the 

Council expects to exercise certain of its 

authorities under Title I of the Dodd-Frank 

Act. The Council retains discretion, subject 

to applicable statutory requirements, to 

consider factors relevant to the assessment of 

a potential risk or threat to U.S. financial 

stability on a case-by-case basis. If the 

Council were to depart from the 

interpretative guidance, it would need to 

provide a reasoned explanation for its action, 

which would ordinarily require 

acknowledging the change in position.4

II. Activities-Based Approach 

The Dodd-Frank Act gives the Council 

broad discretion in determining how to 

respond to potential threats to U.S. financial 

stability. A determination to subject a 

nonbank financial company to Federal 

Reserve supervision and prudential 

standards under section 113 of the DoddFrank Act is only one of several Council 

authorities for responding to potential risks 

to U.S. financial stability.5 The Council will 

prioritize its efforts to identify, assess, and 

address potential risks and threats to U.S. 

financial stability through a process that 

emphasizes an activities-based approach, and 

will pursue entity-specific determinations 

under section 113 of the Dodd-Frank Act 

only if a potential risk or threat cannot be 

addressed through an activities-based 

approach. This approach reflects two 

priorities: (1) Identifying and addressing, in 

consultation with relevant financial 

regulatory agencies,6 potential risks and 

emerging threats on a system-wide basis and 

to reduce the potential for competitive 

distortions among companies and in markets 

that could arise from entity-specific 

regulation and supervision, and (2) allowing 


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7 Dodd-Frank Act section 112(a)(2), 12 U.S.C. 

5322(a)(2). 

8 Dodd-Frank Act section 112(d)(3), 12 U.S.C. 

5322(d)(3). 

9The Dodd-Frank Act provides that the Council’s 

duties include to recommend to the member 

agencies general supervisory priorities and 

principles reflecting the outcome of discussions 

among the member agencies and to make 

recommendations to primary financial regulatory 

agencies to apply new or heightened standards and 

safeguards for financial activities or practices that 

could create or increase risks of significant 

liquidity, credit, or other problems spreading 

among bank holding companies, nonbank financial 

companies, and United States financial markets. 

Dodd-Frank Act sections 112(a)(2)(F), (K), 12 U.S.C. 

5322(a)(2)(F), (K). 

relevant financial regulatory agencies, which 

generally possess greater information and 

expertise with respect to company, product, 

and market risks, to address potential risks, 

rather than subjecting the companies to new 

regulatory authorities. 

As part of its activities-based approach, the 

Council will examine a range of financial 

products, activities, or practices that could 

pose risks to U.S. financial stability. These 

types of activities are often identified in the 

Council’s annual reports, such as activities 

related to (1) the extension of credit, (2) the 

use of leverage or short-term funding, (3) the 

provision of guarantees of financial 

performance, and (4) other key functions 

critical to support the functioning of 

financial markets. The Council considers a 

risk to financial stability to mean a risk of an 

event or development that could impair 

financial intermediation or financial market 

functioning to a degree that would be 

sufficient to inflict significant damage on the 

broader economy. The Council’s activitiesbased approach is intended to identify and 

address risks to financial stability using a 

two-step approach, described below. 

a. Step One of Activities-Based Approach: 

Identifying Potential Risks From Products, 

Activities, or Practices 

Monitoring Markets 

The Council has a statutory duty to 

monitor the financial services marketplace in 

order to identify potential threats to U.S. 

financial stability.7 In the first step of the 

activities-based approach, to enable the 

Council to identify potential risks to U.S. 

financial stability, the Council, in 

consultation with primary financial 

regulatory agencies, intends to monitor 

diverse financial markets and market 

developments to identify products, activities, 

or practices that could pose risks to financial 

stability. When monitoring potential risks to 

financial stability, the Council intends to 

consider the linkages across products, 

activities, and practices, and their 

interconnectedness across firms and markets. 

For example, the Council’s monitoring may 

include: 

• Corporate and sovereign debt and loan 

markets; 

• equity markets; 

• markets for other financial products, 

including structured products and 

derivatives; 

• short-term funding markets; 

• payment, clearing, and settlement 

functions; 

• new or evolving financial products, 

activities, and practices; and 

• developments affecting the resiliency of 

financial market participants. 

To monitor markets and market 

developments, the Council will review 

information such as historical data, research 

regarding the behavior of financial market 

participants, and new developments that 

arise in evolving marketplaces. The Council 

will regularly rely on data, research, and 

analysis from Council member agencies, the 

Office of Financial Research, industry 

participants, and other public sources. 

Consistent with its statutory obligations, the 

Council will, whenever possible, rely on 

information available from primary financial 

regulatory agencies.8

Evaluating Potential Risks 

If the Council’s monitoring of markets and 

market developments identifies a product, 

activity, or practice that could pose a 

potential risk to U.S. financial stability, the 

Council, in consultation with relevant 

financial regulatory agencies, will evaluate 

the potential risk to determine whether it 

merits further review or action. The Council’s 

work in this step may include efforts such as 

sharing data, research, and analysis among 

Council members and member agencies and 

their staffs; consultations with regulators and 

other experts regarding the scope of potential 

risks and factors that may mitigate those 

risks; and the collaborative development of 

analyses for consideration by the Council. As 

part of this work, the Council may also 

engage with industry participants and other 

members of the public as it assesses potential 

risks. 

The Council will assess the extent to which 

characteristics such as the following could 

amplify potential risks to U.S. financial 

stability arising from products, activities, or 

practices: 

• Asset valuation risk or credit risk; 

• leverage, including leverage arising from 

debt, derivatives, off-balance sheet 

obligations, and other arrangements; 

• liquidity risk or maturity mismatch, such 

as reliance on funding sources that could be 

susceptible to dislocations; 

• counterparty risk and 

interconnectedness among financial market 

participants; 

• the transparency of financial markets, 

such as growth in financial transactions 

occurring outside of regulated sectors; 

• operational risks, such as cybersecurity 

and operational resilience; or 

• the risk of destabilizing markets for 

particular types of financial instruments, 

such as trading practices that substantially 

increase volatility in key markets. 

Various factors may exacerbate or mitigate 

each of these types of risks. For example, 

activities may pose greater risks if they are 

complex or opaque, are conducted without 

effective risk-management practices, are 

significantly correlated with other financial 

products, and are either highly concentrated 

or significant and widespread. In contrast, 

regulatory requirements or market practices 

may mitigate risks by, for example, limiting 

exposures or leverage, enhancing riskmanagement practices, or restricting 

excessive risk-taking. 

While the contours of the Council’s initial 

evaluation of any potential risk will depend 

on the type and scope of analysis relevant to 

the particular risk, the Council’s analyses 

will generally focus on four framing 

questions: 

1. How could the potential risk be 

triggered? For example, could it be triggered 

by sharp reductions in the valuation of 

particular classes of financial assets? 

2. How could the adverse effects of the 

potential risk be transmitted to financial 

markets or market participants? For example, 

what are the direct or indirect exposures in 

financial markets to the potential risk? 

3. What impact could the potential risk 

have on the financial system? For example, 

what could be the scale of its adverse effects 

on other companies and markets, and would 

its effects be concentrated or distributed 

broadly among market participants? This 

analysis should take into account factors 

such as existing regulatory requirements or 

market practices that mitigate potential risks. 

4. Could the adverse effects of the potential 

risk impair the financial system in a manner 

that could harm the non-financial sector of 

the U.S. economy? 

If a product, activity, or practice creating 

a potential risk to financial stability is 

identified, the Council will work with 

regulators to address the identified risk, as 

described in section II.b of this appendix. 

b. Step Two of Activities-Based Approach: 

Working With Regulators To Address 

Identified Risks 

If the Council identifies a potential risk to 

U.S. financial stability in step one of the 

activities-based approach, the Council will 

work with the relevant financial regulatory 

agencies at the federal and state levels to seek 

the implementation of actions to address the 

identified potential risk. The Council will 

coordinate among its members and member 

agencies and will follow up on supervisory 

or regulatory actions to ensure the potential 

risk is adequately addressed. The goal of this 

step would be for existing regulators to take 

appropriate action, such as modifying their 

regulation or supervision of companies or 

markets under their jurisdiction in order to 

mitigate potential risks to U.S. financial 

stability identified by the Council.9 If a 

potential risk identified by the Council 

relates to a product, activity, or practice 

arising at a limited number of individual 

financial companies, the Council nonetheless 

will prioritize a remedy that addresses the 

underlying risk across all companies that 

engage in the relevant activity. If the Council 

finds that a particular type of financial 

product could present risks to U.S. financial 

stability, there may be different approaches 

existing regulators could take, based on their 

authorities and the urgency of the risk, such 

as restricting or prohibiting the offering of 

that product, or requiring market participants 

to take additional risk-management steps that 

address the risks. 

