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Business Groups Argue FSOC Casts FISI Net Too Wide

Strategic Finance...February 2012

     Corporate pension funds are among the "nonbank" financial institutions which could run into heightened regulation by the Federal Reserve if deemed "Systematically Important Financial Institutions" by the Financial Stability Oversight Council (FSOC). The FSOC was established by Dodd-Frank, and the idea is to prevent the failure of nonbank companies who "pose a threat to the financial stability of the U.S." Companies who qualify will be designated "Systematically Important Financial Institutions," earning the newest, popular Washington acronym: SIFI. Potential targets include private equity and insurance companies, pension funds and money market mutual funds. Allowing the Fed to regulate money market mutual funds would create some anxiety for corporate financial executives given that those money market funds are a major source of funding to the $1.1 trillion commercial paper market. Moreover, Mary Schapiro, the chairman of the Securities and Exchange Commission, has already said she plans to propose new regulatory rules for money market funds. Those would be in addition to any regulation by the Fed of funds deemed SIFIs.
       The FSOC is now deciding whether to include money market funds, and corporate pension funds, as eligible to be designated an SIFI.  The FSOC plans to use a number of screens to "catch" SIFIs. Those would be yardsticks such as $50 billion global total assets, more than $30 billion of gross notional credit default swaps and more than $20 billion outstanding loans borrowed and bonds issued. But those proposed yardsticks are under fire. David Hirschmann, President and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, says, "Fundamental questions remain unanswered and the re-proposal remains significantly deficient."
     Hal Scott, director of The Committee on Capital Markets Regulation, which has had a high profile in Washington with regard to financial reporting issues, says for example that money market and private equity funds should not be eligible to be designated as SIFI. He also argues that the FSOC should do a cost-benefit analysis of its standard. The FSOC says that the  Office of Information and Regulatory Affairs (OIRA) within White House Office of Management and Budget has determined that the proposed rules are not “economically significant” and thus OIRA has not performed any substantive review. "This determination by OIRA seems on its face somewhat implausible, given the consequence of SIFI designation to the regulation of important financial institutions," states Scott, whose full-time job is Nomura Professor and Director of the Program on International Financial Systems at Harvard Law School.