Meet the new risks, same as the old risks: Trump's FSOC shares many Obama-era fears

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WASHINGTON — In its first annual report to Congress since the Trump administration took office, the Financial Stability Oversight Council identified many of the same sources of risk identified in previous reports, while adding a new emphasis on economic growth and regulatory tailoring.

The report, which the FSOC voted to approve Thursday afternoon, includes extensive examinations of risks to the financial system such as cybersecurity, central counterparty risk, short-term wholesale funding, reference rates and resolution planning. But the primary change from previous reports is its references to the importance of streamlining regulations and ensuring that they foster economic growth, a senior Treasury official said.

Treasury Secretary Steven Mnuchin said the report is “the culmination of a productive process among all of FSOC’s members” and said the council has “received valuable input from the other agencies, and I look forward to implementing the recommendations.”

The general areas of risk hew to recommendations that FSOC made in its 2016 report, which was issued nearly 18 months ago in June 2016. The report is different in some of its particulars, however.

In the area of cybersecurity, the 2017 report calls on Congress to pass legislation that grants the Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Housing Finance Agency and National Credit Union Administration the power to issue enforcement actions against third-party service providers.

The report also calls for the creation of a “private sector council of senior executives” that would meet with “principal-level government counterparts” to discuss cybersecurity issues and threats.

The 2017 report retains much of the language dealing with the potential risks posed by the asset management industry. It noted that since the last FSOC update on asset management in April 2016, the SEC has “finalized a number of rules” to address many of those issues, including liquidity and redemption risk. The report called for principal agencies to review their data collections to assess whether further action is necessary to counter leverage risks posed by hedge funds.

But the report dropped references made in the 2016 report to operational risk, securities lending risk and resolvability and resolution planning for asset managers.

Despite some concerns among members of Congress about the systemic designation of Financial Market Utilities — including some concerns about the FMU designation process included in the Treasury’s November report on nonbank systemic risk — the 2017 FSOC report reiterated concerns from previous years’ reports that the stability and continued function of central counterparties, or CCPs, is of critical importance.

“Due to the increasingly important role CCPs play in the financial markets, effective regulation and risk management of CCPs is essential to financial stability, and should continue to evolve accordingly,” the report said. “The council continues to recommend that the CFTC, Federal Reserve and SEC coordinate in the supervision of all CCPs that are designated by the council as systemically important FMUs.”

The report did include some new details on the risks posed by cryptocurrencies, noting that bitcoin and other virtual currencies are “used only by a very small number of consumers” but that the underlying technology could have much broader impacts on payments, derivatives processing and trade finance. The report concluded that the council should “evaluate the potential effects of new financial products and services on financial stability, including operational risk.”

The report did include a new section in its recommendations dedicated to “regulatory efficiency and effectiveness.” That section noted that while many post-crisis rules have enhanced financial stability, some have “raised concerns about increased compliance costs and regulatory burdens for financial institutions, particularly smaller institutions.”

The section noted agencies’ ongoing or recently completed reviews under the Economic Growth and Regulatory Paperwork Reduction Act, as well as other regulatory review processes that are under way. The section called on regulators to “continue to evaluate regulatory overlap and duplication, modernize outdated regulations, and, where the authority exists, tailor regulations based on the size and complexity of financial institutions.”

A senior Treasury official said that much of the similarity between the 2017 report and earlier reports can be attributed to the fact that the reports are intended to outline the areas where there is a potential for systemic risk, and that new threats of that magnitude do not tend to emerge rapidly from one year to the next but instead are long-term issues that have to be monitored over time. The official also said that, despite there being a change in administration and a change in FSOC leadership, many of the regulators have been the same throughout the year, and so there would naturally be some continuity in the council's views on systemic risk.

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Cyber security Regulatory reform Asset management Steven Mnuchin FSOC Treasury Department SEC CFTC NCUA Federal Reserve