If, after engaging with relevant financial 

regulatory agencies, the Council believes 

those regulators’ actions are insufficient to 


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10 Dodd-Frank Act section 120(a), 12 U.S.C. 

5330(a). 

11 If the Council is unable to determine whether 

the financial activities of a U.S. nonbank financial 

company pose a threat to the financial stability of 

the United States based on certain information, the 

Council may request the Federal Reserve to conduct 

an examination of the U.S. nonbank financial 

company for the sole purpose of determining 

whether the company should be supervised by the 

Federal Reserve for purposes of Title I of the DoddFrank Act. Dodd-Frank Act section 112(d)(4), 12 

U.S.C. 5322(d)(4). 

12The statutory definition of ‘‘nonbank financial 

company’’ excludes bank holding companies and 

certain other types of companies. Dodd-Frank Act 

section 102(a)(4), 12 U.S.C. 5311(a)(4). 

13 Dodd-Frank Act section 113(a)(2), 12 U.S.C. 

5323(a)(2). This list of considerations is applicable 

to U.S. nonbank financial companies. With respect 

to foreign nonbank financial companies, the 

Council is required to take into account a similar 

list of considerations, in some cases limited to the 

companies’ U.S. business or activities. See DoddFrank Act section 113(b)(2), 12 U.S.C. 5323(b)(2). 

address the identified potential risk to U.S. 

financial stability, the Council has authority 

to make formal public recommendations to 

primary financial regulatory agencies under 

section 120 of the Dodd-Frank Act. Under 

section 120, the Council may provide for 

more stringent regulation of a financial 

activity by issuing nonbinding 

recommendations, following consultation 

with the primary financial regulatory agency 

and public notice inviting comments, to the 

primary financial regulatory agency to apply 

new or heightened standards or safeguards 

for a financial activity or practice conducted 

by bank holding companies or nonbank 

financial companies under their 

jurisdiction.10 In addition, in any case in 

which no primary financial regulatory agency 

exists for the company conducting financial 

activities or practices identified by the 

Council as posing risks, the Council can 

consider reporting to Congress on 

recommendations for legislation that would 

prevent such activities or practices from 

threatening U.S. financial stability. The 

Council intends to make recommendations 

under section 120 of the Dodd-Frank Act 

only to the extent that its recommendations 

are consistent with the statutory mandate of 

the primary financial regulatory agency to 

which the Council is making the 

recommendation. 

III. Analytic Framework for Nonbank 

Financial Company Determinations 

If the Council’s collaboration and 

engagement with the relevant financial 

regulatory agencies does not adequately 

address a potential threat identified by the 

Council—or if a potential threat to U.S. 

financial stability is outside the jurisdiction 

or authority of financial regulatory 

agencies—and if the potential threat 

identified by the Council is one that could be 

addressed by a Council determination 

regarding one or more companies, the 

Council may evaluate one or more nonbank 

financial companies for an entity-specific 

determination under section 113 of the DoddFrank Act, applying the analytic framework 

described below. This section describes the 

analysis the Council will conduct in general 

regarding individual nonbank financial 

companies that are considered for a potential 

determination, and section IV of this 

appendix describes the Council’s process for 

those reviews. 

a. Statutory Standards and Considerations 

The Council may determine, by a vote of 

not fewer than two-thirds of the voting 

members of the Council then serving, 

including an affirmative vote by the 

Chairperson of the Council, that a nonbank 

financial company will be supervised by the 

Federal Reserve and be subject to prudential 

standards if the Council determines that (1) 

material financial distress at the nonbank 

financial company could pose a threat to the 

financial stability of the United States (the 

‘‘First Determination Standard’’) or (2) the 

nature, scope, size, scale, concentration, 

interconnectedness, or mix of the activities of 

the nonbank financial company could pose a 

threat to the financial stability of the United 

States (the ‘‘Second Determination 

Standard,’’ and, together with the First 

Determination Standard, the ‘‘Determination 

Standards’’).11 The analytic framework 

described below focuses primarily on the 

First Determination Standard because threats 

to financial stability (such as asset fire sales 

or financial market disruptions) are most 

commonly propagated through a nonbank 

financial company when it is in distress. 

Several terms used in the Determination 

Standards are not defined in the Dodd-Frank 

Act. The Council intends to interpret the 

term ‘‘company’’ to include any corporation, 

limited liability company, partnership, 

business trust, association, or similar 

organization.12 In addition, the Council 

intends to interpret ‘‘nonbank financial 

company’’ as including any successor of a 

company that is subject to a final 

determination of the Council. The Council 

intends to interpret the term ‘‘material 

financial distress’’ as a nonbank financial 

company being in imminent danger of 

insolvency or defaulting on its financial 

obligations. The Council intends to interpret 

the term ‘‘threat to the financial stability of 

the United States’’ as meaning the threat of 

an impairment of financial intermediation or 

of financial market functioning that would be 

sufficient to inflict severe damage on the 

broader economy. For purposes of 

considering whether a nonbank financial 

company could pose a threat to U.S. financial 

stability under either Determination 

Standard, the Council intends to assess the 

company in the context of a period of overall 

stress in the financial services industry and 

in a weak macroeconomic environment, with 

market developments such as increased 

counterparty defaults, decreased funding 

availability, and decreased asset prices. The 

Council believes this is appropriate because 

in such a context, the risks posed by a 

nonbank financial company may have a 

greater effect on U.S. financial stability. 

The Dodd-Frank Act requires the Council 

to consider 10 specific considerations when 

determining whether a nonbank financial 

company satisfies either of the Determination 

Standards. These statutory considerations 

help the Council to evaluate whether one of 

the Determination Standards has been met: 13

• The extent of the leverage of the 

company; 

• the extent and nature of the off-balancesheet exposures of the company; 

• the extent and nature of the transactions 

and relationships of the company with other 

significant nonbank financial companies and 

significant bank holding companies; 

• the importance of the company as a 

source of credit for households, businesses, 

and state and local governments and as a 

source of liquidity for the U.S. financial 

system; 

• the importance of the company as a 

source of credit for low-income, minority, or 

underserved communities, and the impact 

that the failure of such company would have 

on the availability of credit in such 

communities; 

• the extent to which assets are managed 

rather than owned by the company, and the 

extent to which ownership of assets under 

management is diffuse; 

• the nature, scope, size, scale, 

concentration, interconnectedness, and mix 

of the activities of the company; 

• the degree to which the company is 

already regulated by one or more primary 

financial regulatory agencies; 

• the amount and nature of the financial 

assets of the company; and 

• the amount and types of the liabilities of 

the company, including the degree of 

reliance on short-term funding. 

The statute also requires the Council to 

take into account any other risk-related 

factors that the Council deems appropriate. 

Any determination by the Council will be 

made based on a company-specific 

evaluation and an application of the 

standards and considerations set forth in 

section 113 of the Dodd-Frank Act, and 

taking into account qualitative and 

quantitative information the Council deems 

relevant to a particular nonbank financial 

company. The Council anticipates that the 

information relevant to an in-depth analysis 

of a nonbank financial company may vary 

based on the nonbank financial company’s 

business. 

The discussion below describes how the 

Council will apply the Determination 

Standards in its evaluation of a nonbank 

financial company, including how the 

Council will take into account the statutory 

considerations, and other risk-related factors 

that the Council will take into account. Due 

to the unique threat that each nonbank 

financial company could pose to U.S. 

financial stability and the nature of the 

inquiry required by the statutory 

considerations, the Council expects that its 

evaluations of nonbank financial companies 

will be firm-specific and may include 

quantitative and qualitative information that 

the Council deems relevant to a particular 

nonbank financial company. The 

transmission channels, sample metrics, and 

other factors set forth below are not 

exhaustive and may not apply to all nonbank 

financial companies under evaluation. 

b. Transmission Channels 

The Council’s evaluation of any nonbank 

financial company under section 113 of the 

Dodd-Frank Act will seek to determine 

whether a nonbank financial company meets 


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14 Dodd-Frank Act section 113(a)(2)(F), 12 U.S.C. 

5323(a)(2)(F). 

one of the Determination Standards 

described above. In its analysis of a nonbank 

financial company, the Council will assess 

how the negative effects of the company’s 

material financial distress, or of the nature, 

scope, size, scale, concentration, 

interconnectedness, or mix of the company’s 

activities, could be transmitted to or affect 

other firms or markets, thereby causing a 

broader impairment of financial 

intermediation or of financial market 

functioning. Such a transmission of risk can 

occur through various mechanisms, or 

channels. The Council has identified three 

transmission channels as most likely to 

facilitate the transmission of the negative 

effects of a nonbank financial company’s 

material financial distress, or of the nature, 

scope, size, scale, concentration, 

interconnectedness, or mix of the company’s 

activities, to other financial firms and 

markets: Exposure; asset liquidation; and 

critical function or service. These three 

transmission channels are described below. 

The Council may also consider other relevant 

channels through which risks could be 

transmitted from a particular nonbank 

financial company and thereby pose a threat 

to U.S. financial stability. The Council will 

take into account the 10 statutory 

considerations as part of its evaluation of a 

nonbank financial company under the three 

transmission channels and the other factors 

described below. 

Exposure Transmission Channel 

Under this transmission channel, the 

Council will evaluate whether a nonbank 

financial company’s creditors, 

counterparties, investors, or other market 

participants have direct or indirect exposure 

to the nonbank financial company that is 

significant enough to materially and 

adversely affect those or other creditors, 

counterparties, investors, or other market 

participants and thereby pose a threat to U.S. 

financial stability. 

The Council expects that its analyses under 

the exposure transmission channel will 

generally include the factors described 

below. The potential threat to U.S. financial 

stability will generally be greater if the 

amounts of the exposures are larger; if the 

terms of the transactions provide less 

protection for the counterparty; and if the 

largest counterparties include large financial 

institutions. The Council also will consider 

a company’s leverage and size. A company’s 

leverage can amplify the risks posed by 

exposures, including off-balance sheet 

exposures, by reducing the company’s ability 

to satisfy its obligations to creditors in the 

event of its material financial distress. Size 

is relevant to this analysis, as material 

financial distress at a larger nonbank 

financial company would generally transmit 

risk on a larger scale than distress at a 

smaller company. Size may be measured by 

the assets, liabilities, and capital of the firm. 

As required by statute, the Council will 

consider the extent to which assets are 

managed rather than owned by the company 

and the extent to which ownership of assets 

under management is diffuse; this recognizes 

the distinct nature of exposure risks when 

the company is acting as an agent rather than 

as principal.14 In particular, in the case of a 

nonbank financial company that manages 

assets on behalf of customers or other third 

parties, the third parties’ direct financial 

exposures are often to the issuers of the 

managed assets, rather than to the nonbank 

financial company managing those assets. 

The Council will consider the exposures 

that counterparties and other market 

participants have to a nonbank financial 

company arising from the company’s capital 

markets activities. This assessment includes 

an evaluation of the company’s relationships 

with other significant nonbank financial 

companies and significant bank holding 

companies. In most cases, the Council will 

consider factors such as the amount and 

nature of, and counterparties to, the 

company’s: 

• Outstanding debt (regardless of term) 

and other liabilities (such as guaranteed 

investment contracts issued by an insurance 

company or Federal Home Loan Bank loans). 

• Derivatives transactions (which may be 

measured on the basis of gross notional 

amount, net fair value, or potential future 

exposures). 

• Securities financing transactions (i.e., 

repurchase agreements and securities lending 

transactions). 

• Lines of credit. 

• Credit-default swaps outstanding for 

which the company or an affiliate is the 

reference entity (generally focusing on singlename credit-default swaps). 

Relevant metrics may include the number, 

size, and financial strength of a nonbank 

financial company’s counterparties, 

including the proportion of its 

counterparties’ exposure to the nonbank 

financial company relative to the 

counterparties’ capital. The potential risk 

arising under this transmission channel 

depends not only on the number of 

counterparties that a nonbank financial 

company has, but also on the importance of 

that nonbank financial company to its 

counterparties and the extent to which the 

counterparties are interconnected with other 

financial firms, the financial system, and the 

broader economy. Therefore, the Council will 

focus on exposures of large financial 

institutions to the nonbank financial 

company under review. This analysis will 

take into account both individual 

counterparty exposures as well as aggregate 

exposures of other financial institutions to 

the company under review. The amount and 

types of other exposures that counterparties 

and other market participants have to a 

nonbank financial company is highly 

dependent on the nature of the company’s 

business. The Council’s analysis will take 

these other fact-specific considerations into 

account. 

The Council also will consider factors that 

mitigate the potential risks posed by 

exposures to the nonbank financial company. 

For example, exposures of a company’s 

counterparties arising from capital markets 

activities may be collateralized by highquality, highly liquid securities, such as U.S. 

Treasury securities, which reduces the 

potential for the exposure to serve as a 

channel for the transmission of risk. 

Contagion. The negative effects of the 

material financial distress of a large, 

interconnected nonbank financial company 

are not necessarily limited to the amount of 

direct losses suffered by the firm’s creditors, 

counterparties, investors, or other market 

participants. In general, the wider and more 

interconnected a company’s network of 

financial counterparties, the greater the 

potential negative effect of the material 

financial distress of the company. Aggregate 

exposures to a nonbank financial company 

can create a potential threat to U.S. financial 

stability if they lead to contagion among 

financial institutions and financial markets 

more broadly. Contagion has the potential to 

spread distress quickly and seemingly 

unexpectedly. Such transmission is 

associated with opaque balance sheets, 

closely correlated markets, and coordination 

failures among investors. In such 

circumstances, fire sales by a highly 

leveraged and interconnected nonbank 

financial company may result in a loss of 

confidence in other financial companies that 

are perceived to have similar characteristics. 

The Council will seek evidence regarding the 

potential for contagion, including relevant 

industry-specific historical examples and the 

scope of the company’s interconnectedness 

with large financial institutions, among other 

factors. Various market-based or regulatory 

factors can strongly mitigate the risk of 

contagion. Contagion should be viewed in 

conjunction with other factors described 

above when evaluating risk under the 

exposure transmission channel. 

Asset Liquidation Transmission Channel 

Under this transmission channel, the 

Council will consider whether a nonbank 

financial company holds assets that, if 

liquidated quickly, could cause a fall in asset 

prices and thereby significantly disrupt 

trading or funding in key markets or cause 

significant losses or funding problems for 

other firms with similar holdings. This 

channel would likely be most relevant for a 

nonbank financial company that could be 

forced to liquidate assets quickly due to its 

funding and liquid asset profile. For 

example, this could be the case if a nonbank 

financial company relies heavily on shortterm funding. The Council may also consider 

whether a deterioration in asset pricing or 

market functioning could pressure other 

financial firms to sell their holdings of 

affected assets in order to maintain adequate 

capital and liquidity, which, in turn, could 

produce a cycle of asset sales that could lead 

to further market disruptions. This analysis 

includes an assessment of any maturity 

mismatch at the company—the difference 

between the maturities of the company’s 

assets and liabilities. A company’s reliance 

on short-term funding to finance longer-term 

positions can subject the company to rollover 

or refinancing risk that may force it to sell 

assets rapidly at low market prices. 

The Council’s analyses of the asset 

liquidation transmission channel will focus 

on three central factors, described below. 

Liquidity of the company’s liabilities. The 

first factor in the Council’s assessment under 


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this transmission channel is the amount and 

nature of the company’s liabilities that are, or 

could become, short-term in nature. This 

analysis involves an assessment of the 

company’s liquidity risk. Liquidity risk 

generally refers to the risk that a company 

may not have sufficient funding to satisfy its 

short-term needs. For example, relevant 

factors may include: 

• The company’s short-term financial 

obligations (including outstanding 

commercial paper). 

• Financial arrangements that can be 

terminated by counterparties and therefore 

become short-term (including callable debt, 

derivatives, securities lending, repurchase 

agreements, and off-balance-sheet exposures). 

• Long-term liabilities that may come due 

in a short-term period. 

• Financial transactions that may require 

the company to provide additional margin or 

collateral to the counterparty. 

• Products that allow customers rapidly to 

withdraw funds from the company. 

• Liabilities related to other collateralized 

borrowings and deposits. 

The Council will quantitatively identify 

the scale of potential liquidity needs that 

could plausibly arise at the company. As part 

of this analysis, the Council will apply 

counterparty and customer withdrawal rates 

based on historical examples and other 

relevant models to assess the scope of 

plausible withdrawals. In addition, any 

ability of the company or its financial 

regulators to impose stays on counterparty 

terminations or withdrawals is relevant, 

because it may reduce the company’s 

liquidity needs in an event of material 

financial distress. The Council also will 

consider the company’s internal estimates of 

potential liquidity needs in a context of 

material financial distress. 

The company’s leverage and short-term 

debt ratios are relevant to this analysis, as 

high leverage and reliance on short-term 

funding can increase the potential for a 

company to be subject to sudden liquidity 

strains that force it rapidly to sell assets. 

Leverage can be measured by the ratio of 

assets to capital or as a measure of economic 

risk relative to capital. The latter 

measurement can better capture the effect of 

derivatives and other products with 

embedded leverage on the risk undertaken by 

a nonbank financial company. Comparisons 

of leverage to peer financial institutions can 

help indicate the level of risk at the 

company. Metrics that may be used to assess 

leverage include: 

• Total assets and total debt measured 

relative to total equity, which measures 

financial leverage. 

• Derivatives liabilities and off-balance 

sheet obligations relative to total equity, 

which may show how much off-balance sheet 

leverage a nonbank financial company may 

have. 

• Securities financing transactions and 

funding agreements that provide alternative 

sources of liquidity or operating income, 

which indicate the use of operating leverage. 

• Changes in leverage ratios, which may 

indicate that a nonbank financial company is 

increasing or decreasing its risk profile. 

Liquidity of the company’s assets. The 

second factor under the asset liquidation 

transmission channel is an analysis of the 

company’s assets that the company could 

rapidly liquidate, if necessary, to satisfy its 

obligations. In particular, the Council expects 

that this assessment will focus on the size 

and liquidity characteristics of the company’s 

investment portfolio. The Council will assess 

the company’s assets, grouped into categories 

such as highly liquid (for example, cash, U.S. 

Treasury securities, and U.S. agency 

mortgage-backed securities) and less-liquid 

(for example, corporate bonds, non-agency 

mortgage-backed securities, and mortgages 

and other loans) to determine if it holds cash 

instruments or readily marketable securities 

that could reasonably be expected to have a 

liquid market in times of broader market 

stress. To the extent that the company’s 

assets are encumbered, those assets would 

generally not be considered to be available to 

satisfy short-term obligations. 

Potential fire sale impacts. The third factor 

in the asset liquidation transmission channel 

analysis is the potential effects of the 

company’s asset liquidation on markets and 

market participants. As described above, the 

Council will assess the scale of potential 

liquidity needs that could plausibly arise at 

the company and the amount and nature of 

financial assets the company could sell to 

satisfy its obligations. In this step of the asset 

liquidation transmission channel analysis, 

the Council will apply quantitative models to 

assess how the company could satisfy the 

identified range of potential liquidity needs 

by rapidly selling its identified liquid assets. 

To assess this factor, the Council will 

compare the volume of the company’s 

potential liquidation of particular categories 

of financial instruments with the average 

daily trading volume in the United States of 

those types of instruments. In general, a rapid 

liquidation of a significant amount of 

relatively illiquid financial instruments, or 

instruments that are widely held by other 

market participants, will have a greater effect 

on the market than a liquidation of the same 

amount of highly liquid instruments or 

instruments that are not widely held. The 

Council may also conduct an analysis to 

assess the relative impact of negative shocks 

to the equity or assets of certain financial 

institutions on other financial institutions. 

The Council expects that its analysis will 

generally focus on potential asset liquidation 

periods of 30 to 90 days. 

The order in which a nonbank financial 

company may liquidate assets is a factor in 

the extent of any fire sale risk, but is subject 

to considerable uncertainties. A company 

could liquidate a significant portion of its 

highly liquid assets first, in order to reduce 

the likelihood that the company would be 

forced to liquidate illiquid assets in the event 

of its material financial distress. However, in 

the event of the company’s material financial 

distress, a company may also be expected to 

seek to maintain compliance with any 

applicable risk-based capital ratios and other 

requirements. Doing so might require a 

company to sell a mix of assets across a 

number of asset classes, rather than proceed 

with the sale of assets in order from most 

liquid to least liquid. Further, in the event of 

a significant market disruption, there could 

be a meaningful first-mover advantage to 

selling less-liquid assets first. For example, 

markets for less-liquid assets, such as private 

and public corporate bonds and asset-backed 

securities, could be prone to disruption in 

the event that a seller liquidated a large 

portion of its portfolio of those assets. Given 

these potential discounts, in some 

circumstances a company may be 

incentivized to sell a portion of its less-liquid 

assets first and to hold U.S. government 

securities and agency mortgage-backed 

securities, which tend to increase in value 

during a period of market turmoil. To the 

extent that a company’s highly liquid assets 

are encumbered (for example, under 

securities financing transactions or as 

collateral for loans), the company would also 

need to sell less-liquid assets to satisfy its 

liquidity needs. Further, a company’s 

holdings of liquid assets could be reduced 

before the company enters material financial 

distress. As a result, the Council may take 

into account company-specific factors in 

assessing the order in which the company 

might liquidate assets. One approach the 

Council may take is to assess the potential 

effects if the company sells pro rata portions 

of the more-liquid segments of its investment 

portfolio (such as cash and highly liquid 

instruments, U.S. agency securities, 

investment-grade public corporate debt 

securities, publicly traded equity securities, 

and asset backed-securities). 

Critical Function or Service Transmission 

Channel 

Under this transmission channel, the 

Council will consider the potential for a 

nonbank financial company to become 

unable or unwilling to provide a critical 

function or service that is relied upon by 

market participants and for which there are 

no ready substitutes. This factor is commonly 

referred to as ‘‘substitutability.’’ 

Substitutability captures the extent to which 

other firms could provide similar financial 

services in a timely manner at a similar price 

and quantity if a nonbank financial company 

withdraws from a particular market. 

Substitutability also captures situations in 

which a nonbank financial company is the 

primary or dominant provider of services in 

a market that the Council determines to be 

essential to U.S. financial stability. A risk 

under this transmission channel may be 

identified if a company provides a critical 

function or service that may not easily be 

substitutable. 

Concern about a potential lack of 

substitutability could be greater if a nonbank 

financial company and its competitors are 

likely to experience stress at the same time 

because they are exposed to the same risks. 

The Council may also analyze the nonbank 

financial company’s activities and critical 

functions and the importance of those 

activities and functions to the U.S. financial 

system and assess how those activities and 

functions would be performed by the 

nonbank financial company or other market 

participants in the event of the nonbank 

financial company’s material financial 

distress. The Council also will consider 

substitutability with respect to any nonbank 

financial company with global operations to 

identify the substitutability of critical market 


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15 Dodd-Frank Act section 113(a)(2)(H), 12 U.S.C. 

5323(a)(2)(H). 

16See MetLife, Inc. v. Financial Stability 

Oversight Council, 177 F. Supp.3d 219, 242 (D.D.C. 

2016) (quoting 12 U.S.C. 5323(a)(2)(K) and 

Michigan v. Environmental Protection Agency, 135 

S. Ct. 2699, 2707 (2015)). 

17See Office of Management and Budget Circular 

A–4 (Sept. 17, 2003). 

18The Council will also consider non-quantified 

benefits and costs. See Office of Management and 

Budget Circular A–4 (Sept. 17, 2003), section 

(E)(Developing Benefit and Cost Estimates)(7). 

19 Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C. 

5322(a)(1)(C). 

functions that the company provides in the 

United States in the event of material 

financial distress of a foreign parent 

company. 

The analysis of this channel incorporates a 

review of the competitive landscape for 

markets in which a nonbank financial 

company participates and for the services it 

provides (including the provision of liquidity 

to the U.S. financial system, the provision of 

credit to low-income, minority, or 

underserved communities, or the provision 

of credit to households, businesses and state 

and local governments), the ability of other 

firms to replace those services, and the 

nonbank financial company’s market share. 

This analysis may focus on the company’s 

market share in specific product lines and 

the ability of substitutes to replace a service 

or function provided by the company. The 

Council’s evaluation of a nonbank financial 

company’s market share regarding a 

particular product or service may include 

assessments of the ability of the nonbank 

financial company’s competitors to expand to 

meet market needs during a period of overall 

stress in the financial services industry or in 

a weak macroeconomic environment; the 

costs that market participants would incur if 

forced to switch providers; the timeframe 

within which a disruption in the provision 

of the product or service would materially 

affect market participants or market 

functioning; and the economic implications 

of such a disruption. 

c. Complexity and Resolvability 

The potential threat a nonbank financial 

company could pose to U.S. financial 

stability may be mitigated or aggravated by 

the company’s complexity, opacity, or 

resolvability. In particular, a risk may be 

aggravated if a nonbank financial company’s 

resolution under ordinary insolvency regimes 

could disrupt key markets or have a material 

adverse impact on other financial firms or 

markets. An evaluation of a nonbank 

financial company’s complexity and 

resolvability entails an assessment of (1) the 

complexity of the nonbank financial 

company’s legal, funding, and operational 

structure, and (2) any obstacles to the rapid 

and orderly resolution of the nonbank 

financial company: 

• Legal structure factors may include the 

number of jurisdictions the company 

operates in, the number of subsidiaries, and 

the organizational structure. 

• Funding structure factors may include 

the degree of interaffiliate dependency for 

liquidity and funding (such as intercompany 

loans or other affiliate support arrangements), 

payment operation (such as treasury 

operations), and risk-management. 

• Operational structure factors may 

include the number of employees, the 

number of U.S. and non-U.S. locations, and 

the degree of inter-company dependency in 

regard to financial guarantees and support 

arrangements, the ability to separate 

functions and spin off services or business 

lines, the complexity and resiliency of 

intercompany and outsourced services and 

arrangements in resolution, and the 

likelihood of preserving franchise value in a 

recovery or resolution scenario. 

• Cross-border operational factors may 

include size and complexity of the 

company’s cross-border operations and 

impact of potential ring-fencing on an orderly 

resolution. 

Factors that would tend to increase the risk 

associated with a company’s complexity and 

resolvability include large size or scope of 

activities; a complex legal or operational 

structure; multi-jurisdictional operations and 

regulatory regimes; complex funding 

structures; the potential impact of a loss of 

key personnel; and shared services among 

affiliates. 

d. Existing Regulatory Scrutiny 

As noted above, one of the considerations 

the Council is statutorily required to take into 

account in making a determination under 

section 113 of the Dodd-Frank Act is the 

degree to which the nonbank financial 

company is already regulated by one or more 

primary financial regulatory agencies.15 In its 

analysis of this statutory consideration, the 

Council will focus on the extent to which 

existing regulation of the company has 

mitigated the potential risks to financial 

stability identified by the Council. For 

example, factors that may be used to assess 

existing regulatory scrutiny include: 

• The extent to which the company’s 

primary financial regulator has imposed riskmanagement standards such as capital, 

liquidity, and reporting requirements, as 

relevant to the type of company, and has 

authority to supervise, examine, and bring 

enforcement actions, with respect to the 

company and its affiliates, including nonU.S. entities. 

• Regulators’ processes for inter-regulator 

coordination. 

• For non-U.S. entities, the extent to which 

the company is supervised and subject to 

prudential standards on a consolidated basis 

in its home country that are administered 

and enforced by a comparable foreign 

supervisory authority. 

e. Benefits and Costs of Determination; 

Likelihood of Material Financial Distress 

Determining whether the expected benefits 

of a potential Council determination justify 

the expected costs is necessary to ensure that 

the Council’s actions are expected to provide 

a net benefit to U.S. financial stability and 

are consistent with thoughtful 

decisionmaking.16 Financial stability benefits 

may be difficult to quantify, and some of the 

costs may be difficult to forecast with 

precision, but the Council will make a 

determination under section 113 only if the 

expected benefits to financial stability from 

Federal Reserve supervision and prudential 

standards justify the expected costs that the 

determination would impose. As part of this 

analysis, the Council will assess the 

likelihood of a firm’s material financial 

distress, in order to assess the extent to 

which a determination may promote U.S. 

financial stability. 

The key elements of regulatory analysis 

include (1) a statement of the need for the 

proposed action, (2) an examination of 

alternative approaches, and (3) an evaluation 

of the benefits and costs (quantitative and 

qualitative) of the proposed action and the 

main alternatives.17 The Council will 

quantify reasonable estimable benefits and 

costs (using ranges, as appropriate).18 The 

Council will conduct this analysis only in 

cases where the Council is concluding that 

the company meets one of the standards for 

a determination by the Council under section 

113 of the Dodd-Frank Act, because in other 

cases doing so would not affect the outcome 

of the Council’s analysis. 

Benefits. With respect to the benefits of a 

Council determination, the Council will 

consider the benefits of the determination 

itself, both to (1) the U.S. financial system 

and the U.S. economy and (2) the nonbank 

financial company due to additional 

regulatory requirements resulting from the 

determination, particularly the prudential 

standards adopted by the Federal Reserve 

under section 165 of the Dodd-Frank Act. 

One of the Council’s statutory purposes is 

to respond to emerging threats to the stability 

of the U.S. financial system.19 The primary 

intended benefit of a determination under 

section 113 of the Dodd-Frank Act is a 

reduction in the likelihood or severity of a 

financial crisis. Therefore, the Council will 

consider potential benefits to the U.S. 

financial system and the U.S. economy 

arising from a Council determination. To the 

extent that a Council determination reduces 

the likelihood or severity of a potential 

financial crisis, the determination could 

enhance financial stability and improve the 

functioning of financial markets. The Council 

may use various measures of systemic risk to 

assess any improvement in financial stability. 

Such measures include S-Risk (which 

attempts to quantify the amount of capital a 

financial firm would need to raise in order 

to function normally in the event of a severe 

financial crisis), conditional value at risk, 

and certain estimates of fire sale risk, among 

others. To assess the benefit to the U.S. 

financial system and the U.S. economy from 

a determination, the Council may also 

consider historical analogues to the nonbank 

under review. In addition, the Council may 

compare the risks to financial stability posed 

by a particular nonbank to the risks posed by 

large bank holding companies, in order to 

produce an assessment of the relative risks 

the company may pose. Further, the loss of 

any implicit ‘‘too big to fail’’ or similar 

subsidy would be considered a benefit to the 

economy, even if it increases the nonbank 

financial company’s cost of capital. 

Analysis of the benefits of a determination 

for the relevant nonbank financial company 

may include those arising directly from the 


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20 Dodd-Frank Act section 165, 12 U.S.C. 5365. 

21The Council would be most likely to consider 

a determination under section 113 only in rare 

instances such as an emergency situation or if a 

potential threat to U.S. financial stability is outside 

the jurisdiction or authority of financial regulatory 

agencies. 

22See Dodd-Frank Act section 112(d)(3), 12 

U.S.C. 5322(d)(3). 

23See 12 CFR 1310.21(c). 

Council’s determination as well as any 

benefits arising from anticipated new or 

increased requirements resulting from the 

determination, such as additional 

supervision and enhanced capital, liquidity, 

or risk-management requirements. For 

example, a nonbank financial company 

subject to a Council determination may 

benefit from a lower cost of capital or higher 

credit ratings upon meeting its postdetermination regulatory requirements. 

Costs. With respect to the costs of a 

Council determination, the Council will 

consider the costs of the determination itself, 

both to (1) the nonbank financial company 

due to additional regulatory requirements 

resulting from the determination, including 

the costs of the prudential standards adopted 

by the Federal Reserve under section 165 of 

the Dodd Frank Act; and (2) the U.S. 

economy. 

The Council will consider costs to the 

company arising from anticipated new or 

increased regulatory requirements resulting 

from the determination related to: 

• Risk-management requirements, such as 

the costs of capital planning and stress 

testing. 

• Supervision and examination, such as 

compliance costs to the firm of additional 

examination and supervision. 

• Increased capital requirements, after 

accounting for offsetting benefits to taxpayers 

and to the holders of the firm’s other 

liabilities. 

• Liquidity requirements, such as the 

opportunity cost from any requirement to 

hold additional high-quality liquid assets, 

relative to the company’s current investment 

portfolio. 

Because the Federal Reserve is required to 

tailor prudential standards to a nonbank 

financial company subject to a Council 

determination after the Council has made a 

determination regarding the company, the 

new regulatory requirements that result from 

the Council’s determination will not be 

known to the Council during its analysis of 

the company. In cases where the nonbank 

financial company under review primarily 

engages in bank-like activities, the Council 

may consider, as a proxy, the costs that 

would be imposed on the nonbank if the 

Federal Reserve imposed prudential 

standards similar to those imposed on bank 

holding companies with at least $250 billion 

in total consolidated assets under section 165 

of the Dodd-Frank Act.20

The Council also will consider the cost of 

a determination under section 113 of the 

Dodd-Frank Act to the U.S. economy by 

assessing the impact of the determination on 

the availability and cost of credit or financial 

products in relevant U.S. markets. To the 

extent that the markets in which the relevant 

nonbank participates have low concentration, 

the impact that the determination regarding 

one firm would have on credit conditions 

would generally be immaterial. However, if 

the relevant markets are concentrated, a 

Council determination regarding a significant 

market participant could have a material 

impact on credit conditions in that market. 

As part of this analysis, the Council may also 

consider the extent to which any reduction 

in financial services provided by the 

nonbank financial company under review 

would be offset by other market participants. 

Likelihood of Material Financial Distress. 

As part of the assessment of the overall 

impact of a Council determination for any 

company under review under the First 

Determination Standard, the Council will 

assess the likelihood of the company’s 

material financial distress, applying 

quantitative and qualitative factors. There are 

a number of widely known measures for 

assessing the risk of default of financial 

institutions. These include market-based 

measures (e.g., distance-to-default measures, 

default probabilities implied by creditdefault swap prices); accounting-based 

measures (e.g., statistical models using 

capital adequacy, portfolio quality, 

profitability and other institution-specific 

characteristics to predict failure); and marketand accounting-based measures (e.g., 

academic models, credit ratings). In addition, 

the Council may evaluate a nonbank 

financial company’s resiliency to asset or 

capital shocks. The Council’s analysis of the 

likelihood of a nonbank financial company’s 

material financial distress will be conducted 

taking into account a period of overall stress 

in the financial services industry and a weak 

macroeconomic environment. The Council 

may also consider the results of any stress 

tests that have previously been conducted by 

the company or by its primary financial 

regulatory agency. 

Nonetheless, the Council recognizes the 

difficulty of accurately forecasting firm 

failures, particularly for any period beyond a 

very short time horizon. Therefore, the 

assessment of likelihood may not be based on 

any individual model, and the Council may 

not seek to produce a quantitative estimate of 

the probability of a company’s material 

financial distress. The Council will attempt 

to quantify the likelihood of material 

financial distress where doing so is possible. 

If doing so is not possible with respect to a 

specific firm, as an alternative, the Council 

will generally take into account quantitative 

and qualitative factors related to (1) the types 

of market-based or accounting-based 

measures described above and (2) historical 

examples regarding the characteristics of 

financial companies that have experienced 

financial distress. In particular, relevant 

factors in this analysis may include the 

company’s leverage; its liquidity risk 

(including reliance on short-term funding) or 

maturity mismatch; its risk-management 

practices; its existing regulation; and any 

rapid growth in its business (which may 

indicate a concentration in high-risk 

activities). 

IV. The Determination Process 

As described in section II of this appendix, 

the Council will prioritize an activities-based 

approach for identifying, assessing, and 

addressing potential risks to financial 

stability. However, if a potential risk or threat 

to U.S. financial stability cannot be 

addressed through an activities-based 

approach,21 the Council may subject a 

nonbank financial company to review for an 

entity-specific determination under section 

113 of the Dodd-Frank Act. The Council 

expects generally to follow a two-stage 

process of evaluation and analysis for 

determinations under section 113. 

In the first stage of the process (‘‘Stage 1’’), 

nonbank financial companies identified as 

potentially posing risks to U.S. financial 

stability will be notified and subject to a 

preliminary analysis, based on quantitative 

and qualitative information available to the 

Council primarily through public and 

regulatory sources. During Stage 1, the 

Council will permit, but not require, the 

company to submit relevant information. The 

Council will also consult with the primary 

financial regulatory agency or home country 

supervisor, as appropriate. This approach 

will enable the Council to fulfill its statutory 

obligation to rely whenever possible on 

information available through the Office of 

Financial Research (the ‘‘OFR’’), Council 

member agencies, or the nonbank financial 

company’s primary financial regulatory 

agencies before requiring the submission of 

reports from any nonbank financial 

company.22

Following Stage 1, nonbank financial 

companies that are selected for additional 

review will receive notice that they are being 

considered for a proposed determination that 

the company could pose a threat to U.S. 

financial stability (a ‘‘Proposed 

Determination’’) and will be subject to indepth evaluation during the second stage of 

review (‘‘Stage 2’’). Stage 2 will involve the 

evaluation of additional information 

collected directly from the nonbank financial 

company. At the end of Stage 2, the Council 

may consider whether to make a Proposed 

Determination with respect to the nonbank 

financial company. If a Proposed 

Determination is made by the Council, the 

nonbank financial company may request a 

hearing in accordance with section 113(e) of 

the Dodd-Frank Act and § 1310.21(c) of the 

Council’s rule.23 After making a Proposed 

Determination and holding any written or 

oral hearing if requested, the Council may 

vote to make a final determination. 

a. Stage 1: Preliminary Evaluation of 

Nonbank Financial Companies 

Stage 1 involves a preliminary analysis of 

nonbank financial companies to assess the 

risks they could pose to U.S. financial 

stability. 

Identification of Company for Review in 

Stage 1 

If, as described in section II, the Council’s 

consultation with and any recommendations 

to a nonbank financial company’s primary 

financial regulatory agency do not adequately 

address a potential risk identified by the 

Council, the Council may evaluate one or 

more individual nonbank financial 

companies for an entity-specific 


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9046 Federal Register / Vol. 84, No. 49 / Wednesday, March 13, 2019 / Proposed Rules 

24The Council’s Deputies Committee is 

composed of senior officials from each Council 

member and member agency. It coordinates and 

oversees the work of the Council’s other interagency 

staff committees. 

25 Dodd-Frank Act section 113(g), 12 U.S.C. 

5323(g). 26See 12 CFR 1310.21(a). 

determination under section 113 of the DoddFrank Act. The Council or its Deputies 

Committee 24 will vote to commence review 

of a nonbank financial company in Stage 1. 

When evaluating the potential risks 

associated with a nonbank financial 

company, the Council may consider the 

company and its subsidiaries together. This 

approach enables the Council to consider 

potential risks arising across the consolidated 

organization, while retaining the ability to 

make a determination regarding either the 

parent or any individual nonbank financial 

company subsidiary (or neither), depending 

on which entity the Council determines 

could pose a threat to financial stability. 

Engagement With Company and Regulators 

in Stage 1 

The Council will provide a notice to any 

nonbank financial company under review in 

Stage 1. In Stage 1, the Council will consider 

available public and regulatory information; 

in addition, a company under review in Stage 

1 may submit to the Council any information 

it deems relevant to the Council’s evaluation 

and may, upon request, meet with staff on 

the Council’s analytical team. In order to 

reduce the burdens of review on the 

company, the Council will not require the 

company to submit information during Stage 

1. In addition, staff on the analytical team 

will, upon request, provide the company 

with a list of the primary public sources of 

information being considered during the 

Stage 1 analysis, so that the company has an 

opportunity to understand the information 

the Council may rely upon during Stage 1. 

During the discussions in Stage 1 with the 

company, the Council intends for staff of 

Council members and member agencies to 

explain to the company the key risks that 

have been identified in the analysis. Because 

the review of the company is preliminary and 

continues to change until the Council makes 

a final determination, these identified risks 

may shift over time. 

The Council will also consider in Stage 1 

information available from relevant existing 

regulators of the company. Under the DoddFrank Act, the Council is required to consult 

with the primary financial regulatory agency, 

if any, for each nonbank financial company 

or subsidiary of a nonbank financial 

company that is being considered for a 

determination before the Council makes any 

final determination with respect to such 

company.25 For any company under review 

in Stage 1 that is regulated by a primary 

financial regulatory agency or home country 

supervisor, the Council will notify the 

regulator or supervisor that the company is 

under review no later than such time as the 

company is notified. As part of that 

consultation process, the Council will 

consult with the primary financial regulatory 

agency, if any, of each significant subsidiary 

of the nonbank financial company, to the 

extent the Council deems appropriate in 

Stage 1, before the Council votes on whether 

to advance the company to Stage 2. The 

Council will actively solicit the regulator’s 

views regarding risks at the company and 

potential mitigants. In order to enable the 

regulator to provide relevant information, the 

Council will share its preliminary views 

regarding potential risks at the company, and 

request that the regulator provide 

information regarding those specific risks, 

including whether the risks are adequately 

mitigated by factors such as existing 

regulation or the company’s business 

practices. During the determination process, 

the Council will continue to encourage the 

regulator to address any risks to U.S. 

financial stability using the regulator’s 

existing authorities; if the Council believes 

the regulator’s actions adequately address the 

potential risks to U.S. financial stability the 

Council has identified, the Council may 

discontinue its consideration of the firm for 

a potential determination under section 113 

of the Dodd-Frank Act. 

Based on the preliminary evaluation in 

Stage 1, the Council may begin a more 

detailed analysis of the company by 

advancing the company to Stage 2, or it may 

decide not to evaluate the company further. 

If the Council determines not to advance a 

company that has been reviewed in Stage 1 

to Stage 2, the Council will notify the 

company in writing of the Council’s decision. 

The notice will clarify that a vote not to 

advance the company from Stage 1 to Stage 

2 at that time does not preclude the Council 

from reinitiating review of the company in 

Stage 1. For example, the Council may 

reinitiate review of the company if material 

changes affecting the firm merit further 

evaluation. 

b. Stage 2: In-Depth Evaluation 

Stage 2 involves an in-depth evaluation of 

any company that the Council has 

determined merits additional review. 

In Stage 2, the Council will review the 

relevant company using information 

collected directly from the nonbank financial 

company, as well as public and regulatory 

information. The review will focus on 

whether the nonbank financial company 

could pose a threat to U.S. financial stability 

because of the company’s material financial 

distress or the nature, scope, size, scale, 

concentration, interconnectedness, or mix of 

the activities of the company. The Council 

expects that the transmission channels 

discussed above, and other appropriate 

factors, will be used to evaluate a nonbank 

financial company’s potential to pose a threat 

to U.S. financial stability. 

Engagement With Company and Regulators 

in Stage 2 

Each nonbank financial company to be 

evaluated in Stage 2 will receive a notice (a 

‘‘Notice of Consideration’’) that the nonbank 

financial company is under consideration for 

a Proposed Determination. The Council also 

will submit to the company a request that the 

company provide information that the 

Council deems relevant to the Council’s 

evaluation, and the nonbank financial 

company will be provided an opportunity to 

submit written materials to the Council.26

This information will generally be collected 

by the OFR. Before requiring the submission 

of reports from any nonbank financial 

company that is regulated by a Council 

member agency or any primary financial 

regulatory agency, the Council, acting 

through the OFR, will coordinate with such 

agencies and will, whenever possible, rely on 

information available from the OFR or such 

agencies. Council members and their 

agencies and staffs will maintain the 

confidentiality of such information in 

accordance with applicable law. During Stage 

2, the company may also submit any other 

information that it deems relevant to the 

Council’s evaluation. Information considered 

by the Council includes details regarding the 

company’s financial activities, legal 

structure, liabilities, counterparty exposures, 

resolvability, and existing regulatory 

oversight. 

Information requests likely will involve 

both qualitative and quantitative data. 

Information relevant to the Council’s analysis 

may include confidential business 

information such as detailed information 

regarding financial assets, terms of funding 

arrangements, counterparty exposure or 

position data, strategic plans, and 

interaffiliate transactions. 

The Council will make staff on the 

Council’s analytical team available to meet 

with the representatives of any company that 

enters Stage 2, to explain the evaluation 

process and the framework for the Council’s 

analysis. If the analysis in Stage 1 has 

identified specific aspects of the company’s 

operations or activities as the primary focus 

for the evaluation, staff will notify the 

company of those issues, although the issues 

will be subject to change based on the 

ongoing analysis. In addition, the Council 

expects that its Deputies Committee will 

grant a request to meet with a company in 

Stage 2 to allow the company to present any 

information or arguments it deems relevant 

to the Council’s evaluation. 

During Stage 2 the Council will also seek 

to continue its consultation with the 

company’s primary financial regulatory 

agency or home country supervisor in a 

timely manner before the Council makes any 

proposed or final determination with respect 

to such nonbank financial company. The 

Council will continue to encourage the 

regulator during the determination process to 

address any risks to U.S. financial stability 

using the regulator’s existing authorities; as 

noted above, if the Council believes the 

regulator’s actions adequately address the 

potential risks to U.S. financial stability the 

Council has identified, the Council may 

discontinue its consideration of the firm for 

a potential determination under section 113 

of the Dodd-Frank Act. 

Before making a Proposed Determination 

regarding a nonbank financial company, the 

Council will notify the company when the 

Council believes that the evidentiary record 

regarding such nonbank financial company is 

complete. The Council will notify any 

nonbank financial company in Stage 2 if the 

nonbank financial company ceases to be 


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27 12 CFR 1310.10(b). 

28 Dodd-Frank Act section 113(e)(1), 12 U.S.C. 

5323(e)(1). 

29See 12 CFR 1310.21(c). 

30Financial Stability Oversight Council Hearing 

Procedures for Proceedings Under Title I or Title 

VIII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, available at https://

www.treasury.gov/initiatives/fsoc/designations/ 

Pages/Hearing-Procedures.aspx. 

31 Dodd-Frank Act section 113(e)(3), 12 U.S.C. 

5323(e)(3); see also 12 CFR 1310.21(d)(2) and (e)(2). 

32See 12 CFR 1310.21(d)(3) and (e)(3) and 

1310.22(d)(3). 

33See Dodd-Frank Act section 112(d)(5), 12 

U.S.C. 5322(d)(5); see also 12 CFR 1310.20(e). 

considered for a determination. Any nonbank 

financial company that ceases to be 

considered at any time in the Council’s 

determination process may be considered for 

a Proposed Determination in the future at the 

Council’s discretion, consistent with the 

processes described above. 

c. Proposed and Final Determination 

Proposed Determination 

Based on the analysis performed in Stage 

2, a nonbank financial company may be 

considered for a Proposed Determination. A 

proposed determination requires a vote of 

two-thirds of the voting members of the 

Council then serving, including an 

affirmative vote by the Chairperson of the 

Council.27 Following a Proposed 

Determination, the Council will issue a 

written notice of the Proposed Determination 

to the nonbank financial company, which 

will include an explanation of the basis of 

the Proposed Determination.28 Promptly after 

the Council votes to make a proposed 

determination regarding a company, the 

Council will provide the company’s primary 

financial regulatory agency or home country 

supervisor (subject to appropriate protections 

for confidential information) with the 

nonpublic written explanation of the basis of 

the Council’s proposed or final 

determination. The Council also will publish 

the explanation of the basis of the Proposed 

Determination, subject to redactions to 

protect confidential information from the 

company or its regulators. 

Hearing 

A nonbank financial company that is 

subject to a Proposed Determination may 

request a nonpublic hearing to contest the 

Proposed Determination in accordance with 

section 113(e) of the Dodd-Frank Act. If the 

nonbank financial company requests a 

hearing in accordance with the procedures 

set forth in § 1310.21(c) of the Council’s 

rule,29 the Council will set a time and place 

for such hearing. The Council has published 

hearing procedures on its website.30 In light 

of the short statutory timeframe for 

conducting a hearing, and the fact that the 

purpose of the hearing is to benefit the 

company, if a company requests that the 

Council waive the statutory deadline for 

conducting the hearing, the Council may do 

so in appropriate circumstances. 

Final Determination 

After making a Proposed Determination 

and holding any requested written or oral 

hearing, the Council may, by a vote of not 

fewer than two-thirds of the voting members 

of the Council then serving (including an 

affirmative vote by the Chairperson of the 

Council), make a final determination that the 

company will be subject to supervision by 

the Federal Reserve and prudential 

standards. If the Council makes a final 

determination, it will provide the company 

with a written notice of the Council’s final 

determination, including an explanation of 

the basis for the Council’s decision.31 The 

Council will also provide the company’s 

primary financial regulatory agency or home 

country supervisor (subject to appropriate 

protections for confidential information) with 

the nonpublic written explanation of the 

basis of the Council’s final determination. 

The Council expects that its explanation of 

the final basis for any determination will 

highlight the key risks that led to the 

determination and include clear guidance 

regarding the factors that were most 

important in the Council’s determination. 

When practicable and consistent with the 

purposes of the determination process, the 

Council will provide a nonbank financial 

company with a notice of a final 

determination at least one business day 

before publicly announcing the 

determination pursuant to § 1310.21(d)(3), 

§ 1310.21(e)(3), or § 1310.22(d)(3) of the 

Council’s rule.32 In accordance with section 

113(h) of the Dodd-Frank Act, a nonbank 

financial company that is subject to a final 

determination may bring an action in U.S. 

district court for an order requiring that the 

determination be rescinded. 

The Council does not intend to publicly 

announce the name of any nonbank financial 

company that is under evaluation prior to a 

final determination with respect to such 

company. However, if a company that is 

under review in Stage 1 or Stage 2 publicly 

announces the status of its review by the 

Council, the Council intends, upon the 

request of a third party, to confirm the status 

of the company’s review. In addition, the 

Council will publicly release the explanation 

of the Council’s basis for any nonbank 

financial company determination or 

rescission of a determination. The Council is 

subject to statutory and regulatory 

requirements to maintain the confidentiality 

of certain information submitted to it by a 

nonbank financial company or its 

regulators.33 In light of these confidentiality 

obligations, such confidential information 

will be redacted from the materials that the 

Council makes publicly available. 

V. Annual Reevaluations of Nonbank 

Financial Company Determinations 

After the Council makes a final 

determination regarding a company, the 

Council intends to encourage the company or 

its regulators to take steps to mitigate the 

potential risks identified in the Council’s 

written explanation of the basis for its final 

determination. Except in cases where new 

material risks arise over time, if a company 

adequately addresses the potential risks 

identified in writing by the Council at the 

time of the final determination and in 

subsequent reevaluations, the Council should 

generally be expected to rescind its 

determination regarding the company. 

For any nonbank financial company that is 

subject to a final determination, the Council 

is required to reevaluate the determination at 

least annually, and to rescind the 

determination if the Council determines that 

the company no longer meets the statutory 

standards for a determination. The Council 

may also consider a request from a company 

for a reevaluation before the next required 

annual reevaluation, in the case of an 

extraordinary change that materially 

decreases the threat the nonbank financial 

company could pose to U.S. financial 

stability. 

The Council applies the same standards of 

review in its annual reevaluations as the 

standard for an initial determination 

regarding a nonbank financial company: 

either the company’s material financial 

distress, or the nature, scope, size, scale, 

concentration, interconnectedness, or mix of 

the company’s activities, could pose a threat 

to U.S. financial stability. If the Council 

determines that the company no longer meets 

those standards, the Council will rescind its 

determination. 

The Council’s annual reevaluations 

generally assess whether any material 

changes since the previous reevaluation and 

since the determination justify a rescission of 

the determination, based on the same 

transmission channels and other factors that 

are considered during a determination 

decision. The Council expects that its 

reevaluation process will focus on whether 

any material changes—including changes at 

the company, changes in its markets or its 

regulation, changes in the Council’s own 

analysis, or otherwise—result in the 

company no longer meeting the standard for 

a determination. In light of the frequent 

reevaluations, the Council’s analyses will 

generally focus on changes since the 

Council’s previous review, but the ultimate 

question the Council will seek to assess is 

whether changes in the aggregate since the 

Council’s determination regarding the 

company have caused the company to cease 

meeting the Determination Standards. The 

Council expects that its analysis in its annual 

reevaluations will generally be organized 

around the three transmission channels 

described above as well as existing regulatory 

scrutiny and the company’s complexity and 

resolvability. 

Before the Council’s annual reevaluation of 

a determination regarding a nonbank 

financial company, the Council will provide 

the company with an opportunity to meet 

with staff of Council members and member 

agencies to discuss the scope and process for 

the review and to present information 

regarding any change that may be relevant to 

the threat the company could pose to 

financial stability. Staff of Council members 

and member agencies will also be available 

to meet with the company during the annual 

reevaluation, at the company’s request. In 

addition, during an annual reevaluation, a 

company may submit any written 

information to the Council the company 

considers relevant to the Council’s analysis. 

During annual reevaluations, companies are 

encouraged to submit information regarding 


amozie on DSK9F9SC42PROD with PROPOSALS
9048 Federal Register / Vol. 84, No. 49 / Wednesday, March 13, 2019 / Proposed Rules 

any changes related to the company’s risk 

profile that mitigate the potential risks 

previously identified by the Council. Such 

changes could include updates regarding 

company restructurings, regulatory 

developments, market changes, or other 

factors. If the company has taken steps to 

address the potential risks previously 

identified by the Council, the Council will 

assess whether those risks have been 

adequately mitigated to merit a rescission of 

the determination regarding the company. If 

the company explains in detail potential 

changes it could make to its business to 

address the potential risks previously 

identified by the Council, staff of Council 

members and member agencies will endeavor 

to provide their feedback on the extent to 

which those changes may address the 

potential risks. 

If a company contests the Council’s 

determination during the Council’s annual 

reevaluation, the Council will vote on 

whether to rescind the determination and 

provide the company, its primary financial 

regulatory agency, and the primary financial 

regulatory agency of its significant 

subsidiaries with a notice explaining the 

primary basis for any decision not to rescind 

the determination. If the Council does not 

rescind the determination, the written notice 

provided to the company will address each 

of the material factors raised by the company 

in its submissions to the Council contesting 

the determination during the annual 

reevaluation. The written notice from the 

Council will also explain in detail why the 

Council did not find that the company no 

longer met the standard for a determination 

under section 113 of the Dodd-Frank Act. In 

general, due to the sensitive nature of its 

analyses in annual reevaluations, the Council 

may not in all cases publicly release the 

written findings that it provides to the 

company. 

Finally, the Council will provide each 

nonbank financial company subject to a 

Council determination with an opportunity 

for an oral hearing before the Council once 

every five years at which the company can 

contest the determination. 

Dated: March 6, 2019. 

Bimal Patel, 

Deputy Assistant Secretary for the Financial 

Stability Oversight Council, Department of 

the Treasury. 

[FR Doc. 2019–04488 Filed 3–12–19; 8:45 am] 

BILLING CODE 4810–25–P–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 71 

[Docket No. FAA–2019–0124; Airspace 

Docket No. 18–ASO–18] 

Proposed Establishment and 

Amendment of Area Navigation (RNAV) 

Routes; Southeastern United States 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: This action proposes to 

establish 2 new low altitude RNAV 

routes T–239, and T–258, and modify 3 

existing RNAV routes T–290, T–292, 

and T–294 in the southeastern United 

States. The proposal would expand the 

availability of RNAV routing in support 

of transitioning the National Airspace 

System (NAS) from ground-based to 

satellite-based navigation. 

DATES: Comments must be received on 

or before April 29, 2019. 

ADDRESSES: Send comments on this 

proposal to the U.S. Department of 

Transportation, Docket Operations, 1200 

New Jersey Avenue SE, West Building 

Ground Floor, Room W12–140, 

Washington, DC 20590; telephone: 1 

(800) 647–5527 or (202) 366–9826. You 

must identify FAA Docket No. FAA– 

2019–0124; Airspace Docket No. 18– 

ASO–18 at the beginning of your 

comments. You may also submit 

comments through the internet at http:// 

www.regulations.gov. 

FAA Order 7400.11C, Airspace 

Designations and Reporting Points, and 

subsequent amendments can be viewed 

online at http://www.faa.gov/air_traffic/ 

publications/. For further information, 

you can contact the Airspace Policy 

Group, Federal Aviation 

Administration, 800 Independence 

Avenue SW, Washington, DC 20591; 

telephone: (202) 267–8783. The Order is 

also available for inspection at the 

National Archives and Records 

Administration (NARA). For 

information on the availability of FAA 

Order 7400.11C at NARA, call (202) 

741–6030, or go to http://

www.archives.gov/federal-register/cfr/ 

ibr-locations.html. 

FAA Order 7400.11, Airspace 

Designations and Reporting Points, is 

published yearly and effective on 

September 15. 

FOR FURTHER INFORMATION CONTACT: Paul 

Gallant, Airspace Policy Group, Office 

of Airspace Services, Federal Aviation 

Administration, 800 Independence 

Avenue SW, Washington, DC 20591; 

telephone: (202) 267–8783. 

SUPPLEMENTARY INFORMATION: 

Authority for This Rulemaking 

The FAA’s authority to issue rules 

regarding aviation safety is found in 

Title 49 of the United States Code. 

Subtitle I, Section 106 describes the 

authority of the FAA Administrator. 

Subtitle VII, Aviation Programs, 

describes in more detail the scope of the 

agency’s authority. This rulemaking is 

promulgated under the authority 

described in Subtitle VII, Part A, 

Subpart I, Section 40103. Under that 

section, the FAA is charged with 

prescribing regulations to assign the use 

of the airspace necessary to ensure the 

safety of aircraft and the efficient use of 

airspace. This regulation is within the 

scope of that authority as it would 

expand the availability of RNAV in the 

eastern United States to improve the 

efficiency of the NAS by lessening the 

dependency on ground-based 

navigation. 

Comments Invited 

Interested parties are invited to 

participate in this proposed rulemaking 

by submitting such written data, views, 

or arguments as they may desire. 

Comments that provide the factual basis 

supporting the views and suggestions 

presented are particularly helpful in 

developing reasoned regulatory 

decisions on the proposal. Comments 

are specifically invited on the overall 

regulatory, aeronautical, economic, 

environmental, and energy-related 

aspects of the proposal. 

Communications should identify both 

docket numbers (FAA Docket No. FAA– 

2019–0124; Airspace Docket No. 18– 

ASO–18 and be submitted in triplicate 

to the Docket Management Facility (see 

ADDRESSES section for address and 

phone number). You may also submit 

comments through the internet at http:// 

www.regulations.gov. 

Commenters wishing the FAA to 

acknowledge receipt of their comments 

on this action must submit with those 

comments a self-addressed, stamped 

postcard on which the following 

statement is made: ‘‘Comments to FAA 

Docket No. FAA–2019–0124; Airspace 

Docket No. 18–ASO–18.’’ The postcard 

will be date/time stamped and returned 

to the commenter. 

All communications received on or 

before the specified comment closing 

date will be considered before taking 

action on the proposed rule. The 

proposal contained in this action may 

be changed in light of comments 

received. A report summarizing each 

substantive public contact with FAA 

personnel concerned with this 

rulemaking will be filed in the docket. 

Availability of NPRM’s 

An electronic copy of this document 

may be downloaded through the 

internet at http://www.regulations.gov. 

Recently published rulemaking 

documents can also be accessed through 

the FAA’s web page at http://

www.faa.gov/air_traffic/publications/ 

airspace_amendments/. 

You may review the public docket 

containing the proposal, any comments 


amozie on DSK9F9SC42PROD with PROPOSALS